-----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, G4AP65mwwoJhATOsvDgfgXIetJepRpyXpHfa5GetdHzvOwVqlO9MZ1aJ0AiV7Lfl KLkGyXc+RDdBVT3beRG35g== 0001020215-96-000003.txt : 19960930 0001020215-96-000003.hdr.sgml : 19960930 ACCESSION NUMBER: 0001020215-96-000003 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 14 FILED AS OF DATE: 19960927 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ATLAS ENERGY FOR THE NINETIES PUBLIC NO 5 LTD CENTRAL INDEX KEY: 0001020215 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] STATE OF INCORPORATION: PA FILING VALUES: FORM TYPE: SB-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-09991 FILM NUMBER: 96636006 BUSINESS ADDRESS: STREET 1: 311 ROUSER ROAD CITY: MOON TOWNSHIP STATE: PA ZIP: 15108 BUSINESS PHONE: 4122622830 SB-2/A 1 J.Breznai -------------------------------------------------------------------------- As filed with the Securities and Exchange Commission on September 27, 1996 Registration No. 333-09991 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 PRE-EFFECTIVE AMENDENT No.1 TO FORM SB-2 REGISTRATION STATEMENT Under The Securities Act of 1933 ATLAS-ENERGY FOR THE NINETIES-PUBLIC #5 LTD. (Exact name of Registrant as Specified in its Charter) 311 ROUSER ROAD MOON TOWNSHIP, PENNSYLVANIA 15108 (412) 262-2830 (Address and Telephone Number of Principal Executive Offices and Principal Place of Business) JAMES R. O'MARA, PRESIDENT ATLAS RESOURCES, INC. 311 ROUSER ROAD, MOON TOWNSHIP, PENNSYLVANIA 15108 (412) 262-2830 (Name, Address and Telephone Number of Agent for Service) Copies to: WALLACE W. KUNZMAN, JR., ESQ. JAMES R. O'MARA KUNZMAN & BOLLINGER, INC. ATLAS RESOURCES, INC. 5100 N. BROOKLINE 311 ROUSER ROAD SUITE 600 MOON TOWNSHIP, PENNSYLVANIA OKLAHOMA CITY, OKLAHOMA 73112 15108 Approximate Date of Commencement of Proposed Sale to the Public; AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: [X] CALCULATION OF REGISTRATION Proposed Proposed Title of Each Dollar Maximum Maximum Amount of Class of Securities Amount Offering Aggregate Registration to be Registered to be Price per Offering Price Fee Registered Unit Units (1) $8,000,000 $10,000 $8,000,000 $2,758.40 (1) "Units" means the Limited Partner interests and the Investor General Partner interests offered to Participants in the Partnership. THE REGISTRANT HEREBY AMENDS THE REGISTRATION STATEMENT ON SUCH DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A) MAY DETERMINE. - ---------------------------------------------------------------------------- ATLAS-ENERGY FOR THE NINETIES-PUBLIC #5 LTD. CROSS REFERENCE SHEET PURSUANT TO RULE 404 Item of Form SB-2 Caption in Prospectus 1. Front of Registration Statement and Outside Front Cover of Prospectus Front Page of Registration Statement and Outside Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus Inside Front and Outside Back Cover Pages of Prospectus 3. Summary Information and Risk Factors Summary of the Offering; Risk Factors 4. Use of Proceeds Summary of the Offering; Capitalization and Source of Funds and Use of Proceeds 5. Determination of Offering Price Not Applicable 6. Dilution Not Applicable 7. Selling Security Holders Not Applicable 8. Plan of Distribution Summary of the Offering; Plan of Distribution 9. Legal Proceedings Litigation 10. Directors, Executive Officers, Promoters and Control Persons Management 11. Security Ownership of Certain Beneficial Owners and Management Management 12. Description of Securities Summary of the Offering; Terms of the Offering; Summary of Partnership Agreement 13. Interest of Named Experts and Counsel Legal Opinions; Experts 14. Disclosure of Commission Position on Indemnification for Securities Act Liabilities Fiduciary Responsibilities of the Managing General Partner 15. Organization Within Last Five Years Management 16. Description of Business Proposed Activities; Management 17. Management's Discussion and Analysis or Plan of Operation Proposed Activities 18. Description of Property A. Issuers Engaged or to Be Engaged in Significant Mining Operations B. Supplementing Financial Information about Oil and Gas Producing Activities Proposed Activities A. Not Applicable B. Not Applicable 19. Certain Relationships and Related Transactions Compensation; Management; Conflicts of Interest 20. Market for Common Equity and Related Stockholder Matters Not Applicable 21. Executive Compensation Management 22. Financial Statements Financial Information Concerning the Managing General Partner, AEGH and the Partnership 23. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure Not Applicable - ---------------------------------------------------------------------------- Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. - ----------------------------------------------------------------------------- Preliminary Prospectus (Subject to Completion) Dated September 27 , 1996 ATLAS-ENERGY FOR THE NINETIES-PUBLIC #5 LTD. $1,000,000 Minimum Aggregate Capital Contributions General and Limited Partner Interests at $10,000 per Unit Minimum Purchase: 1 Unit ($10,000) This Prospectus describes an offering of 800 general and limited partner interests of $10,000 each in Atlas-Energy for the Nineties-Public #5 Ltd., a limited partnership. See "Summary of the Offering - Terms of the Offering - Type of Units" for a discussion of the difference between Investor General Partner Units and Limited Partner Units. Upon commencement of operations, the Partnership will acquire Leases for drilling Development Wells thereon, and produce and market natural gas, if any, derived therefrom. The Partnership is expected to generate significant tax deductions. (See "Proposed Activities" and "Tax Aspects".) Investors in the Partnership will be admitted either as Investor General Partners or Limited Partners depending upon their election and whether the requisite suitability standards are met. For the meaning of certain capitalized terms used herein, see "Definitions". The Partnership, upon commencement of the offering of Units, will not have any properties or assets. The Managing General Partner of the Partnership is Atlas Resources, Inc. ("Atlas"), a Pennsylvania corporation. Atlas is responsible for the acquisition and supervision of the Partnership's properties and all other activities of the Partnership. THESE SECURITIES ARE SPECULATIVE AND ARE SUBJECT TO CERTAIN RISKS INCLUDING: PURCHASE OF THE UNITS INVOLVES A HIGH LEVEL OF RISK; CONSEQUENTLY, PROSPECTIVE INVESTORS MUST MEET STRICT SUITABILITY STANDARDS ESTABLISHED BY THE MANAGING GENERAL PARTNER. THE DRILLING AND COMPLETION OPERATIONS TO BE UNDERTAKEN BY THE PARTNERSHIP FOR THE DEVELOPMENT OF GAS RESERVES INVOLVE THE POSSIBILITY OF A SUBSTANTIAL OR PARTIAL LOSS OF AN INVESTMENT IN THE PARTNERSHIP BECAUSE OF WELLS WHICH ARE PRODUCTIVE BUT DO NOT PRODUCE ENOUGH REVENUE TO RETURN THE INVESTMENT MADE; THE REVENUES OF THE PARTNERSHIP ARE DIRECTLY RELATED TO THE ABILITY TO MARKET THE NATURAL GAS AND THE PRICE OF NATURAL GAS WHICH IS CURRENTLY UNSTABLE AND CANNOT BE PREDICTED AND IF THE PRICE OF GAS DECREASES THEN THE PARTICIPANT RETURNS WILL DECREASE; UNLIMITED JOINT AND SEVERAL LIABILITY FOR PARTNERSHIP OBLIGATIONS FOR THOSE INVESTORS WHO CHOOSE TO INVEST AS INVESTOR GENERAL PARTNERS UNTIL THEY CONVERT TO LIMITED PARTNER INTERESTS; LACK OF LIQUIDITY OR A MARKET FOR THE UNITS; LACK OF CONFLICT OF INTEREST RESOLUTION PROCEDURES, CONSEQUENTLY, CONFLICTS OF INTEREST BETWEEN THE MANAGING GENERAL PARTNER AND THE INVESTORS MAY NOT NECESSARILY BE RESOLVED IN THE BEST INTERESTS OF THE INVESTORS; TOTAL RELIANCE ON MANAGING GENERAL PARTNER AND ITS AFFILIATES; AUTHORIZATION OF SUBSTANTIAL FEES TO MANAGING GENERAL PARTNER AND ITS AFFILIATES; INVESTORS AND THE MANAGING GENERAL PARTNER WILL SHARE IN COSTS DISPROPORTIONATELY TO THEIR SHARING OF REVENUES; POSSIBLE ALLOCATION OF TAXABLE INCOME TO INVESTORS IN EXCESS OF THEIR CASH DISTRIBUTIONS FROM THE PARTNERSHIP; AND NO GUARANTY OF CASH DISTRIBUTIONS EVERY QUARTER. (SEE "RISK FACTORS", PAGE 8.) THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. IN MAKING AN INVESTMENT DECISION INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE PERSON OR ENTITY CREATING THE SECURITIES AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Price to Commissions Proceeds to Net Proceeds Public and Partnership for Wholesaling (4) Drilling Costs(5) Fees(3) Per Unit (1) 10,000$ 1,050$ 10,000$ 10,000 Minimum (2)$1,000,000 $105,000 $1,000,000 $1,000,000 Maximum (2)$7,000,000 $735,000 $7,000,000 $7,000,000 Potential Maximum (2) $8,000,000 $840,000 $8,000,000 $8,000,000 (Page ii) (1) The minimum required purchase is one (1) Unit or $10,000; however, the Managing General Partner, in its discretion, may accept one-half Unit ($5,000) subscriptions. (See "Terms of the Offering - Suitability Standards".) (2) The subscription period will terminate on or before December 31, 1996 ("Offering Termination Date"). The maximum amount of subscriptions to be accepted from Participants will be $7,000,000 (700 Units), and the minimum amount of subscriptions will be $1,000,000 (100 Units). However, if subscriptions for all 700 Units being offered are obtained, the Managing General Partner, in its sole discretion, may offer not more than 100 additional Units and increase the maximum aggregate subscriptions with which the Partnership may be funded to not more than 800 Units ($8,000,000). The Managing General Partner may buy up to 10% of the Units, which will not be applied towards the minimum Partnership Subscription required for the Partnership to begin operations. The subscription proceeds will be deposited in an interest bearing escrow account at National City Bank of Pennsylvania prior to the receipt of the minimum Partnership Subscription, after which the funds will be paid directly to the Partnership account and will continue to earn interest until the Offering Termination Date. The Partnership will begin all activities, including drilling, after the Offering Termination Date. If subscriptions for $1,000,000 are not received by December 31, 1996, the sums deposited in the escrow account will be returned to the subscriber with interest thereon. Checks for the full subscription amount should be made payable to "National City Bank, Escrow Agent, Atlas Public #5 Ltd." and sent, together with a copy of the executed subscription, to National City Bank of Pennsylvania., Corporate Trust Department, 300 Fourth Avenue, Pittsburgh, Pennsylvania 15278-2331. (See "Terms of the Offering - - Partnership Closing and Escrow".) (3) The Units will be offered by registered broker-dealers which are members of the National Association of Securities Dealers, Inc. ("NASD") on a best efforts basis. (Best efforts means that the broker-dealers will not guarantee the sale of a certain amount of Units.) The broker-dealer will be paid cash Sales Commissions of 7.5% of the Agreed Subscription and will be entitled to reimbursement of its bona fide accountable due diligence expenses incurred in discharging its due diligence obligations of .5% of the Units sold by it. Wholesalers will receive 2.5% of Agreed Subscriptions obtained through such wholesalers' efforts. (See "Plan of Distribution".) All Sales Commissions, due diligence reimbursements and wholesalers' fees will be paid by the Managing General Partner and will not be paid with subscription proceeds. (See "Participation in Costs and Revenues".) (4) The Managing General Partner will pay all Organization Costs associated with the issuance of the Units, which will not exceed 4.5% of Agreed Subscriptions ($450 per Unit). (See "Participation in Costs and Revenues".) (5) After the payment of Organization and Offering Costs by the Managing General Partner, the Partnership will utilize 100% of the Partnership Subscription to drill and complete Development Wells as described herein. (See "Proposed Activities.) - ------------------------------------------------------------------------- (Page iii) Summary of the Offering 1 The Partnership 1 Investment Objectives 1 Investment Features 1 Terms of the Offering 2 Reports 2 No Additional Assessments 2 Suitability Standards - Long Term Investment 2 Tax Status 3 Partnership Agreement 3 Application of Proceeds 3 Participation in Costs and Revenues 3 Prior Activities 4 Risk Factors 4 Actions to be Taken by Managing General Partner to Reduce Risks of Additional Payments by Investor General Partners 5 Compensation to the Managing General Partner, the Operator and their Affiliates 6 Conflicts of Interest 7 Distribution 7 Risk Factors 8 Special Risks of the Partnership 8 Speculative Nature of Investment 8 Unlimited Liability of Investor General Partners 8 Illiquid Investment and Restrictions on Transferability of Participants' Interests 9 Total Reliance upon the Managing General Partner 9 Management Obligations of Managing General Partner Not Exclusive 9 Managing General Partner Liquid Net Worth Is not Guaranteed 9 Diversification Depends Upon Subscription Proceeds 9 Greater Risks Borne by Participants 9 Compensation and Fees to the Managing General Partner Regardless of Success of the Activities 9 Dry Hole Risk in Development Drilling 9 Risk of Unproductive Wells in Development Drilling 9 Risks Regarding Marketing of Gas 10 Possible Delays in Production and Shut-In Wells 10 Unspecified Location of a Portion of the Prospects 11 No Guarantee of Data Regarding Currently Proposed Prospects 11 Atlas' Subordination is not a Guarantee 11 Borrowings by the Managing General Partner Could Reduce Funds Available for Its Subordination Obligation 11 Possibility of Reduction or Unavailability of Insurance 11 Possible Nonperformance by Subcontractors 11 Risk of Prepayment to Atlas 11 Possible Leasehold Defects 12 Partnership Borrowings May Reduce or Delay Distributions 12 Atlas Will Receive Benefit from Transfer of Leases 12 Other Circumstances Under Which Distributions May Be Reduced or Delayed 12 Conflicts of Interest 12 Risk Regarding Participation with Third Parties 12 Dissolution of the Partnership or Withdrawal or Removal of the Managing General Partner May Have Adverse Effects 12 Indemnification and Exoneration of the Managing General Partner Would Reduce Distributions 13 Limited Partner Liability for Repayment of Certain Distributions 13 Possibility of Unauthorized Acts of Investor General Partners 13 Risks That Repurchase Obligation May Not Be Funded and Repurchase Price May Not Reflect Full Value 13 Possible Participation in Roll-Up 14 General Risks of the Oil and Gas Business 14 Speculative Nature of Gas Business 14 Risks of Decrease in the Price of Gas 14 Drilling Hazards May Be Encountered 14 Competition in Marketing Natural Gas Production 15 Risk of New Governmental Regulations 15 Potential Liability for Pollution; Environmental Matters 15 Uncertainty of Costs 15 Tax Risks 15 Tax Consequences May Vary Depending on Individual Circumstances 15 Risk of Changes in the Law 15 No Advance Ruling from the IRS on Tax Consequences 15 Possible Taxes in Excess of Cash Distributions 15 Partnership Allocations Are Subject to Challenge by the IRS in the Event of an Audit 16 1996 Tax Deductions Are Subject to Challenge by the IRS in the Event of an Audit 16 Possible Alternative Minimum Tax Liability 16 Investment Interest Deductions May Be Limited 16 IRAs and Other Qualified Plans Will Receive Unrelated Business Taxable Income 16 Lack of Tax Shelter Registration 16 State and Local Taxes May Apply 16 Capitalization and Source of Funds and Use of Proceeds 17 In General 17 Source of Funds 17 Use of Proceeds 17 Subsequent Source of Funds and Borrowings 18 Compensation 19 Oil and Gas Revenues 19 Lease Costs 19 Administrative Costs 19 Drilling Contracts 19 Per Well Charges 20 Transportation and Marketing Fees 20 Other Compensation 20 Estimate of Administrative Costs and Direct Costs to Be Borne by the Partnership 20 Terms of the Offering 21 Subscription to the Partnership 21 Payment of Subscriptions 21 Partnership Closing and Escrow 21 Offering Period 21 Acceptance of Subscriptions 21 Drilling Period 22 Interest of Participants in the Partnership 22 Qualification of the Partnership 22 Suitability Standards 22 Subscriptions by IRAs, Keogh Plans and Other Qualified Plans 23 Subscription by Managing General Partner 24 Conflicts of Interest 24 In General 24 - -------------------------------------------------------------------------- (Page iv) Fiduciary Responsibility of the Managing General Partner 24 Transactions with Atlas and its Affiliates 25 Conflict Regarding the Drilling and Operating Agreement 25 Conflicts Regarding Sharing of Costs and Revenues 25 Tax Matters Partner 26 Other Activities of the Managing General Partner, the Operator and their Affiliates 26 Conflicts Involving the Acquisition of Leases 26 Conflicts Between Participants 28 Lack of Independent Underwriter and Due Diligence Investigation 28 Conflicts Concerning Legal Counsel 28 Conflicts Regarding Repurchase Obligation 28 Other Conflicts 29 Procedures to Reduce Conflicts of Interest 29 Policy Regarding Roll-Ups 30 Certain Transactions 31 Fiduciary Responsibility of the Managing General Partner 31 General 31 Limitations on Managing General Partner Liability as Fiduciary 31 Limitations on Managing General Partner Indemnification 32 Prior Activities 32 Management 39 Managing General Partner and Operator 39 Officers, Directors and Key Personnel 40 Remuneration 42 Security Ownership of Certain Beneficial Owners and Managers 43 Transactions with Management and Affiliates 44 Investment Objectives 44 Proposed Activities 45 In General 45 Intended Areas of Operations 45 Acquisition of Leases 46 Title to Properties 47 Formation of the Partnership and Powers of the Managing General Partner 47 Drilling and Completion Activities; Operation of Producing Wells 47 Sale of Oil and Gas Production 49 Interests of Parties 50 Insurance 50 Use of Consultants and Subcontractors 51 Information Regarding Currently Proposed Prospects 51 Competition, Markets and Regulation 81 Competition 81 Marketing 81 State Regulations 81 Environmental Regulation 81 Crude Oil Regulation 82 Federal Gas Regulation 82 Proposed Regulation 82 Participation in Costs and Revenues 83 In General 83 Costs 83 Revenues 83 Subordination of Portion of Managing General Partner's Net Revenue Share 84 Allocation and Adjustment Among Participants 86 Distributions 86 Tax Aspects 86 Summary of Tax Opinion 86 In General 86 Partnership Taxation 89 Partnership Classification 89 Limitations on Passive Activities 89 Taxable Year 90 1996 Expenditures 90 Availability of Certain Deductions 90 Intangible Drilling and Development Costs 90 Drilling Contracts 91 Depletion Allowance 92 Depreciation - Accelerated Cost Recovery System 92 Leasehold Costs and Abandonment 93 Tax Basis of Participants' Interests 93 Distributions from a Partnership 93 Sale of the Properties 93 Disposition of Partnership Interests 93 Minimum Tax - Tax Preferences 93 Limitations on Deduction of Investment Interest 94 Allocations 94 "At Risk" Limitation for Losses 94 Partnership Organization and Syndication Fees 95 Tax Elections 95 Disallowance of Deductions under Section 183 of the Code 95 Termination of a Partnership 95 Lack of Registration as a Tax Shelter 95 Tax Returns and Audits 96 Penalties and Interest 96 State and Local Taxes 96 Severance, Franchise, and Ad Valorem (Real Estate) Taxes 97 Tax Consequences to Qualified Plans and IRAs 97 Social Security Benefits and Self-Employment Tax 97 Foreign Partners 97 Estate and Gift Taxation 98 Changes in Law 98 Definitions 98 Summary of Partnership Agreement 98 Responsibility of Managing General Partner 103 Liabilities of General Partners, Including Investor General Partners 103 Liability of Limited Partners 104 Amendments 104 Notice 104 Voting Rights 104 Access to Records 105 Withdrawal of Managing General Partner 105 Removal of Operator 105 Term and Dissolution 105 Summary of Drilling and Operating Agreement 105 Reports to Investors 106 Repurchase Obligation 107 Transferability of Units 108 Plan of Distribution 104 Sales Material 109 Legal Opinions 109 Experts 109 Litigation 110 Additional Information 110 Financial Information Concerning the Managing General Partner, AEGH and the Partnership 110 Exhibits Exhibit (A) Amended and Restated Certificate and Agreement of Limited Partnership Exhibit (I-A) Managing General Partner Signature Page Exhibit (I-B) Subscription Agreement Exhibit (II) Drilling and Operating Agreement Exhibit (B) Special Suitability Requirements and Disclosures to Investors - -------------------------------------------------------------------------- (Page 1) SUMMARY OF THE OFFERING This summary is qualified in its entirety by the more detailed information appearing elsewhere in this Prospectus. Prospective investors are directed to "Definitions," which defines the capitalized terms used throughout this Prospectus. THE PARTNERSHIP Atlas-Energy for the Nineties-Public #5 Ltd. (the "Partnership"), is a Pennsylvania limited partnership which includes Atlas Resources, Inc. ("Atlas"), of Pittsburgh, Pennsylvania, as Managing General Partner and Operator, and subscribers to Units as either Limited Partners or Investor General Partners. The Partnership will be funded to drill wells which are located primarily in Mercer County, Pennsylvania, although the Managing General Partner has reserved the right to use up to 15% of the Partnership Subscription to drill wells in other areas of the Appalachian Basin. Atlas anticipates that all of the Partnership's wells will be classified as gas wells which may produce a small amount of oil. The majority, if not all, of the wells drilled by the Partnership will be Development Wells which will test the Clinton/Medina geological formation ("Clinton/Medina"). For a description of the Prospects which are currently proposed see "Proposed Activities - Information Regarding Currently Proposed Prospects". Atlas and its Affiliates will act as general drilling contractor and operator for all the wells. (See "Proposed Activities".) INVESTMENT OBJECTIVES The Partnership's principal investment objectives are to invest the Partnership Subscription in natural gas Development Wells which will: (1) Provide quarterly cash distributions until the wells are depleted, (historically 20+ years) with a preferred annual cash flow of 10% during the first five years based on the original subscription amount. (See "Risk Factors - Special Risks of the Partnership- Risk of Unproductive Wells in Development Drilling," "Prior Activities" and "Participation in Costs and Revenues - Subordination of Portion of Managing General Partner's Net Revenue Share".) (2) Obtain tax deductions in 1996 from intangible drilling and development costs to offset a portion of the Participants' taxable income (subject to the passive activity rules in the case of Limited Partners). One Unit will produce a 1996 tax deduction of $8,000 against ordinary income for Investor General Partners and against passive income for Limited Partners. For an investor in either the 39.6% or 36% tax bracket, one Unit will save $3,168 or $2,880 respectively in federal taxes this year. Most states also allow this type of a deduction against the state income tax. (3) Offset a portion of any taxable income generated by the Partnership with tax deductions from percentage depletion, presently 20% (estimated to be 22% on net revenue). Atlas estimates that this feature should reduce an investor's effective tax rate from 39.6% to 31.7% (i.e., 80% of 39.6%) on Partnership net revenues. (4) Obtain tax deductions of the remaining 20% of the initial investment from 1997 through 2004. The investor will receive an additional $2,000 tax deduction per Unit generated through the remaining depreciation over a seven-year cost recovery period of the Partnership's equipment costs for the wells. ATTAINMENT OF THE PARTNERSHIP'S INVESTMENT OBJECTIVES WILL DEPEND ON MANY FACTORS, INCLUDING THE ABILITY OF THE MANAGING GENERAL PARTNER TO SELECT SUITABLE PROSPECTS WHICH WILL BE PRODUCTIVE AND PRODUCE ENOUGH REVENUE TO RETURN THE INVESTMENT MADE. THE SUCCESS OF THE PARTNERSHIP DEPENDS LARGELY ON FUTURE ECONOMIC CONDITIONS, ESPECIALLY THE FUTURE PRICE OF NATURAL GAS WHICH IS VOLATILE. THERE CAN BE NO GUARANTEE THAT THE FOREGOING OBJECTIVES WILL BE ATTAINED. INVESTMENT FEATURES PREFERRED 10% CASH RETURN (CUMULATIVE 5 YEARS). The Partnership is structured to provide preferred cash distributions to the Participants equal to a minimum of 10% of their Agreed Subscription in each of the first five twelve-month periods of Partnership operations. To help insure the Participants achieve this investment feature, Atlas will subordinate a part of its Partnership revenues in an amount up to 10% of the Partnership Net Production Revenues. (Partnership Net Production Revenues is gross revenues after deduction of the related Operating Costs, Direct Costs, Administrative Costs and all other Partnership costs not specifically allocated.) This feature allows the investors to receive a greater percentage of cash distributions if the Partnership does not provide the 10% return to Participants as described above. (See "Risk Factors - Special Risks of the Partnership - Borrowings by the Managing General Partner Could Reduce Funds Available for Its Subordination Obligation" and "Participation in Costs and Revenues - Subordination of Portion of Managing General Partner's Net Revenue Share".) REPURCHASE OBLIGATION. Beginning in 2000, the Participants may present their interests for repurchase by the Managing General Partner. Repurchase of Units is subject to certain conditions, including the financial ability of the Managing General Partner to - -------------------------------------------------------------------------- (Page 2) purchase the Units. (See "Risk Factors - Special Risks of the Partnership - Risk That Repurchase Obligation May Not Be Funded and Repurchase Price May Not Reflect Full Value" and "Repurchase Obligation".) INVESTOR INTEREST FEATURE. A Participant will receive interest on his Agreed Subscription up until the time of the Offering Termination Date. The interest will be paid to Participants approximately six weeks after the Offering Termination Date. TERMS OF THE OFFERING IN GENERAL. Units of Participation ("Units") are offered at $10,000 per Unit. The minimum subscription is one Unit; however, the Managing General Partner, in its discretion, may accept one-half Unit ($5,000) subscriptions. Larger subscriptions will be accepted in $1,000 increments. Agreed Subscriptions are payable 100% in cash at the time of subscribing. The maximum amount of subscriptions to be accepted from Participants will be $7,000,000 (700 Units), and the minimum amount of subscriptions will be $1,000,000 (100 Units). However, if subscriptions for all 700 Units being offered are obtained, the Managing General Partner, in its sole discretion, may offer not more than 100 additional Units and increase the maximum aggregate subscriptions with which the Partnership may be funded to not more than 800 Units ($8,000,000). Pending receipt of the minimum Partnership Subscription, deposits in the escrow account will earn interest at National City Bank of Pennsylvania's variable market rate for short term deposits. If the minimum Partnership Subscription is not received on or before December 31, 1996, subscriptions will be refunded in full with interest earned thereon. The Managing General Partner may buy up to 10% of the Units, which will not be applied towards the minimum Partnership Subscription required for the Partnership to begin operations. For a full discussion of the various terms of the offering, see "Terms of the Offering". ESCROW ACCOUNT. The subscription proceeds will be deposited in an interest bearing escrow account at National City Bank of Pennsylvania, Pittsburgh, Pennsylvania until the receipt of the minimum Partnership Subscription after which the funds will be paid directly to the Partnership account and will continue to earn interest until the Offering Termination Date. The Partnership will not begin its activities, including drilling, until after the Offering Termination Date. (See "Terms of the Offering - Partnership Closing and Escrow".) TYPE OF UNITS. Participants may purchase Limited Partner Units or Investor General Partner Units. Although costs, revenues and cash distributions allocable to the Participants are shared pro rata based upon the amount of their Agreed Subscriptions, there are material differences in the federal income tax effects and liability associated with these different types of Units in the Partnership. Investor General Partners will have unlimited joint and several liability regarding Partnership activities, but their use of Partnership losses will not be subject to the passive activity limitations. Limited Partners will have limited liability, but their use of Partnership losses generally will be limited to net passive income from "passive" trade or business activities, which generally includes the Partnership and other limited partnership investments. (See "- Actions to be Taken by Managing General Partner to Reduce Risks of Additional Payments by Investor General Partners," below, "Risk Factors - - Special Risks of the Partnership- Unlimited Liability of Investor General Partners," "Tax Aspects - Limitations on Passive Activities," and "Summary of Partnership Agreement".) REPORTS A status report detailing the progress of drilling activities will be furnished to each Participant. In addition, each Participant will be provided within 120 days after the end of each calendar year audited financial statements showing the income, expenses, assets and liabilities of the Partnership at the end of its fiscal year prepared in accordance with generally accepted accounting principles. Tax information with respect to the Partnership's operations for each calendar year will be furnished to each Participant by March 15 of the following year. (See "Reports to Investors".) NO ADDITIONAL ASSESSMENTS The Units are not subject to assessment. The Partnership will not call upon the Participants for additional amounts of capital beyond their Agreed Subscriptions. However, in the case of Investor General Partners, if the insurance proceeds, Partnership assets, and Atlas' and AEGH indemnification of the Investor General Partners were not sufficient to satisfy Partnership liabilities for which the Investor General Partners were also liable, the Managing General Partner could call upon Investor General Partners to make additional Capital Contributions to the Partnership from their personal assets to satisfy such liabilities. Also, if the Partnership requires additional funds, which the Managing General Partner does not anticipate, such funds will have to be provided by borrowings or the retention of Partnership revenues. (See "Capitalization and Source of Funds and Use of Proceeds". ) SUITABILITY STANDARDS - LONG TERM INVESTMENT The Managing General Partner has instituted strict suitability standards for investment in the Partnership. The high degree of investment risk together with the restrictions on the sale of Units, lack of a market for the Units, and the tax consequences of the sale of Units make investment in the Partnership suitable only for persons who are able to hold their Units on a long-term investment basis. (See "Terms of the Offering - Suitability Standards".) - --------------------------------------------------------- (Page 3) TAX STATUS The Managing General Partner has received an opinion of counsel from Kunzman & Bollinger, Inc., Oklahoma City, Oklahoma, that the Partnership will be classified as a partnership for federal income tax purposes and the Managing General Partner intends to rely upon such opinion. The opinion of counsel is not binding on the IRS and is based upon various factual assumptions and current law. (See "Risk Factors - Tax Risks - No Advance Ruling from the IRS on Tax Consequences".) PARTNERSHIP AGREEMENT The Partnership is a Pennsylvania limited partnership and will be governed by the Partnership Agreement, the form of which is included as Exhibit (A) to this Prospectus, as well as the provisions of the Pennsylvania Revised Uniform Limited Partnership Act. Among other matters, the Partnership Agreement provides for the distribution f revenues and the allocation of costs, revenues, expenses, income, gain, deductions and credits to and among the Partners. The Partnership Agreement also provides for Partnership reporting and the conduct of Partnership business and operations. The Participants have certain rights, exercisable with limited exception by majority vote, relating to their ownership of a Unit in the Partnership including the right to: call a meeting of the Partners; remove the Managing General Partner and elect a new Managing General Partner; elect a new Managing General Partner if the Managing General Partner elects to withdraw from the Partnership; remove the Operator and elect a new Operator; amend the Partnership Agreement; dissolve and wind up the Partnership; approve or disapprove any sale of all or substantially all of the assets of the Partnership; and cancel any contract for services with the Managing General Partner, the Operator or their Affiliates, without penalty upon sixty days' notice. Atlas and its Affiliates may vote any Units purchased by them with respect to certain Matters. These and other rights are more particularly described in Section 4.03(c) and its subsections of the Partnership Agreement and are subject to certain limitations as set forth therein. APPLICATION OF PROCEEDS The Partnership Subscription will be expended by the Partnership for the purposes and in the percentages shown below assuming the minimum number of Units is sold. EXPENDITURE OF THE PARTNERSHIP SUBSCRIPTION . MINIMUM PARTNERSHIP SUBSCRIPTION ($1,000,000)..PERCENTAGE Organization and Offering Costs -0- -0- Lease Acquisition Costs -0- -0- Intangible Drilling Costs 800,000 80% Tangible Costs 200,000 20% TOTAL $1,000,000 100% For a more complete discussion of how the Partnership will apply the proceeds of this offering, see "Capitalization and Source of Funds and Use of Proceeds". PARTICIPATION IN COSTS AND REVENUES The following table sets forth the participation in costs and revenues of the Partnership between the Managing General Partner and the Participants. (See "Definitions" and "Participation in Costs and Revenues".) MANAGING GENERAL PARTNER..PARTICIPANTS PARTNERSHIP COSTS... Organization and Offering Costs (1) 100% 0% Lease Costs 100% 0% Intangible Drilling Costs 0% 100% Tangible Costs 14% 86% Operating Costs, Administrative Costs, Direct Costs and All Other Costs (2) . . 25% 75% PARTNERSHIP REVENUES. Equipment Proceeds (3) (3) All other Revenues including Production Revenues 25% 75% (1) The Managing General Partner's payment of Organization and Offering costs in an amount up to 15% of the Partnership Subscription will be credited towards its required Capital Contribution. Although Organization and Offering Costs in excess (Page 4) of 15% of the Partnership Subscription also will be paid by the Managing General Partner, such payments will be without recourse to the Partnership and the Managing General Partner will not be credited with such amounts towards its required Capital Contribution. (2) In the event Atlas has to subordinate its Partnership revenues in an amount up to 10% of Net Production Revenues of the Partnership, Operating Costs, Direct Costs, Administrative Costs and all other Partnership costs not specifically allocated will be charged to the parties in the same ratio as the related production revenues are being credited. (See "- Investment Features - Preferred 10% Cash Return (cumulative 5 years)," above and "Risk Factors - Special Risks of the Partnership - Borrowings by the Managing General Partner Could Reduce Funds Available for Its Subordination Obligation".) (3) Proceeds from the sale or other disposition of equipment will be credited to the parties charged with the costs of such equipment in the ratio in which such costs were charged. PRIOR ACTIVITIES Atlas has previously sponsored four public and nineteen private drilling programs formed since 1985 to conduct natural gas drilling and development activities in Pennsylvania and Ohio. Atlas has drilled approximately 1,500 wells over the 23 year period from 1972 to 1995 and during this time it has completed approximately 97% of the wells. In the current area of primary interest in Mercer County, Pennsylvania, Atlas has completed 99% of more than approximately 640 wells drilled. (See "Prior Activities" and "Proposed Activities - Information Regarding Currently Proposed Prospects".) RISK FACTORS This offering involves numerous risks, including the risks of oil and gas drilling, the risks associated with investments in oil and gas drilling programs, and tax risks. (See "Risk Factors".) Each prospective investor should carefully consider a number of significant risk factors inherent in and affecting the business of the Partnership and this offering, including the following. RISKS PERTAINING TO OIL AND GAS INVESTMENTS: The drilling and completion operations to be undertaken by the Partnership for the development of gas reserves involve the possibility of a substantial or partial loss of an investment in the Partnership because of wells which are productive but do not produce enough revenue to return the investment made and/or from time to time Dry Holes. The revenues of the Partnership are directly related to the ability to market the natural gas and the price of natural gas which is currently unstable and cannot be predicted. If gas prices decrease then investor returns will decrease. Oil and gas operations in the United States are subject to extensive government regulation. Future pollution and environmental laws could have an adverse effect on the Partnership. SPECIAL RISKS OF THE PARTNERSHIP: The Managing General Partner will have the exclusive management and control of all aspects of the business of the Partnership. Prior to the conversion of Investor General Partners to Limited Partners, Investor General Partners will have unlimited joint and several liability for all obligations and liabilities to creditors and claimants arising from the conduct of Partnership operations and if such liabilities exceed the Partnership's assets and insurance and the assets of the Managing General Partner and AEG Holdings, Inc. ("AEGH") (which have agreed to indemnify the Investor General Partners), the Investor General Partners could incur liability in excess of their Agreed Subscriptions. Lack of liquidity or a market for the Units, necessitating a long-term investment commitment. Lack of asset diversification and concentration of investment risk should less than the maximum Partnership Subscription be raised and thus fewer wells drilled. The Managing General Partner Anticipates that 31 to 32 wells will be drilled if the maximum Partnership Subscription of $7,000,000 is received, and 4 to 5 wells will be drilled if only the minimum Partnership Subscription of $1,000,000 is received. Certain conflicts of interest between the Managing General Partner and the Partnership and lack of procedures to resolve such conflicts. (Page 5) Atlas and its Affiliates can be expected to profit from the Partnership even though it is possible that Partnership activities could result in little or no profit, or a loss, to Participants. Investors and the Managing General Partner will share in costs disproportionately to their sharing of revenues. Atlas intends that the Partnership will drill the currently proposed Prospects described in "Proposed Activities - Information Regarding Currently Proposed Prospects"; however, if there are adverse events with respect to any of the currently proposed Prospects, Atlas has the right acting as a prudent operator to substitute the Partnership's Prospects. Also, up to 15% of the Partnership Subscription may be used to drill Prospects which are not described in "Proposed Activities - Information Regarding Currently Proposed Prospects". Although Atlas has pledged to subordinate a portion of its Partnership Net Production Revenues, the subordination is not a guarantee by Atlas. If the wells produce gas in small amounts and/or the price of gas decreases, then even with subordination the cash flow to the Participants may be very small and they may not receive a return of their entire investment. Quarterly cash distributions to investors may be deferred to the extent revenues are used for Partnership operations or reserves or if production is reduced because of decreases in the price of gas. Subject to certain conditions, beginning in 2000 the Participants may present their interests for purchase by the Managing General Partner. There is a risk that the Managing General Partner, or its Affiliates, will not have the necessary cash flow or be able to arrange financing for such purposes on terms which are reasonable as determined by the Managing General Partner, and in such event the Managing General Partner is able to suspend its repurchase obligation. TAX RISKS: There is no guarantee that if the Partnership is audited the IRS will not challenge the deductions claimed by the Partnership. Alternative minimum taxable income of "independent producers," which includes most investors, cannot be reduced by more than 40% in the 1996 tax year by reason of the repeal of the preference item for intangible drilling and development costs. The proper application of many provisions of the IRS regulations governing partnership allocations is currently unclear. Should the IRS successfully challenge the allocation provisions contained in the Partnership Agreement, Participants could incur a greater tax liability. However, assuming the effect of the allocations set forth in the Partnership Agreement is substantial in light of a Participant's tax attributes that are unrelated to the Partnership, in Special Counsel's opinion it is more likely than not that such allocations will govern each Participant's distributive share to the extent they do not cause or increase deficit balances in the Participants' Capital Accounts. ACTIONS TO BE TAKEN BY MANAGING GENERAL PARTNER TO REDUCE RISKS OF ADDITIONAL PAYMENTS BY INVESTOR GENERAL PARTNERS The Managing General Partner will attempt to conduct the operations of the Partnership in a manner designed to reduce the risk that an Investor General Partner could be required to make additional payments to the Partnership. The actions to be taken by the Managing General Partner include: 1. INSURANCE. Twenty million dollars of liability coverage during drilling operations and eleven million dollars thereafter as set forth in "Proposed Activities - Insurance." 2. CONVERSION OF INVESTOR GENERAL PARTNER UNITS TO LIMITED PARTNER INTERESTS. Pursuant to the Partnership Agreement, Investor General Partner Units in the Partnership will be converted to Limited Partner interests after substantially all of the Partnership Wells have been drilled and completed, which is anticipated to be in late summer of 1997. Once conversion has taken place, Investor General Partners will continue to have the responsibilities of general partners with respect to Partnership tort, contract and environmental liabilities and obligations incurred prior to the effective date of the conversion. However, such Investor General Partners will have the lesser liability of limited partners under Pennsylvania law with respect to obligations and liabilities arising after the conversion. Nevertheless, an Investor General Partner might become liable for obligations in excess of his Agreed Subscription to the Partnership during the time when the Partnership is engaged in drilling activities and for environmental claims that arose during drilling activities but were not discovered until after conversion. 3. NONRECOURSE DEBT. Under the Partnership Agreement the Partnership will be permitted to borrow funds only from Atlas or its Affiliates and Atlas and its Affiliates will not have recourse against the non-Partnership assets of the individual Investor (Page 5) General Partners. Accordingly, no Investor General Partner could be required to contribute funds to the Partnership in the case of a default under such loan arrangement. Because the Participants do not bear the risk of repaying these borrowings with non-Partnership assets, the borrowings will not increase the extent to which Participants are allowed to deduct their individual shares of Partnership losses. (See "Tax Aspects - Tax Basis of Participants' Interests" and "- `At Risk' Limitation For Losses".) Any such borrowings will be repaid from Partnership revenues. The amount that may be borrowed at any one time may not exceed an amount equal to 5% of the Partnership Subscription. To further protect the Investor General Partners, during producing operations all third party goods and services will be acquired by Atlas and its Affiliates and the Partnership will then acquire such goods and services from Atlas and its Affiliates at their Cost. 4. INDEMNIFICATION. Atlas and AEGH will indemnify each Investor General Partner from any liability incurred in connection with the Partnership which is in excess of such Investor General Partner's interest in the undistributed net assets of the Partnership and insurance proceeds, if any. Upon such indemnification by Atlas and/or AEGH, each Investor General Partner who has been indemnified is deemed to have transferred and subrogated his rights for contribution from or against any other Investor General Partner to Atlas and/or AEGH. Atlas' and AEGH's indemnification obligation, however, will not eliminate an Investor General Partner's potential liability in the event that insurance is not sufficient or available to cover a liability and Atlas' and AEGH's assets are insufficient to satisfy their indemnification obligation. There can be no assurance that Atlas' and AEGH's assets, including their liquid assets, will be sufficient to satisfy their indemnification obligation. (See "Risk Factors - Special Risks of the Partnership - Managing General Partner Liquid Net Worth Is Not Guaranteed" and "Financial Information Concerning the Managing General Partner, AEGH and the Partnership".) COMPENSATION TO THE MANAGING GENERAL PARTNER, THE OPERATOR AND THEIR AFFILIATES The following is a tabular presentation of the items of compensation and reimbursement to be received by Atlas and its Affiliates from the Partnership which are discussed more fully in "Compensation." FORM OF COMPENSATION AND/OR REIMBURSEMENT AMOUNT Partnership Interest 25% of the oil and gas revenues of the Partnership in return for paying Organization and Offering Costs equal to 15% of the Partnership Subscription, 14% of Tangible Costs and contributing all Prospects the Partnership at Cost, or fair market value if Cost is materially more than fair market value.(1) Contract drilling rates Competitive industry rates. Atlas anticipates that it will have a profit of approximately 11% to 15% per well if the well is drilled to a depth of 6,150 feet.(1) Operator's Per-Well Charges Competitive industry rates, currently $275 per well per month. (See "Proposed Activities- Drilling and Completion Activities; Operation of Producing Wells".) (1) Direct Costs Reimbursement at Cost.(1) Administrative Costs Unaccountable, fixed payment reimbursement of Managing General Partner's administrative overhead which the Managing General Partner has set at $75 per well per month.(1) Transportation and Marketing Fee Competitive industry rate of 29 per MCF. (1) - ---------------------------------------------- (1) Cannot be quantified at the present time. - -------------------------------------------------------------------------- (Page 7) The following organizational chart shows the relationship between Atlas Resources, Inc., the Managing General Partner, and its Affiliates. (See "Management".)
Organizational Diagram AEG HOLDINGS,INC. : AIC, INC : ......................................................................................... : : : : : : : ATLAS MERCER GAS PENNSYLVANIA ATLAS ENERGY TRANSATCO ATLAS GAS ATLAS ENERGY RESOURCES GATHERING INDUSTRIAL CORPORATION INC.,WHICH MARKETING GROUP, INC. (MANAGING INC., (GAS ENERGY,INC. (DRILLER AND OWNS 50% OF INC. (DRILLER AND GENERAL GATHERING ("PIE") OPERATOR IN TOPICO (MARKETS OPERATOR IN PARTNER, COMPANY) (SELLS GAS TO WV AND (OPERATES NATURAL OHIO DRILLER PENNSYLVANIA MANAGING PIPELINE GAS) AND OPERATOR) INDUSTRY) GENERAL IN OHIO : : : : ARD AED INVESTMENTS, INC. INVESTMENTS, INC. 1 2 3 4 5 6 6
CONFLICTS OF INTEREST The Managing General Partner has a fiduciary duty to exercise good faith and to deal fairly with the Participants in handling the affairs of the Partnership. Nevertheless, there are various conflicts of interest between the Managing General Partner and the Participants with respect to the Partnership. Conflicts of interest are inherent in oil and gas drilling programs involving non-industry participants because the transactions are entered into without arms' length negotiation. Such conflicts of interest include services provided to the Partnership by the Managing General Partner and its Affiliates and the amount of compensation paid by the Partnership for such services, which Leases will be acquired by the Partnership or other Programs sponsored by the Managing General Partner or its Affiliates and the terms upon which such acquisitions are made, the allocation of the Managing General Partner's management time, services and other functions among the Partnership and other Programs sponsored by the Managing General Partner and its Affiliates, the Managing General Partner's obligation to repurchase Participants' Units presented to it beginning in 2000 and the amount of the repurchase price, and other conflicts of interest. Other than certain guidelines set forth in "Conflicts of Interest", the Managing General Partner has no established procedures to resolve a conflict of interest. Consequently, conflicts of interest between the Managing General Partner and the Participants may not necessarily be resolved in the best interests of the Participants. Under Section 4.05(a) of the Partnership Agreement, the Managing General Partner, the Operator and their Affiliates have no liability to the Participants for any action or inaction on their part which they determined was in the best interest of the Partnership, provided that such course of conduct did not constitute negligence or misconduct of the Managing General Partner, the Operator or their Affiliates. (See "Conflicts of Interest".) DISTRIBUTION The Units will be offered by registered broker-dealers which are members of the National Association of Securities Dealers, Inc. ("NASD") on a best efforts basis. (Best efforts means that the broker-dealers will not guarantee the sale of a certain amount of Units.) The broker-dealers will be paid cash Sales Commissions of 7.5% of the Agreed Subscription and will be entitled to reimbursement of their bona fide accountable due diligence expenses incurred in discharging their due diligence obligations of .5% of the Units sold by them. Atlas has engaged three wholesalers who will receive 2.5% of Agreed Subscriptions obtained through such wholesalers' (Page 8) efforts. All Sales Commissions, due diligence reimbursements and wholesaling fees will be paid by the Managing General Partner and will not be paid with subscription proceeds. Upon receipt of the required minimum Partnership Subscription and after the checks have cleared, Sales Commissions, due diligence reimbursements and wholesaling fees will be paid by the Managing General Partner to the broker-dealers every two weeks until the Offering Termination Date. (See "Terms of the Offering - Partnership Closing and Escrow," "Participation in Costs and Revenues" and "Plan of Distribution".) THE FOREGOING SUMMARY OF CERTAIN PROVISIONS OF THE PROSPECTUS DOES NOT PURPORT TO BE A COMPLETE DESCRIPTION OF THE TERMS AND CONSEQUENCES OF AN INVESTMENT IN THE PARTNERSHIP. PROSPECTIVE INVESTORS AND THEIR ADVISERS SHOULD CAREFULLY READ THE ENTIRE PROSPECTUS AND ALL ATTACHED EXHIBITS BEFORE MAKING AN INVESTMENT IN THE PARTNERSHIP. RISK FACTORS An investment in the Partnership involves a high degree of risk and is suitable only for investors of substantial financial means who have no need of liquidity in their investment. SPECIAL RISKS OF THE PARTNERSHIP SPECULATIVE NATURE OF INVESTMENT. Exploration for gas is an inherently speculative activity. There is always the risk that drilling activity may result in wells which do not produce gas in sufficient quantities to return the investment made and from time to time Dry Holes. There is a substantial risk that the price of gas will be volatile and may decrease. A Participant will be able to recover his investment only through distributions of sales proceeds from production of the Partnership gas reserves which deplete over time. All or a portion of these distributions may be considered to include a return to Participants of their investment in the Partnership. There can be no guarantee that the Participants will recover all of their investment or if they do recover their investment that they will receive a rate of return on their investment that is competitive with other types of investment. (See "Proposed Activities - Intended Areas of Operations".) UNLIMITED LIABILITY OF INVESTOR GENERAL PARTNERS. Under Pennsylvania law, each Investor General Partner will have unlimited joint and several liability with respect to the activities of the Partnership which could result in an Investor General Partner being required to make payments, in addition to his original investment, in amounts which are impossible to determine because of their uncertain nature with respect to the development and operation of the wells. Also, the Partnership may own less than 100% of the Working Interest in the Prospects and in that event each Investor General Partner may have joint and several liability with the other third party owners of the Working Interest. Although under the terms of the Partnership Agreement the Investor General Partners agree to be responsible for and pay their respective proportionate shares of such obligations and liabilities, such agreement does not legally negate each Investor General Partner's joint and several liability for such obligations and liabilities as among themselves if an Investor General Partner does not pay his respective proportionate share of such obligations and liabilities and/or in the event that a court holds the Investor General Partners and the other third party owners of the Working Interest to be jointly and severally liable. (See "Summary of the Offering - Actions to be Taken by Managing General Partner to Reduce Risks of Additional Payments by Investor General Partners", "- General Risks of the Oil and Gas Business - Drilling Hazards May Be Encountered," "- General Risks of the Oil and Gas Business - Potential Liability for Pollution; Environmental Matters," and "Summary of Partnership Agreement - Liabilities of General Partners, Including Investor General Partners".) In addition to the other actions summarized in this Prospectus which will be taken by Atlas to reduce the risk of additional payments by the Investor General Partners, Atlas and AEGH have agreed to indemnify each Investor General Partner from any liability incurred in connection with the Partnership which is in excess of such Investor General Partner's share of Partnership assets. There can be no assurance that Atlas' and AEGH's assets, including their liquid assets, will be sufficient to satisfy their indemnification obligation. This risk is increased because Atlas and AEGH have made and will make similar financial commitments in other drilling programs. The Partnership will also have the benefit of general and excess liability insurance of $20,000,000 during drilling operations and, thereafter, $11,000,000, per occurrence and in the aggregate. Nevertheless, the Investor General Partners may become subject to tort or contract liability in excess of the amounts insured under such policies and also may be subject to liability for pollution, abuses of the environment and other damages against which the Managing General Partner cannot insure because coverage is not available or against which it may elect not to insure because of high premium costs or other reasons. If the insurance proceeds, Partnership assets, and Atlas' and AEGH's indemnification of the Investor General Partners were not sufficient to satisfy such liability an Investor General Partner's personal assets could be required to be used to satisfy such liability. (Page 9) ILLIQUID INVESTMENT AND RESTRICTIONS ON TRANSFERABILITY OF PARTICIPANTS' INTERESTS. Participants in the Partnership must assume the risks of an illiquid investment Participants' interests are not marketable; and the transferability of Participants' interests is limited, both by express provision of the Partnership Agreement and the provisions of state and federal securities laws. Under thePartnership Agreement, Units are nontransferable except with the consent of the Managing General Partner, and an assignee of a Participant's Unit is entitled to become a substituted Partner only if the assignor gives the assignee such right, the Managing General Partner consents to such substitution in its discretion, the assignee pays all costs of such substitution, and the assignee executes and delivers the instruments, in form and substance satisfactory to the Managing General Partner, necessary to effect substitution and confirm the agreement of the assignee to be bound by the terms and conditions of the Partnership Agreement. Under the federal securities laws, Units cannot be transferred in the absence of an effective registration of the Units under the Securities Act of 1933, as amended, or an exemption therefrom. The Managing General Partner has no obligation to register the Units for such purpose. Such interests cannot be readily liquidated by a Participant in the event of an emergency, and any such sale would create adverse tax and economic consequences for the selling Participant. (See "Repurchase Obligation" and "Transferability of Units".) TOTAL RELIANCE UPON THE MANAGING GENERAL PARTNER. The Managing General Partner will have the exclusive right to control the affairs and business of the Partnership. No prospective investor should purchase any Units in the Partnership unless he is willing to entrust all aspects of management of the Partnership to Atlas. (See "Conflicts of Interest" and "Summary of Partnership Agreement".) MANAGEMENT OBLIGATIONS OF MANAGING GENERAL PARTNER NOT EXCLUSIVE. Atlas must devote that amount of time to the Partnership's affairs as it determines reasonably necessary. Atlas and its Affiliates will be engaged in other oil and gas activities and other unrelated business ventures for their own account or for the account of others during the term of the Partnership. (See "Conflicts of Interest - Other Activities of the Managing General Partner, the Operator and their Affiliates".) MANAGING GENERAL PARTNER LIQUID NET WORTH IS NOT GUARANTEED. Atlas, as Managing General Partner, is primarily responsible for the conduct of the Partnership's affairs. A significant adverse financial reversal for Atlas could adversely affect the Partnership and the value of the Units therein. The net worth of Atlas and AEGH is largely based on the estimated value of producing gas properties that they hold, and is not readily available in cash absent borrowings or a sale of the properties. Also, gas prices are volatile and if gas prices decrease, this will have a direct adverse effect on the estimated value of such properties and, therefore, on the net worth of Atlas and AEGH. There is no assurance that Atlas and AEGH will have the necessary net worth, currently or in the future, to meet their indemnification obligation to the Investor General Partners or with respect to Atlas its other financial commitments under the Partnership Agreement. These risks are increased because Atlas and AEGH have made and will make similar financial commitments in other programs. (See "Financial Information Concerning the Managing General Partner, AEGH and the Partnership".) DIVERSIFICATION DEPENDS UPON SUBSCRIPTION PROCEEDS. The fewer the number of Units purchased the fewer the number of wells which the Partnership will participate in developing which will limit the ability to spread the risks of drilling. Conversely, as the Partnership size increases the number of wells will increase, thereby increasing the diversification of the Partnership. . The Managing General Partner anticipates that 31 to 32 wells will be drilled if the maximum Partnership Subscription of $7,000,000 is received, and 4 to 5 wells will be drilled if only the minimum Partnership Subscription of $1,000,000 is received. If the Managing General Partner, however, is unable to secure sufficient attractive Prospects for a larger Partnership, it is possible that the average quality of the wells drilled could decline. In addition, greater demands will be placed on the management capabilities of the Managing General Partner in a large Partnership. (See "Proposed Activities - In General".) GREATER RISKS BORNE BY PARTICIPANTS. Under the cost and revenue sharing provisions of the Partnership Agreement, the Participants and the Managing General Partner will share in costs disproportionately to their sharing of revenues. (See "Participation in Costs and Revenues".) COMPENSATION AND FEES TO THE MANAGING GENERAL PARTNER REGARDLESS OF SUCCESS OF THE ACTIVITIES. Atlas and its Affiliates can be expected to profit from the Partnership even though Partnership activities result in little or no profit, or a loss to Participants. (See "Compensation".) DRY HOLE RISK IN DEVELOPMENT DRILLING. Although the Dry Hole risk associated with Development Wells in the Appalachian Basin is greatly reduced, there can be no assurance that there will not be some Dry Holes. (See "Prior Activities".) RISK OF UNPRODUCTIVE WELLS IN DEVELOPMENT DRILLING. Completion of a Development Well in the Clinton/Medina geological formation in Pennsylvania or Ohio, or any other Development Well drilled by the Partnership in the Appalachian Basin should not be equated with commercial success. These geologic formations are characterized by low permeability (ability of hydrocarbon-bearing rock to allow the flow of oil and gas), low porosity (capacity of rock to hold oil and gas) and other geological characteristics which may reduce the profit potential of a well completed to such geologic formations. A well drilled to such geologic formations may be completed and productive but not produce enough revenue to return the investment made, even if tax consequences are considered. (Page 10) With respect to Atlas' prior partnerships since 1985, twenty-two of the twenty-three partnerships have not yet returned to the investor 100% of his capital contributions without taking tax savings into account. However, all of the partnerships are continuing to make cash distributions and eighteen of the partnerships were formed in 1990 or subsequent years. (See "- General Risks of the Oil and Gas Business - Speculative Nature of Gas Business," "Prior Activities" and "Proposed Activities".) RISKS REGARDING MARKETING OF GAS. Atlas estimates that a portion of the Partnership's gas production in Mercer County will be transported through Atlas' and its Affiliates' own pipeline system and sold directly to industrial end-users in the area where the wells will be drilled. The remainder of the Partnership's gas will be transported through Atlas' and its Affiliates' pipelines to the interconnection points maintained with Tennessee Gas Transmission Co., National Fuel Supply Corporation, National Fuel Gas Distribution Company, East Ohio Natural Gas Company and Peoples Natural Gas Company. Atlas markets portions of the gas through long term contracts, short term contracts and monthly spot market sales. There is no assurance of the price at which the Partnership's gas will be sold, and generally, the revenues received by the Partnership will be less the farther the gas is transported because of the increased transportation costs. (See "- General Risks of the Oil and Gas Business - Risk of Decrease in the Price of Gas," "Proposed Activities - Sale of Oil and Gas Production" and "Competition, Markets and Regulation - Marketing".) The sale to industrial end-users also can raise risks relating to the credit worthiness of the industrial end-user. In the event that the industrial end-user does not pay, or delays payment, the Partnership may not be paid or may experience delays in receiving payment for natural gas that has already been delivered. For example, after Sharon Steel Corporation ("Sharon") filed Chapter 11 bankruptcy in 1987, it continued to purchase most of Atlas' and its Affiliates' natural gas production in the Mercer County field until it filed a second Chapter 11 bankruptcy in 1992. At that time, Atlas and various programs where Atlas is either the Managing General Partner and/or operator lost approximately $2,400,000, for approximately 77 days of gas sales, of which approximately $600,000 was owed to Atlas and the balance was owed to the various programs. (See "- General Risk of the Oil and Gas Business - Competition in Marketing Natural Gas Production," "Proposed Activities - Sale of Oil and Gas Production," "Competition, Markets and Regulation - Marketing" and "Financial Information Concerning the Managing General Partner, AEGH and the Partnership".) Also, there can be no assurance that the terms of a gas supply agreement with an end-user will continue to be favorable over the life of the wells. Most gas supply agreements provide that prices may be adjusted upward or downward from time to time in accordance with market conditions. Also, when the gas supply agreements expire the industrial end-users may negotiate lower pricing terms. (See "Proposed Activities - Sale of Oil and Gas Production" and "Competition, Markets and Registration - Marketing".) Finally, potential conflicts of interest are presented by the Managing General Partner's obligation to market the oil and gas production of other Programs sponsored by the Managing General Partner and its Affiliates as well as any oil and gas production of the Partnership. In this regard, the Managing General Partner and its Affiliates have adopted the following procedures and conditions to reduce some of these potential conflicts of interest. All benefits from marketing arrangements or other relationships affecting property of the Managing General Partner or its Affiliates and the Partnership will be fairly and equitably apportioned according to the respective interest of each in such property. Marketing all of the relatively small amounts of oil produced by the wells generally is not a problem. Atlas anticipates selling all of such oil to Quaker State Oil Refinery Company or other oil companies in the area where the well is situated in spot sales. With respect to natural gas production from the wells, the Managing General Partner will treat all wells in a geographic area equally concerning to whom and at what price the Partnership's gas will be sold and to whom and at what price the gas of other oil and gas Programs which the Managing General Partner has sponsored or will sponsor will be sold. The Managing General Partner calculates a weighted average selling price for all of the gas sold in a geographic area by taking all money received from the sale of all of the gas sold to its customers in a geographic area and dividing by the volume of all gas sold from the wells in that geographic area. This ensures that the various Programs receive the same selling price for their gas production in the same geographic area. Also, in the event that Atlas determines curtailment of production would be in the best interests of its Programs, production will be curtailed to the same degree in all of the wells in the same geographic area. On the other hand, if Atlas has not decided to curtail production, but all of the gas produced cannot be sold because of limited demand which increases pipeline pressure, then the production that is sold will be from those wells which are best able to feed into the pipeline, regardless of which Programs own the wells. ((See "Conflicts of Interest - Procedures to Reduce Conflicts of Interest.") POSSIBLE DELAYS IN PRODUCTION AND SHUT-IN WELLS. Production from wells may be reduced or Shut-In due to marketing demands which tend to be seasonal. There is no assurance that Atlas will not have to curtail production in 1997 or subsequent years awaiting a better price for the gas. Production from wells drilled in certain areas may also be delayed for up to several months until construction of the necessary pipelines and production facilities is completed, however, such delays are not anticipated by Atlas with respect to any of the wells currently proposed for the partnership. (See "Proposed Activities - Sale of Oil and Gas Production" and "Competition, Markets and Regulation - Marketing".) (Page 11) UNSPECIFIED LOCATION OF A PORTION OF THE PROSPECTS. Atlas intends that the Partnership will be assigned 100% of the Working Interest and will drill the currently proposed Prospects described in "Proposed Activities - Information Regarding Currently Proposed Prospects" which represent approximately 85% of the potential $8,000,000 maximum Partnership Subscription assuming 100% of the Working Interest is acquired by the Partnership and the Managing General Partner elects to increase the size of the offering to $8,000,000. The currently proposed Prospects are all situated in Mercer County, Pennsylvania. However, the Managing General Partner has reserved the right to use up to 15% of the Partnership Subscription to drill additional Prospects in other areas of the Appalachian Basin which are not described in "Proposed Activities - Information Regarding Currently Proposed Prospects". The Partnership also may acquire Working Interests in additional Prospects which are not described in "Proposed Activities - Information Regarding Currently Proposed Prospects" in the event the Partnership acquires less than 100% of the Working Interest in one or more Prospects. In addition, Atlas has the right to delete any Prospect which it deems to be inappropriate for the Partnership because of adverse events or for which insufficient funds are available, and it may substitute or adjust the Partnership's interest in the Prospects as it deems necessary to meet the objectives of the Partnership. A prospective Participant has no information regarding any additional and/or substitutional Leases. The Partnership does not have the right of first refusal in the selection of Leases from the inventory of the Managing General Partner and its Affiliates, and they may sell their Leases to other programs, companies, joint ventures or other persons at any time. (See "- Total Reliance upon the Managing General Partner," above, and "Proposed Activities - Acquisition of Leases" and "Proposed Activities - Information Regarding Currently Proposed Prospects".) NO GUARANTEE OF DATA REGARDING CURRENTLY PROPOSED PROSPECTS. The data included in "Proposed Activities - Information Regarding Currently Proposed Prospects" has been prepared by Atlas from sources deemed reliable by it; however, Atlas cannot guarantee that the data reflects all of the wells drilled in the area or that the amount of gas production in the area is accurate in all cases. As to certain of the Prospects the production information is incomplete because the wells are being operated by third parties and the information is unavailable to Atlas. Also, some of the wells have only been producing for a short period of time or are not yet completed or online. (See "Proposed Activities - Information Regarding Currently Proposed Prospects".) ATLAS' SUBORDINATION IS NOT A GUARANTEE. Atlas has agreed to subordinate a portion of its share of Partnership Net Production Revenues generated from the sale of gas in the Partnership. If the wells, however, produce gas in small amounts, and/or the price of gas decreases, then even with subordination the cash flow to the Participants may be very small and they may not receive a return of their entire investment. (See "- Borrowings by the Managing General Partner Could Reduce Funds Available for Its Subordination Obligation" and "Participation in Costs and Revenues - Subordination of Portion of Managing General Partner's Net Revenue Share".) BORROWINGS BY THE MANAGING GENERAL PARTNER COULD REDUCE FUNDS AVAILABLE FOR ITS SUBORDINATION OBLIGATION. It is anticipated that the Managing General Partner will pledge, for its own corporate purposes, either its Partnership interest and/or an undivided interest in the assets of the Partnership equal to its interest in the revenues of the Partnership. Such a pledge, in the event of a default to the lender, would reduce the Partnership Net Production Revenues of Atlas available for Atlas' subordination obligation. Also, the Managing General Partner is not obligated to attempt or arrange for or secure any similar financing for any Participants for their own account. (See "Conflicts of Interest - Other Conflicts" and "Summary of Partnership Agreement".) POSSIBILITY OF REDUCTION OR UNAVAILABILITY OF INSURANCE. It is possible that some or all of the insurance coverage which the Partnership has available may become unavailable or prohibitively expensive. In such case, Investor General Partners who elected to remain Investor General Partners after notice that the insurance is being reduced could be exposed to additional financial risk, and all Participants could be subject to greater risk of loss of their investment. (See "- General Risks of the Oil and Gas Business - Drilling Hazards May Be Encountered," "Proposed Activities - Insurance" and "Tax Aspects - Limitations on Passive Activities".) POSSIBLE NONPERFORMANCE BY SUBCONTRACTORS. Atlas, as Operator and general drilling contractor, will subcontract some of the services to subcontractors. There is a risk that if such subcontractors fail to timely pay for materials or services on the wells the Partnership could incur excess costs. To reduce this risk Atlas will use only subcontractors that have previously performed similar activities for Atlas in a satisfactory manner, will endeavor to ascertain the financial condition of the subcontractors and attempt to secure lien releases from the various subcontractors. (See - "Unlimited Liability of Investor General Partners," above and "Proposed Activities - Drilling and Completion Activities; Operation of Producing Wells".) RISK OF PREPAYMENT TO ATLAS. Advance payments by the Partnership to the Managing General Partner and its Affiliates are prohibited, except where advance payments are required to secure tax benefits of prepaid drilling costs and for a business purpose. Because it is anticipated the Partnership will be required to pay the entire contract price for the Partnership Wells immediately because of tax reasons, such funds could be subject to claims of creditors of such Operator. Currently, Atlas is not aware of any existing creditors of Atlas or its Affiliates which would have a claim to prepaid Partnership funds. Although the Partnership is not required to prepay completion costs of a well before a decision is made to complete the well, it is anticipated that all wells will be required to be (Page 12) completed before an evaluation can be made as to their potential productivity. (See "Financial Information Concerning the Managing General Partner, AEGH and the Partnership".) POSSIBLE LEASEHOLD DEFECTS. The Working Interests in the Leases to be assigned to the Partnership by Atlas will be assigned without title insurance and there is a risk of title failure. (See "Proposed Activities - Title to Properties".) PARTNERSHIP BORROWINGS MAY REDUCE OR DELAY DISTRIBUTIONS. Although it is not anticipated that the Partnership will borrow any funds, the Managing General Partner is authorized to increase the working capital of the Partnership by making advances to the Partnership. Borrowings by the Partnership can result in delayed or reduced cash distributions while the loan is being repaid. (See "Capitalization and Source of Funds and Use of Proceeds" and "- Tax Risks - Possible Taxes in Excess of Cash Distributions," below.) ATLAS WILL RECEIVE BENEFIT FROM TRANSFER OF LEASES. The Managing General Partner will contribute sufficient undeveloped Leases to the Partnership to drill the Partnership's wells at the Cost of such Leases, or fair market value if Cost is materially more than fair market value. The Cost of the Leases will include a portion of the Managing General Partner's reasonable, necessary and actual expenses for geological, geophysical, engineering, interest expense, legal, and other like services allocated to the Partnership's Leases determined using industry guidelines. The Managing General Partner will receive a benefit from these transactions. In addition, such contributions could create conflicts of interest for the Managing General Partner. Wells will be drilled by the Partnership to test the Clinton /Medina geologic formation, a blanket geological formation prevalent in Ohio and Pennsylvania. A Prospect will be deemed to consist of the drilling or spacing unit on which such well will be drilled if the Clinton/Medina geological formation to which such well will be drilled contains Proved Reserves and the drilling or spacing unit protects against drainage. The development of wells on such acreage may provide Atlas with offset sites by allowing it to ascertain at the Partnership's expense the value of adjacent acreage in which the Partnership would not have any right to participate in developing. (See "Conflicts of Interest - Conflicts Involving Acquisition of Leases," "Conflicts of Interest - Other Activities of the Managing General Partner, the Operator and their Affiliates" and "Proposed Activities".) OTHER CIRCUMSTANCES UNDER WHICH DISTRIBUTIONS MAY BE REDUCED OR DELAYED. Although the Managing General Partner intends to distribute the cash quarterly, distributions may be deferred to the extent revenues are used for cost overruns, costs related to completing and Fracturing some of the wells in a third zone or remedial work to improve a well's producing capability or in the event a productive gas well is Shut-In for an indeterminate time awaiting an acceptable market for such production. In addition, the Operator pursuant to the Drilling and Operating Agreement has reserved the right at any time after three years from the date a Partnership Well has been placed into production to withhold revenues of the well of up to $200 per month to establish a reserve for the estimated costs of eventually plugging and abandoning the well, although historically Atlas has never done so after only three years. There can be no assurance that cash distributions will be regularly paid or that they will exceed the amount of the taxes payable by a Participant with respect to his investment in the Units. (See "- Tax Risks - Possible Taxes in Excess of Cash Distributions".) CONFLICTS OF INTEREST. There are conflicts of interest between the Managing General Partner and its Affiliates and the Partnership including, but not limited to, the compensation paid by the Partnership to Atlas and the terms of the offering have been determined solely by Atlas; Atlas may have conflicts of interest in allocatin management time, services and other functions (which are allocated on an as- needed basis consistent with its fiduciary duties) among the Partnership and its other oil and gas programs; and conflicts of interest may arise concerning which Leases Atlas will assign to the Partnership for drilling, and which Leases Atlas will assign to its other drilling programs. Other than certain guidelines set forth in "Conflicts of Interest", the Managing General Partner has no established procedures to resolve a conflict of interest. (See " - Risks Regarding Marketing of Gas" above, and "Conflicts of Interest".) RISK REGARDING PARTICIPATION WITH THIRD PARTIES. It is anticipated that the Partnership will own 100% of the Working Interest in the wells, however, the Partnership has reserved the right to take as little as 25% of the Working Interest. Therefore, it is possible that other Working Interest owners will participate with the Partnership to drill some of the wells. Additional financial risks are inherent in any operation where the cost of drilling, equipping, completing and operating wells is shared by more than one person. In the event the Partnership pays its share of such costs, but another Working Interest owner does not, the Partnership may have to pay the costs of such defaulting party. (See "-Unlimited Liability of Investor General Partners," above, and "Proposed Activities".) DISSOLUTION OF THE PARTNERSHIP OR WITHDRAWAL OR REMOVAL OF THE MANAGING GENERAL PARTNER MAY HAVE ADVERSE EFFECTS. At any time commencing ten years after the Offering Termination Date and the Partnership's primary drilling activities, the Managing General Partner may voluntarily withdraw as Managing General Partner without the consent of the Participants upon giving 120 days' written notice of withdrawal to the Participants. In addition, the Managing General Partner may be removed at any time upon sixty (Page 13) days' advance written notice to the outgoing Managing General Partner, by the affirmative vote of Participants (excluding the Managing General Partner and its Affiliates with respect to any Units purchased by them) whose Agreed Subscriptions equal a majority of the Partnership Subscription (excluding any Units purchased by the Managing General Partner or its Affiliates). If Atlas would withdraw or be removed as Managing General Partner of the Partnership and the Participants failed to elect to continue the Partnership and to designate a substituted Managing General Partner of the Partnership, the Partnership would terminate and dissolve and adverse tax and other consequences could result. If the Partnership was dissolved the Participants may receive a distribution of direct property interests. As joint interest owners, Limited Partners would have joint and several liability for the obligations or liabilities arising out of joint owner operations and might find it desirable to obtain insurance protection or dispose of the property interests, which may be difficult. To reduce this risk the Managing General Partner will attempt upon liquidation and dissolution to use its best efforts to sell the Partnership's properties or to cause some type of entity which would preserve the limited liability of the former Limited Partners, such as a liquidating trust, to be established to hold the Partnership's properties. However, even if the properties were transferred to a liquidating trust upon dissolution of the Partnership, it might be difficult for the liquidating trust to deal with such assets and realize their full value. For example, to replace the management provided by the Managing General Partner, the trustee of the liquidating trust would need the services of professional operators. Further, after dissolution and the completion of payments to third party creditors, the Managing General Partner has priority in liquidation for any claims of indebtedness before the Participants. Such distributions may also have adverse income tax consequences to the Participants. (See "- Unlimited Liability of Investor General Partners," above, and "Tax Aspects - Disposition of Partnership Interests".) INDEMNIFICATION AND EXONERATION OF THE MANAGING GENERAL PARTNER WOULD REDUCE DISTRIBUTIONS. Under the Partnership Agreement the Managing General Partner and its Affiliates may be indemnified by the Partnership for losses or liabilities incurred in connection with the activities of the Partnership if they determined in good faith that the course of conduct which caused the loss or liability was in the best interest of the Partnership, they were acting on behalf of or performing services for the Partnership and such course of conduct was not the result of their negligence or misconduct. Use of Partnership capital or assets for such indemnification would reduce amounts available for Partnership operations or for distribution to Participants. (See "Fiduciary Responsibility of the Managing General Partner".) LIMITED PARTNER LIABILITY FOR REPAYMENT OF CERTAIN DISTRIBUTIONS. Under the Pennsylvania Revised Uniform Limited Partnership Act (the "Partnership Act"), the liability of the Limited Partners for the losses, debts and obligations of the Partnership will generally be limited to their Agreed Subscription and their allocable share of any undistributed net profits. However, under the Partnership Act a Limited Partner may, for a period of two years, be required to repay to the Partnership any Capital Contributions "wrongfully" returned to a Limited Partner in violation of the Partnership Agreement or Pennsylvania law, with interest thereon, including but not limited to any distribution to the Limited Partners to the extent that, after giving effect to such distribution, all liabilities of the Partnership, other than liabilities to the Participants on account of their contributions and to the Managing General Partner, exceed Partnership assets. Also, a Limited Partner will be liable for the obligations of the Partnership if he takes part in the control of the business of the Partnership. (See "Summary of Partnership Agreement - Liability of Limited Partners".) POSSIBILITY OF UNAUTHORIZED ACTS OF INVESTOR GENERAL PARTNERS. Under the Partnership Act a general partner may bind the partnership by his action, unless the partner in fact has no authority to act for the partnership and the person with whom he is dealing has knowledge of the fact he has no such authority. Under the Partnership Act, knowledge may be actual knowledge of the lack of authority or knowledge of other facts which in the circumstances would show bad faith. Although there is a risk that an Investor General Partner might bind the Partnership by his acts, Atlas believes it will have such exclusive control over the conduct of the business of the Partnership that it is unlikely a third party, in the absence of bad faith, would deal with an Investor General Partner as to the Partnership's business. RISKS THAT REPURCHASE OBLIGATION MAY NOT BE FUNDED AND REPURCHASE PRICE MAY NOT REFLECT FULL VALUE. Subject to certain conditions, beginning in 2000 the Participants may present their interests for purchase by the Managing General Partner. The Managing General Partner anticipates purchasing such interests primarily through cash flow and secondarily through corporate borrowings secured by the interests purchased. There is a risk that the Managing General Partner, or its Affiliates, will not have the necessary cash flow or be able to arrange financing for such purposes on terms which are reasonable as determined by the Managing General Partner in its sole discretion, and in such event the Managing General Partner is able to suspend its repurchase obligation. In addition, the Managing General Partner has and will incur similar presentment obligations in connection with other oil and gas programs which it or its Affiliates may sponsor. The purchase price to be paid to the Participant will be based upon the Participant's share of the net assets and liabilities of the Partnership based upon his Agreed Subscription. The purchase price will include: (i) 70% of the present worth of future net revenues from the Partnership's Proved Reserves, (ii) Partnership cash on hand, (iii) prepaid expenses and accounts receivable of the Partnership, (Page 14) less a reasonable amount for doubtful accounts, and (iv) the estimated market value of all assets of the Partnership not separately specified above, determined in accordance with standard industry valuation procedures. The amount attributable to Partnership reserves will be determined based on an engineering report prepared by the Partnership and reviewed by an Independent Expert. The Participants will be provided a computation of the total oil and gas Proved Reserves of the Partnership and the present worth thereof, employing a discount rate equal to 10%, a constant price for the oil and basing the price of gas upon the existing gas contract(s) at the time of the repurchase. The Reserve Report must be within 120 days of the commencement of the repurchase offer. There will be deducted from the foregoing sum: (i) all Partnership debts, obligations and other liabilities, including accrued expenses, and (ii) any distributions made to the Participants between the date of the request and the actual payment; provided, however, that if any cash distributed was derived from the sale, subsequent to the request, of oil, gas or other mineral production or of a producing property owned by the Partnership, for purposes of determining the reduction of the purchase price, such distributions will be discounted at the same rate used to take into account the risk factors employed to determine the present worth of the Partnership's Proved Reserves. The purchase price may be further adjusted by the Managing General Partner for estimated changes therein from the date of such report to the date of payment of the purchase price to the Participants: (i) by reason of production or sales of, or additions to, reserves and lease and well equipment, sale or abandonment of leases, and similar matters occurring prior to payment of the purchase price to the selling Participant, and (ii) by reason of any of the following occurring prior to payment of the purchase price to the selling Participant: changes in well performance, increases or decreases in the market price of oil, gas or other minerals, revision of regulations relating to the importing of hydrocarbons, changes in income, ad valorem and other tax laws (e.g., material variations in the provisions for depletion) and similar matters. Because of the difficulty in accurately estimating oil and gas reserves, the purchase price may not reflect the full value of the Partnership property to which it relates. Such estimates are merely appraisals of value and may not correspond to realizable value. There can be no assurance that the purchase price paid for the interest and any revenues received by the Participant prior to the repurchase will be equal to the original price paid for such interests. Conversely, a Participant might realize a greater return if he retains the Units, which the Participant may elect, rather than sells the Units as provided herein. (See "Conflicts of Interest - Conflicts Regarding Repurchase Obligation" and "Repurchase Obligation".) POSSIBLE PARTICIPATION IN ROLL-UP . There is no assurance that at some indeterminate time in the future the Partnership will not become involved in a "Roll-Up" transaction. In that event, there could be changes in the rights, preferences, and privileges of the Participants in the Partnership; such as increasing the compensation of the Managing General Partner, amending the voting rights of the Participants, listing the Units on a national securities exchange or on NASDAQ, changing the fundamental investment objectives of the Partnership, or materially altering the duration of the Partnership. However, any Participant who votes "no" on a Roll-Up proposal will be offered a choice of (a) accepting the securities of the Roll-Up Entity offered in the proposed Roll-Up; (b) remaining a Participant in the Partnership and preserving his interests in the Partnership on the same terms and conditions as existed previously; or (c) receiving cash in an amount equal to his pro-rata share of the appraised value of the Partnership's net assets. (See "Conflicts of Interest - Policy Regarding Roll-Ups" .) GENERAL RISKS OF THE OIL AND GAS BUSINESS SPECULATIVE NATURE OF GAS BUSINESS. Gas exploration is an inherently speculative activity. The Managing General Partner cannot predict the amount of gas recoverable from any Prospect, the time it will take to recover the gas or the price at which the gas will be marketed. Because of the risk involved, there can be no guarantee that the Participants will recover all of their investment or that their investment will be profitable. (See "Proposed Activities - Intended Areas of Operations".) RISKS OF DECREASE IN THE PRICE OF GAS. The price at which the gas can be sold will depend on factors largely beyond the control of the Partnership. For example, during most of the 1980's and 1990's oil and gas prices have been unstable. If there is a significant reduction in the price of gas, it will have a material adverse impact on the net revenues which the Partnership will derive from the production of its wells, possibly even precluding or limiting distributions to the Participants. There is a substantial risk that the price of gas will continue to be volatile and may decrease. (See "Proposed Activities - Sale of Oil and Gas Production" and "Competition, Markets and Regulation - Marketing".) DRILLING HAZARDS MAY BE ENCOUNTERED. There are numerous natural hazards involved in the drilling of wells including unexpected or unusual formations, pressures and blowouts that may result in possible damage to property and third parties including surface damage, bodily injury, damage to and loss of equipment, reservoir damage and loss of reserves. The Partnership may also be subject to liability for pollution such as accidental leakages, abuses of the environment and other similar damages incurred during drilling. Although the Partnership will maintain insurance coverage in the amounts the Managing General Partner deems appropriate, it is possible that insurance coverage may be insufficient. Uninsured liabilities would reduce the funds available to the Partnership, may result in the loss of Partnership properties and may create liability for Investor General Partners. (See "Proposed Activities - Insurance".) (Page 15) COMPETITION IN MARKETING NATURAL GAS PRODUCTION. There is competition for the most desirable Leases, and the Partnership will encounter intense competition in the sale of its gas production. The quantities of gas to be delivered by the Partnership may also be affected by factors beyond its control, such as the inability of the wells to deliver gas at pipeline quality and pressure, premature exhaustion of reserves, changes in governmental regulations affecting allowable production and priority allocations and price limitations imposed by federal and state regulatory agencies. (See "-Special Risks of the Partnership- Risks Regarding Marketing of GAS", "Proposed Activities - Sale of Oil and Gas Production" and "Competition, Markets and Regulation".) RISK OF NEW GOVERNMENTAL REGULATIONS. Oil and gas operations in the United States, including lease acquisitions and other energy-related activities, are subject to extensive government regulation and to interruption or termination by governmental authorities on account of ecological and other considerations. Proposals concerning regulation and taxation of the oil and gas industry are constantly before Congress. It is impossible to predict which proposals, if any, will be enacted into law and, if enacted, the exact effect they might have on the Partnership. (See "Competition, Markets and Regulation".) POTENTIAL LIABILITY FOR POLLUTION; ENVIRONMENTAL MATTERS. The Partnership may be subject to liability for pollution and other damages due to hazards which cannot be insured against or will not be insured against due to prohibitive premium costs or for other reasons. In this regard the Investor General Partners might become liable for obligations in excess of their Agreed Subscriptions for environmental claims that arose during drilling activities, but were not discovered until after the Investor General Partners converted to Limited Partner status. Environmental regulatory matters also could increase substantially the cost of doing business, and may cause delays in producing natural gas from the Partnership's wells or require the modification of operations in certain areas. (See "Competition, Markets and Regulation".) UNCERTAINTY OF COSTS. There is no assurance that over the life of the Partnership there will not be fluctuating or even increasing costs in doing business. This would directly affect the Managing General Partner's ability to operate the Partnership's wells and property at acceptable price levels. (See "Competition, Markets and Regulation - Competition".) TAX RISKS TAX CONSEQUENCES MAY VARY DEPENDING ON INDIVIDUAL CIRCUMSTANCES. There are various risks associated with the federal income tax aspects of an investment in the Partnership. Each potential investor is urged to consult his own tax advisor concerning the effects of federal income tax law and regulations and interpretations thereof, on his own tax situation. (See "Tax Aspects".) RISK OF CHANGES IN THE LAW. The Partnership and the Participants could be adversely affected by changes in the tax laws that may result through future Congressional action, Tax Court or other judicial decisions, or interpretations by the IRS. (See "Tax Aspects".) NO ADVANCE RULING FROM THE IRS ON TAX CONSEQUENCES. The Managing General Partner has received an opinion of counsel that, more likely than not, the Partnership will be classified as a partnership for federal income tax purposes and not as a corporation or a publicly traded partnership. The opinion of counsel is not binding on the IRS and is based upon certain factual assumptions which may or may not prove to be true. The Partnership does not meet all of the procedural tests of the IRS for obtaining an advance ruling on partnership classification and no advance ruling on this or any other tax consequence of an investment in the Partnership will be requested. There can be no assurance that the Partnership will not at some later date be found to be an association taxable as a corporation in which event Participants would be prevented from reporting on their tax returns their distributive shares of Partnership income and loss, Partnership income would be subject to tax at the partnership level at corporate tax rates and distributions to Participants could be treated as dividends subject to tax at the Participant level. (See "Tax Aspects - Partnership Classification".) Nevertheless, Special Counsel's tax opinion includes its opinion that the significant tax benefits of the Partnership, in the aggregate, more likely than not will be realized as contemplated by this Prospectus. (See "Tax Aspects - Summary of Tax Opinion".) POSSIBLE TAXES IN EXCESS OF CASH DISTRIBUTIONS. A Participant's share of Partnership revenues applied to principal on any Partnership loans from Atlas will be included in his taxable income. Although Partnership income may be offset in part by depletion or other deductions, interest on Partnership borrowings will be subject to certain restrictions on the deduction of "investment interest" and the limitation on passive activity losses in the case of Limited Partners and no deductions will be allowed for repayments of principal. Thus, a Participant may become subject to income tax liability in excess of cash actually received from the Partnership. To the extent the Partnership has cash available for distribution, however, it is Atlas' policy that Partnership distributions will not be less than the Participants' estimated income tax liability with respect to Partnership income. (See "Tax Aspects - Limitations on Passive Activities," "- Limitations on Deduction of Investment Interest," and "- Allocations".) Under the Partnership Agreement, taxable income or gain may be allocated to the Participants in the event there are deficits in the Participants' Capital Accounts even though such Participants are not allocated a corresponding amount of Partnership revenues. Also (Page 16) , there may be tax liability in excess of cash distributions to the Participants because Partnership production revenues are retained by the Operator beginning three years after the wells are placed in production to establish a reserve for the estimated costs of eventually plugging and abandoning Partnership Wells, although historically Atlas has never done this after only three years. In addition, the taxable disposition of Partnership property or a Participant's interest in the Partnership may result in income tax liability in excess of cash distributions. (See "Tax Aspects - Sale of the Properties" and "- Disposition of Partnership Interests".) PARTNERSHIP ALLOCATIONS ARE SUBJECT TO CHALLENGE BY THE IRS IN THE EVENT OF AN AUDIT. The allocations of Partnership costs, revenues and related tax items between the Managing General Partner and the Participants are subject to Treasury Regulations and the proper application of many provisions of the regulations is currently unclear. Should the IRS successfully challenge the allocation provisions contained in the Partnership Agreement, Participants could incur a greater tax liability. However, assuming the effect of the allocations set forth in the Partnership Agreement is substantial in light of a Participant's tax attributes that are unrelated to the Partnership, in Special Counsel's opinion it is more likely than not that such allocations will govern each Participant's distributive share to the extent they do not cause or increase deficit balances in the Participants' Capital Accounts. (See "Tax Aspects - Allocations".) 1996 TAX DEDUCTIONS ARE SUBJECT TO CHALLENGE BY THE IRS IN THE EVENT OF AN AUDIT. The Managing General Partner anticipates that all of the Partnership Subscription will be expended in 1996, and that the Participants' allocable share of income and deductions generated thereby will be reflected on the Participants' tax returns for that period. Any net loss of the Partnership allocable to a Limited Partner (but not an Investor General Partner) generally will be subject to the "passive activity" loss limitation rules under the Tax Reform Act of 1986. In addition, there is no guarantee that if the Partnership is audited the IRS will not challenge the deductions claimed by the Partnership. The time for assessment of tax resulting from adjustments to the Partnership's information tax returns may extend beyond the time for other assessments. (See "Tax Aspects - Limitations on Passive Activities," "- 1996 Expenditures," "- Availability of Certain Deductions" and "- Intangible Drilling and Development Costs".) Depending primarily on when the Partnership Subscription is received, it is anticipated that the Partnership will prepay in 1996 most, if not all, of its Intangible Drilling Costs for wells the drilling of which will be commenced in 1997. The deductibility in 1996 of such advance payments cannot be guaranteed. (See "Tax Aspects - Drilling Contracts".) POSSIBLE ALTERNATIVE MINIMUM TAX LIABILITY. Alternative minimum taxable income of "independent producers," which includes most investors, cannot be reduced by more than 40% in the 1996 tax year by reason of the repeal of the preference item for intangible drilling and development costs. (See "Tax Aspects - Minimum Tax - Tax Preferences".) INVESTMENT INTEREST DEDUCTIONS MAY BE LIMITED. Interest paid to acquire or carry investment assets is deductible only to the extent of net investment income. Because investment income includes income from activities, such as the Partnership in the case of Investor General Partners, which are not passive activities and in which the taxpayer does not materially participate, losses from the Partnership will reduce an Investor General Partner's investment income and may adversely affect the deductibility of the Investor General Partner's investment interest expense, if any. (See "Tax Aspects - Limitations on Deduction of Investment Interest".) IRAS AND OTHER QUALIFIED PLANS WILL RECEIVE UNRELATED BUSINESS TAXABLE INCOME. Generally, a qualified retirement plan or an IRA is exempt from federal income tax. However, "unrelated business taxable income" received by a qualified plan or an IRA may, under some circumstances, be subject to federal income taxation. It is anticipated that all of the income of the Partnership will be unrelated business taxable income, which may result in federal income tax being imposed upon income derived by a qualified plan or an IRA from an interest in the Partnership. (See "Tax Aspects - Tax Consequences to Qualified Plans and IRAs" ). LACK OF TAX SHELTER REGISTRATION. Atlas believes that the Partnership will not be a tax shelter required to register with the IRS and does not intend to cause the Partnership to register as such with the IRS. If it is subsequently determined that the Partnership was required to be registered with the IRS as a tax shelter, each Participant would be liable for a $250 penalty for failure to include the tax registration number of the Partnership on his tax return, unless such failure was due to reasonable cause. However, based on the representations of the Managing General Partner, Special Counsel has expressed the opinion that the Partnership, more likely than not, is not required to be registered with the IRS as a tax shelter. (See "Tax Aspects - Lack of Registration as a Tax Shelter".) STATE AND LOCAL TAXES MAY APPLY. A Participant may incur tax liability with respect to Partnership income in the state and locality in which he resides as well as the states and localities where the Partnership's Development Wells are situated. Participants should consult with their own tax advisors concerning the state and local tax consequences of an investment in the Partnership. (See "Tax Aspects - State and Local Taxes.) (Page 17) CAPITALIZATION AND SOURCE OF FUNDS AND USE OF PROCEEDS IN GENERAL The Units will not be subject to Assessments. The Partnership will not call upon the Participants for additional amounts of capital beyond their Agreed Subscriptions. However, in the case of Investor General Partners, if the insurance proceeds, Partnership assets, and Atlas' and AEGH's indemnification of the Investor General Partners were not sufficient to satisfy a Partnership liability for which the Investor General Partners were also liable, the Managing General Partner could call upon Investor General Partners to make additional Capital Contributions to the Partnership from their personal assets to satisfy such liability. The drilling of the wells is expected to be funded entirely through the Partnership Subscription and the Capital Contributions of the Managing General Partner. In the event the Partnership requires additional funds as a result of cost overruns in the drilling or completion of wells, which the Managing General Partner does not anticipate, other than completing and Fracturing some of the wells in a third zone, or additional development or remedial work is subsequently required for a well, then such funds may be provided by borrowings as discussed below in "- Subsequent Source of Funds and Borrowings" or by the retention of Partnership revenues. The Managing General Partner does not anticipate, however, that any borrowings will be required prior to any availability of revenues from production. SOURCE OF FUNDS Upon completion of the offering, the Capital Contributions to the Partnership of the Participants will range from $1,000,000 to $7,000,000 unless Atlas in its sole discretion offers not more than 100 additional Units and increases the Participants' Capital Contributions to the Partnership to not more than $8,000,000. The Capital Contributions of the Managing General Partner will range from $198,725 if the Capital Contributions of the Participants are $1,000,000, to $1,390,970 if the Capital Contributions of the Participants are $7,000,000, to $1,589,695 if the Capital Contributions of the Participants are $8,000,000. See the "- Managing General Partner Capital" table below for a breakout of the costs paid by the Managing General Partner. Therefore, the total amount of Capital Contributions available to the Partnership from the Participants and the Managing General Partner will range from $1,198,725 if 100 Units are sold, to $8,390,970 if 700 Units are sold, to $9,589,695 if 800 Units are sold. USE OF PROCEEDS The following tables present information respecting the financing of the Partnership in three different circumstances: (1) if 800 Units ($8,000,000) are sold, (2) if 700 Units ($7,000,000) are sold, and (3) if the minimum 100 Units ($1,000,000) are sold. Substantially all of the Partnership Subscription available to the Partnership will be disbursed for the following purposes and in the following manner:
PARTICIPANT CAPITAL ENTITY RECEIVING PAYMENT NATURE OF PAYMENT 800 UNITS SOLD .% (1) 700 UNITS SOLD .% (1) 100 UNITS SOLD .% (1) Total Participant Capital $8,000,000 100% $7,000,000 100% $1,000,000 100% LESS: Public Offering Expenses.. Broker-Dealers Sales Commissions, reimbursement for bona fide accountable due diligence expenses and wholesaling fees (2) - 0 - - 0 - - 0 - - 0 - - 0 - - 0 - Various Organization Costs (2) - 0 - - 0 - - 0 - - 0 - - 0 - - 0 - AMOUNT AVAILABLE FOR INVESTMENT:.. . The Managing General Partner Capital available for $8,000,000 100% $7,000,000 100% $1,000,000 100% drilling and completing wells The Managing General Partner Leases (3) - 0 - 0 0 0 0 0 (Page 18) 1) The percentage is based upon total Participants' Agreed Subscriptions and excludes the Managing General Partner's Capital Contribution. (2) Organization and Offering Costs will be paid by the Managing General Partner. However, the Managing General Partner will not be credited with the payment of Organization and Offering Costs in excess of 15% of the Partnership Subscription towards its required Capital Contribution of 15%. (3) Instead of making a contribution in cash for Leases, the Prospects will be contributed to the Partnership in kind by the Managing General Partner at its Cost of $3,600 per Prospect or fair market value if Cost is materially more than fair market value. The Managing General Partner will contribute approximately 4.49 Prospects if 100 Units are sold, 31.42 Prospects if 700 Units are sold, and 35.91 Prospects if 800 Units are sold.
MANAGING GENERAL PARTNER CAPITAL ENTITY RECEIVING PAYMENT NATURE OF PAYMENT 800 UNITS SOLD. % (1) 700 UNITS SOLD .% (1) 100 UNITS SOLD. % (1) Total Participant Capital $1,589,695 100% $1,390,970 100% $198,725 100% LESS: Public Offering Expenses.. Broker-Dealers Sales Commissions, reimbursement for bona fide accountable due diligence expenses and wholesaling fees (2) $840,000 53% $735,000 53% $105,000 53% Various Organization Costs (2) $360,000 23% $315,000 23% $45,000 23% AMOUNT AVAILABLE FOR INVESTMENT:.. The Managing General Partner Capital available for $260,419 16% $227,858 16% $32,561 8% drilling and completing wells The Managing General Partner Leases (3) $129,276 8% $113,112 8% $16,164 8% 1) The percentage is based upon the Managing General Partner's Capital Contribution and excludes the Participants' Agreed Subscriptions. (2) Organization and Offering Costs will be paid by the Managing General Partner. However, the Managing General Partner will not be credited with the payment of Organization and Offering Costs in excess of 15% of the Partnership Subscription towards its required Capital Contribution of 15%. (3) Instead of making a contribution in cash for Leases, the Prospects will be contributed to the Partnership in kind by the Managing General Partner at its Cost of $3,600 per Prospect or fair market value if Cost is materially more than fair market value. The Managing General Partner will contribute approximately 4.49 Prospects if 100 Units are sold, 31.42 Prospects if 700 Units are sold, and 35.91 Prospects if 800 Units are sold.
SUBSEQUENT SOURCE OF FUNDS AND BORROWINGS As indicated above, it is anticipated that substantially all of the Partnership's initial capital will be committed or expended following the offering. Any additional funds which may subsequently be required will be withheld from production from Partnership Wells or borrowings by the Partnership from Atlas or its Affiliates, although Atlas is not contractually committed to make such a loan. There will be no borrowings from third parties. The amount that may be borrowed by the Partnership from Atlas and its Affiliates may not at any time exceed 5% of the Partnership Subscription and must be without recourse to the Participants. The Partnership's repayment of any such borrowings would be from Partnership production revenues and would reduce or delay cash distributions to the Participants. See "Conflicts of Interest - Procedures to Reduce Conflicts of Interest," paragraph (9), for the terms of any loan with Atlas. (Page 19) COMPENSATION A narrative presentation of the items of compensation paid to the Managing General Partner and its Affiliates from the Partnership is set forth below. Following the narrative presentation is a tabular presentation of the estimated Administrative Costs and Direct Costs to be borne by the Partnership. OIL AND GAS REVENUES. The Managing General Partner will be allocated 25% of the oil and gas revenues of the Partnership in return for paying Organization and Offering Costs equal to 15% of the Partnership Subscription, 14% of Tangible Costs and contributing all Leases to the Partnership at Cost, or fair market value if Cost is materially more than fair market value. (See "Participation in Costs and Revenues.) - --------------------------------------------------------------------------- (Page 18) LEASE COSTS. The Managing General Partner will contribute sufficient undeveloped Leases to the Partnership to drill the Partnership's wells at the Cost of such Leases, or fair market value if Cost is materially more than fair market value. The Cost of the Leases will include a portion of the Managing General Partner's reasonable, necessary and actual expenses for geological, geophysical, engineering, interest expense, legal, and other like services allocated to the Partnership's Leases determined using industry guidelines which are set forth in "Proposed Activities - Acquisition of Leases". The Managing General Partner will not retain any Overriding Royalty for itself from such Leases. Assuming the Partnership acquires 100% of the Working Interest in 4.49 Prospects if the minimum Partnership Subscription is received, 31.42 Prospects if the maximum Partnership Subscription is received, and 35.91 Prospects if the Managing General Partner increases the size of the offering to $8,000,000, it is estimated that Atlas' credit for Lease costs at $3,600 per Prospect will range from $16,164, to $113,112, to $129,276, respectively. (See "Proposed Activities - Acquisition of Leases".) The Managing General Partner will receive a benefit from these transactions. In addition, such contributions could create conflicts of interest for the Managing General Partner. The majority, if not all, of the wells will be drilled by the Partnership to test the Clinton/Medina geologic formation, a blanket geological formation prevalent in Ohio and Pennsylvania. A Prospect will be deemed to consist of the drilling or spacing unit on which such well will be drilled if the Clinton/Medina geological formation to which such well will be drilled contains Proved Reserves and the drilling or spacing unit protects against drainage. The development of wells on such acreage may provide Atlas with offset sites by allowing it to ascertain at the Partnership's expense the value of adjacent acreage in which the Partnership would not have any right to participate in developing. (See "Conflicts of Interest- Conflicts Involving Acquisition of Leases," "Conflicts of Interest - Other Activities of the Managing General Partner, the Operator and their Affiliates" and "Proposed Activities".) ADMINISTRATIVE COSTS. The Managing General Partner and its Affiliates will receive an unaccountable, fixed payment reimbursement for their Administrative Costs determined by the Managing General Partner to be an amount equal to $75 per well per month, which will be proportionately reduced to the extent the Partnership acquires less than 100% of the Working Interest in the well. The unaccountable, fixed payment reimbursement of $75 per well per month shall not be increased in amount during the term of the Partnership. Further, Atlas, as Managing General Partner, shall not be reimbursed for any additional Partnership Administrative Costs and the unaccountable, fixed payment reimbursement of $75 per well per month shall be the entire payment to reimburse Atlas for the Partnership's Administrative Costs. Finally, Atlas, as Managing General Partner, shall not receive the unaccountable, fixed payment reimbursement of $75 per well per month for plugged or abandoned wells. See "- Estimate of Administrative Costs and Direct Costs to Be Borne by the Partnership" for an estimate of those costs in the first twelve months. DRILLING CONTRACTS. The Partnership will enter into a drilling contract with Atlas to drill and complete the Partnership Wells. For each well completed and placed into production, the Partnership will pay Atlas an amount equal to $37.39 per foot to the depth of the well at its deepest penetration. For each well which the Partnership elects not to complete, the Partnership will pay Atlas an amount equal to $20.60 per foot to the depth of the well. The amount of compensation which Atlas could earn as a result of these arrangements is dependent upon many factors, including the actual cost of the wells and the number of wells drilled. Atlas anticipates that it will have reimbursement of general and administrative overhead of $3,600 per well and a profit of approximately 11% ($24,900) to 15% ($33,960) per well for a well drilled to a depth of 6,150 feet. Assuming the Partnership acquires 100% of the Working Interest in 4.49 Prospects if the minimum Partnership Subscription is received, 31.42 Prospects if the maximum Partnership Subscription is received and 35.91 Prospects if the Managing General Partner increases the size of the offering to $8,000,000 and all of the wells are drilled to 6,150 feet and completed, it is estimated that Atlas' general and administrative reimbursement and profit will range from $127,965 to $168,645 for all of the wells if the minimum Partnership Subscription is received, $782,358 to $1,067,023 if the maximum Partnership Subscription is received, and $1,023,435 to $1,348,780 if the Managing General Partner increases the size of the offering to $8,000,000. The footage contract will cover all costs other than the cost of a pumping unit for an oil well, which is not anticipated, and the cost of a third completion and Frac. Such costs will be charged at cost plus 10% if provided by third parties and at competitive (Page 20) rates in the area if provided by Atlas or its Affiliates. The cost of the well will be proportionately reduced to the extent the Partnership acquires less than 100% of the Working Interest. (See the Drilling and Operating Agreement, Exhibit (II) to the Partnership Agreement.) PER WELL CHARGES. When the wells have commenced production Atlas, as Operator, will be reimbursed at actual cost for all direct expenses incurred on behalf of the Partnership and will receive well supervision fees for operating and maintaining the wells during producing operations in the amount of $275 per well per month subject to an annual adjustment for inflation. Assuming the Partnership acquires 100% of the Working Interest in 4.49 Prospects if the minimum Partnership Subscription is received, 31.42 Prospects if the maximum Partnership Subscription is received, and 35.91 Prospects if the Managing General Partner increases the size of the offering to $8,000,000, and all of the wells are drilled and completed, it is estimated that these costs will range from $14,817 if the minimum Partnership Subscription is received, to $103,686 if the maximum Partnership Subscription is received, to $118,503 if the - -------------------------------------------------------------------------- (Page 19) Managing General Partner increases the size of the offering to $8,000,000, for Partnership's first twelve months of operations. The well supervision fees will be proportionately reduced to the extent the Partnership acquires less than 100% of the Working Interest in the well. TRANSPORTATION AND MARKETING FEES. Mercer Gas Gathering, Inc., an Affiliate of Atlas, will deliver natural gas produced by the Partnership to either industrial end-users in the area or interstate pipeline systems and local distribution companies. Atlas Gas Marketing, Inc., an Affiliate of Atlas, will provide marketing services to the Partnership. The Partnership will pay a combined transportation and marketing charge at a competitive rate, which is currently 29 cents per MCF. (See "Management".) OTHER COMPENSATION. Atlas or an Affiliate will be reimbursed by the Partnership for any loan Atlas or an Affiliate may make to or on behalf of the Partnership and will have the right to charge a competitive rate of interest on any such loan. If Atlas provides equipment, supplies and other services to the Partnership it may do so at competitive industry rates. (See "Conflicts of Interest".) ESTIMATE OF ADMINISTRATIVE COSTS AND DIRECT COSTS TO BE BORNE BY THE PARTNERSHIP The Managing General Partner estimates that the unaccountable, fixed payment reimbursement for Administrative Costs allocable to the Partnership's first twelve months of operation will not exceed approximately $4,041 if the minimum Partnership Subscription is received (4.49 wells at $75 per well per month), approximately $28,278 if the maximum Partnership Subscription is received (31.42 wells at $75 per well per month), and approximately $32,319 if the Managing General Partner increases the size of the offering to $8,000,000 (35.91 wells at $75 per well per month). Administrative Costs are all customary and routine expenses incurred for the conduct of Partnership administration, including: legal, finance, accounting, secretarial, travel, office rent, telephone, data processing and other items of a similar nature. No Administrative Costs charged will be duplicated under any other category of expense or cost. Minimum Maximum If Managing General Partnership Partnership Partner Increases Subscription Subscription Offering ($1,000,000) ($7,000,000) ($8,000,000) Unaccountable, fixed payment reimbursement for Administrative Costs $4,041 $28,278 $32,319 Direct Costs will be billed directly to and paid by the Partnership to the extent practicable. The anticipated Direct Costs set forth below may vary from the estimates shown for numerous reasons which cannot accurately be predicted, such as the number of Participants, the number of wells drilled, the Partnership's degree of success in its activities, the extent of any production problems, inflation and various other factors involving the administration of the Partnership. Minimum Maximum If Managing General Partnership Partnership Partner Increases Subscription Subscription Offering ($1,000,000) ($7,000,000) ($8,000,000) DIRECT COSTS External Legal $ 6,000 $ 6,000 $6,000 Audit Fees 2,500 6,000 6,000 Independent Engineering Reports 1,500 3,000 3,000 TOTAL $10,000 $15,000 $15,000 (Page 21) TERMS OF THE OFFERING SUBSCRIPTION TO THE PARTNERSHIP The Partnership will offer a minimum of 100 Units and a maximum of 700 Units. However, if subscriptions for all 700 Units being offered are obtained, the Managing General Partner, in its sole discretion, may offer not more than 100 additional Units and increase the maximum aggregate subscriptions with which the Partnership may be funded to not more than 800 Units ($8,000,000). Units in the Partnership are offered at a subscription price of $10,000 per Unit. The minimum subscription per investor is one Unit; however, the Managing General Partner, in its discretion, may accept one-half Unit ($5,000) subscriptions. Larger Agreed Subscriptions will be accepted in $1,000 increments. The Managing General Partner will have exclusive management authority for the Partnership. Subscribers who purchase Units as Investor General Partners or as Limited Partners will serve as Participants of the Partnership. PAYMENT OF SUBSCRIPTIONS Agreed Subscriptions are payable 100% in cash at the time of subscribing. PARTNERSHIP CLOSING AND ESCROW Subject to the receipt of the minimum Partnership Subscription of $1,000,000, the Managing General Partner may close the offering period on or before December 31, 1996 (the "Offering Termination Date"). The Partnership will not commence drilling operations until after the Offering Termination Date. No subscriptions to the Partnership will be accepted after receipt of the maximum Partnership Subscription (including the additional 100 Units which may be offered) or the Offering Termination Date, whichever event occurs first. Pending receipt of the minimum Partnership Subscription, subscription deposits in the escrow account will earn interest at National City Bank of Pennsylvania's variable market rate for short term deposits. If subscriptions for $1,000,000 are not received by December 31, 1996, the sums deposited in the escrow account will be returned to the subscribers with interest thereon. The Managing General Partner may buy up to 10% of the Units, which will not be applied towards the minimum Partnership Subscription required for the Partnership to begin operations . (See "Conflicts of Interest - Conflicts Between Participants.") Subscription payments will be held in a separate interest bearing escrow account at National City Bank of Pennsylvania pending the receipt of the minimum Partnership Subscription, after which the Partnership funds and additional subscription payments will be paid directly to the Partnership account and will continue to earn interest until the Offering Termination Date. Any interest earned on Agreed Subscriptions prior to the Offering Termination Date will be credited to the accounts of the respective subscribers and paid approximately six weeks after the Offering Termination Date. Subscriptions will not be commingled with the funds of the Managing General Partner or its Affiliates nor shall subscriptions be subject to the claims of their creditors. Subscription proceeds will be invested during the escrow period only in institutional investments comprised of or secured by securities of the United States government. The funds in the Partnership account, pending their use for Partnership operations, may be temporarily invested in income producing short-term, highly liquid investments, where there is appropriate safety of principal, such as U.S. Treasury Bills. In the event that the Managing General Partner determines that the Partnership may be deemed an investment company under the Investment Company Act of 1940, such investment activity will cease. OFFERING PERIOD The offering period will commence on the date of this Prospectus and will terminate on a date to be determined by the Managing General Partner, in its sole discretion. In no event, however, will the offering period extend beyond the earlier of December 31, 1996, or the receipt of Partnership subscriptions for $8,000,000. ACCEPTANCE OF SUBSCRIPTIONS The execution of the Subscription Agreement by a subscriber constitutes a binding offer to buy Units in the Partnership and an agreement to hold the offer open until the Agreed Subscription is accepted or rejected by the Managing General Partner. Once an investor subscribes he will not have any revocation rights. The Managing General Partner has the discretion to refuse to accept any Agreed Subscription without liability to the subscriber. Agreed Subscriptions will be accepted or rejected by the Partnership within thirty days of their receipt; if rejected, all funds will be returned to the subscriber immediately. Upon the original sale of Units, the Participants will be admitted as Partners not later than fifteen days after the release from escrow of Participants' funds to the Partnership, and thereafter Participants will be admitted into the Partnership not later than the last day of the calendar month in which their Agreed Subscriptions were accepted by the Partnership. The execution of the Subscription Agreement and its acceptance by the Managing General Partner also constitutes the execution of the Partnership Agreement and an agreement to be bound by the terms thereof as a Participant, including the granting of a special power of attorney to the Managing General Partner appointing it as the Participant's lawful representative and attorney in-fact to make, (Page 22) execute, sign, swear to and file an Amended Certificate of Limited Partnership from time to time, governmental reports and certifications, and other matters. (See the Partnership Agreement, Exhibit (A) to this Prospectus.) DRILLING PERIOD Although it is anticipated that the Partnership will spend the entire Partnership Subscription soon after the Offering Termination Date, the Partnership will have a period of one year from the termination of the offering period to use or commit funds to drilling activities. If, within such one year period, the Partnership has not used, or committed for use, as evidenced by a written agreement, the net subscription proceeds, then the Managing General Partner will cause the remainder of such net subscription proceeds, except for necessary operating capital and amounts reserved for identified activities, to be distributed pro rata to the Participants in the ratio of their Agreed Subscriptions as a return of capital, together with interest earned thereon after the Offering Termination Date, and the Managing General Partner will reimburse the Participants for selling or other offering expenses allocable to the return of capital. INTEREST OF PARTICIPANTS IN THE PARTNERSHIP See "Participation in Costs and Revenues - Allocation and Adjustment among Participants" regarding the Participants' share of revenues, gains, costs, credits, expenses, losses and other charges and liabilities. QUALIFICATION OF THE PARTNERSHIP The Managing General Partner has elected for the Partnership to be governed by the partnership laws of Pennsylvania and has filed the Certificate of Limited Partnership. The Managing General Partner will take all other actions necessary to qualify the Partnership to do business as a limited partnership or cause the limited partnership status of the Partnership to be recognized in other jurisdictions. SUITABILITY STANDARDS IN GENERAL. It is the obligation of persons selling Units to make every reasonable effort to assure that the Units are suitable for investors, based on the investor's investment objectives and financial situation, regardless of the investor's income or net worth. The Managing General Partner shall maintain for a period of at least six years a record of each investor's suitability. Units will be sold only to an investor who has a minimum net worth of $225,000 or a minimum net worth of $60,000 and had during the last tax year or estimates that he will have during the current tax year "taxable income" as defined in Section 63 of the Code of at least $60,000 without regard to an investment in Units. Net worth will be determined exclusive of home, home furnishings and automobiles. Additional suitability requirements are applicable to residents of certain states. (See "- Purchasers of Limited Partner Units" and "- Purchasers of Investor General Partner Units", below.) Also, the transferability of Participants' interest is limited, both by express provision of the Partnership Agreement and the provisions of state and federal securities laws. (See "Risk Factors - Special Risks of the Partnership - Illiquid Investment and Restrictions on Transferability of Participants' Interests.") For example, California residents generally may not transfer Units without the consent of the California Commissioner of Corporations, and the Commissioner of Securities of Missouri classifies the Units as being ineligible for any transactional exemption under the Missouri Uniform Securities Act (Section 409.402(b), RSMo. 1969). Therefore, unless the Units are again registered, the offer for sale or resale of Units by a Participant in the State of Missouri may be subject to the sanctions of the act. Other state securities law limitations on the transferability of Participants' interests will be applicable in other states. PURCHASERS OF LIMITED PARTNER UNITS. A resident of California must (i) have a net worth of not less than $250,000 (exclusive of home, furnishings, and automobiles) and expect to have gross income in the current tax year of $65,000 or more, or (ii) have a net worth of not less than $500,000 (exclusive of home, furnishings, and automobiles), or (iii) have a net worth of not less than $1,000,000, or (iv) expect to have gross income in the current tax year of not less than $200,000. A Michigan or North Carolina resident must have either: (i) a net worth of not less than $225,000 (exclusive of home, furnishings, and automobiles), or (ii) a net worth of not less than $60,000 (exclusive of home, furnishings, and automobiles) and estimated current tax year taxable income as defined in Section 63 of the Internal Revenue Code of 1986 of $60,000 or more without regard to an investment in the Partnership. In addition, a resident of Michigan or Ohio shall not make an investment in the Partnership in excess of 10% of his net worth (exclusive of home, furnishings and automobiles). PURCHASERS OF INVESTOR GENERAL PARTNER UNITS. A resident of Alabama, Maine, Massachusetts, Minnesota, Mississippi, North Carolina, Pennsylvania, Tennessee,or Texas,must represent that he(i) has an individual or joint net worth with his or her spouse of $225,000 or more, without regard to the investment in the Partnership (exclusive of home, furnishings, and automobiles), and a combined gross income of $100,000 or more for the current year and for the two previous years; or (ii) has an individual or joint net worth (Page 23) with his or her spouse in excess of $1,000,000, inclusive of home, home furnishings and automobiles; or (iii) has an individual or joint net worth with his or her spouse in excess of $500,000, exclusive of home, home furnishings, and automobiles; or (iv) has a combined "gross income" as defined in Code Section 61 in excess of $200,000 in the current year and the two previous years. A resident of Arizona, Indiana, Iowa, Kentucky, Michigan, Missouri, New Mexico, Ohio, Oklahoma, South Dakota, Vermont or Washington must represent that he (i) has an individual or joint net worth with his or her spouse of $225,000 or more, without regard to the investment in the Partnership (exclusive of home, furnishings, and automobiles), and a combined "taxable income" of $60,000 or more for the previous year and expects to have a combined "taxable income" of $60,000 or more for the current year and for the succeeding year; or (ii) has an individual or joint net worth with his or her spouse in excess of $1,000,000, inclusive of home, home furnishings and automobiles; or (iii) has an individual or joint net worth with his or her spouse in excess of $500,000, exclusive of home, home furnishings, and automobiles; or (iv) has a combined "gross income" as defined in Code Section 61 in excess of $200,000 in the current year and the two previous years. In addition, a resident of Michigan or Ohio shall not make an investment in the Partnership in excess of 10% of his net worth (exclusive of home, furnishings and automobiles). A resident of New Hampshire must represent that he is an "accredited investor" as that term is defined in Regulation D promulgated by the Securities and Exchange Commission, which includes, but is not limited to (i) a natural person whose individual net worth, or joint net worth with that person's spouse, at the time of his purchase exceeds $1,000,000; and (ii) a natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year. A resident of California must represent that he (i) has a net worth of not less than $250,000 (exclusive of home, furnishings, and automobiles) and expects to have gross income in the current tax year of $120,000 or more, or (ii) has a net worth of not less than $500,000 (exclusive of home, furnishings, and automobiles), or (iii) has a net worth of not less than $1,000,000 or (iv) expects to have gross income in the current tax year of not less than $200,000. MISCELLANEOUS. In the case of sales to fiduciary accounts, all of the suitability standards set forth above and for the appropriate state shall be met by the beneficiary, the fiduciary account, or by the donor or grantor who directly or indirectly supplies the funds to purchase the Partnership interests if the donor or grantor is the fiduciary. Investors are required to execute their own Subscription Agreements. The Managing General Partner will not accept any Subscription Agreement that has been executed by someone other than the investor, unless such person has been given the legal power of attorney to sign on the investor's behalf and the investor meets all of the conditions herein. The Managing General Partner may not complete a sale of Units to an investor until at least five business days after the date the investor receives a final prospectus. In addition, the Managing General Partner will send each investor a confirmation of purchase. Transferees of Units seeking to become substituted Partners must meet the requirements imposed by the Partnership Agreement. (See "Transferability of Units".) SUBSCRIPTIONS BY IRAS, KEOGH PLANS AND OTHER QUALIFIED PLANS Before investing in the Partnership, trustees and other fiduciaries of IRAs, Keogh Plans and qualified retirement plans should carefully consider whether such an investment is consistent with their fiduciary responsibilities. Trustees and other fiduciaries of qualified retirement plans, IRAs that are set up as part of a plan sponsored and maintained by an employer, and Keogh Plans under which employees, in addition to self-employed individuals, are participants, are governed by the fiduciary responsibility provisions of Title I of the Employee Retirement Income Security Act of 1974 ("ERISA"). In addition, .4975 of the Code imposes an excise tax with respect to certain prohibited transactions involving the assets of any qualified retirement plan, IRA or Keogh Plan. An investment in the Partnership by a plan covered by ERISA must be made in accordance with the general obligation of fiduciaries under ERISA to discharge their duties (i) for the exclusive purpose of providing benefits to participants and their beneficiaries; (ii) with the same standard of care that would be exercised by a prudent man acting under similar circumstances, (iii) in such a manner as to diversify the investments of the plan, unless it is clearly prudent not to do so; and (iv) in accordance with the documents establishing the plan. Depending upon particular circumstances involved, a fiduciary's decision to cause a plan covered by ERISA to invest in the Partnership could be viewed as inconsistent with one or more of these criteria, and therefore as a violation of the fiduciary's duty. However, in the case of a plan which provides for individual accounts (for example, an IRA or self-directed Keogh Plan) and which permits a participant or beneficiary to exercise independent control over the assets in his individual account, the plan's fiduciary will not be liable for any investment loss or for any breach that results from such exercise of control by the participant or beneficiary. (Page 24) Regulations issued by the Department of Labor provide that when a plan covered by ERISA or by .4975 of the Code (e.g. an IRA) makes an investment in an equity interest of an entity that is neither a publicly offered security nor a security issued by an investment company registered under the Investment Company Act of 1940, the underlying assets of the entity in which the investment is made could be treated as assets of the investing plan ("plan assets"). An investment in the Partnership may not be considered to be an investment in a publicly offered security and the Partnership will not be registered under the Investment Company Act of 1940. Therefore, unless an exemption applies (see below), investments in the Partnership may result in the Partnership's assets being classified as plan assets. Classification of the assets of the Partnership as "plan assets" could adversely affect both the plan fiduciary and the Managing General Partner. The term "fiduciary" is defined generally to include any person who exercises any authority or control over the management or disposition of plan assets; thus, classification of Partnership assets as plan assets could make the Managing General Partner a "fiduciary" of an investing plan. Violation of fiduciary duties by the Managing General Partner could result in liability not only for the Managing General Partner but for the trustee or other fiduciary of an investing plan, who under certain circumstances could be held liable for breaches of fiduciary standards by his co-fiduciaries. In addition, if assets of the Partnership are classified as "plan assets," certain transactions that the Partnership might enter into in the ordinary course of its business and operations might constitute "prohibited transactions" under ERISA and the Code. A prohibited transaction, in addition to imposing potential personal liability upon trustees and other fiduciaries of plans subject to Title 1 of ERISA may also result in the imposition of an excise tax under the Code or a penalty under ERISA upon the disqualified person or party in interest with respect to the qualified retirement plan, IRA, or Keogh Plan. If the disqualified person who engages in the transaction is the individual on behalf of whom the IRA is maintained (or his beneficiary), the IRA may lose its tax-exempt status and its assets may be deemed to have been distributed to such individual in a taxable distribution (and no excise tax will be imposed) on account of the prohibited transaction. The Managing General Partner expects that the Partnership will be able to utilize an exemption in the regulations which provides that the underlying assets of an entity in which a plan invests will not be classified as plan assets if equity participation in the entity by benefit plan investors is not significant (i.e., 25% or more). Subscriptions to the Partnership by benefit plan investors (as that term is defined in the regulations) are restricted to less than 25% of the Partnership Units. Therefore, the assets of the Partnership should not be treated as plan assets under the regulations. (See "Risk Factors - Tax Risks - IRAs and Other Qualified Plans Will Receive Unrelated Business Taxable Income"). SUBSCRIPTION BY MANAGING GENERAL PARTNER Atlas will serve as Managing General Partner of the Partnership and is required to make certain contributions to the Partnership. The Managing General Partner and its officers and directors and Affiliates may also subscribe for Units in the Partnership on the same basis as Limited Partners or Investor General Partners, except that they are not required to pay Sales Commissions, due diligence reimbursements or wholesaling fees. Also, the Managing General Partner may buy up to 10% of the Units, which will not be applied towards the minimum Partnership Subscription required for the Partnership to begin operations. Subject to the foregoing , any subscription by the Managing General Partner or its officers, directors or Affiliates will dilute the voting rights of the Participants. However, the Managing General Partner and its officers, directors and Affiliates are prohibited from voting with respect to certain matters. (See "Summary of Partnership Agreement - Voting Rights.") Voting Rights.") CONFLICTS OF INTEREST IN GENERAL Conflicts of interest are inherent in oil and gas drilling programs involving non-industry participants because transactions are entered into without arms' length negotiation. The interests of the Participants and those of Atlas and its Affiliates may be inconsistent in some respects or in certain instances. The following discussion describes certain possible conflicts of interest that may arise for Atlas and its Affiliates in the course of the Partnership and certain limitations which are designed to reduce, but which will not eliminate, the conflicts. It should be noted, however, that the following discussion is not intended to be all inclusive and that other transactions or dealings may arise in the future that could result in conflicts of interest for Atlas and its Affiliates. (See "Fiduciary Responsibility of the Managing General Partner".) FIDUCIARY RESPONSIBILITY OF THE MANAGING GENERAL PARTNER The Managing General Partner is accountable to the Partnership as a fiduciary and consequently has a duty to exercise good faith and to deal fairly with the Participants in handling the affairs of the Partnership. While the Managing General Partner will endeavor to avoid conflicts of interest to the extent possible, such conflicts nevertheless may occur and, in such event, the actions of the Managing (Page 25) General Partner may not be most advantageous to the Partnership. Because Atlas makes a significant contribution on each well, this conflict of interest will be reduced. Nevertheless, in the event the Managing General Partner should breach its fiduciary responsibilities, a Participant would be entitled to an accounting and to recover any economic losses caused by such breach. (See "Fiduciary Responsibility of the Managing General Partner".) TRANSACTIONS WITH ATLAS AND ITS AFFILIATES Although Atlas and its Affiliates believe that the items of compensation and reimbursement that it and its Affiliates will receive in connection with the Partnership are reasonable, the items of compensation have been determined solely by Atlas and are not the result of any negotiation or agreement between Atlas and any person dealing at arms' length and having no affiliation between them. Atlas will be entitled to receive items of compensation and reimbursement in connection with the Partnership even though it is possible that the Partnership's activities could result in little or no profit, or a loss to Participants. Although such fees must be competitive with the prices of other unaffiliated persons in the same geographic area engaged in similar businesses, the entity or person providing the services or equipment can be expected to profit from such transactions. It may be to the best interests of Atlas to first enter into contracts with itself and its Affiliates and second with nonaffiliated parties even though the contract terms, or skill and experience, offered by the nonaffiliated parties to the Partnership may be comparable to that available from Atlas and its Affiliates. The Managing General Partner and any Affiliate will not render to the Partnership any oil field, equipage or other services nor sell or lease to the Partnership any equipment or related supplies unless such person is engaged, independently of the Partnership and as an ordinary and ongoing business, in the business of rendering such services or selling or leasing such equipment and supplies to a substantial extent to other persons in the oil and gas industry in addition to the partnerships in which the Managing General Partner or an Affiliate has an interest; and the compensation, price or rental therefor will be competitive with the compensation, price or rental of other persons in the area engaged in the business of rendering comparable services or selling or leasing comparable equipment and supplies which could reasonably be made available to the Partnership. If such person is not engaged in such a business then such compensation, price or rental will be the Cost of such services, equipment or supplies to such person or the competitive rate which could be obtained in the area, whichever is less. Any services not otherwise described in this Prospectus for which the Managing General Partner or any of its Affiliates are to be compensated will be embodied in a written contract which precisely describes the services to be rendered and the compensation to be paid. Such compensation, if any, will be reported to Participants in the Partnership's annual and semiannual reports pursuant to 4.03(b)(1)(b) of the Partnership Agreement and a copy of any such contract will be provided to a Participant upon request pursuant to 4.03(b)(5) of the Partnership Agreement. Such contracts are cancelable without penalty upon sixty days written notice by Participants whose Agreed Subscriptions equal a majority of the Partnership Subscription. With respect to Units owned by the Managing General Partner or its Affiliates, the Managing General Partner and its Affiliates may not vote or consent regarding any transactions between the Partnership and the Managing General Partner or its Affiliates, and their Units will not be included for purposes of determing a majority of the Partnership Subscription with respect to such contracts. CONFLICT REGARDING THE DRILLING AND OPERATING AGREEMENT It is anticipated that all of the wells developed by the Partnership will be drilled and operated pursuant to the Drilling and Operating Agreement. As the Managing General Partner of the Partnership, Atlas will be required to monitor and enforce, on behalf of the Partnership, its own compliance with the provisions of the Drilling and Operating Agreement, which creates a continuing conflict of interest. (See "Proposed Activities".) CONFLICTS REGARDING SHARING OF COSTS AND REVENUES The share of revenues that Atlas will receive pursuant to the Partnership Agreement will be "Carried" in that Atlas will contribute total Capital Contributions to the Partnership in an amount less than the Partnership's revenues which it will receive. This may create a conflict of interest between the Managing General Partner and the Participants regarding the determination of which Leases will be acquired by the Partnership and the profit potential associated with the Leases. In addition, the allocation of all of the Intangible Drilling Costs to the Participants and 14% of the Tangible Costs to Atlas of the wells developed by the Partnership involves conflicts of interest between the Participants and Atlas where completion of a marginally productive well might prove beneficial to the Participants but not to Atlas. At the time a completion decision is made the Participants will have already paid the majority of their costs so they will want to complete the well if there is any opportunity to recoup any of their costs. Conversely, the Managing General Partner will not have paid any money prior to this time and it will only want to pay such costs if it is assured of recouping its money and making a profit. Based upon its past experience, however, Atlas anticipates that all Partnership Wells will be required to be completed before a determination can be made as to the well's productivity. In any event, Atlas will not cause any well to be plugged and abandoned by the Partnership without a completion attempt having been made (Page 26) unless Atlas determines that such well should be plugged and abandoned in accordance with the generally accepted and customary oil and gas field practices and techniques then prevailing in the geographic area of the well location. TAX MATTERS PARTNER Atlas will be the Partnership's "Tax Matters Partner" and, as such, will have broad authority to act on behalf of the Partnership and the Participants in any administrative or judicial proceeding involving the IRS. The possession of such authority by the Tax Matters Partner may involve conflicts of interest such as whether or not to expend Partnership funds to contest a proposed adjustment by the IRS, if any, to the amount of the Partnership's deduction for Intangible Drilling Costs which is allocated 100% to the Participants, or to contest a proposed decrease by the IRS, if any, in the amount of the Managing General Partner's credit to its Capital Account for contributing the Leases to the Partnership which would decrease the Managing General Partner's Distribution Interest in the Partnership. There also may be conflicts of interest with respect to the Partnership's reimbursement of expenses incurred by the Managing General Partner in its role as the Partnership's Tax Matters Partner. (See "Tax Aspects".) OTHER ACTIVITIES OF THE MANAGING GENERAL PARTNER, THE OPERATOR AND THEIR AFFILIATES Atlas will be required to devote to the Partnership such time and attention as Atlas considers to be necessary or appropriate for the proper supervision and management of the operations and activities of the Partnership. Atlas has sponsored and continues to manage other oil and gas programs (see "Prior Activities"), and Atlas expects to organize and manage additional oil and gas programs, which may be concurrent. In addition, Atlas and its Affiliates will be free to engage in other oil and gas related business activities, either for their own account or on behalf of other programs, partnerships, joint ventures, corporations or other entities in which they have an interest. They may, therefore, be expected to have conflicts of interest in allocating management time, services and other functions among the Partnership and such other oil and gas programs, partnerships and ventures. Subject to its fiduciary duties, Atlas will not be restricted in any manner from participating in other businesses or activities, despite the fact that such other businesses or activities may be competitive with the operations and activities of the Partnership and may operate in the same areas as the Partnership. Notwithstanding, the Managing General Partner and its Affiliates may pursue business opportunities that are consistent with the Partnership's investment objectives for their own account only after they have determined that such opportunity either cannot be pursued by the Partnership because of insufficient funds or because it is not appropriate for the Partnership under the existing circumstances. CONFLICTS INVOLVING THE ACQUISITION OF LEASES Atlas will select, in its sole discretion, the Prospects to be developed by the Partnership. Conflicts of interest may arise concerning which Prospects Atlas will assign to the Partnership and which Atlas will assign to other drilling programs to be organized by Atlas or where Atlas serves as driller/operator. It may prove to Atlas' or its Affiliates' advantage to have the Partnership bear the costs and risks of drilling a particular Prospect rather than another partnership. These potential conflicts of interest will be increased to some extent by the fact that Atlas expects to be organizing and allocating Prospects to more than one drilling program at a time including a year end program in which Affiliates of the Managing General Partner invest. There can be no assurance that the activities of the Partnership and those of other drilling programs to be organized by Atlas will not conflict. To reduce this conflict of interest the Managing General Partner will not drill for its own account and generally takes a similar interest in other partnerships where it serves as Managing General Partner and/or driller/operator. In Pennsylvania and Ohio the assignments of the Leases will be limited to a depth of from the surface through the Clinton/Medina geological feature to the top of the Queenston formation, and Atlas will retain the drilling rights below the Clinton/Medina geological formation. Although the retention of the deep drilling rights may create a conflict of interest between the Partnership and Atlas, Atlas believes that the Partnership's drilling to the Clinton/Medina geological formation will not provide any geologic information that would prove up or assist in evaluating drilling to formations deeper than the Clinton/Medina geological formation. Further, the amount of the credit Atlas receives for the Partnership Leases does not include any value allocable to the deep drilling rights retained by Atlas. No procedures, other than the guidelines set forth below, have been established by the Managing General Partner to handle or to resolve any of the conflicts which may arise in this or another context; however, the Managing General Partner owes a fiduciary duty to the Participants in the operation and management of the Partnership and is restricted from engaging in certain transactions with Affiliates and others under the terms of the Partnership Agreement. The Managing General Partner, its Affiliates and the Partnership will abide by the guidelines set forth below. (Page 27) (1) FAIR AND REASONABLE. Neither the Managing General Partner nor any Affiliate will sell, transfer, or convey any property to or purchase any property from the Partnership, directly or indirectly, except pursuant to transactions that are fair and reasonable, nor take any action with respect to the assets or property of the Partnership which does not primarily benefit the Partnership. (2) TRANSFERS AT COST. The Leases acquired from the Managing General Partner or its Affiliates must be contributed to the Partnership at the Cost of such Lease, unless the Managing General Partner shall have cause to believe that Cost is materially more than the fair market value of such property, in which case the credit for such contribution will be made for a price not in excess of its fair market value. A determination of fair market value must be supported by an appraisal from an Independent Expert. Such opinion and any associated supporting information must be maintained in the Partnership's records for at least six years. (3) LIMITATIONS ON ACTIVITIES OF THE MANAGING GENERAL PARTNER AND ITS AFFILIATES ON LEASES ACQUIRED BY THE PARTNERSHIP. During a period of five years from the Offering Termination Date of the Partnership, if the Managing General Partner or any of its Affiliates, excluding another Program in which the interest of the Managing General Partner or its Affiliates is substantially similar to or less than their interest in the Partnership, proposes to acquire an interest from an unaffiliated person, in a Prospect in which the Partnership possesses an interest or in a Prospect in which the Partnership's interest has been terminated without compensation within one year preceding such proposed acquisition, the following conditions shall apply (a) if the Managing General Partner or the Affiliate, excluding another Program in which the interest of the Managing General Partner or its Affiliates is substantially similar to or less than their interest in the Partnership, does not currently own property in the Prospect separately from the Partnership, then neither the Managing General Partner nor the Affiliate shall be permitted to purchase an interest in the Prospect; and (b) if the Managing General Partner or the Affiliate, excluding another Program in which the interest of the Managing General Partner or its Affiliates is substantially similar to or less than their interest in the Partnership, currently own a proportionate interest in the Prospect separately from the Partnership, then the interest to be acquired shall be divided between the Partnership and the Managing General Partner or the Affiliate in the same proportion as is the other property in the Prospect; provided, however, if cash or financing is not available to the Partnership to enable it to consummate a purchase of the additional interest to which it is entitled, then neither the Managing General Partner nor the Affiliate shall be permitted to purchase any additional interest in the Prospect. (4) TRANSFER OF LESS THAN THE MANAGING GENERAL PARTNER'S AND ITS AFFILIATE'S ENTIRE INTEREST. A sale, transfer or a conveyance to the Partnership of less than all of the ownership of the Managing General Partner or an Affiliate, excluding another Program in which the interest of the Managing General Partner or its Affiliates is substantially similar to or less than their interest in the Partnership, in any Prospect will not be made unless the interest retained by the Managing General Partner or the Affiliate is a proportionate Working Interest, the respective obligations of the Managing General Partner or its Affiliates and the Partnership are substantially the same after the sale of the interest by the Managing General Partner or its Affiliates, and the Managing General Partner's interest in revenues does not exceed the amount proportionate to its retained Working Interest. Neither the Managing General Partner nor any Affiliate will retain any Overriding Royalty Interests or other burdens on an interest sold by it to the Partnership. With respect to its retained interest the Managing General Partner will not Farmout a Lease for the primary purpose of avoiding payment of its costs relating to drilling the Lease. This paragraph does not prevent the Managing General Partner or its Affiliates from subsequently dealing with their retained interest as they may choose with unaffiliated parties or Affiliated partnerships. (5) EQUAL PROPORTIONATE INTEREST. If the Managing General Partner or an Affiliate, excluding another Program in which the interest of the Managing General Partner or its Affiliates is substantially similar to or less than their interest in the Partnership, sells, transfers or conveys any oil, gas or other mineral interests or property to the Partnership, it must, at the same time, sell to the Partnership an equal proportionate interest in all its other property in the same Prospect. Notwithstanding, a Prospect shall be deemed to consist of the drilling or spacing unit on which such well will be drilled by the Partnership if the geological feature to which such well will be drilled contains Proved Reserves and the drilling or spacing unit protects against drainage. With respect to an oil and gas Prospect located in Ohio and Pennsylvania on which a well will be drilled by the Partnership to test the Clinton/Medina geologic formation a Prospect shall be deemed to consist of the drilling and spacing unit if it meets the test in the preceding sentence. It is anticipated that most, if not all, of the Prospects which will be developed by the Partnership will develop the Clinton/Medina geologic formation. The development of wells on such acreage may provide the Managing General Partner with offset sites by allowing it to ascertain at the Partnership's expense the value of adjacent acreage in which the Partnership would not have any right to participate in developing. See the Production Map in "Proposed Activities - - Information Regarding Currently Proposed Prospects" for the acreage owned by the Managing General Partner in the area surrounding the currently proposed Prospects. To reduce this conflict of interest neither the Managing General Partner nor its Affiliates may drill (Page 28) any well within 1,650 feet of an existing Partnership Well in the Clinton/Medina formation in Pennsylvania, or within 1,100 feet of an existing Partnership Well in Ohio, within five years of the drilling of the Partnership Well. In the event the Partnership abandons its interest in a well, this restriction will continue for one year following the abandonment. (6) SUBSEQUENTLY ENLARGING PROSPECT. If the area constituting the Partnership's Prospect is subsequently enlarged to encompass any area wherein the Managing General Partner or an Affiliate, excluding another Program in which the interest of the Managing General Partner or its Affiliates is substantially similar to or less than their interest in the Partnership, owns a separate property interest, such separate property interest or a portion thereof shall be sold, transferred or conveyed to the Partnership in accordance with Sections 2, 4 and 5, above, if the activities of the Partnership were material in establishing the existence of Proved Undeveloped Reserves which are attributable to such separate property interest. Notwithstanding, Prospects in the Clinton/Medina geological formation will not be enlarged or contracted if the Prospect was limited to the drilling or spacing unit because the well was being drilled to Proved Reserves in the Clinton/Medina geological formation and the drilling or spacing unit protected against drainage. (7) TRANSFER OF LEASES TO THE MANAGING GENERAL PARTNER. The Managing General Partner and its Affiliates will not purchase any producing or non-producing oil and gas properties from the Partnership. (8) TRANSFER OF LEASES BETWEEN AFFILIATED LIMITED PARTNERSHIPS. The Partnership shall not purchase properties from or sell properties to any other Affiliated partnership. This prohibition, however, shall not apply to joint ventures among such Affiliated partnerships, provided that the respective obligations and revenue sharing of all parties to the transaction are substantially the same and the compensation arrangement or any other interest or right of either the Managing General Partner or its Affiliates is the same in each Affiliated partnership, or, if different, the aggregate compensation of the Managing General Partner or the Affiliate is reduced to reflect the lower compensation arrangement. (9) NO FARMOUTS. The Partnership shall not farmout its Leases. (10) LEASES ONLY FOR STATED PURPOSE OF THE PARTNERSHIP. The Partnership shall acquire only Leases reasonably expected to meet the stated purposes of the Partnership. No Leases shall be acquired for the purpose of a subsequent sale unless the acquisition is made after a well has been drilled to a depth sufficient to indicate that such an acquisition would be in the Partnership's best interest. CONFLICTS BETWEEN PARTICIPANTS The Managing General Partner and its officers and directors and Affiliates may also subscribe for Units in the Partnership on the same basis as Limited Partners or Investor General Partners, except that they are not required to pay Sales Commissions, due diligence reimbursements or wholesaling fees. Also, the Managing General Partner may buy up to 10% of the Units, which will not be applied towards the minimum Partnership Subscription required for the Partnership to begin operations. Subject to the foregoing, any subscription by the Managing General Partner or its officers, directors or Affiliates will dilute the voting rights of the Participants and there may be a conflict with respect to certain matters. However, the Managing General Partner and its officers, directors and Affiliates also are prohibited from voting with respect to certain matters. (See "Summary of Partnership Agreement - Voting Rights.") LACK OF INDEPENDENT UNDERWRITER AND DUE DILIGENCE INVESTIGATION The terms of this offering, the Partnership Agreement and the Drilling and Operating Agreement were determined by the Managing General Partner without arms' length negotiations. Prospective Participants have not been separately represented by legal counsel, which might include the negotiation of certain more favorable terms in the Partnership Agreement and the Drilling and Operating Agreement on behalf of prospective Participants. Although the soliciting broker-dealers will receive a .5% reimbursement of their bona fide accountable due diligence expenses for certain due diligence investigations conducted by such broker-dealers, there was not an extensive in-depth "due diligence" investigation of the existing and proposed business activities of the Partnership and the Managing General Partner which would be provided by independent underwriters. (See "Plan of Distribution".) CONFLICTS CONCERNING LEGAL COUNSEL It is anticipated that legal counsel to Atlas will also serve as legal counsel to the Partnership and that such dual representation will continue in the future. However, should a future dispute arise between the Participants and Atlas, or should counsel advise Atlas that counsel reasonably believes its representation of the Partnership will be adversely affected by counsel's responsibilities to Atlas, Atlas will cause the Participants to retain separate counsel for such matters. CONFLICTS REGARDING REPURCHASE OBLIGATION The Participants' right to present their Units to Atlas for repurchase creates a conflict of interest between the Participants and the Managing General Partner in the suspension of the repurchase obligation and in arriving at the amount which will be paid by the (Page 29) Managing General Partner for the Participants' interests. The Managing General Partner may suspend its repurchase obligation if it does not have the necessary cash flow or it cannot borrow the funds on terms which the Managing General Partner deems reasonable, which is a subjective determination. The Managing General Partner will also determine the repurchase price based upon a reserve report prepared by the Partnership and reviewed by an Independent Expert chosen by the Managing General Partner. Furthermore, the formula for arriving at the repurchase price has some subjective determinations within the control of the Managing General Partner. (See "Repurchase Obligation".) OTHER CONFLICTS A conflict of interest is created with the Participants by the Managing General Partner's right to hypothecate its interest or withdraw an interest in the Partnership Wells with respect to the Managing General Partner's subordination obligation. A further conflict of interest is created by the Managing General Partner's right to determine the order of priority and the construction of pipelines which may be required in order to connect certain Prospects into the Atlas transmission network. (See "Risk Factors - Special Risks of the Partnership - Borrowings by the Managing General Partner Could Reduce Funds Available for Its Subordination Obligation" and "Summary of Partnership Agreement - Withdrawal of Managing General Partner".) PROCEDURES TO REDUCE CONFLICTS OF INTEREST The Managing General Partner and its Affiliates have adopted the following procedures and conditions to reduce some of the conflicts of interest inherent in oil and gas drilling programs and to assure that transactions between the Managing General Partner or its Affiliates, on the one hand, and the Partnership, on the other hand, are fair and reasonable. The Managing General Partner has no other conflict of interest resolution procedures. Consequently, conflicts of interest between the Managing General Partner and the Participants may not necessarily be resolved in the best interests of the Participants. (1) NO COMMINGLING. The funds of the Partnership will be kept in separate accounts and will not be commingled with the funds of the Managing General Partner, any Affiliate or any other entity. (2) NO COMPENSATING BALANCES. Neither the Managing General Partner nor any Affiliate will use the Partnership's funds as compensating balances for its own benefit. (3) FUTURE PRODUCTION. Neither the Managing General Partner nor any Affiliate will commit the future production of a well developed by the Partnership exclusively for its own benefit. (4) MARKETING ARRANGEMENTS. All benefits from marketing arrangements or other relationships affecting property of the Managing General Partner or its Affiliates and the Partnership will be fairly and equitably apportioned according to the respective interests of each in such property. The Managing General Partner shall treat all wells in a geographic area equally concerning to whom and at what price the Partnership's gas will be sold and to whom and at what price the gas of other oil and gas Programs which the Managing General Partner has sponsored or will sponsor will be sold. The Managing General Partner calculates a weighted average selling price for all of the gas sold in a geographic area by taking all money received from the sale of all of the gas sold to its customers in a geographic area and dividing by the volume of all gas sold from the wells in that geographic area. Notwithstanding, the Managing General Partner and its Affiliates are parties to, and contract for, the sale of natural gas with industrial end-users and will continue to enter into such contracts on their own behalf, and the Partnership will not be a party to such contracts. The Managing General Partner and its Affiliates also have a substantial interest in certain pipeline facilities and compression facilities which access interstate pipeline systems, which it is anticipated will be used to transport the Partnership's gas production as well as Affiliated partnership and third-party gas production, and the Partnership will not receive any interest in the Managing General Partner's and its Affiliates' pipeline or gathering system or compression facilities. (See "Proposed Activities - - Sale of Oil and Gas Production - In General".) (5) ADVANCE PAYMENTS. Advance payments by the Partnership to the Managing General Partner and its Affiliates are prohibited, except where advance payments are required to secure tax benefits of prepaid drilling costs and for a business purpose. These payments, if any, shall not include nonrefundable payments for completion costs prior to the time that a decision is made that the well or wells warrant a completion attempt. (6) NO PROFIT IN CONTRAVENTION OF FIDUCIARY DUTY. The Managing General Partner will not profit by drilling in contravention of its fiduciary obligation to the Participants. (7) DISCLOSURE. Any agreement or arrangement which binds the Partnership must be fully disclosed in the Prospectus. (8) LOANS FROM THE PARTNERSHIP. The Partnership will not loan money to the Managing General Partner or any Affiliate. (Page 30) (9) LOANS TO THE PARTNERSHIP. Neither the Managing General Partner nor any Affiliate will loan money to the Partnership where the interest to be charged exceeds the Managing General Partner's or the Affiliate's interest cost or where the interest to be charged exceeds that which would be charged to the Partnership (without reference to the Managing General Partner's or the Affiliate's financial abilities or guarantees) by unrelated lenders, on comparable loans for the same purpose, and neither the Managing General Partner nor any Affiliate will receive points or other financing charges or fees, regardless of the amount, although the actual amount of such charges incurred from third-party lenders may be reimbursed to the Managing General Partner or the Affiliate. (10) NO REBATES. No rebates or give-ups may be received by the Managing General Partner or any Affiliate nor may the Managing General Partner or any Affiliate participate in any reciprocal business arrangements which would circumvent these guidelines. ( 11 ) SALE OF ASSETS. The sale of all or substantially all of the assets of the Partnership (including without limitation, Leases, wells, equipment and production) can only be made with the consent of Participants (including Atlas and its Affiliates with respect to any Units purchased by them) whose Agreed Subscriptions equal a majority of the Partnership Subscription (including Units purchased by Atlas and its Affiliates). (12) PARTICIPATION IN OTHER PARTNERSHIPS. If the Partnership participates in other partnerships or joint ventures (multi-tier arrangements), the terms of any such arrangements shall not result in the circumvention of any of the requirements or prohibitions contained in the Partnership Agreement, including the following: (i) there will be no duplication or increase in organization and offering expenses, the Managing General Partner's compensation, Partnership expenses or other fees and costs; (ii) there will be no substantive alteration in the fiduciary and contractual relationship between the Managing General Partner and the Participants; and (iii) there will be no diminishment in the voting rights of the Participants. (13) INVESTMENTS. Partnership funds may not be invested in the securities of another person except in the following instances: investments in Working Interests or undivided Lease interests made in the ordinary course of the Partnership's business; temporary investments in income producing short-term highly liquid investments, where there is appropriate safety of principal, such as U.S. Treasury Bills; multi-tier arrangements meeting the requirements of (12) above; investments involving less than 5% of the Partnership Subscription which are a necessary and incidental part of a property acquisition transaction; and investments in entities established solely to limit the Partnership's liabilities associated with the ownership or operation of property or equipment, provided, in such instances duplicative fees and expenses shall be prohibited. POLICY REGARDING ROLL-UPS It is possible at some indeterminate time in the future that the Partnership will become involved in a "Roll-Up". The complete definition of "Roll-Up" is set forth in "Definitions." In general, a Roll-Up means a transaction involving the acquisition, merger, conversion, or consolidation of the Partnership with or into another partnership, corporation or other entity (the "Roll-Up Entity") and the issuance of securities by the Roll-Up Entity to Participants. A Roll-Up will also include any change in the rights, preferences, and privileges of the Participants in the Partnership; such changes could include increasing the compensation of the Managing General Partner, amending the voting rights of the Participants, listing the Units on a national securities exchange or on NASDAQ, changing the fundamental investment objectives of the Partnership, or materially altering the duration of the Partnership. The Partnership Agreement provides various policies in the event that a Roll-Up should occur in the future. These policies include: (i) an appraisal of all Partnership assets will be from a competent Independent Expert, and a summary of the appraisal will be included in a report to the Participants in connection with a proposed Roll-Up; (ii) any Participant who votes "no" on the proposal will be offered a choice of (a) accepting the securities of the Roll-Up Entity offered in the proposed Roll-Up; (b) remaining a Participant in the Partnership and preserving his interests in the Partnership on the same terms and conditions as existed previously; or (c) receiving cash in an amount equal to his pro-rata share of the appraised value of the Partnership's net assets; and (iii) the Partnership will not participate in a proposed Roll-Up (a) which would result in the diminishment of a Participant's voting rights under the Roll-Up Entity's chartering agreement; (b) in which the Participants' right of access to the records of the Roll-Up Entity would be less than those provided by the Partnership Agreement; or (c) in which any of the costs of the transaction would be borne by the Partnership if the proposed Roll-Up is not approved by 75% in interest of the Participants. The Partnership Agreement further provides that the Partnership will not participate in a Roll-Up transaction unless the Roll-Up transaction is approved by Participants whose Agreed Subscriptions equal 75% of the Partnership Subscription. (See 4.03(d)(16) of the Partnership Agreement.) With respect to Units owned by the Managing General Partner and its Affiliates, the Managing General Partner and its Affiliates will not vote or consent with respect to a proposed Roll-Up, and in determining the required percentage interest of Units necessary to approve any proposed Roll-Up, any Units owned by the Managing General Partner and its Affiliates will not be included. - --------------------------------------------------------------------------- (Page 31)
CERTAIN TRANSACTIONS As of July 15, 1996, previous limited partnerships sponsored by the Managing General Partner and its Affiliates had made payments to the Managing General Partner and its Affiliates as set forth below. PROSPECTIVE INVESTORS SHOULD NOT ASSUME THAT THE PAST PERFORMANCE OF PRIOR PROGRAMS IS INDICATIVE OF THE FUTURE RESULTS OF THE PARTNERSHIP. Leasehold Cumulative Leasehold Reimbursement Drilling of General and Cumulative and Investor Non-recurring Completion Operator's Admn Program Subscriptions Management Fee Costs (1)(2) Charges Overhead Atlas L.P. #1-1985 $ 600,000 0 $600,000 $135,095 $29,750 A.E. Partners 1986 631,250 0 631,250 98,936 39,075 A.E. Partners 1987 721,000 0 721,000 103,914 43,050 A.E. Partners 1988 617,050 0 617,050 79,860 37,350 A.E. Partners 1989 550,000 0 550,000 61,816 34,600 A.E. Partners 1990 887,500 0 887, 95,094 34,950 A.E. Nineties-10 2,200,000 0 2,200,000 216,903 35,750 A.E. Nineties-11 750,000 0 761,802 (2) 81,006 49,009 A.E. Partners 1991 868,750 0 867,750 69,168 39,300 A.E. Nineties-12 2,212,500 0 2,272,017 (2) 225,242 47,794 A.E. Nineties-JV 92 4,004,813 0 4,157,700 (2) 299,703 58,780 A.E. Partners 1992 600,000 0 600,000 37,561 17,325 A.E. Nineties-Public #1 2,988,960 0 3,026,348 (2) 117,680 32,775 A.E. Nineties-1993 Ltd. 3,753,937 0 3,480,656 (2) 211,529 36,654 A.E. Partners 1993 700,000 0 689,940 31,000 13,575 A.E. Nineties-Public #2 3,323,920 0 3,324,668 (2) 113,389 22,137 A.E. Nineties-14 9,940,045 0 9,512,015 (2) 342,413 53,164 A.E. Partners 1994 892,500 0 892,500 11,262 7,575 A.E. Nineties-Public #3 5,799,750 0 5,799,750 95,213 12,833 A.E. Nineties-15 10,954,715 0 9,859,244 41,834 6,863 A.E. Partners 1995 600,000 0 600,000 0 0 A.E. Nineties-Public #4 6,991,350 0 6,991,350 20,525 3,847 A.E. Nineties-16(3) 7,564,345 0 7,564,345 0 0
(1) Excluding the Managing General Partner's Capital Contributions. (2) Includes additional drilling costs paid with production revenues. (3) This program had its first closing on June 15, 1996. FIDUCIARY RESPONSIBILITY OF THE MANAGING GENERAL PARTNER GENERAL The Managing General Partner is vested with the power and authority to manage the Partnership and its assets. Consequently, it is accountable to the Participants as a fiduciary and must exercise good faith and act with integrity in handling the affairs of the Partnership. The Managing General Partner has a fiduciary responsibility for the safekeeping and use of all funds and assets of the Partnership whether or not in the Managing General Partner's possession or control, and the Managing General Partner may not employ, or permit another to employ, such funds or assets in any manner except for the exclusive benefit of the Partnership. Neither the Partnership Agreement nor any other agreement between the Managing General Partner and the Partnership may contractually limit any fiduciary duty owed to the Participants by the Managing General Partner under applicable law except as set forth in ..4.01, 4.02, 4.04, 4.05 and 4.06 of the Partnership Agreement. This is a rapidly expanding and changing area of the law and Participants who have questions concerning the duties of the Managing General Partner should consult their own counsel. LIMITATIONS ON MANAGING GENERAL PARTNER LIABILITY AS FIDUCIARY Under the terms of the Partnership Agreement, the Managing General Partner, the Operator and their Affiliates will not be liable to the Partnership or the Participants for any loss suffered by the Partnership or Participants which arises out of any action or inaction of the Managing General Partner, the Operator or their Affiliates if the Managing General Partner, the Operator and their Affiliates (Page32) determined in good faith that such course of conduct was in the best interest of the Partnership; the Managing General Partner, the Operator and their Affiliates were acting on behalf of, or performing services for, the Partnership; and such course of conduct did not constitute negligence or misconduct of the Managing General Partner, the Operator or their Affiliates. Therefore, Participants may have a more limited right of action than they would have had absent these limitations in the Partnership Agreement. These limitations, however, do not apply to Participants' rights under the federal securities laws, and Participants whose Agreed Subscriptions equal a majority of the Partnership Subscription may vote to remove the Managing General Partner and/or the Operator. (See "Summary of Partnership Agreement - Voting Rights" and "- Removal of Operator.") In addition, the Partnership Agreement provides for indemnification of the Managing General Partner, the Operator and their Affiliates by the Partnership against any losses, judgments, liabilities, expenses and amounts paid in settlement of any claims sustained by them in connection with the Partnership provided that the Managing General Partner, the Operator and their Affiliates determined in good faith that the course of conduct which caused the loss or liability was in the best interest of the Partnership; the Managing General Partner, the Operator and their Affiliates were acting on behalf of, or performing services for the Partnership; and such course of conduct was not the result of negligence or misconduct of the Managing General Partner, the Operator or their Affiliates. Payments arising from such indemnification or agreement to hold harmless are recoverable only out of the tangible net assets of the Partnership including insurance proceeds. Notwithstanding the above, the Managing General Partner, the Operator and their Affiliates and any person acting as a broker-dealer may not be indemnified for any losses, liabilities, or expenses arising from or out of an alleged violation of federal or state securities laws unless (i) there has been a successful adjudication on the merits of each count involving alleged securities law violations as to a particular indemnity, (ii) such claims have been dismissed with prejudice on the merits by a court of competent jurisdiction as to a particular indemnity, or (iii) a court of competent jurisdiction approves a settlement of the claims as to a particular indemnity and finds that indemnification of the settlement and related costs should be made, and the court considering the request for indemnification has been advised of the position of the Securities and Exchange Commission, the Massachusetts Securities Division, the states which are specifically set forth in the Partnership Agreement, and the position of any state securities regulatory authority in which the plaintiff claims he was offered or sold Partnership Units, with respect to the issue of indemnification for violation of securities laws. LIMITATIONS ON MANAGING GENERAL PARTNER INDEMNIFICATION To the extent that any indemnification provision in the Partnership Agreement purports to include indemnification for liabilities arising under the Securities Act of 1933, as amended, Participants should be aware that, in the opinion of the Securities and Exchange Commission, such indemnification is contrary to public policy and therefore unenforceable. In any event, Participants and their advisers should review closely the provisions of the Partnership Agreement concerning exculpation and indemnification of the Managing General Partner and consult their own attorneys if they have any questions. The Partnership will not incur the cost of the portion of any insurance which insures any party against any liability as to which such party is prohibited from being indemnified. The advancement of Partnership funds to the Managing General Partner or its Affiliates for legal expenses and other costs incurred as a result of any legal action for which indemnification is being sought is permissible only if the Partnership has adequate funds available and the following conditions are satisfied: the legal action relates to acts or omissions with respect to the performance of duties or services on behalf of the Partnership; the legal action is initiated by a third party who is not a Participant, or the legal action is initiated by a Participant and a court of competent jurisdiction specifically approves such advancement; and the Managing General Partner or its Affiliates undertake to repay the advanced funds to the Partnership, together with the applicable legal rate of interest thereon, in cases in which such party is found not to be entitled to indemnification. PRIOR ACTIVITIES The following tables, other than Table 5, reflect certain historical data with respect to nineteen private drilling programs in which Atlas served as Managing General Partner, which raised a total of $49,068,405, and four public drilling programs in which Atlas served as Managing General Partner which raised a total of $19,103,980. FOR SEVERAL REASONS, INCLUDING DIFFERENCES IN PROGRAM STRUCTURE, PROPERTY LOCATIONS, PROGRAM SIZE AND ECONOMIC CONSIDERATIONS, IT SHOULD NOT BE ASSUMED THAT PARTICIPANTS IN THE OFFERING COVERED BY THIS PROSPECTUS WILL EXPERIENCE RETURNS, IF ANY, COMPARABLE TO THOSE EXPERIENCED BY INVESTORS IN SUCH PRIOR DRILLING PROGRAMS. THE RESULTS OF SUCH PRIOR DRILLING PROGRAMS SHOULD BE VIEWED ONLY AS A MEASURE OF THE LEVEL OF ACTIVITY AND EXPERIENCE OF ATLAS WITH RESPECT TO DRILLING PROGRAMS. - -------------------------------------------------------------------------- (Page 33)
Table 1 sets forth certain sales information of previous limited partnerships sponsored by the Managing General Partner and its Affiliates. TABLE 1 EXPERIENCE IN RAISING FUNDS AS OF JULY 15, 1996 DATE OF COM- YEARS MENCE- DATE OF WELLS NUMBER INVESTOR ATLAS MENT OF FIRST IN PEVIOUS OF SUBSCRP- INVEST- TOTAL OPERA- DISTRI- PRODUC- ASSESS PROGRAM INVESTORS TIONS MENT CAPITAL TIONS BUTIONS TION MENTS ================================================================================================= ATLAS L.P. #1 1985 19 $600,000 $114,800 $714,800 12/31/85 07/02/86 10.55 -0- A.E. PARTNERS 1986 24 631,250 120,400 751,650 12/31/86 04/02/87 9.55 -0- A.E. PARTNERS 1987 17 721,000 158,269 879,269 12/31/87 04/02/88 8.55 -0- A.E. PARTNERS 1988 21 617,050 135,450 752,500 12/31/88 04/02/89 7.55 -0- A.E. PARTNERS 1989 21 550,000 120,731 670,731 12/31/89 04/02/90 6.55 -0- A.E. PARTNERS 1990 27 887,500 244,622 1,132,122 12/31/90 04/02/91 5.55 -0- A.E. NINETIES-10 60 2,200,000 484,380 2,684,380 12/31/90 03/31/91 5.33 -0- A.E. NINETIES-11 25 750,000 268,003 1,018,003 09/30/91 01/31/92 4.50 -0- A.E. PARTNERS 1991 26 868,750 318,063 1,186,813 12/31/91 04/02/92 4.33 -0- A.E. NINETIES-12 87 2,212,500 791,833 3,004,333 12/31/91 04/30/92 4.25 -0- A.E. NINETIES-JV 92 155 4,004,813 1,414,917 5,419,730 10/28/92 04/05/93 3.08 -0- A.E. PARTNERS 1992 21 600,000 176,100 776,100 12/14/92 07/02/93 3.58 -0- A.E. NINETIES-PUBLIC #1 221 2,988,960 528,934 3,517,894 12/31/92 07/15/93 2.83 -0- A.E. NINETIES-1993 LTD. 125 3,753,937 1,264,183 5,018,120 10/08/93 02/10/94 2.50 -0- A.E. PARTNERS 1993 21 700,000 219,600 919,600 12/31/93 07/02/94 2.25 -0- A.E. NINETIES-PUBLIC #2 269 3,323,920 587,340 3,911,260 12/31/93 06/15/94 2.00 -0- A.E. NINETIES-14 263 9,940,045 3,584,027 13,524,072 08/11/94 01/10/95 1.50 -0- A.E. PARTNERS 1994 23 892,500 231,500 1,124,000 12/31/94 07/02/95 1.25 -0- A.E. NINETIES-PUBLIC #3 391 5,799,750 928,546 6,728,296 12/31/94 06/05/95 1.25 -0- A.E. NINETIES-15 244 10,954,715 3,435,936 14,390,651 09/12/96 02/07/96 0.42 -0- A.E. PARTNERS 1995 23 600,000 244,725 844,725 05/01/96 N/A N/A -0- A.E. NINETIES-PUBLIC #4 324 6,991,350 1,287,782 8,279,132 12/31/95 07/08/96 0.25 -0- A.E. NINETIES-16 177 7,564,345 1,134,652 8,698,997 06/15/96 N/A N/A -0- - -------------------------------------------------------------------------------------------------------- (Page 34) Table 2 reflects the drilling activity of previous limited partnerships sponsored by the Managing General Partner and its Affiliates. All of the wells were Development Wells. PROSPECTIVE INVESTORS SHOULD NOT ASSUME THAT THE PAST PERFORMANCE OF PRIOR PROGRAMS IS INDICATIVE OF THE FUTURE RESULTS OF THE PARTNERSHIP.
TABLE 2 WELL STATISTICS - DEVELOPMENT WELLS AS OF JULY 15, 1996 GROSS WELLS (1): NET WELLS (2) PROGRAM OIL GAS DRY : OIL GAS DRY - ------------------------------------------------------------- ATLAS L.P. #1 1985 0 7 1 0 3.15 0.25 A.E. PARTNERS 1986 0 8 0 0 3.50 0.00 A.E. PARTNERS 1987 0 9 0 0 4.10 0.00 A.E. PARTNERS 1988 0 9 0 0 3.80 0.00 A.E. PARTNERS 1989 0 10 0 0 3.30 0.00 A.E. PARTNERS 1990 0 12 0 0 5.00 0.00 A.E. NINETIES-10 0 12 0 0 11.50 0.00 A.E. NINETIES-11 0 14 0 0 4.30 0.00 A.E. PARTNERS 1991 0 12 0 0 4.95 0.00 A.E. NINETIES-12 0 14 0 0 12.50 0.00 A.E. NINETIES-JV 92 0 52 0 0 24.44 0.00 A.E. PARTNERS 1992 0 7 0 0 14.00 0.00 A.E. NINETIES-1993 LTD 0 20 2 0 19.40 2.00 A.E. PARTNERS 1993 0 8 0 0 4.00 0.00 A.E. NINETIES-PUBLIC #2 0 16 0 0 15.31 0.00 A.E. NINETIES-14 0 55 1 0 55.00 1.00 A.E. PARTNERS 1994 0 12 0 0 5.00 0.00 A.E. NINETIES-PUBLIC #3 0 27 0 0 26.00 0.00 A.E. NINETIES-15 0 61 0 0 55.50 0.00 A.E. PARTNERS 1995 0 6 0 0 3.00 0.00 A.E. NINETIES-PUBLIC #4 0 31 0 0 30.50 0.00 A.E. NINETIES-16 0 32 0 0 32.00 0.00 ============================================================= TOTALS: 0 448 4 0 343.75 3.25 (1) A "gross well" is one in which a leasehold interest is owned. (2) A "net well"" equals the actual leasehold interest owned in one gross well devided by one hundred. Example: a 50% leasehold interest in a well is one gross well, but a .50 net well. - ------------------------------------------------------------------------- (Page 35)
Table 3 provides information concerning the operating results of previous limited partnerships sponsored by the Managing General Partner. PROSPECTIVE INVESTORS SHOULD NOT ASSUME THAT THE PAST PERFORMANCE OF PRIOR PROGRAMS IS INDICATIVE OF THE FUTURE RESULTS OF THE PARTNERSHIP. TABLE 3 INVESTOR OPERATING RESULTS - INCLUDING EXPENSES AS OF July 15,1996 CASH LATEST -ON- AVERAGE QTRLY CASH (1) - - TOTAL COSTS - - CASH (2) CASH YEARLY DISTRIB.as of PROGRAM CAPITALIZATION OPERATING ADMIN. DIRECT DISTRIBUTIONS RETURN RETURN Dt of TBL ======================================================================================================== ATLAS L.P. #1 - 1985 $600,000 $117,043 $25,620 $6,834 $1,189,740 198% 19% $9,366 A.E. PARTNERS LP - 1986 631,250 85,642 33,705 5,676 549,552 87% 9% 6,000 A.E. PARTNERS LP - 1987 721,000 83,388 34,463 6,365 470,829 65% 8% 2,942 A.E. PARTNERS LP - 1988 617,050 62,877 29,273 6,065 417,769 68% 9% 4,047 A.E. PARTNERS LP - 1989 550,000 53,102 29,479 4,005 537,489 98% 15% 9,050 A.E. PARTNERS LP - 1990 887,500 75,321 36,750 3,750 605,816 68% 12% 16,219 A.E. NINETIES - 10 2,200,000 168,678 37,550 15,260 1,074,207 49% 9% 31,823 A.E. NINETIES - 11 750,000 59,021 36,458 25,757 622,993 83% 18% 22,790 A.E. PARTNERS LP - 1991 868,750 55,870 42,000 12,007 580,152 67% 15% 25,475 A.E. NINETIES - 12 2,212,500 164,474 35,633 94,236 1,161,970 53% 12% 47,613 A.E. NINETIES - JV 92 4,004,813 212,783 43,033 180,736 1,818,842(3) 45% 15% 100,936 A.E. PARTNERS LP - 1992 600,000 30,618 18,675 2,135 376,863 63% 18% 37,879 A.E. NINETIES - PUBLIC #1 2,988,960 101,905 27,283 63,384 1,138,817 38% 13% 74,949 A.E. NINETIES - 1993 LTD. 3,753,937 156,350 28,533 19,913 1,117,937 30% 12% 113,637 A.E. PARTNERS LP - 1993 700,000 26,810 15,375 1,585 314,409 45% 20% 55,877 A.E. NINETIES - PUBLIC #2 3,323,920 100,127 19,271 22,460 752,510 23% 11% 146,060 A.E. NINETIES - 14 9,940,045 255,386 46,000 8,128 1,636,319 16% 11% 249,996 A.E. PARTNERS LP - 1994 892,500 11,763 10,050 1,025 197,788 22% 18% 42,520 A.E. NINETIES - PUBLIC #3 5,799,750 93,741 17,483 18,841 901,708 16% 12% 277,070 A.E. NINETIES - 15 10,954,715 61,646 14,438 4,609 917,117 8% 20% 577,598 A.E. PARTNERS LP - 1995 600,000 0 0 0 0 0% 0% 0 A.E. NINETIES - PUBLIC #4 6,991,350 15,394 2,885 8,731 175,000 3% 10% 175,000 A.E. NINETIES - 16 (4) 7,564,345 0 0% 0 0 0% 0 0 (1) There have been no Partnership borrowings other than from Atlas. The approximate principal amounts of such borrowings were as follows: A.E. Nineties-10 $330,000; A.E. Nineties-11 $112,500; A.E. Nineties-12 $331,875. A portion of each program's cash distribution was used to repay that program's loan. (2) All cash distributions were from the sale of gas, and not sale of properties. (3) A portion of the cash distributions was used to drill three reinvestment wells at a cost of $333,860 in accordance with the terms of the offering. (4) This program had its first closing on June 15, 1996. - ------------------------------------------------------------------------------------------------------- (Page 36)
Table 3A provides information concerning the operating results of previous limited partnerships sponsored by the Managing General Partner and its Affiliates. PROSPECTIVE INVESTORS SHOULD NOT ASSUME THAT THE PAST PERFORMANCE OF PRIOR PROGRAMS IS INDICATIVE OF THE FUTURE RESULTS OF THE PARTNERSHIP.
TABLE 3A MANAGING GENERAL PARTNER OPERATING RESULTS - INCLUDING EXPENSES AS OF July 15, 1996 CASH LATEST -ON- QTRLY CASH --------TOTAL COSTS-------- CASH CASH DISTRIB.AS PROGRAM CAPITALIZATION OPERATING ADMIN. DIRECT DISTRIBUTIONS(1) RETURN DATE OF TBL. - ---------------------------------------------------------------------------------------------------- ATLAS L.P. #1 - 1985 $114,800 $22,294 $4,880 $1,093 $223,327 195% $1,784 A.E. PARTNERS LP - 1986 120,400 16,313 6,420 908 103,649 86% 1,143 A.E. PARTNERS LP - 1987 158,269 24,043 9,937 1,424 116,994 74% 848 A.E. PARTNERS LP - 1988 135,450 20,250 9,427 1,477 99,084 73% 1,270 A.E. PARTNERS LP - 1989 120,731 11,657 6,471 721 121,682 101% 2,153 A.E. PARTNERS LP - 1990 244,622 0 0 25,107 228,707 93% 6,006 A.E. NINETIES - 10 484,380 0 0 56,226 379,306 78% 11,253 A.E. NINETIES - 11 268,003 25,295 15,625 5,981 250,803 94% 9,767 A.E. PARTNERS LP - 1991 318,063 0 0 18,623 256,756 81% 9,392 A.E. NINETIES - 12 791,833 70,489 15,271 14,880 467,618 59% 20,406 A.E. NINETIES - JV 92 1,414,917 104,803 21,195 7,480 724,273 51% 29,309 A.E. PARTNERS LP - 1992 176,100 0 0 10,206 194,209 110% 9,690 A.E. NINETIES - PUBLIC #1 528,934 32,180 8,616 8,209 330,568 62% 17,483 A.E. NINETIES - 1993 LTD. 1,264,183 67,007 12,228 4,952 322,696 26% 0 A.E. PARTNERS LP - 1993 219,600 0 0 8,937 107,103 49% 192,254 A.E. NINETIES - PUBLIC #2 587,340 31,619 6,086 7,093 126,882 22% 0 A.E. NINETIES - 14 3,584,027 125,787 22,656 4,003 819,303 23% 120,904 A.E. PARTNERS LP - 1994 231,500 0 0 3,921 57,954 25% 14,998 A.E. NINETIES - PUBLIC #3 928,546 31,247 5,828 6,280 300,569 32% 92,357 A.E. NINETIES - 15 3,435,936 26,420 6,188 1,975 393,050 11% 247,542 A.E. PARTNERS LP - 1995 244,725 0 0 0 0 0% 0 A.E. NINETIES - PUBLIC #4 1,287,782 5,131 962 2,910 13,891 1% 13,891 A.E. NINETIES - 16 (2) 1,134,652 0 0 0 0 0 0
(1) All cash distributions were from the sale of gas and not sales of properties. (2) This program had its first closing on June 15, 1996. - -------------------------------------------------------------------------- (Page 37) Table 4 sets forth the aggregate cash distributions and estimated federal tax savings to investors in Atlas' prior programs, based on the maximum marginal tax rate in each year, as reported in the partnerships' tax returns and such share of tax deductions as a percentage of their subscriptions. PROSPECTIVE SUBSCRIBERS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS CONCERNING THEIR SPECIFIC TAX SITUATIONS AND SHOULD NOT ASSUME THAT THE PAST PERFORMANCE OF PRIOR PROGRAMS IS INDICATIVE OF THE FUTURE RESULTS OF THE PARTNERSHIP
TABLE 4 SUMMARY OF INVESTOR TAX BENEFITS AND CASH DISTRIBUTION RETURNS 07/15/96 ESTIMATED FEDERAL TAX SAVINGS FROM (1) CUMULATIVE (2) (3) (3) (3) (4) (5) INVESTORS PERCENT OF 1ST YEAR EFF. 1ST YR CASH TOTAL CASH CASH DIST. INVESTOR TAX TAX I.D.C. DEPLETION SECTION 29 DISTRIBUTION DIST & & TAX SAVINGS PROGRAM CAPITAL DEDUCT RATE DEDUCT ALLOWANCE DEPRE TAX CREDIT TOTAL AS OF DT of TBL-SAVINGS- -TO--DATE ================================================================================================================================ ATLAS L.P. #1 - 1985 $600,000 99% 50.0% $298,337 $99,838 N/A $55,915 $454,090 $1,189,740 $1,643,830 274% A.E. PARTNERS LP - 1986 631,250 99% 50.0% 312,889 49,235 N/A 13,507 375,631 549,552 925,183 147% A.E. PARTNERS LP - 1987 721,000 99% 38.5% 356,895 38,305 N/A N/A 395,200 470,829 866,029 120% A.E. PARTNERS LP - 1988 617,050 99% 33.0% 244,351 34,045 N/A N/A 278,396 417,769 696,165 113% A.E. PARTNERS LP - 1989 550,000 99% 33.0% 179,685 46,872 N/A N/A 226,557 537,489 764,046 139% A.E. PARTNERS LP - 1990 887,500 99% 33.0% 275,125 56,461 N/A 159,085 490,671 605,816 1,096,487 124% A.E. NINETIES - 10 2,200,000 100% 33.0% 726,000 101,560 N/A 298,531 1,126,091 1,074,207 2,200,298 100% A.E. NINETIES - 11 750,000 100% 31.0% 232,500 56,731 N/A 188,742 477,973 622,993 1,100,966 147% A.E. PARTNERS LP - 1991 868,750 100% 31.0% 269,313 59,020 N/A 162,099 490,432 580,152 1,070,584 123% A.E. NINETIES - 12 2,212,500 100% 31.0% 685,875 117,996 N/A 342,198 1,146,069 1,161,970 2,308,039 104% A.E. NINETIES - JV 92 4,004,813 92.5% 31.0% 1,313,629 174,683 N/A 455,273 1,943,585 1,818,842 3,762,427 94% A.E. PARTNERS LP - 1992 600,000 100% 31.0% 186,000 41,112 N/A 114,424 341,536 376,863 718,399 120% A.E. NINETIES - PUBLIC #1 2,988,960 80.5% 36.0% 877,511 131,397 70,847 N/A 1,079,755 1,138,817 2,218,572 74% A.E. NINETIES - 1993 LTD. 3,753,937 92.5% 39.6% 1,378,377 108,120 N/A N/A 1,486,497 1,117,937 2,604,434 69% A.E. PARTNERS LP - 1993 700,000 100% 39.6% 273,216 28,521 N/A N/A 301,737 314,409 616,146 88% A.E. NINETIES - PUBLIC #2 3,323,920 78.7% 39.6% 1,036,343 105,952 65,004 N/A 1,207,299 752,510 1,959,809 59% A.E. NINETIES - 9,940,045 95% 39.6% 3,739,445 184,853 N/A N/A 3,924,298 1,636,319 5,560,617 56% A.E. PARTNERS LP - 1994 892,500 100% 39.6% 353,430 15,996 N/A N/A 369,426 197,788 567,214 64% A.E. NINETIES - PUBLIC #3 5,799,750 76.2% 39.6% 1,752,761 84,725 48,574 N/A 1,886,060 901,708 2,787,768 48% A.E. NINETIES - 15 10,954,715 90.0% 39.6% 3,904,260 82,928 N/A N/A 3,987,188 917,117 4,904,305 45% A.E. PARTNERS LP - 1995 600,00 100% 39.6% 237,600 0 N/A N/A 237,600 - 237,600 40% A.E. NINETIES - PUBLIC #4 6,991,350 80% 39.6% 2,214,860 13,302 0 N/A 2,228,162 175,000 2,403,162 34% A.E. NINETIES - 16 (6) 7,564,345 80% 39.6% 2,396,385 0 0 N/A 2,396,385 0 2,396,385 32% (1) These columns reflect the savings in taxes which would have been paid by an investor, assuming full use of deductions available to the investor. (2)It is anticipated that approximately 80% of an Investor General Partner's subscription to the Partnership will be deductible in 1996. (3) The I.D.C. Deductions, Depletion Allowance and MACRS depreciation deductions have been reduced to credit equivalents. (4) The Section 29 tax credit is not available with respect to wells drilled after December 31, 1992. N/A means not applicable. (5) These distributions were all from production revenues., See footnotes 1 and 3 of Table 3. (6) This Program had its first closing on June 15, 1996
- ------------------------------------------------------------------------ (Page 38) Table 5 sets forth programs in which Atlas and Atlas Energy served as operator and/or drilling contractor for third party general partners as well as the partnerships where Atlas served as managing general partner. The table includes Atlas' share of costs and revenues set forth in Table 3A, above. Atlas has drilled approximately 1,499 wells over the 24 year period from 1972 to 1995 and during this time it has completed 97% of the wells. In the current primary area of interest in Mercer County Atlas has completed 99% of more than approximately 640 wells drilled. These results are summarized below.
TABLE 5 ATLAS RESOURCES, INC. AND ITS AFFILIATES' HISTORICAL PRODUCTION RECORD AS OF July 15, 1996 (4) YEAR CUM % RETURN LAST WELLS WERE TOTAL TOTAL AMOUNT TOTAL CASH THREE MONTHS DISTRIB. PLACED INTO MCF'S INVESTED IN AMOUNT ON ENDING AS OF PROD. WELLS(1) PRODUCED WELLS(2) RETURNED(2) CASH(3) DATE OF TABLE ======================================================================================================= 1973 6 2,394,376 $ 576,000 $3,834,314 666% $16,889 1974 23 3,116,867 2,515,200 4,289,637 171% 13,349 1975 23 3,657,487 2,686,200 5,841,938 217% 22,267 1976 15 2,791,582 1,819,200 4,264,180 234% 10,409 1977 29 8,905,896 4,042,600 15,789,384 391% 60,348 1978 84 7,384,967 12,269,900 18,228,172 149% 67,026 1979 54 8,711,841 7,404,000 18,969,856 256% 46,127 1980 45 5,418,403 6,561,100 13,132,495 200% 44,195 1981 85 5,860,131 14,885,850 16,351,158 110% 38,611 1982 77 2,429,650 12,745,500 5,662,450 44% 4,675 1983 33 1,177,067 6,725,480 2,819,398 42% 13,981 1984 52 4,169,283 10,663,250 9,535,375 89% 58,678 1985 46 4,485,729 8,971,200 9,584,183 107% 52,446 1986 43 4,911,497 9,439,100 9,671,868 102% 73,855 1987 12 1,088,291 2,437,800 1,928,020 79% 14,819 1988 38 3,629,990 7,886,386 6,359,146 81% 56,483 1989 48 3,355,259 9,967,768 6,203,955 62% 71,218 1990 32 3,220,952 6,607,333 6,121,072 93% 105,729 1991 92 7,371,787 18,465,287 13,753,538 74% 436,806 1992 65 5,987,348 14,444,116 10,846,242 75% 555,906 1993 106 7,098,177 21,764,596 11,739,395 54% 764,801 1994 97 3,625,470 20,418,364 5,838,216 29% 809,937 1995 103 2,458,385 22,303,186 4,077,817 18% 1,318,577 1996 58 312,235 12,957,277 564,677 4% 550,206 TOTAL 1,266 $103,562,670 $238,556,693 $205,406,485 86% $5,207,338
(1) The above numbers do not include information for: (a) 87 wells drilled for General Motors from 1971 to 1973 which were subsequently purchased by General Motors; (b) 25 wells successfully drilled in 1981 and 1982 for an industrial customer which requested that the wells be capped and not placed into production; (c) 127 wells drilled from 1980 to 1985 which were sold in 1993 and are no longer operated by Atlas; and (d) wells which were drilled recently but are not yet in production. (2) The column "Total Amount Invested in Wells" only includes funds paid to Atlas or Atlas Energy as operator and/or drilling contractor for drilling and completing the designated wells. This column does not include all of the costs paid by investors to the third party managing general partner and/or sponsor of the program because such information is generally not available to Atlas or Atlas Energy. Similarly, the column "Total Amount Returned" only includes amounts paid by Atlas or Atlas Energy as operator of the wells to the third party managing general partner and/or sponsor of the program. This column does not set forth the revenues which were actually received by the investors from the third party managing general partner and/or sponsor because such information is generally not available to Atlas or Atlas Energy. Notwithstanding, the columns "Total Amount Invested in Wells" and "Total Amount Returned" also include the partnerships where Atlas serves as managing general partner and are presented on the same basis as the third party partnerships. (3) This column reflects total cash distributions beginning with the first production from the well, as a percentage of the total amount invested in the well, and includes the return of the investors' capital. (4) THE RESULTS OF TABLE 5 SHOULD BE VIEWED ONLY AS A MEASURE OF THE LEVEL OF ACTIVITY AND EXPERIENCE OF ATLAS WITH RESPECT TO DRILLING PROGRAMS. - -------------------------------------------------------------------------- (Page 39) MANAGEMENT MANAGING GENERAL PARTNER AND OPERATOR Atlas, a Pennsylvania corporation, was incorporated in 1979 and Atlas Energy, an Ohio corporation, was incorporated in 1973. As of December 31, 1995, Atlas and Atlas Energy operated approximately 1,051 oil or natural gas wells located in Ohio and Pennsylvania. Atlas and Atlas Energy have acted as operator with respect to the drilling of a total of approximately 1500 gas wells, approximately 1,448 of which were capable of production in commercial quantities. Atlas' primary offices are located at 311 Rouser Road, Moon Township, Pennsylvania 15108, near the Pittsburgh International Airport. Atlas has previously sponsored four public and nineteen private drilling programs formed since 1985 to conduct natural gas drilling and development activities in Pennsylvania and Ohio. In addition, as operator, Atlas acted as general contractor with respect to the drilling and completion of such partnerships' natural gas wells located in Pennsylvania and is responsible for operating such wells. Atlas Energy acted in the same capacity as operator of such partnerships' wells located in Ohio. (See "Prior Activities".) Atlas and its Affiliates employ a total of approximately ninety-four persons, consisting of three geologists, five landmen, five engineers, thirty-three operations staff, eight accounting, one legal, eight gas marketing, and eighteen administrative personnel. The balance of the personnel are engineering, pipeline and field supervisors. Atlas and Atlas Energy are wholly owned subsidiaries of AIC, Inc., a corporation formed in July, 1995, which is a wholly owned subsidiary of AEG Holdings, Inc. ("AEGH"), a corporation which was also formed in July, 1995. The other subsidiaries of AIC, Inc. are: Atlas Gas Marketing, Inc., a gas marketing company; Mercer Gas Gathering, Inc., a gas gathering company which gathers gas from Atlas' wells in Mercer County, Pennsylvania, and delivers such gas directly to industrial end-users or to interstate pipelines and local distribution companies; Pennsylvania Industrial Energy, Inc., which sells natural gas to industrial end-users in Pennsylvania, Transatco, Inc., which owns a 50% interest in Topico which operates a pipeline in Ohio, and Atlas Energy Corporation, which will serve as a drilling contractor and well operator in West Virginia and as managing general partner of exploratory programs. In addition, Atlas is the sole owner of ARD Investments, Inc., a corporation formed in July, 1995, and Atlas Energy is the sole owner of AED Investments, Inc., a corporation formed in July, 1995. Prior to July, 1995, all of the Atlas companies were wholly owned by Atlas Energy. The purpose of forming AEGH, AIC, Inc., ARD Investments, Inc. and AED Investments, Inc. was to achieve more efficient concentration of funds of the Atlas group of companies, thereby minimizing transaction costs and maximizing returns on investment vehicles. Atlas and its Affiliates have constructed for their use over 500 miles of gas transmission lines, produce in excess of nine billion cubic feet of natural gas annually from wells they operate, which they market directly to end users or to interstate pipelines and local distribution companies, and also purchase an additional eight billion cubic feet of natural gas annually from third party producers locally and in the south/southwest United States and resell the production to more than 100 customers. - -------------------------------------------------------------------------- (Page 40)
Organizational Diagram AEG HOLDINGS,INC. : AIC, INC : ......................................................................................... : : : : : : : ATLAS MERCER GAS PENNSYLVANIA ATLAS ENERGY TRANSATCO ATLAS GAS ATLAS ENERGY RESOURCES GATHERING INDUSTRIAL CORPORATION INC.,WHICH MARKETING GROUP, INC. (MANAGING INC., (GAS ENERGY,INC. (DRILLER AND OWNS 50% OF INC. (DRILLER AND GENERAL GATHERING ("PIE") OPERATOR IN TOPICO (MARKETS OPERATOR IN PARTNER, COMPANY) (SELLS GAS TO WV AND (OPERATES NATURAL OHIO DRILLER PENNSYLVANIA MANAGING PIPELINE GAS) : AND OPERATOR) INDUSTRY) GENERAL IN OHIO : : : : : ARD AED INVESTMENTS, INC. INVESTMENTS, INC. 1 2 3 4 5 6 6
The audited financial statements of Atlas and AEGH as of July 31, 1995 and 1994, are included in "Financial Information Concerning the Managing General Partner, AEGH and the Partnership". OFFICERS, DIRECTORS AND KEY PERSONNEL The directors of Atlas serve until Atlas' next annual meeting of stockholders in October, 1996, or until their successors are elected. All officers serve until the regular meeting of directors immediately following the annual meeting of stockholders and until their successors are elected. The officers, directors and key personnel of Atlas, who are also officers, directors and key personnel of AEGH and Atlas Energy, are as follows: NAME AGE POSITION OR OFFICE Charles T. Koval 62 Co-Chairman of the Board and a Director Joseph R. Sadowski 65 Co-Chairman of the Board and a Director James R. O'Mara 52 President, Chief Executive Officer and a Director Bruce M. Wolf 47 General Counsel, Secretary and a Director James J. Kritzo 61 Vice President of the Land Department Donald P. Wagner 54 Vice President of Operations Frank P. Carolas 36 Vice President of Geology Tony C. Banks 41 Vice President of Finance and Chief Financial Officer Barbara J. Krasnicki 51 Vice President of Administration Jacqueline B. Poloka 45 Controller John A. Ranieri 36 Director of Gas Marketing - -------------------------------------------------------------------------- (Page 41) CHARLES T. KOVAL. Co-Chairman of the Board and a director. From 1955 to 1963, Mr. Koval served as a pilot in the U.S. Marine Corps and the Pennsylvania National Guard, attaining the rank of captain. He co-founded Atlas. Prior to the formation of Atlas, he was involved in the securities business initially with a national firm, Federated Investors, and then with his own firm, Allegheny Planned Income, both headquartered in Pittsburgh, Pennsylvania. Mr. Koval is serving and has served as a director of Imperial Harbors since 1980. Mr. Koval received a Bachelor of Science Degree from Pennsylvania State University in 1955. JOSEPH R. SADOWSKI. Co-Chairman of the Board and a director. He co-founded Atlas. Mr. Sadowski has been involved in the securities business with Revere Management and Oppenheimer Management Company. From 1966 until 1971, he managed his own brokerage firm, Whitman Securities in Cherry Hill, New Jersey. Mr. Sadowski has served as a director of Dixon Ticonderoga since 1987 and is a past director of Northeast Ohio Operating Companies, Inc., Canonsburg Hospital Foundation and the Verland Foundation. Mr. Sadowski received a Bachelor of Arts Degree in Industrial Management from LaSalle College in 1954, attended Temple University from September, 1957 to June, 1958 and is a graduate of Girard. JAMES R. O'MARA. President, chief executive officer and a director. Mr. O'Mara served with the United States Army Security Agency (ASA) and is a Vietnam veteran. Mr. O'Mara is a Certified Public Accountant and had been associated with Coopers and Lybrand, a national accounting firm, and Teledyne, Inc., a large conglomerate, before joining Atlas in 1975. He is a member of the Pennsylvania Institute of Certified Public Accountants and the President of Mercer Gas Gathering, Inc. Mr. O'Mara received a Bachelor of Science Degree in Accounting from Gannon University in 1968. BRUCE M. WOLF. General Counsel, Secretary and a director. Mr. Wolf received a Bachelor of Arts Degree from Washington and Jefferson College in 1970 and his law degree in 1975 from the University of Pittsburgh. From 1975 until his association with Atlas in January, 1980, he was a member of the staff of Price Waterhouse and Company, a national accounting firm. Mr. Wolf is a member of the Bars of Pennsylvania, the U.S. Tax Court, the Allegheny County Bar Association and its respective Taxation and Natural Resources Sections. He is also a member of the Board of Trustees and currently President of the Independent Oil and Gas Association of Pennsylvania, a trade association representing Pennsylvania natural gas producers. Mr. Wolf is the President of Atlas Gas Marketing, Inc., AIC, Inc., ARD Investments, Inc. and AED Investments, Inc. JAMES J. KRITZO. Vice President of the Land Department. Mr. Kritzo attended Indiana University of Pennsylvania. From 1956 to 1963 he was employed by R.J. Reynolds Company in Sales and Marketing. In 1964 he joined the Sherwin Williams Company as a Regional Sales Representative, later being appointed Operations Manager of the Pittsburgh District Service Center. In 1979 he joined the Land Department of Atlas. Mr. Kritzo is a member of the Association of Petroleum Landmen and the Benedum Chapter of the A.A.P.L. DONALD P. WAGNER. Vice President of Operations. Mr. Wagner, who has over 32 years experience in all phases of gas and oil field operations, was President of Energy Well Services, Inc., from 1971 through 1979 when he joined Atlas. Mr. Wagner is a member of the Society of Petroleum Engineers as well as a member of the Pennsylvania Oil and Gas Association. FRANK P. CAROLAS. Vice President of Geology. Mr. Carolas is a certified petroleum geologist and has been with Atlas since 1981. He received a Bachelor of Science Degree in Geology from Pennsylvania State University in 1981 and is an active member of the American Association of Petroleum Geologists. TONY C. BANKS. Vice President and Chief Financial Officer. Mr. Banks has over twenty years of finance, accounting and administrative experience in the oil and gas industry, all with various subsidiaries of Consolidated Natural Gas Company. He started as an accounting clerk with CNG's parent company in 1974 and progressed through various positions with CNG's Appalachian producer, northeast gas marketer and southwest producer to his last position as Treasurer of CNG's national energy marketing subsidiary. Mr. Banks served on CNG's corporate-wide Financial Accounting and Planning, Energy Price Risk and Information Services Steering committees and has chaired the Financial Advisory and Accounting Research committees. In 1989, Mr. Banks was a seminar instructor for the University of Tulsa, and over the years has given presentations to industry groups on topics including energy derivatives, accounting for Appalachian gas imbalances and post regulation credit review and evaluation. He received a Bachelor of Science Degree in Accounting/Computers from Point Park College in Pittsburgh and passed the Pennsylvania Certified Public Accountant examination in 1988. Mr. Banks is Vice President of AIC,Inc, ARD Investments, Inc. and AED Investments, Inc. - -------------------------------------------------------------------------- (Page 42) BARBARA J. KRASNICKI. Vice President of Administration. Ms. Krasnicki has been with Atlas Energy since its inception in 1971. She was the Office and Personnel Manager for Atlas Energy during that time. She served as Office Manager of Allegheny Planned Income from 1965 to 1971. Ms. Krasnicki has an Associate in Science Degree from Point Park College, Pittsburgh, Pennsylvania. JACQUELINE B. POLOKA. Controller. Ms. Poloka began her career with Atlas in 1980 as Administrative Assistant. She was promoted to Production Accounting Manager in 1987 and subsequently to Controller in 1994. Ms. Poloka graduated from Carlow College, Pittsburgh, Pennsylvania with a Bachelor of Science Degree in Accounting. Ms. Poloka is a member of the American Society of Women Accountants and the Ohio Valley College Club. JOHN A. RANIERI. Director of Gas Marketing for Atlas Gas Marketing, Inc. Mr. Ranieri graduated from Northwestern University in 1981 with a Bachelor of Science Degree in Chemical Engineering. He joined the Columbia Gas Distribution Companies as a marketing engineer; first in Charleston, West Virginia, and later in Mansfield, Ohio. In 1984, he was promoted to Gas Procurement Manager of Columbia Gas of Pennsylvania with responsibility for all Appalachian purchases. In 1988 he helped start a new marketing affiliate for the parent company and remained with that organization until joining Atlas in July, 1990. The officers and directors of AIC, Inc., which owns 100% of the common stock of Atlas, are as follows: Bruce M. Wolf, President and a director, Tony C. Banks, Vice President, Secretary and a director, and Norman J. Shuman, Vice President, Treasurer and a director. The biographies of Messrs. Wolf and Banks are set forth above. REMUNERATION No officer or director of the Managing General Partner will receive any direct remuneration or other compensation from the Partnership. Such persons will receive compensation solely from Atlas and its Affiliated companies. The aggregate remuneration paid during the fiscal year ended July 31, 1995, to the five most highly compensated persons who are executive officers of Atlas and whose aggregate remuneration exceeded $100,000 and to all executive officers of Atlas as a group, for services in all capacities while acting as executive officers of Atlas and its
Affiliates, was as follows: Name of individual Capacities in which Cash Compensation Aggregate number of persons served Compensation Pursuant to contingent forms GROUP (3) Plans (2) of remuneration Charles T. Koval Co-Chairman of the Board and a Director $294,700 $2,772 - - - Joseph R. Sadowski Co-Chairman of the Board and a Director $275,700 $2,772 - - - James R. O'Mara President and a Director $242,812 $10,206 - Bruce M. Wolf General Counsel,Secretary and a Director $179,064 $8,895 - Tony C. Banks Vice President & Chief Financial Officer $120,000 $2,310 - - - Executive Officers as a Group (9 persons) $1,410,738 $58,278 -
(1) The amounts indicated were composed of salaries and all cash bonuses for services rendered to Atlas and its Affiliates during the last fiscal year, including compensation that would have been paid in cash but for the fact the payment of such compensation was deferred. - -------------------------------------------------------------------------- (Page 43) (2) Atlas and its Affiliates have a retirement plan described under "- Security Ownership of Certain Beneficial Owners and Managers - ESOP," below, and a 401(K) plan which allowed employees to contribute the lesser of 15% of their compensation or $9,500 for the calendar year 1995 or $9,240 for the calendar year 1994. Atlas Energy contributed an amount equal to 30% of each employee's contribution. (3) There were no stock options granted or exercised during the fiscal year ended July 31, 1995, to the above individuals. (See "- Security Ownership of Certain Beneficial Owners and Managers - Agreements Affecting Ownership of AEGH Stock," below.) (4) During the fiscal year ended July 31, 1995, each director was paid a director's fee of $12,000 for the year. There are no other arrangements for remuneration of directors. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGERS AEGH owns 100% of the common stock of AIC, Inc., which owns 100% of the common stock of Atlas. The following table sets forth, as of July 31, 1995, information as to the beneficial ownership of common stock of AEGH by each person known to AEGH to own beneficially 5% or more of the outstanding common stock of AEGH, by directors and nominees, naming them individually, and by all directors and officers of AEGH as a group: SHARES OF COMMON PERCENT OF CLASS Charles T. Koval 109,391 27.662% Joseph R. Sadowski 109,142 27.599% James R. O'Mara 95,164 (1) 24.064% Bruce M. Wolf 44,710 (2) 11.306% Directors and Officers as a Group (9 persons) 377,654 (1)(2) 95.499% (1) Includes 22,164 shares of AEGH issuable upon the grant and exercise of stock options held by Mr. O'Mara. (2) Includes 14,210 shares of AEGH issuable upon the grant and exercise of stock options held by Mr. Wolf. ESOP. AEGH has adopted Atlas Energy's existing Employee Stock Ownership Plan ("ESOP") for the benefit of its employees, other than Messrs. Koval and Sadowski, to which it will contribute annually approximately 6% of annual compensation in the form of shares of AEGH. AEGH anticipates that it will contribute approximately 3,000 shares of its stock in the ESOP each year. AGREEMENTS AFFECTING OWNERSHIP OF AEGH STOCK. Pursuant to agreements between AEGH and its shareholders to accommodate the desire of Messrs. Sadowski and Koval to gradually liquidate a majority of their stock ownership in AEGH in preparation for their eventual retirement from AEGH, it is anticipated that by the year 2003 the stock ownership of AEGH by Messrs. Koval and Sadowski will be reduced through a series of stock redemption's to approximately 15% each; the stock ownership of certain of the remaining officers will be increased to approximately 60%, in the aggregate; and the stock ownership of the ESOP will be approximately 10%. The stock redemption will require AEGH to execute promissory notes, from time to time, in favor of Messrs. Koval and Sadowski, the first of which, in the original principal amount of $4,974,340 each, plus interest at 13.5%, were executed by Atlas Energy and were assumed by AEGH and are reflected in the audited balance sheet of Atlas Energy and its subsidiaries dated July 31, 1995. These promissory notes are totally subordinated to AEGH's obligations to banks, the ESOP and any and all other debts or obligations of AEGH, including its indemnification obligations and Atlas' drilling obligation to the Partnership. (See "Financial Information Concerning the Managing General Partner, AEGH and the Partnership".) If AEGH defaults on a promissory note, Messrs. Koval and Sadowski are entitled to purchase up to approximately an additional 1,500,000 shares of AEGH to regain management control. Messrs. Koval and Sadowski also had options to sell 131,425 shares of common stock to Atlas Energy on the earlier of the satisfaction of the promissory notes discussed above or November 14, 1999, and an option to sell 87,356 shares of common stock to Atlas Energy on November 14, 2004; however, these options have been waived. Atlas views the transactions discussed above as a natural transition which will have no adverse effect on the operations or activities of Atlas or the Partnership. In 1990, Messrs. Koval and Sadowski entered into five year employment agreements with Atlas Energy, which agreements have been transferred to AEGH, renewable for an additional five year term and on an annual basis after the first 10 years. The terms and provisions of the employment agreements are subject to negotiation at the time of each renewal, and currently do not provide for any severance payments. Also, during the terms of the promissory notes Messrs. Koval and Sadowski have the right to serve as directors of AEGH and as one of the two trustees of the ESOP. On November 8, 1990, Atlas Energy entered into a Stock Option Agreement which established a management employee stock option plan to provide incentive compensation for certain of its key employees to acquire up to 47,578 shares of common stock of Atlas Energy. Pursuant to the plan, Messrs. O'Mara and Wolf were granted stock options for 22,164 and 14,210 shares, respectively. The options are 100% vested with an option price of $1.00 per share and may be exercised when the promissory notes to Messrs. Koval (Page 43) and Sadowski have been satisfied and will terminate on August 15, 2012. The issuance of future options will be determined at a later date. On November 14, 1990, Atlas Energy granted 92,098 shares of restricted common stock to certain management investors of the company, which was valued at the time by Atlas Energy at $2,695,708. The restrictions lapse with respect to 25% of the shares on November 14, 1990, 1991, 1992 and 1993. (See "Financial Information Concerning the Managing General Partner, AEGH and the Partnership".) The Stock Option Agreement and the outstanding stock options have been converted from Atlas Energy to AEGH. The shareholders are also subject to a Shareholders Agreement which provides, among other things, that such shareholders may not transfer their shares in AEGH unless the shares have first been offered to AEGH and the other shareholders. TRANSACTIONS WITH MANAGEMENT AND AFFILIATES Atlas, its officers, directors and Affiliates have in the past invested, and may in the future invest, as participants in oil and gas programs sponsored by Atlas on the same terms as unrelated investors. The Managing General Partner and its officers and directors and Affiliates may also subscribe for Units in the Partnership on the same basis as Limited Partners or Investor General Partners, except that they are not required to pay Sales Commissions, due diligence reimbursements or wholesaling fees. Also, the Managing General Partner may buy up to 10% of the Units, which will not be applied towards the minimum Partnership Subscription required for the Partnership to begin operations. Subject to the foregoing, any subscription by the Managing General Partner or its officers, directors or Affiliates will dilute the voting rights of the Participants. However, the Managing General Partner and its officers, director and Affiliates are prohibited from voting with respect to certain matters. (See "Summary of Partnership Agreement - Voting Rights.") Atlas, its officers, directors and Affiliates have also participated in the past, and may in the future participate, as Working Interest owners in wells in which Atlas or its oil and gas programs have an interest. Frequently, such participation has been on more favorable terms than the terms which were available to unrelated investors and AEGH has loaned to its officers and directors amounts in excessof $60,000 from time to time as necessary for participation in such wells or programs. Prior to 1996 such loans either were non-interest bearing or accrued interest at variable rates, but since 1995 all new loans for such purposes are required to bear interest. Currently, no such loans are outstanding. See "Conflicts of Interest - Certain Transactions" for further information concerning prior activities between Atlas and its Affiliates and the partnerships where Atlas serves as Managing General Partne INVESTMENT OBJECTIVES The Partnership's principal investment objectives are to invest the Partnership Subscription in natural gas Development Wells which will: (1) Provide quarterly cash distributions until the wells are depleted, (historically 20+ years) with a preferred annual cash flow of 10% during the first five years based on the original subscription amount. (See "Risk Factors - Special Risks of the Partnership - Risk of Unproductive Wells in Development Drilling," "Prior Activities" and "Participation in Costs and Revenues - Subordination of Portion of Managing General Partner's Net Revenue Share".) 2) Obtain tax deductions in 1996 from intangible drilling and development costs to offset a portion of the Participants' taxable income (subject to the passive activity rules in the case of Limited Partners). One Unit will produce a 1996 tax deduction of $8,000 against ordinary income for Investor General Partners and against passive income for Limited Partners. For an investor in either the 39.6% or 36% tax bracket, one Unit will save $3,168 or $2,880 respectively in federal taxes this year. Most states also allow this type of a deduction against the state income tax. 3) Offset a portion of any taxable income generated by the Partnership with tax deductions from percentage depletion, presently 20% (estimated to be 22% on net revenue). Atlas estimates that this feature should reduce an investor's effective tax rate from 39.6% to 31.7% (i.e., 80% of 39.6%) on Partnership net revenues. (4) Obtain tax deductions of the remaining 20% of the initial investment from 1997 through 2004. The investor will receive an additional $2,000 tax deduction per Unit generated through the remaining depreciation over a seven-year cost recovery period of the Partnership's equipment costs for the wells. (Page 45) ATTAINMENT OF THE PARTNERSHIP'S INVESTMENT OBJECTIVES WILL DEPEND ON MANY FACTORS, INCLUDING THE ABILITY OF THE MANAGING GENERAL PARTNER TO SELECT SUITABLE PROSPECTS WHICH WILL BE PRODUCTIVE AND PRODUCE ENOUGH REVENUE TO RETURN THE INVESTMENT MADE. THE SUCCESS OF THE PARTNERSHIP DEPENDS LARGELY ON FUTURE ECONOMIC CONDITIONS, ESPECIALLY THE FUTURE PRICE OF NATURAL GAS WHICH IS VOLATILE. THERE CAN BE NO GUARANTEE THAT THE FOREGOING OBJECTIVES WILL BE ATTAINED. PROPOSED ACTIVITIES IN GENERAL The Partnership will be funded to drill wells which are located primarily in Mercer County, Pennsylvania, although the Managing General Partner has reserved the right to use up to 15% of the Partnership Subscription to drill wells in other areas of the Appalachian Basin. Atlas anticipates that all of the Partnership's wells will be classified as gas wells which may produce a small amount of oil. (See "- Information Regarding Currently Proposed Prospects" and "Prior Activities".) The wells drilled by the Partnership will be Development Wells which will primarily test the Clinton/Medina geological formation in Pennsylvania and Ohio. It is anticipated that the Clinton/Medina formation to be tested by the Partnership will normally be found between 5,900 to 6,800 feet in depth. The number of Prospects in which the Partnership will acquire interests and on which the Partnership will drill wells will depend on the amount of the Partnership Subscription received and the Partnership's aggregate percentage of the Working Interest in the wells. Assuming the Partnership acquires 100% of the Working Interest in the Prospects, the Participants would participate in developing approximately 4.49 Prospects if the minimum Partnership Subscription of $1,000,000 is received, 31.42 Prospects if the maximum Partnership Subscription of $7,000,000 is received, and 35.91 Prospects if the Managing General Partner increases the size of the offering to $8,000,000. The actual amount of the Working Interest in each Prospect acquired by the Partnership and the number of Prospects developed by the Partnership may vary from these estimates. The Managing General Partner may not, without the vote of a majority in interest of Participants, change the investment and business purpose of the Partnership or cause the Partnership to engage in activities outside the stated business purposes of the Partnership through joint ventures with other entities. INTENDED AREAS OF OPERATIONS Prospects located in Pennsylvania and drilled to the Clinton/Medina geological formation will consist of approximately 50 acres, subject to adjustment to take into account lease boundaries. Wells in Pennsylvania will not be drilled closer than approximately 1,650 feet to each other, which is greater than the minimum area permitted by state law (660 feet) or local practice to protect against drainage from adjacent wells. Prospects located in Ohio and drilled to the Clinton/Medina geological formation will consist of approximately 40 acres subject to adjustment to take in to account Lease boundaries, and will not be drilled closer than approximately 1,100 feet to each other. In addition, the assignments will be limited to a depth of from the surface to the top of the Queenston formation, and Atlas will retain the drilling rights below the Clinton/Medina geological feature. The Partnership will not acquire the deep drilling rights because it is a Development Drilling program which will not allocate any money to seismic or to drilling Exploratory Wells which would be the case with Horizons deeper than the Clinton/Medina. Notwithstanding, in the future seismic could be run on the Horizons below the Clinton/Medina geological feature which might provide a basis for Atlas drilling an Exploratory Well. The Partnership would not share in the profits, if any, from these activities. (See "- Acquisition of Leases" and "- Information Regarding Currently Proposed Prospects", below.) The wells in Pennsylvania and Ohio will test the Clinton/Medina geological formation, a blanket sandstone found throughout most of the northwestern edge of the Appalachian Basin. The Clinton/Medina is described in petroleum industry terms as a "tight" sandstone with porosity ranging from 6% to 12% and with very low permeability. Porosity is the percentage of void space between sand grains that is available for occupancy by either liquids or gases. Permeability is the property of porous rock that allows fluids or gas to flow through it. Geological features such as structure and faulting are not factors in finding productive Clinton/Medina deposits, instead, sand quality in terms of net pay zone thickness and porosity and the effectiveness of fracture stimulation appear to be the governing factors in generating commercial production. A well drilled in the Clinton/Medina usually requires hydraulic Fracturing of the formation to stimulate productive capacity. Based on the results of Atlas' previous programs, it is anticipated that all of the Partnership's wells will be completed and Fraced in two different zones of the Clinton/Medina geological feature. Generally, gas from Clinton/Medina wells is produced at rates which decline rapidly during the first few years of operation. Although Clinton/Medina wells (Page 46) can produce for many years, a proportionately larger amount of the production can be expected within the first several years. See "- Information Regarding Currently Proposed Prospects" and the model decline curve included in the geological report prepared by United Energy Development Consultants, Inc. ("UEDC"), an independent geological and engineering firm, ("UEDC Geological Report"). The Managing General Partner also has reserved the right to use up to 15% of the Partnership Subscription to drill wells in other areas of the Appalachian Basin. ACQUISITION OF LEASES Atlas will have the right, in its sole discretion, to select the Prospects which the Partnership will participate in developing. The currently proposed Prospects are set forth in "- Information Regarding Currently Proposed Prospects", and represent the necessary Prospects if 85% of the potential maximum Partnership Subscription of $8,000,000 is raised and the Partnership takes 100% of the Working Interest. It is anticipated that the Prospects will be transferred to the Partnership, but not immediately recorded, upon or after the Offering Termination Date subject to Atlas' right of substitution of such Prospects depending upon, among other things, the amount of the Partnership Subscription, the latest geological data available, potential title problems, approvals by federal and state departments or agencies, agreements with other Working Interest owners and continuing review of other properties which may be available and if no other circumstances occur which in Atlas' opinion diminish the relative attractiveness of the Prospects. It is not anticipated that such Prospects will be selected in the order in which they are set forth. Atlas has the right, in its sole discretion, to substitute other Prospects not identified, provided that such other Prospects meet the same general criteria for development potential as the currently proposed Prospects. However, most, if not all, of the Partnership's Development Wells will have as their objective the Clinton/Medina formation discussed in the UEDC Geological Report and will be located in areas where Atlas or its Affiliates have previously conducted drilling operations. Nevertheless, the Managing General Partner has reserved the right to use up to 15% of the Partnership Subscription to drill wells in other areas of the Appalachian Basin. In the event any of the currently proposed Prospects are substituted, or the Partnership takes a lesser percentage of the Working Interest in the Prospects, or more than 85% of the potential maximum Partnership Subscription of $8,000,000 is raised, or Prospects will be drilled in areas of the Appalachian Basin other than the currently proposed locations, the Prospects will be selected by Atlas primarily from Leases included in the existing leasehold inventory of Atlas or its Affiliates and to a lesser extent, from Leases hereafter acquired by Atlas or its Affiliates or from leases owned by independent third parties. Consequently, for additional or substituted Leases prospective subscribers will not have the opportunity to evaluate for themselves the relevant geological, economic or other information regarding one or more of the Prospects to be developed by the Partnership. Atlas has not authorized any party to make any representations concerning the possible inclusion of any other Prospects in the Partnership and no such information will be shown or provided to any person for the purpose of deciding whether to invest in the Partnership. Any representations to the contrary are erroneous and shall be disregarded. Accordingly, prospective Participants should not base any investment decision on any oral representation by any party or on the existence of any such inventory. As of the date of this Prospectus, Atlas and its Affiliates owned approximately 72,650 net and gross acres of undeveloped leasehold acreage in Pennsylvania and no undeveloped leasehold acreage in any other areas of the Appalachian Basin. However, Atlas and its Affiliates are engaged in a program to acquire additional leasehold acreage in Pennsylvania and other areas of the Appalachian Basin. Atlas believes that it and its Affiliates' leasehold inventory will be sufficient to provide all of the Prospects to be developed by the Partnership. Before selecting a Prospect for development by the Partnership, Atlas will review all available geologic data including logs, completion reports and plugging reports for wells located in the vicinity of the proposed Prospect. Atlas has obtained the UEDC Geological Report with respect to the development of the Clinton/Medina geological formation in the primary area where the Partnership will conduct its activity. Although from time to time great disparity in well performance can occur in wells located in close proximity, it has been Atlas' experience that oil and gas production from wells drilled to the Clinton/Medina geologic formation is reasonably consistent within close proximity. (See "Conflicts of Interest- Conflicts Involving the Acquisition of Leases".) Production information relating to the wells which are in the general area of the proposed Prospects is set forth in "- Information Regarding Currently Proposed Prospects". Atlas believes that the production information is reliable, although as to certain of the Prospects the production information is incomplete because there was a third party operator and production information is not available. Also, some of the wells have only been producing for a short period of time or are not yet completed or on-line. In reviewing the production information, prospective subscribers are cautioned to carefully read the general comments set forth in "- Information Regarding Currently Proposed Prospects" regarding the production information. (Page 47) It is anticipated that the Leases comprising each Prospect will be acquired from the Managing General Partner or its Affiliates and credited to the Managing General Partner as a part of its required Capital Contribution at its Cost unless the Managing General Partner has reason to believe that Cost is materially more than the fair market value of such property in which case the price will not exceed the fair market of such property. Production and revenues from a well drilled on a Prospect will be net of the applicable landowner's Royalty Interest (typically 1/8th (12.5%) of gross production), and any other applicable Overriding Royalty Interests, which, in the aggregate, are not expected to exceed 1/32 of 8/8th (3.125%) in respect of any Prospect. Neither Atlas nor its Affiliates will receive any Royalty or Overriding Royalty Interest. It is anticipated that the Partnership will have an 87.5% Net Revenue Interest in each Lease as shown by the summary of the Royalty and Overriding Royalty Interests burdening each Lease location for 27 of the currently proposed Prospects set forth in "- Information Regarding Currently Proposed Prospects", and an 84.375% Net Revenue Interest in the Leases covering three of the currently proposed Prospects. (See "- Interests of Parties".) Although not likely, the Leases may also be subject to third party net profits interests, carried interests, production payments, reversionary interests or other retained or carried interests. With respect to certain conflicts of interest between the Managing General Partner and the Partnership with respect to the acquisition of Leases, see "Conflicts of Interest - Conflicts Involving Acquisition of Leases". Because Atlas will assign to the Partnership only such number of Prospects as Atlas believes are necessary for the drilling operations of the Partnership, the Partnership will not Farmout any undeveloped Prospects. TITLE TO PROPERTIES Title to all Leases acquired by the Partnership will be held in the name of the Partnership. However, it is possible that initially title to such Leases will be held in the name of the Managing General Partner or its Affiliates, or in the name of any nominee designated by the Managing General Partner, in order to facilitate the acquisition of the Leases. Title to the Leases will be transferred to the Partnership from time to time after the Offering Termination Date, and filed for record following drilling. It is not the practice in the oil and gas industry to obtain title insurance on leaseholds and the Managing General Partner will not obtain title insurance with respect to the Working Interests in the Leases to be assigned to the Partnership. Also, in the oil and gas industry leasehold assignments generally do not contain a warranty as to the title to the leasehold. However, a favorable formal title opinion with respect to the Working Interest in each Lease composing the acreage on which the well is situated will be obtained before each well is drilled. Nevertheless, if the title to the Working Interest in a Lease is defective, the Partnership will not have the right to recover against the transferor (the Managing General Partner or its Affiliates) on a title warranty theory and there is no assurance that the Partnership will not experience losses from title defects excluded from or not disclosed by the formal title opinion. The Managing General Partner will take such steps as it deems necessary to assure that the Partnership has acceptable title for its purposes, however, the Managing General Partner is free to use its own judgment in waiving title requirements and will not be liable for any failure of title of Leases transferred to the Partnership. FORMATION OF THE PARTNERSHIP AND POWERS OF THE MANAGING GENERAL PARTNER Atlas will serve as the Managing General Partner of the Partnership and the Operator of the wells in Pennsylvania, Atlas Energy will serve as the Operator of any wells in Ohio, and Atlas or an Affiliate will serve as Operator of any wells located in other areas of the Appalachian Basin. Atlas' authority as Managing General Partner in conducting the affairs of the Partnership is virtually unlimited. However, Participants are expressly granted certain rights and certain express restrictions are placed on the Managing General Partner by the Partnership Agreement. As to the removal of the Managing General Partner and the Operator, and the appointment of successors, see "Summary of Partnership Agreement" and "Summary of Drilling and Operating Agreement" DRILLING AND COMPLETION ACTIVITIES; OPERATION OF PRODUCING WELLS Under the Drilling and Operating Agreements the responsibility for drilling and completing (or plugging) Partnership wells will be on Atlas on Prospects located in Pennsylvania, Atlas Energy on Prospects located in Ohio and Atlas or an Affiliate on any Prospects located in other areas of the Appalachian Basin. The Partnership will pay the drilling and completion costs to Atlas, Atlas Energy or an Affiliate as incurred, except that the Partnership is permitted to make advance payments to Atlas, Atlas Energy, or an Affiliate where necessary to secure tax benefits of prepaid intangible drilling and development costs and there is a valid business reason. Wells will be drilled to a depth sufficient to test thoroughly the objective formation. The Partnership will bear its proportionate share of the cost of drilling and completing or drilling and abandoning the Partnership's wells as follows: for each well completed and placed into production, an amount equal to the depth of the well in feet at its deepest penetration as recorded by the drilling contractor multiplied by $37.39 per foot or for each well which the Partnership elects not to complete, an amount equal to $20.60 per foot multiplied by the depth of the well, as specified above. To the extent that the Partnership acquires less than 100% of a Prospect, its drilling and completion costs of that well will be proportionately decreased. In the event the foregoing rates exceed competitive rates available from other non-affiliated persons in the area engaged in the business of rendering or providing comparable services or (Page 48) equipment, the foregoing rates will be adjusted to an amount equal to that competitive rate. The Managing General Partner may not benefit by interpositioning itself between the Partnership and the actual provider of drilling contractor services. (See "Compensation".) <.R> The footage price includes all ordinary costs of drilling, testing and completing such well including the cost of a second completion and Frac where Atlas considers it to be justified and installing gathering lines and other necessary facilities for the production of natural gas. Although the following costs are possible, it is not anticipated that such costs will be incurred, and the footage rate will not include the cost of completion procedures, equipment or any facilities necessary or appropriate for the production and sale of oil or other liquids and equipment or materials (except salt water collection tanks, separators, siphon string and tubing, which are included) necessary or appropriate to collect, lift or dispose of liquids for efficient gas production. The footage rate will also not include the cost of a third completion and Frac. Such extra costs will be charged at the Operator's standard charges for services performed directly by it (exclusive of services in supervision of third party services) or the Operator's invoice costs of third party services performed and materials and equipment purchased plus 10% to cover supervisory services and overhead. Atlas expects to subcontract some of the actual drilling and completion of Partnership wells to third parties selected by it. Atlas, as Operator, will determine whether or not to complete each well; provided that a well may be completed only if Atlas determines in good faith that there is a reasonable probability of obtaining commercial quantities of gas. Based upon its past experience, Atlas anticipates that all Partnership Wells will be required to be completed before a determination can be made as to the well's productivity. In the event that Atlas determines that a well should not be completed, the well will be plugged and abandoned. In that event the footage rate to the Partnership will be adjusted from $37.39 per foot to $20.60 per foot. Atlas' duties as Operator will include (i) making necessary arrangements for the drilling and completing of Partnership wells and related facilities for which it has responsibility under the Drilling and Operating Agreement; (ii) managing and conducting all field operations in connection with the drilling, testing, equipping, operation and production of such wells; (iii) making technical decisions required in drilling, completing and operating such wells; (iv) maintaining such wells, equipment and facilities in good working order during the useful life thereof; and (v) performing necessary accounting and administrative functions. During producing operations Atlas, as Operator, will receive a monthly well supervision fee of $275 for each producing well for which it has responsibility under the Drilling and Operating Agreement. This fee will be proportionately reduced to the extent the Partnership does not acquire 100% of the Working Interest. This fee may be adjusted on the first day of January of each year beginning January 1, 1998, by an amount which shall not exceed the percentage increase since the previous adjustment date in average earnings of oil and gas industry workers as published by a bureau of the U.S. Department of Labor. In the event the foregoing rates exceed competitive rates available from other non-affiliated persons in the area engaged in the business of rendering or providing comparable services or equipment, the foregoing rates will be adjusted to an amount equal to that competitive rate. The Managing General Partner may not benefit by interpositioning itself between the Partnership and the actual provider of operator services. (See "Compensation".) In no event shall any consideration received for operator services be duplicative of any consideration or reimbursement received pursuant to the Partnership Agreement. The well supervision fee covers all normal and regularly recurring operating expenses for the production, delivery and sale of gas, such as well tending, routine maintenance and adjustment, reading meters, recording production, pumping, maintaining appropriate books and records, preparing reports to the Partnership and to government agencies, and collecting and disbursing revenues. The well supervision fees do not include costs and expenses related to the production and sale of oil, purchase of equipment, materials or third party services, brine disposal, and rebuilding of access roads, all of which will be billed at the invoice cost of materials purchased or third party services performed. The Drilling and Operating Agreement contains a number of other material provisions which should be carefully reviewed and understood by prospective Participants. (See "Summary of Drilling and Operating Agreement".) In the unlikely event that Atlas, Atlas Energy or an Affiliate is not the actual operator of the well during producing operations, Atlas, as Managing General Partner, will review the performance of the third party operator and the costs and expenses charged by it, and will monitor the accounting and production records for the Partnership. The actual operator of the wells will be responsible for performing such services for each well as are customarily performed to operate a gas well in the same general area as where such well is located. When Atlas, Atlas Energy or an Affiliate is not the actual operator of the well during producing operations it will not receive well supervision fees. The third party operator will be reimbursed for its direct costs and will receive either reimbursement of its administrative overhead or well supervision fees pursuant to an operating agreement. Such fees will be subject to an annual adjustment for inflation and will be proportionately reduced to the extent the Partnership does not acquire 100% of the Working Interest. It is anticipated that the Partnership generally will own 100% of the Working Interest in each Prospect but the Partnership has reserved the right to take as little as 25% of the Working Interest. Therefore, it is possible that the Partnership may engage in joint activities on some of (Page 49) the Prospects with third parties, which would decrease the Partnership's Working Interest in the well but increase the diversification of the Partnership's drilling activities. Any other Working Interest owner in such Prospect may have a separate agreement with Atlas with respect to the drilling and operation of a well thereon containing terms and conditions different from those contained in the Drilling and Operating Agreement. However, Atlas will be the operator or have the right to replace the operator of all Partnership Wells and will control all drilling and producing operations including operations with any third parties. SALE OF OIL AND GAS PRODUCTION IN GENERAL. The Managing General Partner is responsible for selling the Partnership's gas and oil production. Atlas' policy is to treat all wells in a given geographic area equally. This reduces certain potential conflicts of interest among the owners of the various wells, including the Partnership, concerning to whom and at what price the gas will be sold. Atlas calculates a weighted average selling price for all of the gas sold in the geographic area, such as the Mercer County area. To arrive at the average weighted selling price the money received from the sale of all of the gas sold to its customers is divided by the volume of all gas sold from the wells in the area. During 1995, Atlas received an average selling price of $2.28 per Mcf for gas sold in the Mercer County area. The average price paid after deducting all expenses, including transportation expenses, was $2.01 per Mcf. On occasion, Atlas has reduced the amount of production it normally sells on the spot market until the spot market price increased. Atlas estimates that a portion of the Partnership's gas will be transported through Atlas' own pipeline system and sold directly to industrial end-users in the area where the wells will be drilled. This will generally result in the Partnership receiving higher prices for the gas than if the gas were transported a farther distance through interstate pipelines because of increased transportation charges. The remainder of the Partnership's gas will be transported through Atlas' pipelines to the interconnection points maintained with Tennessee Gas Transmission Co., National Fuel Gas Supply Corporation, National Fuel Gas Distribution Company, East Ohio Natural Gas Company, and Peoples Natural Gas Company. These delivery points are utilized by Atlas Gas Marketing, Inc. to service its end-user markets in the northeast United States which include in excess of 100 customers. Atlas is currently delivering an average 27,000 MCF of natural gas per day from the Mercer County area to all of the aforementioned markets and has the capacity of delivering 33,000 MCF per day from the Mercer County area. Atlas anticipate that Carbide Graphite will purchase approximately 20% of the Partnership's gas production in 1997 pursuant to a gas contract between Carbide Graphite and an Affiliate of Atlas. Atlas does not believe that any other purchaser of the Partnership's gas production will account for 10% of the Partnership's gas sales revenues in 1997. In order to optimize the price it receives for the sale of natural gas, Atlas markets portions of the gas through long term contracts, short term contracts and monthly spot sales. Atlas currently markets approximately 30,000 MCF per day from gas it and its Affiliates produce and from gas Atlas purchases from other producers for resale. The marketing of natural gas production has been influenced by the availability of certain financial instruments, such as gas futures contracts, options and swaps which, when properly utilized as hedge instruments, provide producers or consumers of gas with the ability to lock in the price which will ultimately be paid for the future deliveries of gas. Atlas may, from time to time, establish strategies utilizing financial instruments to enhance the value of the Partnership's gas production. To assure that the financial instruments will be used solely for hedging price risks and not for speculative purposes, Atlas has established an Energy Price Risk Committee comprised of the President, General Counsel, Chief Financial Officer (chairperson) and Director of Marketing, whose responsibility will be to ascertain that all financial trading is done in compliance with hedging policies and procedures. Atlas does not intend to contract for positions that it cannot offset with actual production. TRANSPORTATION OF GAS. One factor in determining the return to the Partnership is the proximity of the well to the industrial end-user or to an existing pipeline system. It is anticipated that Mercer Gas Gathering, Inc., an Affiliate of Atlas, will transport and compress the natural gas produced by the Partnership into the various pipelines or directly to industrial end-users. In addition, Atlas Gas Marketing, Inc., an Affiliate of Atlas, will have the responsibility to market that portion of gas delivered to the various interconnection pipeline systems to its 100 plus customer base. The Partnership will pay a combined transportation and marketing charge for these services at a competitive rate, which is currently 29 cents per MCF. (See "Compensation" and "Management".) MARKETING OF PRODUCTION FROM WELLS IN OTHER AREAS OF THE APPALACHIAN BASIN. In the event any wells are drilled in areas of the Appalachian Basin other than the Mercer County area, Atlas expects that gas produced from such wells will be supplied to industrial end-users through various pipeline systems. CRUDE OIL. Any crude oil produced from the wells may flow directly into storage tanks where it will be picked up by the oil company, a common carrier or pipeline companies acting for the oil company which is purchasing such crude oil. Therefore, crude oil usually does not present any transportation problem. Atlas anticipates selling any oil produced by the wells to Quaker State Oil Refining Company ("Quaker State") in spot sales. Atlas was receiving approximately $15.50 per barrel in December, 1995, from Quaker State (Page 50) for oil produced in the drilling area. Over the past six years, the price of oil has declined from approximately $38 to as low as $10 per barrel. There can be no assurance as to the price of oil during the term of the Partnership and the actions of OPEC increase the volatility of the price of oil. INTERESTS OF PARTIES The Managing General Partner, Participants and unaffiliated third parties (including landowners) share revenues from production of gas from wells in which the Partnership has an interest. The following chart expresses such interests in gross revenues derived from the wells based on 27 of the currently proposed Prospects set forth below in "- Information Regarding Currently Proposed Prospects". In the event the Partnership acquires less than a 100% Working Interest, the percentages available to the Partnership will decrease proportionately. THIRD PARTY ROYALTIES PARTNERSHIP AND OVERRIDING 87.5 % PARTNERSHIP NET ENTITY INTEREST ROYALTY INTEREST REVENUE INTEREST(1) Managing General Partner 25% Partnership Interest 21.875% Participants 75% Partnership Interest 65.625% Third Parties 12.5% Landowner Royalty 12.500% 100.000% __________________________ (1) On three of the currently proposed Prospects the Net Revenue Interest to the Partnership would be 84.375%, which would reduce the Participants' interest to 63.281%. INSURANCE Since 1972, Atlas and its Affiliates have been involved in the drilling of approximately 1,500 wells in Ohio and Pennsylvania and no blow-out, fire or similar hazard has occurred with respect to any of these wells. Therefore, Atlas and its Affiliates have not made any insurance claims in Ohio and Pennsylvania with respect to such hazards. Atlas will obtain and maintain for the benefit of itself and the Partnership insurance coverage in such amounts, with provisions for such deductible amounts and for such purposes, as would be carried by a reasonable, prudent general contractor and operator in accordance with industry standards. The Partnership and the Investor General Partners will be named as an additional insured under such policies. In addition, Atlas requires all of its subcontractors to certify that they have acceptable insurance coverage for worker's compensation and general, auto and excess liability coverage. Major subcontractors are required to carry general and auto liability insurance with a minimum of $1,000,000 combined single limit for bodily injury and property damage in any one occurrence or accident. Atlas' current insurance coverage satisfies the following specifications: (a) worker's compensation insurance in full compliance with the laws of the Commonwealth of Pennsylvania, and any other applicable state laws; (b) liability insurance (including automobile) which has a $1,000,000 combined single limit for bodily injury and property damage in any one occurrence or accident and in the aggregate; and (c) excess liability insurance as to bodily injury and property damage with combined limits of $20,000,000 during drilling operations, per occurrence or accident and in the aggregate, which includes $250,000 of seepage, pollution and contamination insurance which protects and defends the insured against property damage or bodily injury claims from third parties (other than a co-owner of the Working Interest) alleging seepage, pollution or contamination damage resulting from an accident. Such excess liability insurance will be in place and effective no later than the Offering Termination Date and will be for the sole benefit of the Partnership and no other Program in which Atlas serves as Managing General Partner until the Investor General Partners are converted to Limited Partners, at which time coverage for the exclusive benefit of the Partnership will lapse. However, the Partnership will continue to enjoy the non-exclusive benefit of Atlas' $11,000,000 liability insurance on the same basis as Atlas and its Affiliates, including other Programs in which Atlas serves as Managing General Partner. (See "Competition, Markets and Regulation - State Regulations" and "- Environmental Regulation".) These policies will have terms, including exclusions, standard for the oil and gas industry. (See "Risk Factors - General Risks of the Oil and Gas Business - Drilling Hazards May Be Encountered".) Upon the request of any prospective Participant, Atlas will provide to such prospective Participant or his representatives a copy of Atlas' insurance policies. Atlas will use its best efforts to maintain (Page 51) insurance coverage which meets or exceeds its current coverage but may ultimately be unsuccessful in such efforts because such coverage may become unavailable or cost prohibitive. The Managing General Partner will notify all Participants at least thirty days prior to the effective date of any adverse material change in the Partnership's insurance coverage. If the insurance coverage will be materially reduced, which is not anticipated, the Investor General Partners will have the right to convert their Units into Limited Partner interests prior to such reduction by giving written notice to the Managing General Partner. (See "Tax Aspects - Limitations on Passive Activities".) USE OF CONSULTANTS AND SUBCONTRACTORS Although not anticipated during producing operations, the Partnership Agreement authorizes the Managing General Partner to employ and utilize the services of independent outside consultants and subcontractors. Such persons will normally be compensated through payment on a per diem or other cash fee basis. Such services will be charged to the Partnership as a Direct Cost or as a direct expense pursuant to the Drilling and Operating Agreement, attached as Exhibit (II) to the Partnership Agreement, and will be in addition to the unaccountable, fixed payment reimbursement paid to Atlas and its Affiliates for Administrative Costs, and well supervision fees paid to Atlas as Operator. (See "Compensation" and "Management".) INFORMATION REGARDING CURRENTLY PROPOSED PROSPECTS Set forth below is information relating to Prospects which have been currently proposed for assignment to the Partnership upon the Offering Termination Date and from time to time thereafter subject to Atlas' right to withdraw such Prospects and to substitute other Prospects. The specified Prospects represent the necessary Prospects if 85% of the potential maximum Partnership Subscription of $8,000,000 is raised and the Partnership takes 100% of the Working Interest. Atlas has not proposed any other Prospects if more than this amount is raised, if the Partnership takes a lesser Working Interest in the Prospects and/or if the Prospects are substituted. The assignment of the currently proposed Prospects will be dependent on the non-materialization of any circumstances occurring which, in Atlas' opinion, would diminish the relative attractiveness of the Prospects. Any substituted and/or additional Prospects will meet the same general criteria for development potential as the currently proposed Prospects; however, prospective subscribers will not have the opportunity to evaluate for themselves the relevant geophysical, geological, economic or other information regarding such Prospects. However, most if not all of the Partnership's wells will have as their objective the Clinton/Medina geological formation discussed in the UEDC Geological Report and will be located in areas where Atlas or its Affiliates have previously conducted drilling operations. (See "- Acquisition of Leases".) The purpose of the information regarding the currently proposed Prospects is to assist prospective subscribers in analyzing and evaluating the currently proposed Prospects, including production information for wells in the general area. Atlas believes that production information with respect to wells in the general area is an important indicator in evaluating the economic potential of any Prospect to be developed by the Partnership. However, there can be no assurance that a well drilled by the Partnership will experience production comparable to the production experienced by wells in the surrounding area since the geological conditions in the Clinton/Medina formation can change in a short distance. Prospective subscribers are cautioned and urged to analyze carefully all production information for each well offsetting or in the general area of a specified Prospect and, in the process of doing so, to take the factors set forth below into consideration. 1. The length of time which the well has been on line and the period of time for which production information is shown. - -------------------------------------------------------------------------- (Page 51) 2. The impact of "flush" production of a well which usually occurs in the early period of well operations. This period can vary depending on the location of the well and the manner in which the well is operated. 3. Production declines at various rates throughout the life of a well and decline curves vary depending on the geological location of the well and the manner in which the well is operated. 4. The production information with respect to some wells is incomplete and with other wells very limited. The designation "N/A" means the production was not available to Atlas or if Atlas was the Operator then the well was not on line as of the date of the report. 5. It should be noted that production information for wells located in close proximity to a Prospect tends to be more relevant than production information for wells located at a great distance from a Prospect. 6. Consistency in production among wells tends to confirm the reliability and predictability of such production. (Page 52) All of the specified Prospects are subject to the factors set forth below: 1. There are no Overriding Royalty Interests or other burdens in favor of Atlas or its Affiliates. 2. Atlas or its Affiliates will act as driller and operator for all the wells. It is anticipated that the Partnership generally will be transferred 100% of the Working Interest but the Partnership has reserved the right to take as little as 25% of the Working Interest. 3. Atlas and its Affiliates own acreage in the vicinity of the Prospects. (See "Conflicts of Interest - Conflicts Involving Acquisition of Leases".) 4. The Leases are being contributed to the Partnership at Atlas' Cost of such Lease, unless the Managing General Partner has reason to believe that Cost is materially more than the fair market value of such property, in which case the price will not exceed the fair market value. 5. All wells will be drilled through the Clinton/Medina formation to the top of the Queenston formation. The wells will have no secondary objectives. 6. All of the wells will be gas wells. See the Production Map for the location of Atlas' pipeline. Also, see "- Sale of Oil and Gas Production" concerning a discussion of the marketing arrangements for the Partnership's gas. Included for the Prospects is certain information set forth below which is designed to assist the prospective subscriber in becoming familiar with the Prospect location. 1. A map of western Pennsylvania and eastern Ohio showing their counties. 2. Prospect Lease information. 3. A Location and Production Map showing the Prospects and the wells in the area. 4. Production data. 5. United Energy Development Consultants, Inc.'s geological report. See "Experts" in the Prospectus. - -------------------------------------------------------------------------- (Page 53-54) MAP OF WESTERN PENNSYLVANIA AND EASTERN OHIO Area of Interest Location Map of Western Pennsylvania and Eastern Ohio names the following counties and depicts their boundaries on one page: Eastern Ohio Western Pennsylvania Cuyahoga Erie Cleveland Crawford Lake Mercer Ashtabula Venango Geauga Lawrence Summit Butler Portage Beaver Trumbull Allegheny Stark Pittsburgh Mahoning Washington Columbiana Greene Carroll Fayette Tuscarawas Jefferson Harrison Guernsey Belmont Noble Monroe
(Page 55) (Page 56) PROSPECT LEASE INFORMATION EXHIBIT A ATLAS ENERGY FOR THE NINETIES -- PUBLIC #5 LTD. Net Acres to be Prospect Effective Expiration Landowner Revenue Net Assigned to Name County Date Date Royalty Interest Acres Partnership ================================================================================================ 1. Andrews Unit #1 Mercer 03/09/94 03/09/99 12.50% * 84.375% 18 18 2. Babcock #1 Mercer 08/17/95 08/17/98 12.50% 87.50% 89 50 3. Babyak Unit Mercer 07/10/93 07/10/98 12.50% * 84.375% 79 50 4. Black #2 Mercer 05/18/95 05/18/98 12.50% 87.50% 40 40 5. Byler #14 Lawrence 09/27/91 09/27/97 12.50% 87.50% 145 50 6. Byler #15 Lawrence 09/27/91 09/27/97 12.50% 87.50% 145 50 7. Coast #1 Butler 03/03/95 03/03/98 12.50% 87.50% 70 50 8. Court #1 Mercer 08/03/95 08/03/98 12.50% 87.50% 70 50 9. Doolin #1 Mercer 08/08/96 02/08/97 12.50% 87.50% 24 24 10. Dye #1 Mercer 04/10/95 04/10/98 12.50% 87.50% 65 50 11. Dye #2 Mercer 06/04/96 06/04/99 12.50% 87.50% 51 51 12. Fletcher Unit #2 Mercer 09/05/91 12/05/96 12.50% * 84.375% 110 50 13. Gott #4 Mercer 05/30/94 05/30/97 12.50% 87.50% 575 50 14. Hall #1 Mercer 11/13/95 11/13/98 12.50% 87.50% 52 52 15. Hissom #1 Mercer 05/23/96 05/23/99 12.50% 87.50% 78 50 16. Kelly #1 Mercer 02/11/96 02/11/99 12.50% 87.50% 135 50 17. Kingerski Unit #1 Mercer 05/26/96 05/26/98 12.50% 87.50% 98 50 18. Kloos Unit #4 Mercer HBP HBP 12.50% 87.50% 225 50 19. Kurtek #1 Mercer 04/21/93 04/21/98 12.50% 87.50% 65 50 20. Kurtz #2 Lawrence 09/27/91 09/27/97 12.50% 87.50% 88 50 21. McCullough #11 Mercer 04/12/95 04/12/98 12.50% 87.50% 75 50 22. McCurdy #1 Mercer 04/18/96 04/18/99 12.50% 87.50% 83 50 23. McDowell #11 Mercer 03/04/96 03/04/99 12.50% 87.50% 145 50 24. Myers #2 Butler 08/03/94 08/03/99 12.50% 87.50% 143 50 25. Peterka #2 Mercer HBP HBP 12.50% 87.50% 190 50 26. Rains #1 Mercer 07/25/95 07/25/98 12.50% 87.50% 35 35 27. Sines #3 Mercer 05/06/96 05/06/99 12.50% 87.50% 40 40 28. Steele #1 Mercer 07/27/95 07/27/98 12.50% 87.50% 84 50 29. Tait #3 Mercer 06/27/95 06/27/98 12.50% 87.50% 100 50 30. Vernam #1 Mercer 09/25/94 09/25/97 12.50% 87.50% 57 57
- - * 3.125% Overriding Royalty Interest to a third party. - - HBP - Held by Production - -------------------------------------------------------------------- (Page 57 to 66) LOCATION AND PRODUCTION MAP Location and Production Maps of Mercer, Butler and Lawrence Counties, Pennsylvania, which depicts the following information on nine pages: Proposed Locations; Producing Gas Wells; Dry Holes; Cambrian Tests; Plugged Wells; Upper Plugged, Deep Producing; and Plugged and Abandoned. (Page 68,69,70)
THE PRODUCTION DATA PROVIDED IN THE TABLE BELOW IS NOT INTENDED TO IMPLY THAT THE WELLS TO BE DRILLED BY THE PARTNERSHIP WILL HAVE THE SAME RESULTS, ALTHOUGH IT IS AN IMPORTANT INDICATOR IN EVALUATING THE ECONOMIC POTENTIAL OF ANY PROSPECT TO BE DEVELOPED BY THE PARTNERSHIP. - -------------------------------------------------------------------------- PRODUCTION DATA TOTAL LATEST ID DATE MOS TOTAL LOGGERS 30 DAY NUMBER OPERATOR WELL NAME COMPLT'D ON LINE MCF DEPTH PROD. ==================================================================================================================== 20026 Peoples Nat'l Gas Courtney, W.T. N/A N/A N/A 6400 N/A 20290 Deer Creek Oil & Gas Beggs Unit #1 11/07/81 N/A N/A 5382 N/A 20533 Mitchell Energy Halliday, M. #1 08/15/83 N/A N/A 5905 N/A 20557 P.N.B. Petroleum Turner #1 11/23/83 N/A N/A 5349 N/A 20560 P.N.B. Petroleum Oliver III, # 01/22/84 N/A N/A 5365 N/A 20696 Vista Resources Worley #1 06/30/95 N/A N/A 5734 N/A 20699 Atlas Resources Inc. Struthers, R & J #1 08/05/91 47.0 1477 5832 0 20727 Atlas Resources Inc. Smith-Tetrick #1 09/05/85 100.0 45169 5725 295 21049 Atlas Resources Inc. Humes Unit #1 03/09/90 73.0 108210 5674 1066 21121 Capital Oil & Gas Hostetler, M.D. #1 11/11/90 N/A N/A 6140 N/A 21161 Atlas Resources Inc. Alego #1 11/10/90 64 35730 5737 100 21189 Douglas Oil & Gas McQuiston #1 01/08/91 N/A N/A 5504 N/A 21203 Capital Oil & Gas Heck #2 03/11/91 N/A N/A 6208 N/A 21249 Douglas Oil & Gas King #1 02/23/91 N/A N/A 5761 N/A 21269 Atlas Resources Inc. Sealand #1 04/16/91 60.0 68492 5858 669 21274 Atlas Resources Inc. Murcko #1 03/14/91 61.0 64799 5761 821 21279 Atlas Resources Inc. Fridley #1 04/04/91 61.0 49265 5731 449 21294 Cabot Oil & Gas McDowell, etux #1-A 07/18/91 N/A N/A 5460 N/A 21305 Atlas Resources Inc. Marsh #1 08/15/91 57.0 26628 5831 209 21307 Atlas Resources Inc. Marsh #3 09/12/91 56.0 63321 5777 1068 21312 Atlas Resources Inc. Marsh #2 10/18/91 55.0 59806 5873 706 21313 Atlas Resources Inc. Mercer Vo-Tech #2 08/06/91 57.0 31535 5905 588 21315 Atlas Resources Inc. Kelso Unit #2 08/20/91 56.0 71374 5786 894 21316 Vista Resources King #1 N/A N/A N/A 5700 N/A 21327 Atlas Resources Inc. Cresswell #1 09/05/91 56.0 66801 5651 752 21330 Vista Resources King-Richardson Un. #1 N/A N/A N/A 5800 N/A 21333 Cabot Oil & Gas Lucas, E.I. #1 N/A N/A N/A 5500 N/A 21340 Atlas Resources Inc. Kelso #1 11/19/91 53.0 40701 5797 433 21346 Atlas Resources Inc. Thompson Unit #1 02/11/95 51.0 145809 5759 3361 21352 Atlas Resources Inc. Mathews Unit #2 11/17/95 5.0 16153 6775 603 21365 Atlas Resources Inc. Walter #5 04/03/96 N/A N/A 6737 N/A 21421 Atlas Resources Inc. Hoagland #1 03/02/92 49.0 124058 5751 1392 21424 Atlas Resources Inc. Fridley #2 12/03/91 53.0 152826 5686 2317 21484 Atlas Resources Inc. Struthers Un. #3 02/25/92 Plugged & Abandoned 5849 21497 Capital Oil & Gas Byler, S.M. #2 12/02/92 N/A N/A 6210 N/A 21510 Capital Oil & Gas Cyphert , C #1 10/09/92 N/A N/A 6242 N/A 21550 Douglas Oil & Gas Kapta Unit #1 08/12/92 N/A N/A 5474 N/A 21555 Vista Resources Chelton Unit #1 08/24/92 N/A N/A 5506 N/A 21584 Atlas Resources Inc. Bagnall Unit #6 10/23/92 41.0 154724 5623 2728 21625 Douglas Oil & Gas Wengerd Unit #2 11/21/92 N/A N/A 5475 N/A 21676 Douglas Oil & Gas Ward Unit #1 01/12/93 N/A N/A 5455 N/A 21721 Atlas Resources Inc. Root Unit #1 08/15/85 100.0 31987 5739 144 21753 Douglas Oil & Gas Wengerd Unit #3 10/05/93 N/A N/A 5527 N/A 21863 Atlas Resources Inc. Bartholomew #3 02/03/94 22.0 55783 5813 2005 21921 Atlas Resources Inc. Graham #1 07/13/94 19.0 15784 5922 444 21929 Atlas Resources Inc. Sharpsville Beagle # 12/14/94 6.0 12967 5989 1912 21941 Atlas Resources Inc. Bartholomew #4 09/01/94 19.0 33727 5791 1367 21942 Atlas Resources Inc. Shillito #1 09/09/94 17.0 69496 6017 4664 21948 Atlas Resources Inc. Mills #7 09/07/94 19.0 88692 5654 4709 21949 Atlas Resources Inc. Macri #2 09/02/94 17.0 86422 6013 3442 21954 Atlas Resources Inc. Eperthener #1 11/02/94 5.0 6455 6498 1052 21966 Atlas Resources Inc. Humes #2 10/04/94 18.0 52675 5780 2484 21991 Atlas Resources Inc. Branca Unit #1 10/07/94 17.0 25060 5778 1212 22011 Atlas Resources Inc. Hoagland Unit #2 01/11/95 16.0 34628 6499 3534 22013 Atlas Resources Inc. Andrusky #1 07/18/95 6.0 14216 5974 1735 22016 Atlas Resources Inc. Andrusky #2 02/17/95 13.0 54184 5904 4744 22037 Atlas Resources Inc. Kelly Unit #1 03/15/95 12.0 91528 6055 10042 22043 Atlas Resources Inc. Pizor #3 02/08/95 15.0 16087 6136 781 22059 Atlas Resources Inc. Freeman #1 03/08/95 13.0 17121 6085 1044 22074 Atlas Resources Inc. Graham #2 04/04/95 12.0 43978 5916 3829 22084 Atlas Resources Inc. Layton #1 03/29/95 12.0 28525 6096 1432 22099 Atlas Resources Inc. Marburger #1 07/31/95 6.0 17423 6077 2904 22100 Atlas Resources Inc. Duff #1 08/25/95 6.0 8735 5977 1027 22107 Atlas Resources Inc. Marburger Unit #3 08/01/95 6.0 23830 6101 4711 22108 Atlas Resources Inc. Marburger #2 11/20/95 4.0 6941 6037 2173 22117 Atlas Resources Inc. Polick #1 09/27/95 5.0 19795 5965 5747 22121 Atlas Resources Inc. Duffola Unit #1 09/19/95 6.0 18283 5929 2846 22123 Atlas Resources Inc. Philson #2 11/29/95 3.0 14457 5887 7968 22126 Atlas Resources Inc. Kimes Unit #1 09/22/95 3.0 2758 5994 888 22127 Atlas Resources Inc. Eagle #1 09/15/95 6.0 20508 5943 3428 22129 Atlas Resources Inc. Rabold #4 11/14/95 3.0 9929 5838 3439 22144 Atlas Resources Inc. Devonshire #1 11/30/95 3.0 7879 5988 3135 22152 Atlas Resources Inc. Irwin #2 03/15/96 2.0 1947 6057 1700 22153 Atlas Resources Inc. Buckley #1 03/11/96 2.0 3320 6063 2907 22159 Atlas Resources Inc. Rabold #6 02/09/96 3.0 8488 5900 2505 22160 Atlas Resources Inc. Rabold #5 01/26/96 3.0 9808 5917 3609 22166 Atlas Resources Inc. Goebel #1 01/23/96 3.0 15622 5891 4187 22167 Atlas Resources Inc. Smith #5 01/16/96 3.0 13244 6016 5075 22168 Atlas Resources Inc. Eperthener #2 03/12/96 1.0 840 5953 840 22169 Atlas Resources Inc. Eperthener #3 03/08/96 1.0 755 5963 755 22173 Atlas Resources Inc. McDowell #7 03/29/96 1.0 775 5829 775 22176 Atlas Resources Inc. Struthers #4 03/20/96 1.0 842 5957 842 22177 Atlas Resources Inc. Rabold #3 02/01/96 3.0 6126 5891 1857 22180 Atlas Resources Inc. Philson #3 02/07/96 3.0 6085 5948 2460 22188 Atlas Resources Inc. Vogan #2 03/05/96 1.0 3111 5911 3111 22214 Atlas Resources Inc. Struthers #3 03/26/96 2.0 7303 5878 7007 22216 Atlas Resources Inc. Baun #3 07/11/96 N/A N/A 5992 N/A 22217 Atlas Resources Inc. McDowell #8 04/04/96 1.0 428 5878 428 22226 Atlas Resources Inc. Baun #2 04/10/96 1.0 543 5945 543 22236 Atlas Resources Inc. Taylor #1 07/09/96 N/A N/A 5992 N/A 43346 Atlas Resources Inc. Armstrong #1 03/22/96 N/A N/A 6721 N/A 43347 Atlas Resources Inc. Clinton Rod & Gun1 04/10/96 N/A N/A 6820 N/A 43348 Atlas Resources Inc. Jones #1 04/15/96 N/A N/A 6848 N/A 43352 Atlas Resources Inc. Schwartz #1 03/28/96 N/A N/A 6681 N/A
Production Table as of April 1996 - -------------------------------------------------------------------------- (Page 71) GEOLOGICAL REPORT FOR THE CURRENTLY PROPOSED PROSPECTS (Page 72) GEOLOGIC EVALUATION of ATLAS - ENERGY FOR THE NINETIES-PUBLIC #5 LTD. DRILLING PROGRAM Southeastern Mercer Prospect Area, Pennsylvania Program proposed by: ATLAS RESOURCES, INC. 311 Rouser Road P.O. Box 611 Moon Township, PA 15108 Report submitted by: UEDC United Energy Development Consultants, Inc. 2301 Duss Avenue Suite 12 Ambridge, PA 15003 For: ATLAS - ENERGY FOR THE NINETIES - PUBLIC #5 LTD. Drilling Program by: ATLAS RESOURCES, INC. 311 Rouser Rd. P.O. Box 611 Moon Township, PA 15108 (Page 73) LOCATION MAP - AREA OF INTEREST ( Eastern Ohio, Western Pennsylvania and Northwestern West Virginia ) TABLE OF CONTENTS INVESTIGATION SUMMARY OBJECTIVE AREA OF INVESTIGATION METHODOLOGY SOUTHEASTERN MERCER PROSPECT AREA DRILLING ACTIVITY GEOLOGY STRATIGRAPHY, LITHOLOGY & DEPOSITION RESERVIOR CHARACTERISTICS PRODUCTION CURVE POTENTIAL MARKETS AND PIPELINES STATEMENTS CONCLUSION DISCLAIMER NON-INTEREST (Page 74) INVESTIGATION SUMMARY OBJECTIVE The purpose of the following investigation is to evaluate the geologic feasibility and further development of the Southeastern Mercer Prospect Area (consisting of Butler, Lawrence, and Mercer Counties) as proposed by Atlas Resources, Inc. AREA OF INVESTIGATION A portion of this prospect area, herein identified as the Atlas- Energy for the Nineties-Public #5 Ltd. Drilling Program, contains acreage in Jackson, Findley, CoolSpring, Deer Creek, Mill Creek and Springfield Townships in Mercer County, Wilmington Township in Lawrence County and Marion Township, Butler County. All counties are located in Pennsylvania. Thirty (30) drilling prospects designated for this program will be targeted to produce natural gas from Clinton-Medina Group reserviors, found at an average depth of approximately 6,000 feet beneath the earth's surface. METHODOLOGY The data incorporated into this report was provided by Atlas Resources, Inc. and the in-house archives of UEDC, Inc. Geological mapping and the interpretations by Atlas geologists were also examined. Available "electric" log, completion, and production data on wells offsetting prospect locations and other "key" wells within and adjacent to the defined prospect area were utilized to determine productive and depositional trends. SOUTHEASTERN MERCER PROSPECT AREA DRILLING ACTIVITY The proposed drilling area lies within a region of northwestern Pennsylvania which has been very active for the past decade in terms of exploration for, and exploitation of natural gas (Page 75) reserves. Development within and adjacent to the Southeastern Mercer Prospect Area has escalated since 1986, with Atlas Resources, Inc. and it's affiliates drilling over six hundred (600) wells during this period. Atlas Resources, Inc. has encountered favorable drilling and production results while solidifying a strong acreage position, as Atlas Resources, Inc. continues to identify and extend productive trends. Drilling is ongoing as of the date of this report with recent wells displaying favorable initial drilling and completion results. Competitive activity has begun both south and east of the prospect area, confirming the Clinton-Medina Group of Lower Silurian age as a viable target for the further development of economic quantities of natural gas. GEOLOGY STRATIGRAPHY, LITHOLOGY & DEPOSITION Regionally, the Clinton-Medina Group was deposited in tide- dominated shoreline, deltaic, and shelf environments and is lithologically comprised of alternating sandstones, siltstones and shales. Productive sandstones are composed of siliceous to dolomitic subarkoses, sublitharenites, and quartz arenites. Reservior quality sands occur throughout the delta-complex from eastern Ohio through northwestern Pennsylvania and western New York. The Clinton-Medina Group, deposited during the Lower Silurian, overlies the Upper Ordovician age Queenston shale and is capped by the Middle Silurian Reynales Formation. This dolomitic limestone "cap" is known locally to drillers as the "Packer Shell". Stratigraphically, in descending order, the potentially productive units of the Clinton-Medina Group consist of the: 1) Thorold, 2) Grimsby, 3) Cabot Head, and 4) Whirlpool members. These stratigraphic relationships are illustrated in the following diagram: (Page 76) Chart showing the Stratigraphic Names- New Pennsylvania Middle Silurian Rochester Irondequoit Reynales Lower Silurian Thorold : Grimsby : Cabot Head :...Clinton Medina Group Whirlpool : Ordovician Queenston The Whirlpool is a light gray quartzose sandstone to siltstone ranging in thickness from five (5) to twenty (20) feet. Average porosity values for this sand member range from five (5) to ten (10) percent regionally. Within the area of investigation, porosities in excess of twelve (12) percent occur within localized trends targeted for further development. The Cabot Head is a dark green to black shale, most likely of marine origin. Within the investigated area a Cabot Head sandstone has been encountered in numerous wells. This formation has been found to contribute natural gas when reservoir characteristics, including evidence of enhanced permeability, warrant completion. This sand member is considered a secondary target. The Grimsby is the thickest sandstone member of the Clinton-Medina Group. Sand development ranges from ten (10) to forty-five (45) feet within an interval comprised of fine (Page 77) to very fine, light gray to red sandstones and siltstones broken up by thin dark gray silty shale layers. Average porosity values for the Grimsby are approximately six (6) to (10) percent over the pay interval regionally. Permeability may be enhanced locally by the presence of naturally occurring micro-fractures. Future development focuses on established production trends. The Thorold sandstone is the uppermost producing interval of the Clinton-Medina sequence. This interbedded ferric sand, silt and shale interval averages forty (40) feet. Where pay sand development occurs, porosities are in the typical Clinton-Medina group range of six (6) to (10) percent. Permeability may be enhanced locally by the presence of naturally occurring micro-fractures. RESERVIOR CHARACTERISTICS Petroleum reservoirs are formed by the presence of an impermeable barrier trapping natural gas of commercial quantities in a more permeable medium. In the Clinton-Medina, this occurs either stratigraphically when a permeable sand containing hydrocarbons encounters an impermeable shale or when a permeable sand changes gradually into a non-permeable sand by a cementation process known as "diagenesis". Thus, this type of trap represents cemented-in hydrocarbon accumulations. Electric well logs can be used in conjunction with production to interpret reservior parameters. When sandstones in the Thorold, Grimsby, Cabot Head or Whirlpool develop porosity in excess of 6%, or a bulk density of 2.55 or less, the permeability of the reservoir (which ranges from <0.l to >0.2 mD) can become great enough to allow commercial production of natural gas. Small, naturally occurring cracks in the formation, referred to as micro-fractures, can also enhance permeability. A gamma, bulk density, density porosity and neutron log suite showing sand development in the Grimsby, Cabot Head and Whirlpool is illustrated on the following page. (Page 78) Two other phenomena detected by well logs can occur which are indicators of enhanced permeability. These indicators used to detect productive intervals are: Mudcake buildup across the zone of interest - after loading the wellbore with brine fluid and circulating, an interval with enhanced permeability will accept fluid, filtering out the solids and leaving behind a buildup (or mudcake) on the formation wall. This is detectable with a caliper log. Invasion profile - during circulation, a brine that has a high conductivity (or low resistivity) that is accepted into the formation (as described above) will change the electrical conductivity of the reservoir rock near and around the wellbore. The resistivity will be low nearest to the wellbore and will increase away from the wellbore. A dual laterolog can be used to detect this profile created by a permeable zone - - it records resistivity near the wellbore as well as deeper into the formation. A zone with enhanced permeability will show a separation between the shallow and deep laterologs, while a zone with little or no permeability would cause the two resistivity measurements to read exactly the same. An example follows: (Page 79) GAMMA RAY LOG RESISTIVITY LOG PRODUCTION CURVE A model decline curve for the Southeastern Mercer Prospect Area was created, based on production histories from over 200 wells in the mature portion of the field. The percentage of gas recovery per year is illustrated by the diagram below: (Chart showing a decline curve for a 25 year period.) POTENTIAL MARKETS AND PIPELINES In the area of this drilling program, there are a number of potential purchasers and transporters of natural gas. These include Wheatland Tube Company, Tenneco, National Fuel Supply, National Fuel Distribution and the People's Natural Gas Company. (Page 80) STATEMENTS CONCLUSION UEDC has conducted a geologic feasibility study of the Atlas- Energy for the Nineties-Public #5 Ltd. Drilling Program, which will consist of developmental drilling of the Clinton-Medina Group sands in Mercer, Lawrence and Butler Counties, Pennsylvania. It is the professional opinion of UEDC that the drilling of wells within this program is supported by sufficient geologic and engineering data. DISCLAIMER For the purpose of this evaluation, UEDC did not visit any leaseholds or inspect any of the associated production equipment. Likewise, UEDC has no knowledge as to the validity of title, liabilities, or corporate matters affecting these properties. UEDC does not warrant individual well performance. NON-INTEREST We hereby confirm that UEDC is an independent consulting firm and that neither this firm or any of it's employees, contract consultants, or officers has, or is committed to acquire any interest, directly or indirectly, in Atlas Resources, Inc.; nor is this firm, or any employee, contract consultant, or officer thereof, otherwise affiliated with Atlas Resources, Inc. We also confirm that neither the employment of, nor payment of compensation received by UEDC in connection with this report, is on a contingent basis. Respectfully submitted, UEDC, Inc. /s/Isias Ortez - -------------------------------------------------------------------------- (Page 81) COMPETITION, MARKETS AND REGULATION COMPETITION There are many companies, partnerships and individuals engaged in natural gas exploration, development and operations in the areas where the Partnership is expected to conduct its activities. The industry is highly competitive in all of its phases, including acquiring suitable properties for development and the marketing of natural gas. The Partnership will be competing with other companies, and the sale of the production from the wells will compete with the sale of production from the other wells that have already been drilled or are being operated by Atlas in Mercer County, Pennsylvania. However, to reduce and/or eliminate this conflict of interest it is Atlas' policy to treat all wells in a geographic area equally as to pipeline access and access to Atlas' gas supply agreements. (See "Proposed Activities - Sale of Oil and Gas Production".) Current economic conditions indicate that the costs of exploration and development are increasing gradually; however, the oil and gas industry historically has experienced periods of rapid cost increases from time to time. MARKETING Natural gas and oil, if any, produced by the wells developed by the Partnership must be marketed in order for the Participants to realize revenues from such production. In recent years natural gas and oil prices have been volatile. The marketing of natural gas and oil production, if any, will be affected by numerous factors beyond the control of the Partnership and the effect of which cannot be accurately predicted. These factors include the availability and proximity of adequate pipeline or other transportation facilities; the amount of domestic production and foreign imports of oil and gas; competition from other energy sources such as coal and nuclear energy; local, state and federal regulations regarding production and the cost of complying with applicable environmental regulations; and fluctuating seasonal supply and demand. For example, the demand for natural gas is greater in the winter months than in the summer months, which is reflected in a higher spot market price paid for such gas. Also, increased imports of oil and natural gas have occurred and are expected to continue, and the free trade agreement between Canada and the United States has eased restrictions on imports of Canadian gas to the United States. In the past the reduced demand for natural gas and/or an excess supply of gas has resulted in a lower price paid for the gas. It has also resulted in some purchasers curtailing or restricting their purchases of natural gas, renegotiating existing contracts to reduce both take-or-pay levels and the price paid for delivered gas, and other difficulties in the marketing of production. (See "Proposed Activities - Sale of Oil and Gas Production".) The Clean Air Act Amendments of 1990 contain incentives for the future development of "clean alternative fuel," which includes natural gas and liquefied petroleum gas for "clean-fuel vehicles". Atlas believes the amendments ultimately will have a beneficial effect on natural gas markets and prices. STATE REGULATIONS Oil and gas operations are regulated in Pennsylvania by the Department of Environmental Resources, Pennsylvania, and any other states where Partnership Wells may be situated, impose a comprehensive statutory and regulatory scheme with respect to oil and gas operations. Among other things, such regulations involve (a) new well permit and well registration requirements, procedures and fees, (b) minimum well spacing requirements, (c) restrictions on well locations and underground gas storage, (d) certain well site restoration, groundwater protection and safety measures, (e) landowner notification requirements, (f) certain bonding or other security measures, (g) various reporting requirements, (h) well plugging standards and procedures, and (i) broad enforcement powers. These state regulatory agencies have been granted broad regulatory and enforcement powers which are likely to create additional financial and operational burdens on oil and gas operations like those of the Partnership in such states. Pennsylvania, and the other states in the Appalachian Basin also have in place other pollution and environmental control laws which have become increasingly burdensome in recent years. Enforcement efforts with respect to oil and gas operations have recently increased and it can be anticipated that such regulation will expand and have a greater impact on future oil and gas operations. ENVIRONMENTAL REGULATION Various federal, state and local laws and regulations covering the discharge of materials into the environment, or otherwise relating to the protection of the environment, may affect the Partnership's operations and costs as a result of their effect on oil and gas exploration, development and production activities. The Partnership may generally be liable for cleanup costs to the United States Government under the Federal Clean Water Act for oil or hazardous substance pollution and under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA" or Superfund) for hazardous substance contamination. Such liability is unlimited in cases of willful negligence or misconduct, and there is no limit on liability for environmental cleanup costs or damages (Page 82) with respect to claims by the state or private persons or entities. In addition, the Environmental Protection Agency will require the Partnership to prepare and implement spill prevention control and countermeasure plans relating to the possible discharge of oil into navigable waters and will further require permits to authorize the discharge of pollutants into navigable waters. State and local permits or approvals will also be needed with respect to wastewater discharges and air pollutant emissions. Violations of environment-related Lease conditions or environmental permits can result in substantial civil and criminal penalties as well as potential court injunctions curtailing operations. Such enforcement liabilities can result from either governmental or citizen prosecution. Compliance with these statutes and regulations may cause delays in producing natural gas and oil from the wells and may increase substantially the cost of producing such natural gas and oil. However, such laws and regulations are constantly being revised and changed, and Atlas is unable to predict the ultimate costs of complying with present and future environmental laws and regulations. See "Risk Factors - Special Risks of the Partnership - Unlimited Liability of Investor General Partners" and "Proposed Activities - Insurance," concerning the Managing General Partner's inability to obtain insurance to protect against environmental claims. CRUDE OIL REGULATION The price of oil is not regulated and is subject only to supply, demand, competitive factors, the gravity of the crude oil, sulfur content differentials and other factors. Certain federal reporting requirements are still in effect under U. S. Department of Energy regulations. FEDERAL GAS REGULATION The sale of natural gas is subject to regulation of production and transportation by governmental regulatory agencies. Generally, the regulatory agency in the state where a producing natural gas well is located supervises production activities and the transportation of natural gas sold intrastate. The Federal Energy Regulatory Commission ("FERC"), which succeeded to the authority of the Federal Power Commission regulates the interstate transportation of natural gas and pricing of natural gas sold for resale interstate; and under the Natural Gas Policy Act of 1978 ("NGPA"), the price of intrastate gas. However, price controls for natural gas production from new wells were deregulated on December 31, 1992. Such deregulated gas production may be sold at market prices determined by supply, demand, BTU content, pressure, location of the wells, and other factors. It is unlikely that the Partnership will receive in the near future any substantial benefit from the deregulation of natural gas from new wells. Although the transportation and sale of gas in interstate commerce remains heavily regulated, FERC has sought to promote greater competition in natural gas markets by encouraging open access transportation by interstate pipelines, with the goal of expanding opportunities for producers to contract directly with local distribution companies and end-users. FERC Order No. 500 affects the transportation and marketability of natural gas. Traditionally, natural gas has been sold by producers to pipeline companies, which then resold the gas to end- users. FERC Order No. 500 alters this market structure by requiring interstate pipelines that transport gas for others to provide transportation service to producers, distributors and all other shippers of natural gas on a nondiscriminatory, "first-come, first-served" basis ("open access transportation"), so that producers and other shippers can sell natural gas directly to end-users. FERC Order No. 500 contains additional provisions intended to promote greater competition in natural gas markets. FERC Order 636 which became effective May 18, 1992, requires gas pipeline companies to, among other things, separate their sales services from their transportation services; and provide an open access transportation service that is comparable in quality for all gas suppliers. The premise behind FERC Order 636 was that the gas pipeline companies had an unfair advantage over other gas suppliers because they could bundle their sales and transportation services together. FERC Order 636 is designed to create a regulatory environment in which no gas seller has a competitive advantage over another gas seller because it also provides transportation services. It is difficult to assess the effect of the order on the Partnership. PROPOSED REGULATION From time to time there are a number of proposals considered in Congress and in the legislatures and agencies of various states that if enacted would significantly and adversely affect the oil and natural gas industry. Such proposals involve, among other things, the imposition of new taxes on natural gas and limiting the disposal of waste water from wells. At the present time, it is impossible to accurately predict what proposals, if any, will be enacted by Congress or the legislatures and agencies of various states and what effect any proposals which are enacted will have on the activities of the Partnership. - -------------------------------------------------------------------------- (Page 83) PARTICIPATION IN COSTS AND REVENUES IN GENERAL A tabular summary of the following discussion appears below. Please refer to "Definitions" for a description of the items of revenue and cost included in the terms used herein. COSTS 1. ORGANIZATION AND OFFERING COSTS. Organization and Offering Costs will be allocated and charged 100% to the Managing General Partner. Notwithstanding, Organization and Offering Costs in excess of 15% of the Partnership Subscription will be paid by the Managing General Partner, without recourse to the Partnership, and the Managing General Partner will not be credited with such amounts towards its required Capital Contribution. 2. LEASE COSTS. The Leases will be contributed by the Managing General Partner at its Cost, unless the Managing General Partner shall have cause to believe that value if Cost is materially more than fair market value, in which case the credit for such contribution will br made at a price not in excess of fair market value. 3. INTANGIBLE DRILLING COSTS. Intangible Drilling Costs will be allocated and charged 100% to the Participants. 4. TANGIBLE DRILLING COSTS. Tangible Costs will be allocated and charged 14% to the Managing General Partner and 86% to the Participants. 5. OPERATING COSTS, DIRECT COSTS, ADMINISTRATIVE COSTS AND ALL OTHER COSTS. Operating Costs, Direct Costs, Administrative Costs and all other Partnership costs not specifically allocated will be allocated and charged 75% to the Participants and 25% to the Managing General Partner. However, in the event Atlas has to subordinate a part of its Partnership revenues in an amount up to 10% of the Partnership Net Production Revenues, Operating Costs, Direct Costs, Administrative Costs and all other Partnership costs not specifically allocated will be charged to the parties in the same ratio as the related production revenues are being credited. (See "- Subordination of Portion of Managing General Partner's Net Revenue Share," below.) In addition, the Managing General Partner's aggregate Capital Contributions to the Partnership (including Leases contributed) will not be less than 15% of all Capital Contributions to the Partnership. Any payments by the Managing General Partner in excess of the other costs charged to it under the Partnership Agreement will be used to pay Partnership costs which would otherwise be charged to the Participants. Such Capital Contributions must be paid by the Managing General Partner at the time such costs are required to be paid by the Partnership, but, in no event, later than December 31, 1997. REVENUES 1. PROCEEDS FROM THE SALE OF LEASES. If the Partners' Capital Accounts are adjusted under the Partnership Agreement to reflect the simulated depletion of an oil or gas property of the Partnership, the portion of the total amount realized by the Partnership upon the taxable disposition of such property that represents recovery of its simulated tax basis therein is allocated to the Partners in the same proportion as the aggregate adjusted tax basis of such property was allocated to such Partners (or their predecessors in interest). If the Partners' Capital Accounts are adjusted under the Partnership Agreement to reflect the actual depletion of an oil or gas property of the Partnership, the portion of the total amount realized by the Partnership upon the taxable disposition of such property that equals the Partners' aggregate remaining adjusted tax basis therein is allocated to the Partners in proportion to their respective remaining adjusted tax bases in such property. In addition, proceeds will be allocated to Atlas to the extent of the pre-contribution appreciation in value of such property, if any. Any excess will be credited to the parties in the ratio in which oil and gas production revenues of the Partnership are credited as provided in 4, below. 2. INTEREST PROCEEDS. Interest earned on Agreed Subscriptions prior to the Offering Termination Date will be credited to the accounts of the respective subscribers and paid approximately six weeks after the Offering Termination Date. If a subscription is refunded any interest allocated thereto will also be refunded. After the Offering Termination Date and until proceeds from the offering are invested in the Partnership's oil and gas operations any interest income from temporary investments will be allocated pro rata to the Participants providing such Agreed Subscriptions. All other interest income, including interest earned on the deposit of production revenues, will be credited as provided in 4, below. (Page 84) 3. EQUIPMENT PROCEEDS. Proceeds from the sale or other disposition of equipment will be credited to the parties charged with the costs of such equipment in the ratio in which such costs were charged. 4. PRODUCTION REVENUES. All other revenues of the Partnership, including production revenues, will be credited 75% to the Participants and 25% to the Managing General Partner. (See "- Subordination of Portion of Managing General Partner's Net Revenue Share," below and "Tax Aspects".) 5. LIQUIDATION PROCEEDS. Upon liquidation of the Partnership each Participant will receive his Distribution Interest in the Partnership. "Distribution Interest" means an undivided interest in the assets of the Partnership after payments to creditors of the Partnership or the creation of a reasonable reserve therefor, in the ratio the positive balance of a party's Capital Account bears to the aggregate positive balance of the Capital Accounts of all of the parties determined after taking into account all Capital Account adjustments for the taxable year during which liquidation occurs (other than those made pursuant to liquidating distributions or restoration of deficit Capital Account balances); provided, however, after the Capital Accounts of all of the parties have been reduced to zero, such interest in the remaining assets of the Partnership will equal a party's interest in the related revenues of the Partnership as set forth in .5.01 and its subsections of the Partnership Agreement. Any in kind property distributions to the Participants must be made to a liquidating trust or similar entity for the benefit of the Participants, unless at the time of the distribution: (a) the Managing General Partner offers the individual Participants the election of receiving in kind property distributions and the Participants accept such offer after being advised of the risks associated with such direct ownership; or (b) there are alternative arrangements in place which assure the Participants that they will not, at any time, be responsible for the operation or disposition of the Partnership properties. It will be presumed that a Participant has refused such consent if the Managing General Partner has not received such consent within thirty days after the Managing General Partner mailed the request for such consent. Any Partnership asset which would otherwise be distributed in kind to a Participant, but for the failure or refusal of such Participant to give his written consent to such distribution, may instead be sold by the Managing General Partner at the best price reasonably obtainable from an independent third party who is not an Affiliate of the Managing General Partner. SUBORDINATION OF PORTION OF MANAGING GENERAL PARTNER'S NET REVENUE SHARE The Partnership is structured to provide preferred cash distributions to the Participants equal to a minimum of 10% of their Agreed Subscriptions in each of the first five twelve-month periods of Partnership operations. To help insure the Participants achieve this investment feature, Atlas will subordinate a part of its Partnership revenues in an amount up to 10% of the Partnership Net Production Revenues net of the related costs as set forth in "- Costs - 5. Operating Costs, Direct Costs, Administrative Costs and All Other Costs," above to the receipt by Participants of cash distributions from the Partnership equal to 10% of their Agreed Subscriptions in each of the first five twelve-month periods of Partnership operations. (Partnership Net Production Revenues means gross revenues after deduction of the related Operating Costs, Direct Costs, Administrative Costs and all other Partnership costs not specifically allocated.) The subordination will be determined on a cumulative basis throughout the entire subordination period commencing with the first distribution of revenues to the Participants by debiting or crediting current period Partnership revenues to the Managing General Partner as may be necessary to provide such distributions to the Participants. See 5.01(b)(4) of the Partnership Agreement for details on the subordination Atlas anticipates that the Participants will benefit from the subordination if the price of gas received by the Partnership and/or the results of the Partnership's drilling activities are unable to provide the required return to the Participants. Notwithstanding, if the wells produce gas in small amounts and/or the price of gas declines then even with subordination the cash flow to the Participants may be very small and they may not receive a return of their entire investment. (See "Risk Factors - Special Risks of the Partnership - Borrowings by the Managing General Partner Could Reduce Funds Available for Its Subordination Obligation".) - -------------------------------------------------------------------------- (Page 85) PARTICIPATION IN COSTS AND REVENUES MANAGING GENERAL PARTNER (1) PARTICIPANTS (1) PARTNERSHIP COSTS Organization and Offering Costs (2) 100% 0% Lease Costs (3) 100% 0% Intangible Drilling Costs 0% 100% Tangible Costs 14% 86% Operating Costs, Administrative Costs, Direct Costs and All Other Costs (4)(5)(9) 25% 75% PARTNERSHIP REVENUES Interest Income (6) (6) Equipment Proceeds (7) (7) All other Revenues including Production Revenues (4)(8) 25% 75% PARTICIPATION IN DEDUCTIONS Intangible Drilling Costs 0% 100% Depreciation 14% 86% Depletion Allowances 25% 75% - --------------------------------- (1) Atlas has the option of subscribing for up to 10% of the Units, which will not be applied towards the minimum Partnership Subscription. To the extent of such optional subscriptions the Managing General Partner is deemed a Participant in the Partnership. (See "Terms of the Offering".) (2) In the event the Managing General Partner pays any Organization and Offering Costs in excess of 15% of the Partnership Subscription, such payments will be without recourse to the Partnership, and the Managing General Partner will not be credited with such amounts towards its required Capital Contribution. (3) Leases will be contributed to the Partnership by the Managing General Partner Atlas at its Cost, unless the Managing General Partner shall have cause to believe that Cost is materially more than fair market value, in which case the credit for such contribution will be made at a price not in excess of fair market value. and applied towards its required Capital Contribution to the Partnership. (4) In the event Atlas has to subordinate a part of its Partnership revenues in an amount up to 10% of Partnership Net Production Revenues, then Operating Costs, Direct Costs, Administrative Costs and all other Partnership costs not specifically allocated will be charged to the parties in the same ratio as the related production revenues are being credited. (See "- Subordination of a Portion of Managing General Partner's Net Revenue Share," above and "Risk Factors - Special Risks of the Partnership - Borrowings by the Managing General Partner Could Reduce Funds Available for Its Subordination Obligation".) (5) Includes any other Partnership costs which are not otherwise specifically allocated. (6) Interest earned on Agreed Subscriptions prior to the Offering Termination Date will be credited to the accounts of the respective subscribers and paid approximately six weeks after the Offering Termination Date. If a subscription is refunded any interest allocable thereto will also be refunded. After the Offering Termination Date and until proceeds from the offering are invested in the Partnership's oil and gas operations any interest income from temporary investments will be allocated pro rata to the Participants providing such Agreed Subscription. All other interest income, including interest earned on the deposit of operating revenues, will be credited as oil and gas production revenues are credited. (7) Proceeds from the sale or other disposition of equipment will be credited to the parties charged with the costs of such equipment in the ratio in which such costs were charged. (8) (See "- Revenues - Proceeds from the Sale of Leases" and "- Subordination of Portion of Managing General Partner's Net Revenue Share," above and "- Allocation and Adjustment Among Participants," below.) (9) The Managing General Partner's aggregate Capital Contributions to the Partnership (including Leases contributed) will not be less than 15% of all Capital Contributions to the Partnership. Any payments by the Managing General Partner in excess of the other costs charged to it under the Partnership Agreement will be used to pay Partnership costs which would otherwise be charged to the Participants. Such Capital Contributions must be paid by the Managing General Partner at the time such costs are required to be paid by the Partnership, but, in no event, later than December 31, 1997. - -------------------------------------------------------------------------- (Page 86) ALLOCATION AND ADJUSTMENT AMONG PARTICIPANTS The Participants' share of revenues, gains, credits, costs, expenses, losses and other charges and liabilities will be charged and credited, as among them, pro rata in accordance with their respective Agreed Subscriptions taking into account any Investor General Partner's status as a defaulting Investor General Partner. DISTRIBUTIONS The Managing General Partner will review the accounts of the Partnership at least quarterly to determine whether cash distributions are appropriate and the amount to be distributed, if any. The Partnership will distribute funds to the Managing General Partner and the Participants allocated to their accounts which the Managing General Partner deems unnecessary to be retained by the Partnership. In no event, however, will funds be advanced or borrowed for purposes of distributions, if the amount of such distributions would exceed the Partnership's accrued and received revenues for the previous four quarters, less paid and accrued Operating Costs with respect to such revenues. The determination of such revenues and costs shall be made in accordance with generally accepted accounting principles, consistently applied. Cash distributions from the Partnership to the Managing General Partner shall only be made in conjunction with distributions to Participants and only out of funds properly allocated to the Managing General Partner's account. (See "Summary of Drilling and Operating Agreement.") TAX ASPECTS SUMMARY OF TAX OPINION The Managing General Partner has received the tax opinion of Special Counsel, Kunzman & Bollinger, Inc., Oklahoma City, Oklahoma, which is included as Exhibit (8) to the Registration Statement. While Special Counsel has prepared this section of the Prospectus entitled "Tax Aspects," the opinion of Special Counsel will be limited to those opinions set forth in its Tax Opinion which are summarized below. The Tax Opinion represents only Special Counsel's best legal judgment, and has no binding effect or official status. No assurance can be given that the conclusions expressed in the opinion would be upheld by a court if challenged by the IRS. Such tax opinion is based upon Special Counsel's review of the Registration Statement for Atlas-Energy for the Nineties-Public #5 Ltd., corporate records, certificates, agreements, instruments and other documents, existing statutes, rulings and regulations (which are subject to change and could result in different tax consequences), and certain representations from Atlas. Included among such representations are the following: (1) The Partnership Agreement will be duly executed and recorded. (2) No election will be made for the Partnership to be excluded from the application of the partnership provisions of the Code. (3) The Partnership will own record or legal title to the Working Interest in all of its Prospects. (4) The Managing General Partner will be independent of the Participants and has and will continue to have at all times during the existence of the Partnership a substantial net worth (excluding its interest in the Partnership and any other limited partnerships). (5) The respective amounts that will be paid to Atlas or its Affiliates pursuant to the Partnership Agreement and the Drilling and Operating Agreement are amounts that would ordinarily be paid for similar services in similar transactions between Persons having no affiliation and dealing with each other "at arms' length." (6) The Partnership will elect to deduct currently all intangible drilling and development costs. (7) The Partnership will have a calendar year taxable year. (8) The Drilling and Operating Agreement and any amendments thereto entered into by and between Atlas and the Partnership will be duly executed and will govern the drilling and, if warranted, the completion and operation of the wells in accordance with its terms. (9) Based upon Atlas' review of its previous drilling programs for the past several years and upon the intended operations of the Partnership, Atlas reasonably believes that the aggregate deductions, including depletion deductions, and 350% of the aggregate credits, if any, which will be claimed by Atlas and the Participants, will - -------------------------------------------------------------------------- (Page 87) not during the first five tax years following the funding of the Partnership exceed twice the amounts invested by Atlas and the Participants, respectively. (10) The Investor General Partner Units will not be converted to Limited Partner interests before substantially all of the Partnership Wells have been drilled and completed. (11) The Units will not be traded on an established securities market. In rendering its opinions, Special Counsel has further assumed that (1) each of the Participants has an objective to carry on the business of the Partnership for profit; (2) any amount borrowed by a Participant and contributed to the Partnership will not be borrowed from a Person who has an interest in the Partnership (other than as a creditor) or a related person, as defined in .465 of the Code, to a person (other than the Participant) having such interest and such Participant will be severally, primarily, and personally liable for such amount, and (3) no Participant will have protected himself from loss for amounts contributed to the Partnership through nonrecourse financing, guarantees, stop loss agreements or other similar arrangements. Special Counsel believes that its opinion letter addresses all material federal income tax issues associated with an investment in the Units by an individual Participant who is a resident citizen of the United States. Special Counsel considers material those issues which would affect significantly a Participant's deductions, credits or losses arising from his investment in the Units and with respect to which, under present law, there is a reasonable possibility of challenge by the IRS, or those issues which are expected to be of fundamental importance to a Participant but as to which a challenge by the IRS is unlikely. The issues which involve a reasonable possibility of challenge by the IRS have not been definitely resolved by statute, rulings or regulations, as interpreted by judicial or administrative bodies. Subject to the foregoing, however, in Special Counsel's opinion it is more likely than not that the following tax treatment will be upheld if challenged by the IRS and litigated. PARTNERSHIP CLASSIFICATION. The Partnership will be classified as a partnership for federal income tax purposes, and not as an association taxable as a corporation; the Partnership, as such, will not pay any federal income taxes; and all items of income, gain, loss, deduction, and credit of the Partnership will be reportable by the Partners in the Partnership. (See "- Partnership Classification".) INTANGIBLE DRILLING AND DEVELOPMENT COSTS. Intangible drilling and development costs ("Intangible Drilling Costs") paid by the Partnership under the terms of bona fide drilling contracts for the Partnership's wells will be deductible in the taxable year in which the payments are made and the drilling services are rendered, assuming such amounts are fair and reasonable consideration and subject to certain restrictions summarized below (including basis and "at risk" limitations and the passive activity loss limitation with respect to the Limited Partners). (See "- Intangible Drilling and Development Costs" and "- Drilling Contracts".) PREPAYMENTS OF INTANGIBLE DRILLING AND DEVELOPMENT COSTS. Depending primarily on when the Partnership Subscription is received, it is anticipated that the Partnership will prepay in 1996 most, if not all, of the intangible drilling and development costs related to Partnership Wells the drilling of which will be commenced in 1997. Assuming that such amounts are fair and reasonable, and based in part on the factual assumptions set forth below, in our opinion such prepayments of intangible drilling and development costs will be deductible for the 1996 taxable year even though all Working Interest owners in the well may not be required to prepay such amounts, subject to certain restrictions summarized in "Tax Aspects" (including basis and "at risk" limitations, and the passive activity loss limitation with respect to the Limited Partners). (See "- Drilling Contracts," below.) The foregoing opinion is based in part on the assumptions that: (1) such costs will be required to be prepaid in 1996 for specified wells pursuant to the Drilling and Operating Agreement; (2) pursuant to the Drilling and Operating Agreement the wells are required to be, and actually are, Spudded on or before March 31, 1997, and continuously drilled thereafter until completed, if warranted, or abandoned; and (3) the required prepayments are not refundable to the Partnership and any excess prepayments are applied to intangible drilling and development costs of substitute wells. NOT A PUBLICLY TRADED PARTNERSHIP. Assuming that no more than 10% of the Units are transferred in any taxable year of the Partnership (other than in private transfers described in Treas. Reg. .1.7704-1(e), it is more likely than not that the Partnership will not be treated as a "publicly traded partnership" under the Code. (See "- Limitations on Passive Activities".) PASSIVE ACTIVITY CLASSIFICATION. Oil and gas production income generated by the Partnership's oil and gas properties held as Working Interests, together with gain, if any, from the disposition of such properties and allocable to Limited Partners who are individuals, estates, trusts, closely held corporations or personal service corporations more likely than not will be characterized as income from a passive activity which may be offset by passive activity losses. Income or gain attributable to investments of working capital of the - -------------------------------------------------------------------------- (Page 88) Partnership will be characterized as portfolio income, which cannot be offset by passive activity losses. To the extent the Partnership's oil and gas properties are held as Working Interests, it is more likely than not that the passive activity limitations on losses under .469 will not be applicable to Investor General Partners prior to the conversion of Investor General Partner Units to Limited Partner interests. (See "- Limitations on Passive Activities".) TAX BASIS OF PARTICIPANT'S INTEREST. Each Participant's adjusted tax basis in his Partnership interest will be increased by his total Agreed Subscription. (See "- Tax Basis of Participants' Interests".) AT RISK LIMITATION ON LOSSES. Each Participant initially will be "at risk" to the full extent of his Agreed Subscription. (See "- `At Risk' Limitation For Losses".) DEPLETION ALLOWANCE, The greater of cost depletion or percentage depletion will be available to qualified Participants as a current deduction against Partnership income from oil and gas production revenues on properties of the Partnership, subject to certain restrictions summarized below. (See "- Depletion Allowance".) ACRS. The Partnership's reasonable costs for recovery property (tangible depreciable property used in a trade or business or held for the production of income) which cannot currently be deducted but must be capitalized will be eligible for cost recovery deductions under the modified Accelerated Cost Recovery System, generally over a seven year "cost recovery period," subject to certain restrictions summarized below (including basis and "at risk" limitations and the passive activity loss limitation in the case of the Limited Partners). (See "- Depreciation - Accelerated Cost Recovery System".) AVAILABILITY OF CERTAIN DEDUCTIONS. Business expenses, including payments for personal services actually rendered in the taxable year in which accrued, which are reasonable, ordinary and necessary and do not include amounts for items such as Lease acquisition costs, organization and syndication fees and other items which are required to be capitalized, are currently deductible. (See "- 1996 Expenditures," "- Availability of Certain Deductions" and "- Partnership Organization and Syndication Fees".) ALLOCATIONS. Assuming the effect of the allocations of income, gain, loss, deduction and credit (or items thereof) set forth in the Partnership Agreement, including the allocations of basis and amount realized with respect to oil and gas properties, is substantial in light of a Participant's tax attributes that are unrelated to the Partnership, it is more likely than not that such allocations will have "substantial economic effect" and will govern each Participant's distributive share of such items to the extent such allocations do not cause or increase deficit balances in the Participants' Capital Accounts. (See "- Allocations".) AGREED SUBSCRIPTION. No gain or loss will be recognized by the Participants on payment of their Agreed Subscriptions. PROFIT MOTIVE. Based on the Managing General Partner's representation that the Partnership will be conducted as described in the Prospectus, it is more likely than not that the Partnership will possess the requisite profit motive and will not be properly characterized as a tax shelter for purposes of the tax shelter registration requirement and the substantial understatement of income tax liability penalty. (See "- Disallowance of Deductions Under Section 183 of the Code" and "- Penalties and Interest".) IRS ANTI-ABUSE RULE. Based on the Managing General Partner's representation that the Partnership will be conducted as described in the Prospectus, it is more likely than not that the Partnership will not be subject to the anti-abuse rule set forth in Treas. Reg. .1.701-2. (See "- IRS Anti-Abuse Rule".) OVERALL EVALUATION OF TAX BENEFITS. Based on Special Counsel's conclusion that substantially more than half of the material tax benefits of the Partnership, in terms of their financial impact on a typical investor, more likely than not will be realized if challenged by the IRS, the tax benefits of the Partnership, in the aggregate, which are a significant feature of an investment in the Partnership by a typical original Participant more likely than not will be realized as contemplated by the Prospectus. IN GENERAL The following is a summary of some of the principal features under present federal income tax law which will apply to the Partnership and typical Participants. However, there is no assurance that the present laws or regulations will not be changed and adversely affect a Participant. The IRS may challenge the deductions claimed by the Partnership or a Participant, or the taxable year in which such deductions are claimed, and no guaranty can be given that any such challenge would not be upheld if litigated. The practical utility of the tax aspects of any investment depends largely on the income tax position of the particular Participant in the year in which items of income, gain, loss, deduction or credit are properly taken into account in computing his federal income tax liability. In addition, except as otherwise noted, different tax considerations may apply to foreign persons, corporations, partnerships, trusts and other prospective Participants which are not treated as individuals for federal income tax purposes. EACH PROSPECTIVE PARTICIPANT SHOULD SATISFY HIMSELF AS TO THE TAX CONSEQUENCES OF PARTICIPATING IN THE PARTNERSHIP BY OBTAINING ADVICE FROM HIS OWN TAX ADVISOR. (Page 89) PARTNERSHIP TAXATION For federal income tax purposes, a partnership is not a taxable entity but rather a conduit through which all items of income, gain, loss, deduction, credit and tax preference are passed through to the partners and are required to be reported on their federal income tax returns for the taxable years in which or with which the partnership's taxable year ends. In the event the Partnership were treated as an association taxable as a corporation, the income and deductions of the Partnership would be reported by the Partnership as if it were a corporation, and not by each Partner. The Partnership would be taxed directly on its income at corporate tax rates and distributions to Partners would be treated as taxable dividends to shareholders to the extent of current and accumulated earnings and profits of the Partnership. PARTNERSHIP CLASSIFICATION The Managing General Partner has received the opinion of Special Counsel that, under currently existing laws, rules and regulations, all of which are subject to change with or without retroactive application, the Partnership will be treated as a partnership for federal income tax purposes and not as an association taxable as a corporation. The tax classification of the Partnership as a partnership could be adversely affected following the removal or resignation of the Managing General Partner. This would depend upon the new general partner having substantial assets in addition to its interest in the partnership and the new general partner's relationship to the Participants. The Partnership Agreement does not contain any minimum net worth requirements or contingent liability limits with respect to Atlas' position as Managing General Partner . Consequently, the tax status of the Partnership as a partnership could be adversely affected should the net worth of Atlas materially diminish, or should the contingent liabilities of Atlas materially increase. New standards, if adopted, could be applied retroactively and possibly could have an adverse effect on the classification of the Partnership as a partnership. AN ADVANCE TAX RULING CONFIRMING THE PARTNERSHIP'S STATUS AS A PARTNERSHIP FOR FEDERAL INCOME TAX PURPOSES HAS NOT BEEN OBTAINED FROM THE IRS AND THE MANAGING GENERAL PARTNER DOES NOT INTEND TO APPLY FOR SUCH AN ADVANCE RULING. SUCH A RULING WOULD NOT BE ISSUED IF SOUGHT, AND NO GUARANTY CAN BE GIVEN THAT THE IRS WILL NOT TAKE THE POSITION THAT THE PARTNERSHIP SHOULD BE CLASSIFIED FOR TAX PURPOSES AS AN ASSOCIATION TAXABLE AS A CORPORATION RATHER THAN A PARTNERSHIP. The following discussion assumes that the Partnership will be treated as a partnership for federal income tax purposes. LIMITATIONS ON PASSIVE ACTIVITIES Under the passive activity rules, all income of a taxpayer who is subject to the rules is categorized as: (i) income from passive activities such as limited partners' interests in a business; (ii) active income (e.g., salary, bonuses, etc.); or (iii) portfolio income (e.g., dividends, royalties and interest not derived in the ordinary course of a trade or business). Losses generated by "passive activities" can offset only passive income and cannot be applied against active income or portfolio income. Similar rules apply with respect to tax credits. Passive activities include any trade or business in which the taxpayer does not materially participate. Material participation is defined as a year-round active involvement in the operations of the activity on a regular, continuous, and substantial basis. Under the Partnership Agreement, Limited Partners will not have material participation in the Partnership and generally will be subject to the passive activity rules. A taxpayer who holds a working interest in an oil and gas property that is burdened with the cost of developing and operating the property is excepted from the passive activity rules, whether or not he materially participates in the activity. However, a taxpayer who holds a working interest directly or indirectly through an entity (e.g., a limited partnership interest or S corporation shares) which limits the liability of the taxpayer with respect to such interest is not treated as owning a working interest. Consequently, the exception is not available to Limited Partners in the Partnership, but more likely than not the exception will be available to Investor General Partners prior to their conversion to Limited Partners to the extent the Partnership acquires Working Interests in its Leases, except as noted above. Contractual limitations on the liability of Investor General Partners under the Partnership Agreement (e.g. insurance, limited indemnification, etc.) will not prevent Investor General Partners from claiming deductions under the working interest exception to the passive activity rules. Suspended losses and credits may be carried forward (but not back) and used to offset future years' passive activity income. A suspended loss (but not a credit) is allowed in full when the entire interest is sold to an unrelated third party in a taxable transaction. Upon such disposition the excess of suspended losses and any loss from the activity for the tax year (plus any loss on the sale) over net income or gain for the tax year from all passive activities (determined without regard to such losses) is not treated as a passive loss. Capital losses are limited to the amount of capital gain, plus $3,000 (in the case of married individuals filing joint returns). (Page 90) Net losses and credits of a partner from each publicly traded partnership are suspended and carried forward to be netted against income from that publicly traded partnership only. In addition, net losses from other passive activities may not be used to offset net income from a publicly traded partnership. However, it is more likely than not that the Partnership will not be characterized as a publicly traded partnership under the Code so long as no more than 10% of the Units are transferred in any taxable year of the Partnership (other than in private transfers described in Treas. Reg .1.7704-1(e)). CHARACTERIZATION OF THE PARTNERSHIP'S INCOME. Income (e.g., interest) earned on working capital is treated as portfolio income which cannot be offset with passive losses by Limited Partners. "Portfolio income" consists of (i) interest, dividends and royalties (unless earned in the ordinary course of a trade or business); and (ii) gain or loss not derived in the ordinary course of a trade or business on the sale of property that generates portfolio income or is held for investment. In the opinion of Special Counsel, it is more likely than not that the Partnership's income from the Leases (excluding income attributable to investment of working capital), held as Working Interests, together with gain, if any, from the disposition of such property, will be characterized as passive income rather than portfolio income with respect to Limited Partners subject to the passive activity limitations. CONVERSION FROM INVESTOR GENERAL PARTNER TO LIMITED PARTNER. Investor General Partner Units will be converted to Limited Partner interests after substantially all of the Partnership Wells have been drilled and completed, which is anticipated to be in the late summer of 1997. Thereafter, each Investor General Partner will be deemed a Limited Partner in the Partnership and will enjoy the limited liability provided to limited partners under the Revised Uniform Limited Partnership Act of Pennsylvania with respect to his interest in the Partnership's oil and gas properties. Concurrently, the Investor General Partner will lose the availability of the working interest exception to the passive activity limitations. Except as provided below, an Investor General Partner's conversion of his Partnership interest into a Limited Partner interest should not have adverse tax consequences unless the Investor General Partner's share of any Partnership liabilities is reduced as a result of the conversion. A reduction in a partner's share of liabilities is treated as a constructive distribution of cash to such partner, which reduces the basis of the partner's interest in the partnership and is taxable to the extent it exceeds such basis. In addition, any net income from a Partnership Well allocable to an Investor General Partner will continue to be characterized as non-passive income which cannot be offset with passive losses, even after such Investor General Partner has converted to Limited Partner status. TAXABLE YEAR The Partnership intends to adopt a calendar year taxable year. 1996 EXPENDITURES It is anticipated that all of the Partnership's subscription proceeds will be expended in 1996 and that the income and deductions generated pursuant thereto will be reflected on the Participants' federal income tax returns for that period. (See "Capitalization and Source of Funds and Use of Proceeds" and "Participation in Costs and Revenues".) Depending primarily on when the Partnership Subscription is received, it is anticipated that the Partnership will prepay in 1996 most, if not all, of the intangible drilling and development costs for wells the drilling of which will be commenced in 1997. The deductibility in 1996 of such advance payments cannot be guaranteed. (See "- Drilling Contracts," below.) AVAILABILITY OF CERTAIN DEDUCTIONS The ordinary and necessary expenses of carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered, are deductible in the year incurred. The Managing General Partner has represented to counsel that the amounts payable to the Managing General Partner and its Affiliates, including the amounts paid to Atlas as general drilling contractor, are the amounts which would ordinarily be paid for similar services in similar transactions. (See "- Drilling Contracts," below.) The fees paid to the Managing General Partner and its Affiliates will not be currently deductible to the extent it is determined that they are in excess of reasonable compensation, are properly characterized as organization or syndication fees, other capital costs such as the acquisition cost of the Leases, or not "ordinary and necessary" business expenses, or the services were rendered in tax years other than the tax year in which such fees were deducted by the Partnership. (See "- Partnership Organization and Syndication Fees," below.) In the event of an audit, payments to the Managing General Partner and its Affiliates by the Partnership will be scrutinized by the IRS to a greater extent than payments to an unrelated party. INTANGIBLE DRILLING AND DEVELOPMENT COSTS Assuming a proper election and subject to the passive activity loss rules in the case of Limited Partners, each Participant will be entitled to deduct his share of intangible drilling and development costs ("Intangible Drilling Costs") which include items which do not have salvage value, such as labor, fuel, repairs, supplies and hauling necessary to the drilling of a well. (See "Participation in Costs and (Page 91) Revenues" and "- Limitations on Passive Activities," above.) Such costs generally will be subject to ordinary income recapture if a property is sold at a gain and the amount to be recaptured is not reduced by the amount of additional depletion that could have been claimed if such costs had been capitalized and amortized. (See "- Sale of the Properties," below.) The amount of the deduction for intangible drilling and development costs is limited for integrated oil companies, i.e., (i) those taxpayers who directly or through a related person engage in the retail sale of oil or gas and whose gross receipts for the calendar year from such activities exceed $5,000,000, or (ii) those taxpayers and related persons who have refinery production in excess of 50,000 barrels on any day during the taxable year. Also, productive-well intangible drilling and development costs may subject a Participant to an alternative minimum tax in excess of regular tax unless an election is made to deduct them on a straight line basis over a 60 month period. (See "- Minimum Tax - Tax Preferences," below.) In the preparation of the Partnership's informational tax returns, Atlas will allocate Partnership costs paid by Atlas and the Participants among Intangible Drilling Costs, Tangible Costs, Direct Costs, Administrative Costs, Organization and Offering Costs and Operating Costs based upon guidance from advisors to Atlas. Atlas has allocated approximately 77% of the footage price to be paid by the Partnership for a completed well to intangible drilling and development costs. The IRS could challenge the characterization of costs claimed by the Partnership to be deductible intangible drilling and development costs and recharacterize such costs as some other item which may be non-deductible; however, this would have no effect on the allocation and payment of such costs under the Partnership Agreement. Where a Lease is acquired subject to an obligation to pay an excessive drilling price, such excess amounts may not qualify as deductible intangible drilling and development costs but may be treated as Lease acquisition costs or some other non-deductible expense. DRILLING CONTRACTS The Partnership will enter into the Drilling and Operating Agreement with Atlas, as a third-party general drilling contractor, to drill and complete the Partnership's Development Wells on a footage basis of $37.39 per foot for each well that is drilled and completed. Under the footage drilling contracts, Atlas anticipates that it will have reimbursement of general and administrative overhead of $3,600 per well and a profit of approximately 11% to 15% per well assuming the well is drilled to 6,150 feet. However, the actual cost of the drilling of the wells may be more or less than the estimated amount, due primarily to the uncertain nature of drilling operations. Atlas believes the Drilling and Operating Agreement is at competitive rates in the proposed areas of operation. Nevertheless, the amount of the profit realized by Atlas under the drilling contract, if any, could be challenged by the IRS as unreasonable and disallowed as a deductible intangible drilling and development cost. (See "- Intangible Drilling and Development Costs," above, "Proposed Activities" and "Compensation".) Depending primarily on when the Partnership Subscription is received, it is anticipated that the Partnership will prepay in 1996 most, if not all, of the intangible drilling and development costs for Partnership Wells the drilling of which will be commenced in 1997. In Keller v. Commissioner, 79 T.C. 7 (1982), aff'd. 725 F.2d 1173 (8th Cir. 1984), the Tax Court applied a two-part test for the current deductibility of prepaid intangible drilling and development costs: (1) the expenditure must be a payment rather than a refundable deposit; and (2) the deduction must not result in a material distortion of income taking into substantial consideration the business purpose aspects of the transaction. The Partnership will attempt to comply with the guidelines set forth in Keller with respect to any prepaid intangible drilling and development costs. The Drilling and Operating Agreement will require the Partnership to prepay in 1996 intangible drilling and development costs for specified wells the drilling of which will be commenced in 1997. Although the Partnership is not required to prepay completion costs of a well prior to the time a decision has been made to complete the well, it is anticipated that all Partnership Wells will be required to be completed before an evaluation can be made as to their potential productivity. Prepayments should not result in a loss of current deductibility where there is a legitimate business purpose for the required prepayment, the contract is not merely a sham to control the timing of the deduction and there is an enforceable contract of economic substance. The Drilling and Operating Agreement will require the Partnership to prepay the intangible drilling and development costs of the wells in order to enable the Operator to commence site preparation for the wells, obtain suitable subcontractors at the then current prices and insure the availability of equipment and materials. Under the Drilling and Operating Agreement excess prepaid amounts, if any, will not be refundable to the Partnership but will be applied to intangible drilling and development costs to be incurred in drilling substitute wells. Under Keller, such a provision for substitute wells should not result in the prepayments being characterized as refundable deposits. The likelihood that prepayments will be challenged by the IRS on the grounds that there is no business purpose for the prepayment is increased in the event prepayments are not required with respect to 100% of the Working Interest. It is possible that less than 100% of the Working Interest will be acquired by the Partnership in one or more wells and prepayments may not be required of all holders of the Working Interest. However, in the view of Special Counsel, a legitimate business purpose for the required prepayments may exist under the guidelines set forth in Keller, even though prepayment is not required, or actually received, by the drilling contractor with respect to a portion of the Working Interest. (Page 92) In addition to the foregoing, a current deduction for prepaid intangible drilling and development costs is available only if the drilling of the wells is commenced within 90 days after the close of the taxable year. The Managing General Partner will attempt to cause prepaid Partnership Wells to be Spudded on or before March 31, 1997. However, the Spudding of any Partnership Well may be delayed due to circumstances beyond the control of the Partnership or the drilling contractor. Such circumstances include the unavailability of drilling rigs, weather conditions, inability to obtain drilling permits or access right to the drilling site, or title problems. Due to the foregoing factors, no guaranty can be given that all prepaid Partnership Wells required by the Drilling and Operating Agreement to be Spudded on or before March 31, 1997, will actually be commenced by such date. In that event, deductions claimed in 1996 for prepaid intangible drilling and development costs would be disallowed and deferred to the 1997 taxable year. No assurance can be given that on audit the IRS will not disallow the current deductibility of a portion or all of any prepayments of intangible drilling and development costs under the Partnership's drilling contracts, thereby decreasing the amount of deductions allocable to the Participants for the current taxable year, or that such a challenge would not ultimately be sustained. In the event of disallowance, the deduction will be available in the year the work is actually performed. DEPLETION ALLOWANCE Proceeds from the sale of oil and gas production will constitute ordinary income. A certain portion of such income will not be taxable by virtue of the depletion allowance which permits the deduction from gross income for federal income tax purposes of either the percentage depletion allowance or the cost depletion allowance, whichever is greater. Cost depletion for any year is determined by dividing the adjusted tax basis for the property by the total units of gas or oil expected to be recoverable therefrom and then multiplying the resultant quotient by the number of units actually sold during the year. Cost depletion cannot exceed the adjusted tax basis of the property to which it relates. Percentage depletion generally is available to taxpayers other than integrated oil companies. (See "- Intangible Drilling and Development Costs," above.) Percentage depletion generally is based on the Participant's share of gross income from the oil and gas producing property. Generally, percentage depletion is available with respect to 6 million cubic feet of average daily production of natural gas or 1,000 barrels of average daily production of domestic crude oil. The rate of percentage depletion is 15%. However, percentage depletion for marginal production increases 1% (up to a maximum increase of 10%) for each whole dollar that the domestic wellhead price of crude oil for the immediately preceding year is less than $20 per barrel (without adjustment for inflation). The term "marginal production" includes oil and gas produced from a domestic stripper well property, which is defined as any property which produces a daily average of 15 or less equivalent barrels of oil (90 MCF of natural gas) per producing well on the property in the calendar year. The rate of percentage depletion for marginal production presently is 20%. (See the model decline curve included in the UEDC Geological Report in "Proposed Activities - Information Regarding Currently Proposed Prospects".) Also, percentage depletion may not exceed 100% of the taxable income from each oil and gas property before the deduction for depletion and is limited to 65% of the taxpayer's taxable income for a year computed without regard to deductions for percentage depletion, net operating loss carrybacks and capital loss carrybacks. On disposition of an oil and gas property there is recapture of the lesser of: (i) the amounts that were deducted as intangible drilling and development costs rather than added to basis, plus depletion deductions that reduced the basis of the property; or (ii) the amount realized in the case of a sale, exchange or involuntary conversion or fair market value in all other cases, minus the property's adjusted basis. Availability of percentage depletion must be computed separately for each Participant and not by the Partnership, or for Participants as a whole. Potential Participants are urged to consult their own tax advisors with respect to the availability of percentage depletion to them. DEPRECIATION - ACCELERATED COST RECOVERY SYSTEM The cost of most equipment placed in service by the Partnership will be recovered through depreciation deductions over a seven year cost recovery period, using the 200% declining balance method, with a switch to straight-line to maximize the deduction. Only a half-year of depreciation is allowed for the year recovery property is placed in service or disposed of and in the case of a short tax year, the ACRS deduction is prorated on a 12-month basis. No distinction is made between new and used property and salvage value is disregarded. An alternative depreciation system is used to compute the depreciation preference subject to the alternative minimum tax (using the 150% declining balance method, switching to straight-line, for most personal property). (See "- Minimum Tax - Tax Preferences," below.) A taxpayer may elect to recover the cost of assets using the straight-line method or the alternative depreciation system for regular tax purposes to avoid creating a tax preference. All gain on a disposition of tangible personal property is treated as ordinary income to the extent of ACRS deductions claimed by the taxpayer and deductions allowed under .179 of the Code, which provides an election to expense up to $17,500 of the cost of certain tangible personal property in the year such property is placed in service. The deductible amount is reduced by the cost (Page 93) of qualifying property in excess of $200,000 and cannot exceed the taxable income derived from the active conduct by the taxpayer of the trade or business in which the property is used. These limitations are applied at both the partnership and the partner level. LEASEHOLD COSTS AND ABANDONMENT The costs of acquiring oil and gas Lease interests, together with the related cost depletion deduction and any abandonment loss, are allocated under the Partnership Agreement 100% to Atlas, which will contribute the Leases to the Partnership as a part of its Capital Contribution. TAX BASIS OF PARTICIPANTS' INTERESTS The adjusted basis for federal income tax purposes of a Participant's interest in the Partnership will be adjusted (but not below zero) for any gain or loss to the Participant from a disposition by the Partnership of an oil or gas property, and will be increased by his cash subscription payment and his share of Partnership income. The adjusted basis of a Participant's interest in the Partnership will be reduced by: his share of Partnership losses; his depletion deduction (but not below zero); and cash distributions from the Partnership to him. The reduction in a Participant's share of Partnership liabilities is considered a cash distribution. Should cash distributions exceed the tax basis of the Participant's interest in the Partnership, taxable gain would result to the extent of the excess. A Participant's distributive share of Partnership loss is allowable only to the extent of the adjusted basis of such Participant's interest in the Partnership at the end of the Partnership's taxable year. DISTRIBUTIONS FROM A PARTNERSHIP Generally, a cash distribution from a partnership to a partner in excess of the adjusted basis of such partner's interest in the partnership immediately before the distribution is treated as gain from the sale or exchange of his interest in the partnership to the extent of the excess. No loss is recognized by the partners on these types of distributions. Other distributions of cash, disproportionate distributions of property, and liquidating distributions may result in taxable gain or loss. (See "- Disposition of Partnership Interests" and "- Termination of a Partnership," below.) SALE OF THE PROPERTIES Under current law, a noncorporate taxpayer's ordinary income is taxed at a maximum rate of 39.6%; but net capital gains of a noncorporate taxpayer are taxed at a maximum rate of 28%. The annual capital loss limitation for noncorporate taxpayers is the amount of capital gains plus the lesser of $3,000 ($1,500 for married persons filing separate returns) or the excess of capital losses over capital gains. Long-term losses (like short-term losses) offset ordinary income on a one-for-one basis. Gains or losses from sales of oil and gas properties held for more than twelve months would be, except to the extent of depreciation recapture on equipment and recapture of any intangible drilling and development costs, depletion deductions and certain other losses, treated as a long-term capital gain while a net loss will be an ordinary deduction. Other gains and losses on sales of oil and gas properties will generally result in ordinary gains or losses. DISPOSITION OF PARTNERSHIP INTERESTS The sale or exchange of all or part of a Participant's interest in the Partnership held by him for more than twelve months will generally result in a recognition of long-term capital gain or loss. In the event the interest is held for twelve months or less, such gain or loss will generally be short-term gain or loss. The recapturable portions of depreciation, depletion and intangible drilling and development costs constitute ordinary income. A portion of any gain recognized by a Limited Partner on the sale or other disposition of his interest in the Partnership will also be characterized as portfolio income under the passive activity rules to the extent the gain is itself attributable to portfolio income (e.g. interest on investment of working capital). A Participant's pro rata share of the Partnership's nonrecourse liabilities, if any, as of the date of the sale or exchange must be included in the amount realized. Therefore, the gain recognized may result in a tax liability greater than the cash proceeds, if any, from such disposition. A gift of an interest in the Partnership may result in federal and/or state income tax and gift tax liability of the donor. A Participant who sells or exchanges all or part of his interest in the Partnership is required by the Code to notify the Partnership within 30 days or by January 15 of the following year, if earlier. Other dispositions of a Participant's interest, including a repurchase of the interest by Atlas, may or may not result in recognition of taxable gain. However, no gain should be recognized by an Investor General Partner whose interest in the Partnership is converted to a Limited Partner interest so long as there is no change in his share of the Partnership's liabilities or certain Partnership assets as a result of the conversion. No disposition of an interest in the Partnership (including repurchase of the interest by Atlas) should be made by any Participant prior to consultation with his tax advisor. MINIMUM TAX - TAX PREFERENCES For taxpayers other than integrated oil companies (see "- Intangible Drilling and Development Costs"), the 1992 National Energy Bill repealed (1) the preference for excess intangible drilling and development costs and (2) the excess percentage depletion preference for oil and gas. The repeal of the excess intangible drilling and development costs preference, however, may not result in more than a 40% (Page 94) reduction in the amount of the taxpayer's alternative minimum taxable income computed as if the excess intangible drilling and development costs preference had not been repealed. These rules are summarized below. The alternative minimum tax is intended to insure that no one with substantial income can avoid tax liability by using deductions and credits, including the deductions for intangible drilling and development costs and accelerated depreciation. The alternative minimum tax rate for individuals is 26% on alternative minimum taxable income up to $175,000 ($87,500 for married individuals filing separate returns) and 28% thereafter. Regular tax personal exemptions are not available for purposes of the alternative minimum tax, however, alternative minimum taxable income may be reduced by certain itemized deductions, exemption amounts and net operating losses. Under the prior rules, the amount of intangible drilling and development costs which is not deductible for alternative minimum tax purposes is the excess of the "excess intangible drilling costs" over 65% of net income from oil and gas properties. Excess intangible drilling costs is the regular intangible drilling and development costs deduction minus the amount that would have been deducted under 120-month straight-line amortization, or (at the taxpayer's election) under the cost depletion method. There is no preference for costs of nonproductive wells and with respect to productive wells taxpayers can elect to amortize the year's intangible drilling and development costs ratably over a 60 month period for all tax purposes and then such costs are not treated as an item of tax preference. The likelihood of a Participant incurring, or increasing, any minimum tax liability by virtue of an investment in the Partnership must be determined on an individual basis, and requires consultation by a prospective Participant with his personal tax advisor. LIMITATIONS ON DEDUCTION OF INVESTMENT INTEREST Investment interest is deductible by a noncorporate taxpayer only to the extent of net investment income each year (with an indefinite carryforward of disallowed investment interest). An Investor General Partner's share of any interest expense incurred by the Partnership will be subject to the investment interest limitation. In addition, an Investor General Partner's income and losses (including intangible drilling and development costs) from the Partnership will be considered investment income and losses. Losses allocable to an Investor General Partner will reduce his net investment income and may affect the deductibility of his investment interest expense, if any. No item of income or expense subject to the passive activity loss rules is treated as investment income or investment expense. ALLOCATIONS The Partnership Agreement allocates to each Partner his share of the income, gains, credits and deductions (including the deductions for intangible drilling and development costs and depreciation) generated by the Partnership. (See "Participation in Costs and Revenues".) The Capital Accounts of the Partners are adjusted to reflect such allocations and the Capital Accounts, as adjusted, will be given effect in distributions made to the Partners upon liquidation of the Partnership or any Partner's interest in the Partnership. Generally, a Participant's Capital Account is increased by the amount of money he contributes to the Partnership and allocations to him of income and gain, and decreased by the value of property or cash distributed to him and allocations to him of loss and deductions. It should be noted that each Partner's share of Partnership items of income, gain, loss, deduction and credit must be taken into account whether or not there is any distributable cash. A Participant's share of Partnership revenues applied to the repayment of loans or the reserve for plugging wells will be included in his gross income in a manner analogous to an actual distribution of the income to him. Thus, a Participant may have taxable income from the Partnership for a particular year in excess of any cash distributions from the Partnership to him with respect to that year. To the extent the Partnership has cash available for distribution, however, it is Atlas' policy that Partnership distributions will not be less than the Participants' estimated income tax liability with respect to Partnership income. No assurance can be given that, on audit, the IRS will not take the position that a portion of the deductions allocable to the Participants is not allowable to them. If such a position is taken, there can be no assurance that any resulting deficiency will not ultimately be sustained. However, assuming the effect of the special allocations set forth in the Partnership Agreement is substantial in light of a Participant's tax attributes that are unrelated to the Partnership, in the opinion of Special Counsel it is more likely than not that such allocations will govern each Participant's distributive share of such items to the extent such allocations do not cause or increase deficit balances in the Participants' Capital Accounts. If any allocation under the Partnership Agreement is not recognized for federal income tax purposes, each Participant's distributive share of the items subject to such allocation generally will be determined in accordance with his interest in the Partnership, determined by considering relevant facts and circumstances. To the extent such deductions, as allocated by the Partnership Agreement, exceed deductions which would be allowed pursuant to such a reallocation Participants may incur a greater tax burden. "AT RISK" LIMITATION FOR LOSSES Subject to the limitations on "passive losses" generated by the Partnership in the case of Limited Partners, each Participant may use his share of the Partnership's credits or losses, if any, to offset income from other sources. (See "- Limitations on Passive Activities," above.) However, any individual taxpayer who sustains a loss in connection with the Partnership may deduct such loss only to the extent of the amount he has "at risk" in the Partnership at the end of a taxable year. The amount "at risk" is limited to the amount of money and the adjusted basis of other property the taxpayer has contributed to the activity, and any amount he has borrowed with respect (Page 95) thereto for which he is personally liable or with respect to which he has pledged property other than property used in the activity; limited, however, to the net fair market value of his interest in such pledged property. However, amounts borrowed will not be considered "at risk" if such amounts are borrowed from any person who has an interest (other than as a creditor) in such activity or from a related person to a person (other than the taxpayer) having such an interest. In addition, the amount the taxpayer has "at risk" may not include the amount of any loss that the taxpayer is protected against through nonrecourse loans, guarantees, stop loss agreements, or other similar arrangements. The amount of any such loss that is disallowed in any taxable year will be carried over to the first succeeding taxable year, to the extent a Participant is "at risk." Further, a taxpayer's "at risk" amount in subsequent taxable years with respect to the activity involved will be reduced by that portion of the loss which is allowable as a deduction. Participants' Agreed Subscriptions are funded by a payment of cash (usually "at risk"). PARTNERSHIP ORGANIZATION AND SYNDICATION FEES Expenses connected with the sale of interests in a partnership are not deductible. Although certain organization expenses of a partnership may be deducted and amortized over a period of not less than 60 months, such expenses are charged 100% to the Managing General Partner as part of the Partnership's Organization and Offering Costs and any related deductions will be allocated to the Managing General Partner. TAX ELECTIONS The Code permits partnerships to elect to adjust the basis of partnership property on the transfer of an interest in a partnership by sale or exchange or on the death of a partner, and on the distribution of property by the partnership to a partner (the .754 election). The general effect of such an election is that transferees of the partnership interests are treated, for purposes of depreciation and gain, as though they had acquired a direct interest in the partnership assets and the partnership is treated for such purposes, upon certain distributions to partners, as though it had newly acquired an interest in the partnership assets and therefore acquired a new cost basis for such assets. The Partnership Agreement provides that the Partnership may make the .754 election. Taxpayers may elect to capitalize and amortize "start-up expenditures" over a 60-month period. Such items include amounts: (1) paid or incurred in connection with: (i) investigating and creating an active trade or business; or (ii) any activity engaged in for profit and for the production of income before the day on which the active trade or business begins, in anticipation of such activity becoming an active trade or business; and (2) which would be allowed as a deduction if paid or incurred in connection with the expansion of an existing business. Start-up expenditures do not include amounts paid or incurred in connection with the sale of partnership interests. If it is ultimately determined that any of the Partnership's expenses constituted start-up expenditures and not deductible business expenses, the Partnership's deductions would be reduced. DISALLOWANCE OF DEDUCTIONS UNDER SECTION 183 OF THE CODE A Participant's ability to deduct his share of the Partnership's losses could be lost if the Partnership lacks the appropriate profit motive as determined from an examination of all facts and circumstances at the time. There is a presumption that an activity is engaged in for profit, if, in any three of five consecutive taxable years, the gross income derived from such activity exceeds the deductions attributable to such activity. Thus, if the Partnership fails to show a profit in at least three out of five consecutive years, this presumption will not be available. In that instance, the possibility that the IRS could successfully challenge the deductions claimed by a Participant would be substantially increased. The fact that the possibility of ultimately obtaining profits is uncertain, standing alone, does not appear to be sufficient grounds for the denial of losses. Based on Atlas' representation that the Partnership will be conducted as described in this Prospectus, in the opinion of Special Counsel it is more likely than not that the Partnership will possess the requisite profit motive. TERMINATION OF A PARTNERSHIP A partnership will be considered as terminated for federal income tax purposes if within a twelve month period there is a sale or exchange of 50% or more of the total interest in partnership capital and profits. A partner will realize taxable gain on a termination of the partnership to the extent that money regarded as distributed to him exceeds the adjusted basis of his partnership interest. The conversion of Investor General Partner Units to Limited Partner interests will not result in a termination of the Partnership. LACK OF REGISTRATION AS A TAX SHELTER An organizer of a "tax shelter" must obtain an identification number which must be included on the tax returns of investors in such a tax shelter. For this purpose, a "tax shelter" includes investments with respect to which any person could reasonably infer that the ratio that (1) the aggregate amount of the potentially allowable deductions and 350% of the potentially allowable credits with respect to the investment during the first five years of the investment bears to (2) the amount of money and the adjusted basis of property contributed to the investment exceeds 2 to 1, determined without reduction for gross income derived from the investment. (Page 96) Atlas does not believe that the Partnership will have a tax shelter ratio greater than 2 to 1. Also, because the purpose of the Partnership is to locate, produce and market natural gas on an economic basis, Atlas does not believe that the Partnership will be a "potentially abusive tax shelter." Accordingly, Atlas does not intend to cause the Partnership to register with the IRS as a tax shelter. If it is subsequently determined that the Partnership was required to be registered with the IRS as a tax shelter, Atlas would be subject to certain penalties and each Participant would be liable for a $250 penalty for failure to include the tax shelter registration number on his tax return, unless such failure was due to reasonable cause. A Participant also would be liable for a penalty of $100 for failing to furnish the tax shelter registration number to any transferee of his interest in the Partnership. However, based on the representations of the Managing General Partner, Special Counsel has expressed the opinion that the Partnership, more likely than not, is not required to register with the IRS as a tax shelter. Issuance of a registration number does not indicate that an investment or the claimed tax benefits have been reviewed, examined, or approved by the IRS. INVESTOR LISTS. Any person who organizes a tax shelter required to be registered with the IRS must maintain a list of each investor in the tax shelter. For the reasons described above, Atlas does not believe the Partnership is a tax shelter for this purpose. If this determination is wrong there is a penalty of $50 for each person, unless the failure is due to reasonable cause. TAX RETURNS AND AUDITS IN GENERAL. The tax treatment of all partnership items is generally determined at the partnership, rather than the partner, level; and the partners are generally required to treat partnership items on their individual returns in a manner which is consistent with the treatment of such partnership items on the partnership return. Generally, the IRS must conduct an administrative determination as to partnership items at the partnership level before conducting deficiency proceedings against a partner, and the partners must file a request for an administrative determination before filing suit for any credit or refund. The period for assessing tax against a Partner attributable to a partnership item may be extended as to all partners by agreement between the IRS and Atlas, which will serve as the Partnership's representative ("Tax Matters Partner") in all administrative and judicial proceedings conducted at the partnership level. The Tax Matters Partner generally may enter into a settlement on behalf of, and binding upon, partners owning less than a 1% profits interest in partnerships having more than 100 partners. By executing the Partnership Agreement, each Participant agrees that he will not form or exercise any right as a member of a notice group and will not file a statement notifying the IRS that the Tax Matters Partner does not have binding settlement authority. TAX RETURNS. The preparation and filing of each Participant's federal, state and local income tax returns are the responsibility of the Participant. The Partnership will provide each Participant with the tax information applicable to his investment in the Partnership necessary to prepare such returns; however, the treatment of the tax attributes of the Partnership may vary among Participants. The Managing General Partner, its Affiliates and Special Counsel assume no responsibility for the tax consequences of this transaction to a Participant, nor for the disallowance of any proposed deductions. EACH PARTICIPANT IS URGED TO SEEK QUALIFIED, PROFESSIONAL ASSISTANCE IN THE PREPARATION OF HIS FEDERAL, STATE AND LOCAL TAX RETURNS. PENALTIES AND INTEREST IN GENERAL. Interest (based on the applicable Federal short-term rate plus 3 percentage points) is charged on underpayments of tax and various civil and criminal penalties are included in the Code. PENALTY FOR NEGLIGENCE OR DISREGARD OF RULES OR REGULATIONS. If any portion of an underpayment of tax is attributable to negligence or disregard of rules or regulations, 20% of such portion is added to the tax. Negligence is strongly indicated if a partner fails to treat partnership items on his tax return in a manner that is consistent with the treatment of such items on the partnership's return or to notify the IRS of the inconsistency. VALUATION MISSTATEMENT PENALTY. There is an addition to tax of 20% of the amount of any underpayment of tax of $5,000 or more which is attributable to a substantial valuation misstatement. There is a substantial valuation misstatement if the value or adjusted basis of any property claimed on a return is 200% or more of the correct amount; or if the price for any property or services (or for the use of property) claimed on a return is 200% or more (or 50% or less) of the correct price. If there is a gross valuation misstatement (400% or more of the correct value or adjusted basis or the undervaluation is 25% or less of the correct amount) the penalty is 40%. SUBSTANTIAL UNDERSTATEMENT PENALTY. There is also an addition to tax of 20% of any underpayment if the difference between the tax required to be shown on the return over the tax actually shown on the return, exceeds the greater of 10% of the tax required to be shown on the return, or $5,000. The amount of any understatement generally will be reduced to the extent it is attributable to the tax treatment of an item supported by substantial authority, or adequately disclosed on the taxpayer's return and there is a reasonable basis for the tax treatment of such (Page 96) item by the taxpayer. However, in the case of "tax shelters," the understatement may be reduced only if the tax treatment of an item attributable to a tax shelter was supported by substantial authority and the taxpayer reasonably believed that the tax treatment claimed was more likely than not the proper treatment. A "tax shelter" for this purpose is any entity which has as its principal purpose the avoidance or evasion of federal income tax. Assuming the Partnership is conducted as set forth in this Prospectus, in the opinion of Special Counsel it is more likely than not that the Partnership will not be characterized as a tax shelter for purposes of the substantial understatement of income tax penalty. IRS ANTI-ABUSE RULE. Under Treas. Reg. .1.701-2, if a principal purpose of a partnership is to reduce substantially the partners' federal income tax liability in a manner that is inconsistent with the intent of the partnership rules of the Code, based on all the facts and circumstances, the IRS is authorized to remedy the abuse. For illustration purposes, the following factors may indicate that a partnership is being used in a prohibited manner: (i) the partners' aggregate federal income tax liability is substantially less than had the partners owned the partnership's assets and conducted its activities directly; (ii) the partners' aggregate federal income tax liability is substantially less than if purportedly separate transactions are treated as steps in a single transaction; (iii) one or more partners are needed to achieve the claimed tax results and have a nominal interest in the partnership or are substantially protected against risk; (iv) substantially all of the partners are related to each other; (v) income or gain are allocated to partners who are not expected to have any federal income tax liability; (vi) the benefits and burdens of ownership of property nominally contributed to the partnership are retained in substantial part by the contributing party; and (vii) the benefits and burdens of ownership of partnership property are in substantial part shifted to the distributee partners before or after the property is actually distributed to the distributee partners. Based on the Managing General Partner's representation that the Partnership will be conducted as described in this Prospectus, in the opinion of Special Counsel it is more likely than not that the Partnership will not be subject to the anti-abuse rule set forth in Treas. Reg. .1.701-2. STATE AND LOCAL TAXES The Partnership will operate in states and localities which impose a tax on its assets or its income, or on each Participant. Deductions which are available to Participants for federal income tax purposes may not be available for state or local income tax purposes. Under Pennsylvania law, the Partnership is required to withhold state income tax at the rate of 2.8% of Partnership income allocable to Participants who are not residents of Pennsylvania. Prospective Participants should consult with their own tax advisors concerning the possible effect of various state and local taxes on their personal tax situations. SEVERANCE, FRANCHISE, AND AD VALOREM (REAL ESTATE) TAXES The Partnership may incur various ad valorem or severance taxes imposed by state or local taxing authorities in the event any Partnership Wells are situated in areas of the Appalachian Basin other than Mercer County, Pennsylvania. Currently, there is no similar tax liability in Mercer County, Pennsylvania. TAX CONSEQUENCES TO QUALIFIED PLANS AND IRAS It is anticipated that the Partnership's net income will be attributable entirely to ownership of Working Interests in the Leases and will constitute unrelated business taxable income upon which a tax may be imposed if received by certain tax-exempt organizations. Quarterly payments of estimated tax on unrelated business taxable income are required. However, an additional specific deduction of $1,000 will generally be allowed. There also may be alternative minimum tax liability for tax preference items. PROSPECTIVE PARTICIPANTS THAT ARE EXEMPT FROM FEDERAL INCOME TAX SHOULD CAREFULLY CONSIDER WHETHER AN INVESTMENT IN THE PARTNERSHIP IS APPROPRIATE AND SHOULD CONSULT WITH THEIR OWN TAX ADVISORS PRIOR TO THE INVESTMENT. (See "Terms of the Offering- Subscriptions by IRAs, Keogh Plans and Other Qualified Plans".) SOCIAL SECURITY BENEFITS AND SELF-EMPLOYMENT TAX A Limited Partner's share of income or loss from the Partnership is excluded from the definition of "net earnings from self-employment." No increased benefits under the Social Security Act will be earned by Limited Partners and if any Limited Partners are currently receiving Social Security benefits, their shares of Partnership taxable income will not be taken into account in determining any reduction in benefits because of "excess earnings." An Investor General Partner's share of income or loss from the Partnership will constitute "net earnings from self-employment" for these purposes. For 1996 the ceiling for social security tax of 12.4% is $62,700 and there is no ceiling for medicare tax of 2.9%. Self-employed individuals can deduct one-half of their self-employment tax. FOREIGN PARTNERS The Partnership will be required to withhold and pay to the IRS tax at the highest rate under the Code applicable to Partnership income allocable to foreign partners, even if no cash distributions are made to such partners. A purchaser of a foreign Partner's Units may be required to withhold a portion of the purchase price and the Managing General Partner may be required to withhold with respect to taxable distributions of real property to a foreign Partner. The withholding requirements described above do not obviate United States (Page 98) tax return filing requirements for foreign Partners. In the event of overwithholding, a foreign Partner must file a United States tax return to obtain a refund. ESTATE AND GIFT TAXATION There is no federal tax on lifetime or testamentary transfers of property between spouses. The gift tax annual exclusion is $10,000 per donee. The maximum estate and gift tax rate is 55% (subject to a 5% surtax on amounts in excess of $10,000,000); and estates of $600,000 or less generally are not subject to federal estate tax. In the event of the death of a Participant, the fair market value of his interest as of the date of death (or as of the alternate valuation date) will be included in his estate for federal estate tax purposes. The decedent's heirs will, for federal income tax purposes, take as their basis for the interest the value as so determined for federal estate tax purposes. CHANGES IN LAW The Partnership and the Participants could be adversely affected by any further changes in tax laws that may result through future Congressional action, Tax Court or other judicial decisions, or interpretations by the IRS. The Managing General Partner cannot predict what, if any, changes in the tax law may become law in the future or even if adopted, would apply to the Partnership. THE FOREGOING ANALYSIS IS NOT INTENDED AS A SUBSTITUTE FOR CAREFUL TAX PLANNING. IT IS NOT POSSIBLE TO PREDICT THE EFFECT OF THE TAX LAWS ON INDIVIDUAL PARTICIPANTS. ACCORDINGLY, EACH PARTICIPANT IS URGED TO SEEK, AND SHOULD DEPEND UPON, THE ADVICE OF HIS OWN TAX ADVISORS WITH RESPECT TO HIS INVESTMENT IN THE PARTNERSHIP WITH SPECIFIC REFERENCE TO HIS OWN TAX SITUATION AND POTENTIAL CHANGES IN THE APPLICABLE LAW. DEFINITIONS TERMS DEFINED As used in this Prospectus, the following terms have the meanings hereinafter set forth: (1) "Administrative Costs" means all customary and routine expenses incurred by the Sponsor for the conduct of Partnership administration, including: legal, finance, accounting, secretarial, travel, office rent, telephone, data processing and other items of a similar nature. No Administrative Costs charged will be duplicated under any other category of expense or cost. No portion of the salaries, benefits, compensation or remuneration of controlling persons of Atlas will be reimbursed by the Partnership as Administrative Costs. Controlling persons include directors, executive officers and those holding five percent or more equity interest in the Managing General Partner or a person having power to direct or cause the direction of the Managing General Partner, whether through the ownership of voting securities, by contract, or otherwise. (2) "Administrator" means the official or agency administering the securities laws of a state. (3) "AEGH" means AEG Holdings, Inc., a Pennsylvania corporation, whose principal executive offices are located at 311 Rouser Road, Moon Township, Pennsylvania 15108. (4) "Affiliate" means with respect to a specific person (a) any person directly or indirectly owning, controlling, or holding with power to vote 10 per cent or more of the outstanding voting securities of such specified person; (b) any person 10 per cent or more of whose outstanding voting securities are directly or indirectly owned, controlled, or held with power to vote, by such specified person; (c) any person directly or indirectly controlling, controlled by, or under common control with such specified person; (d) any officer, director, trustee or partner of such specified person; and (e) if such specified person is an officer, director, trustee or partner, any person for which such person acts in any such capacity. (5) "AIC,Inc." means AIC, Inc., a wholly owned subsidiary of AEGH and the sole shareholder of Atlas, whose principal executive offices are located at 311 Rouser Road, Moon Township, Pennsylvania, 15108. (6) "Agreed Subscription" means that amount so designated on the Subscription Agreement executed by the Participant, or, in the case of the Managing General Partner, its subscription under .3.03(b) and its subsections of the Partnership Agreement. (7) "Assessments" means additional amounts of capital which may be mandatorily required of or paid voluntarily by a Participant beyond his subscription commitment. (8) "Atlas" means Atlas Resources, Inc., a Pennsylvania corporation, whose principal executive offices are located at 311 Rouser Road, Moon Township, Pennsylvania 15108. (Page 99) (9) "Atlas Energy" means Atlas Energy Group, Inc., an Ohio corporation, whose principal executive offices are located at 311 Rouser Road, Moon Township, Pennsylvania 15108. (10) "Capital Account" or "account" means the account established for each party to the Partnership Agreement, maintained as provided in .5.02 and its subsections of the Partnership Agreement. (11) "Capital Contribution" means the amount agreed to be contributed to the Partnership by a party pursuant to ..3.04 and 3.05 and their subsections of the Partnership Agreement. (12) "Carried Interest" means an equity interest in a program issued to a person without consideration, in the form of cash or tangible property, in an amount proportionately equivalent to that received from Participants. (13) "Code" means the Internal Revenue Code of 1986, as amended. (14) "Cost", when used with respect to the sale of property to the Partnership, means (a) the sum of the prices paid by the seller to an unaffiliated person for such property, including bonuses; (b) title insurance or examination costs, brokers' commissions, filing fees, recording costs, transfer taxes, if any, and like charges in connection with the acquisition of such property; (c) a pro rata portion of the seller's actual necessary and reasonable expenses for seismic and geophysical services; and (d) rentals and ad valorem taxes paid by the seller with respect to such property to the date of its transfer to the buyer, interest and points actually incurred on funds used to acquire or maintain such property, and such portion of the seller's reasonable, necessary and actual expenses for geological, engineering, drafting, accounting, legal and other like services allocated to the property cost in conformity with generally accepted accounting principles and industry standards, except for expenses in connection with the past drilling of wells which are not producers of sufficient quantities of oil or gas to make commercially reasonable their continued operations, and provided that the expenses enumerated in this subsection (d) hereof shall have been incurred not more than 36 months prior to the purchase by the Partnership. When used with respect to services, "cost" means the reasonable, necessary and actual expense incurred by the seller on behalf of the Partnership in providing such services, determined in accordance with generally accepted accounting principles. As used elsewhere, "cost" means the price paid by the seller in an arm's-length transaction. (15) "Development Drilling" means drilling a Development Well. (16) "Development Well" means a well drilled within the proved area of an oil or gas reservoir to the depth of a stratigraphic Horizon known to be productive. (17) "Direct Costs" means all actual and necessary costs directly incurred for the benefit of the Partnership and generally attributable to the goods and services provided to the Partnership by parties other than the Sponsor or its Affiliates. Direct Costs shall not include any cost otherwise classified as Organization and Offering Costs, Administrative Costs, Intangible Drilling Costs, Tangible Costs, Operating Costs or costs related to the Leases. Direct Costs may include the cost of services provided by the Sponsor or its Affiliates if such services are provided pursuant to written contracts and in compliance with .4.03(d)(7) of the Partnership Agreement. (18) "Drilling and Operating Agreement" means the proposed Drilling and Operating Agreement between Atlas, Atlas Energy or Atlas Energy Corporation as Operator, and the Partnership as Developer, a copy of the proposed form of which is attached as Exhibit (II) to the Partnership Agreement. (19) "Dry Hole" means a well which is plugged and abandoned with or without a completion attempt because the Operator has determined that it will not be productive of gas and/or oil in commercial quantities. (20) "Exploratory Drilling" means drilling an Exploratory Well. (21) "Exploratory Well" means a well drilled to find commercially productive hydrocarbons in an unproved area, to find a new commercially productive Horizon in a field previously found to be productive of hydrocarbons at another Horizon, or to significantly extend a known prospect. (22) "Farmout" means an agreement whereby the owner of the leasehold or Working Interest agrees to assign his interest in certain specific acreage to the assignees, retaining some interest such as an Overriding Royalty Interest, an oil and gas payment, offset acreage or other type of interest, subject to the drilling of one or more specific wells or other performance as a condition of the assignment. (Page 100) (23) "Final Terminating Event" means any one of the following: (i) the expiration of the fixed term of the Partnership; (ii) the giving of notice to the Participants by the Managing General Partner of its election to terminate the affairs of the Partnership; (iii) the giving of notice by the Participants to the Managing General Partner of their similar election through the affirmative vote of Participants whose Agreed Subscriptions equal a majority of the Partnership Subscription; or (iv) the termination of the Partnership under .708(b)(1)(A) of the Code or the Partnership ceases to be a going concern. (24) "Fracturing" or "Frac" means a treatment to a potentially productive geological formation intended to enhance the ability of oil or gas to migrate through the formation to the well hole. Fracturing may involve the application of hydraulic pressure to the reservoir formation or the use of explosive devices to create or enlarge fractures through which oil or gas may move. (25) "Horizon" means a zone of a particular formation; that part of a formation of sufficient porosity and permeability to form a petroleum reservoir. (26) "Independent Expert" means a person with no material relationship to the Sponsor or its Affiliates who is qualified and who is in the business of rendering opinions regarding the value of oil and gas properties based upon the evaluation of all pertinent economic, financial, geologic and engineering information available to the Sponsor or its Affiliates. (27) "Intangible Drilling Costs" or "Non-Capital Expenditures" means those expenditures associated with property acquisition and the drilling and completion of oil and gas wells that under present law are generally accepted as fully deductible currently for federal income tax purposes; and includes all expenditures made with respect to any well prior to the establishment of production in commercial quantities for wages, fuel, repairs, hauling, supplies and other costs and expenses incident to and necessary for the drilling of such well and the preparation thereof for the production of oil or gas, that are currently deductible pursuant to Section 263(c) of the Code and Treasury Reg. Section 1.612-4, which are generally termed "intangible drilling and development costs," including the expense of plugging and abandoning any well prior to a completion attempt. (28) "Investor General Partners" means the persons signing the Subscription Agreement as Investor General Partners and the Managing General Partner to the extent of any optional subscription under .3.03(b)(2) of the Partnership Agreement. All Investor General Partners will be of the same class and have the same rights. (29) "IRS" means the United States Internal Revenue Service. (30) "Landowner's Royalty Interest" means an interest in production, or the proceeds therefrom, to be received free and clear of all costs of development, operation, or maintenance, reserved by a landowner upon the creation of an oil and gas Lease. (31) "Leases" means full or partial interests in oil and gas leases, oil and gas mineral rights, fee rights, licenses, concessions, or other rights under which the holder is entitled to explore for and produce oil and/or gas, and further includes any contractual rights to acquire any such interest. (32) "Limited Partners" means the persons signing the Subscription Agreement as Limited Partners, the Managing General Partner to the extent of any optional subscription under .3.03(b)(2) of the Partnership Agreement, the Investor General Partners upon the conversion of their Investor General Partner Units to Limited Partner interests pursuant to .6.01 (c) of the Partnership Agreement, and any other persons who are admitted to the Partnership as additional or substituted Limited Partners. All Limited Partners will be of the same class and have the same rights; provided, however, Limited Partners who were formerly Investor General Partners remain liable for Partnership obligations incurred prior to the conversion of their Investor General Partner Units to Limited Partner interests in the Partnership, as set forth in the Partnership Agreement. (33) "Managing General Partner" means Atlas Resources, Inc. or any Person admitted to the Partnership as a general partner other than as an Investor General Partner pursuant to the Partnership Agreement who is designated to exclusively supervise and manage the operations of the Partnership. (34) "MCF" means one thousand cubic feet of natural gas. (35) "Net Revenue Interest" means that percentage of revenues attributable to the oil and gas rights subject to a particular Lease which a party acquiring a Lease is entitled to receive by virtue of its interest therein. (36) "Offering Termination Date" means the date after the minimum Partnership Subscription has been received on which the Managing General Partner determines, in its sole discretion, the Partnership's subscription period is closed and the acceptance of subscriptions ceases, which shall not be later than December 31, 1996. (Page 101) (37) "Operating Costs" means expenditures made and costs incurred in producing and marketing oil or gas from completed wells, including, in addition to labor, fuel, repairs, hauling, materials, supplies, utility charges and other costs incident to or therefrom, ad valorem and severance taxes, insurance and casualty loss expense, and compensation to well operators or others for services rendered in conducting such operations. Subject to the foregoing, Operating Costs also include reworking, workover, subsequent equipping and similar expenses relating to any well. (38) "Operator" means Atlas, as operator of Partnership Wells in Pennsylvania, Atlas Energy as operator of Partnership Wells in Ohio and Atlas, or an Affiliate as operator of Partnership Wells in other areas of the Appalachian Basin (39) "Organization Costs" means all costs of organizing the offering, including, but not limited to, expenses for printing, engraving, mailing, charges of transfer agents, registrars, trustees, escrow holders, depositaries, engineers and other experts, expenses of qualification of the sale of the securities under Federal and State law, including taxes and fees, accountants' and attorneys' fees and other front-end fees. (40) "Organization and Offering Costs" means all costs of organizing and selling the offering including, but not limited to, total underwriting and brokerage discounts and commissions (including fees of the underwriters' attorneys), expenses for printing, engraving, mailing, salaries of employees while engaged in sales activities, charges of transfer agents, registrars, trustees, escrow holders, depositaries, engineers and other experts, expenses of qualification of the sale of the securities under federal and state law, including taxes and fees, accountants' and attorneys' fees and other front-end fees. (41) "Overriding Royalty Interest" means an interest in the oil and gas produced pursuant to a specified oil and gas lease or leases, or the proceeds from the sale thereof, carved out of the Working Interest, to be received free and clear of all costs of development, operation, or maintenance. (42) "Participants" means the Managing General Partner to the extent of its optional subscription under .3.03(b)(2) of the Partnership Agreement, the Limited Partners and the Investor General Partners. (43) "Partners" means the Managing General Partner, the Investor General Partners and the Limited Partners. (44) "Partnership" means Atlas-Energy for the Nineties-Public #5 Ltd., the Pennsylvania limited partnership formed pursuant to the Partnership Agreement. (45) "Partnership Agreement" means the Amended and Restated Certificate and Agreement of Limited Partnership, including all Exhibits thereto, as set forth in Exhibit (A) to this Prospectus. (46) "Partnership Net Production Revenues" means gross revenues after deduction of the related Operating Costs, Direct Costs, Administrative Costs and all other Partnership costs not specifically allocated. (47) "Partnership Subscription" means the aggregate Agreed Subscriptions of the parties to the Partnership Agreement; provided, however, with respect to Participant voting rights under the Partnership Agreement, the term "Partnership Subscription" shall be deemed not to include the Managing General Partner's required subscription under .3.03(b)(1) of the Partnership Agreement. (48) "Partnership Well" means a well, some portion of the revenues from which is received by the Partnership. (49) "Person" means a natural person, partnership, corporation, association, trust or other legal entity. (50) "Program" means one or more limited or general partnerships or other investment vehicles formed, or to be formed, for the primary purpose of exploring for oil, gas and other hydrocarbon substances or investing in or holding any property interests which permit the exploration for or production of hydrocarbons or the receipt of such production or the proceeds thereof. (51) "Prospect" means an area covering lands which are believed by the Managing General Partner to contain subsurface structural or stratigraphic conditions making it susceptible to the accumulations of hydrocarbons in commercially productive quantities at one or more Horizons. The area, which may be different for different Horizons, shall be designated by the Managing General Partner in writing prior to the conduct of Partnership operations and shall be enlarged or contracted from time to time on the basis of subsequently acquired information to define the anticipated limits of the associated hydrocarbon reserves and to include all acreage encompassed therein. A "Prospect" with respect to a particular Horizon may be limited to the minimum area permitted by state law or local practice, whichever is applicable, to protect against drainage from adjacent wells if the well to be drilled by the Partnership is to a Horizon containing Proved Reserves. Subject to the foregoing sentence, with respect to the Clinton/Medina geological formation in Ohio and Pennsylvania "Prospect" shall be deemed the drilling or spacing unit. (Page 101) (52) "Proved Reserves" means the estimated quantities of crude oil, natural gas, and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, i.e., prices and costs as of the date the estimate is made. Prices include consideration of changes in existing prices provided only by contractual arrangements, but not on escalations based upon future conditions. (i) Reservoirs are considered proved if economic producibility is supported by either actual production or conclusive formation test. The area of a reservoir considered proved includes (a) that portion delineated by drilling and defined by gas-oil and/or oil-water contacts, if any; and (b) the immediately adjoining portions not yet drilled, but which can be reasonably judged as economically productive on the basis of available geological and engineering data. In the absence of information on fluid contacts, the lowest known structural occurrence of hydrocarbons controls the lower proved limit of the reservoir. (ii) Reserves which can be produced economically through application of improved recovery techniques (such as fluid injection) are included in the "proved" classification when successful testing by a pilot project, or the operation of an installed program in the reservoir, provides support for the engineering analysis on which the project or program was based. (iii) Estimates of proved reserves do not include the following: (a) oil that may become available from known reservoirs but is classified separately as "indicated additional reserves"; (b) crude oil, natural gas, and natural gas liquids, the recovery of which is subject to reasonable doubt because of uncertainty as to geology, reservoir characteristics, or economic factors; (c) crude oil, natural gas, and natural gas liquids, that may occur in undrilled prospects; and (d) crude oil, natural gas, and natural gas liquids, that may be recovered from oil shales, coal, gilsonite and other such sources. (53) "Proved Developed Oil and Gas Reserves" means reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Additional oil and gas expected to be obtained through the application of fluid injection or other improved recovery techniques for supplementing the natural forces and mechanisms of primary recovery should be included as "proved developed reserves" only after testing by a pilot project or after the operation of an installed program has confirmed through production response that increased recovery will be achieved. (54) "Proved Undeveloped Reserves" means reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion. Reserves on undrilled acreage shall be limited to those drilling units offsetting productive units that are reasonably certain of production when drilled. Proved reserves for other undrilled units can be claimed only where it can be demonstrated with certainty that there is continuity of production from the existing productive formation. Under no circumstances should estimates for proved undeveloped reserves be attributable to any acreage for which an application of fluid injection or other improved recovery technique is contemplated, unless such techniques have been proved effective by actual tests in the area and in the same reservoir. (55) "Roll-Up" means a transaction involving the acquisition, merger, conversion or consolidation, either directly or indirectly, of the Partnership and the issuance of securities of a Roll-Up Entity. Such term does not include: (a) a transaction involving securities of the Partnership that have been listed for at least twelve months on a national exchange or traded through the National Association of Securities Dealers Automated Quotation National Market System; or (b) a transaction involving the conversion to corporate, trust or association form of only the Partnership if, as a consequence of the transaction, there will be no significant adverse change in any of the following: voting rights, the term of existence of the Partnership, the Managing General Partner's compensation and the Partnership's investment objectives. (56) "Roll-Up Entity" means a partnership, trust, corporation or other entity that would be created or survive after the successful completion of a proposed roll-up transaction. (57) "Sales Commissions" means all underwriting and brokerage discounts and commissions incurred in the sale of Units in the Partnership payable to registered broker-dealers, excluding reimbursement for bona fide accountable due diligence expenses and wholesaling fees. (58) "Sponsor" means any person directly or indirectly instrumental in organizing, wholly or in part, a program or any person who will manage or is entitled to manage or participate in the management or control of a program. "Sponsor" includes the managing and controlling general partner(s) and any other person who actually controls or selects the person who controls 25% or more of the exploratory, development or producing activities of the program, or any segment thereof, even if that person has not entered into a contract at the time of formation of the program. "Sponsor" does not include wholly independent third parties such as attorneys, accountants, and underwriters whose only compensation is for professional services rendered in connection with the offering of units. Whenever the context so requires, the term "sponsor" shall be deemed to include its affiliates. (Page 103) (59) "Spud" means with respect to any well the commencement of the first boring of the hole for the well for which a "spudding bit" may be used, or such other meaning as is generally accepted in the oil and gas industry. (60) "Shut-In" means temporary cessation of operation of a producing well; such as down time for repair and maintenance or due to the lack of market for production or as a result of a decrease in the price of gas the Managing General Partner has ceased producing all or a portion of the gas from the well. (61) "Subscription Agreement" means an execution and subscription instrument in the form attached as Exhibit (I-B) to the Partnership Agreement. (62) "Subordinated Interest" means an equity interest in a program issued to a person, without payment of full consideration, after the attainment of certain specified performance by the program. (63) "Tangible Costs"or "Capital Expenditures" means those costs associated with the drilling and completion of oil and gas wells which are generally accepted as capital expenditures pursuant to the provisions of the Internal Revenue Code; and includes all costs of equipment, parts and items of hardware used in drilling and completing a well, and those items necessary to deliver acceptable oil and gas production to purchasers to the extent installed downstream from the wellhead of any well and which are required to be capitalized pursuant to applicable provisions of the Code and regulations promulgated thereunder. (64) "Tax Matters Partner" means the Managing General Partner. (65) "Units" or "Units of Participation" means the Limited Partner interests and the Investor General Partner interests purchased by Participants in the Partnership under the provisions of .3.03 and its subsections of the Partnership Agreement. (66) "Working Interest" means an interest in an oil and gas leasehold which is subject to some portion of the Cost of development, operation, or maintenance. SUMMARY OF PARTNERSHIP AGREEMENT NOTE: THE RIGHTS AND OBLIGATIONS OF THE MANAGING GENERAL PARTNER AND THE PARTICIPANTS ARE GOVERNED BY THE PARTNERSHIP AGREEMENT, A COPY OF WHICH IS ATTACHED AS EXHIBIT (A) TO THIS PROSPECTUS. NO PROSPECTIVE PARTICIPANT SHOULD SUBSCRIBE TO THE PARTNERSHIP WITHOUT FIRST THOROUGHLY REVIEWING SUCH PARTNERSHIP AGREEMENT. THE FOLLOWING IS A SUMMARY OF CERTAIN PROVISIONS IN THE PARTNERSHIP AGREEMENT NOT COVERED ELSEWHERE IN THIS PROSPECTUS. RESPONSIBILITY OF MANAGING GENERAL PARTNER The Managing General Partner will have the exclusive management and control of all aspects of the business of the Partnership. (See .4.02(b) of the Partnership Agreement.) No Participant, including the Investor General Partners, will have any voice in the day-to-day business operations of the Partnership. (See .4.03(a)(2) of the Partnership Agreement.) The Managing General Partner is authorized to delegate and subcontract its duties under the Partnership Agreement to others, including entities related to it. (See .4.02(c)(3)(a) of the Partnership Agreement.) LIABILITIES OF GENERAL PARTNERS, INCLUDING INVESTOR GENERAL PARTNERS General Partners, including Investor General Partners, will not be protected by limited liability for Partnership activities. The Investor General Partners will be jointly and severally liable for all obligations and liabilities to creditors and claimants, whether arising out of contract or tort, in the conduct of Partnership operations. (See .4.05(b) of the Partnership Agreement.) If an Investor General Partner is called upon to pay an additional Capital Contribution to the Partnership and fails to pay such required Capital Contribution when due, the remaining Investor General Partners, pro rata, must pay such defaulting Investor General Partner's share of Partnership liabilities and obligations. In that event, the remaining Investor General Partners will have a first and preferred lien on the defaulting Investor General Partner's interest in the Partnership to secure payment of the amount in default plus interest at the legal rate; will be entitled to receive 100% of the defaulting Investor General Partner's cash distributions directly from the Partnership until the amount in default is recovered in full plus interest at the legal rate; and may commence legal action to collect the amount due plus interest at the legal rate. (See .3.05(b) of the Partnership Agreement.) The Managing General Partner maintains general liability insurance. (See .4.02(c)(1)(vi) of the Partnership Agreement.) In addition, the Managing General Partner and AEGH have agreed to indemnify each of the Investor General Partners for obligations related to (Page 104) casualty and business losses which exceed available insurance coverage and Partnership net assets. (See .4.05(b) of the Partnership Agreement.) LIABILITY OF LIMITED PARTNERS The Partnership will be governed by the Pennsylvania Revised Uniform Limited Partnership Act under which a Limited Partner will not be liable to third parties for the obligations of the Partnership unless he is also an Investor General Partner or, in addition to the exercise of his rights and powers as a Limited Partner, such person takes part in the control of the business of the Partnership. (See .4.05(c) of the Partnership Agreement.) Under Pennsylvania law, the Limited Partners should have no liability to the Partnership in excess of their respective Capital Contributions to the Partnership and their share of the Partnership's assets and undistributed income, except generally to the extent of (i) a failure to make a required Capital Contribution, and (ii) for a period of two years, any Capital Contributions "wrongfully" returned to a Limited Partner in violation of the Partnership Agreement or Pennsylvania law, with interest thereon including but not limited to any distribution to the Limited Partners to the extent that, after giving effect to such distribution, all liabilities of the Partnership, other than liabilities to the Participants on account of their contributions and to the Managing General Partner, exceed Partnership assets. Participants will not be obligated to restore any negative balances which exist in their Capital Accounts after liquidation of their interests in the Partnership. (See .3.04(a) of the Partnership Agreement.) AMENDMENTS Amendments to the Partnership Agreement may be proposed by the Managing General Partner or by Participants whose Agreed Subscriptions equal 10% or more of the Partnership Subscription and adopted upon the affirmative vote of Participants whose Agreed Subscriptions equal a majority of the Partnership Subscription. The Partnership Agreement may also be amended by the Managing General Partner for certain purposes, but no amendment materially and adversely affecting the Participants can be made without the consent of the Participants who are so affected. In addition, the Managing General Partner may not, without the affirmative vote of Participants whose Agreed Subscriptions equal a majority of the Partnership Subscription, change the investment and business purpose of the Partnership or cause the Partnership to engage in activities outside the stated business purposes of the Partnership through joint ventures with other entities. (See ..1.04 and 8.05 of the Partnership Agreement.) NOTICE Notice to Participants runs from the date of mailing and is binding on the Participants irrespective of whether or not the notice is in fact received by them. The notice periods are frequently quite short (a minimum of 15 business days)and apply to matters which may seriously affect the Participants' rights. Except where the Partnership Agreement expressly requires affirmative approval, any Participant who fails to timely respond to a request by the Managing General Partner for approval of or concurrence in a proposed action will conclusively be deemed to have approved such action. (See ..8.01(d) and 8.01(e) of the Partnership Agreement.) VOTING RIGHTS Generally, participants will be entitled to vote with respect to any and all Partnership matters at any time a meeting of the Partners is called by the Managing General Partner or Participants owning 10% or more of the Partnership Subscription. Provided, however, except for the special voting rights discussed below, the exercise by Limited Partners of these voting rights is subject to the prior legal determination that the limited liability of the Limited Partners will not be adversely affected, unless in the opinion of counsel to the Partnership, such legal determination is not necessary to maintain the limited liability of the Limited Partners. The Investor General Partners may exercise these rights, whether or not the Limited Partners can participate in the vote, if they represent the requisite percentage of the Participants necessary to take such action. (See 4.03(c) of the Partnership Agreement.) Each Unit is entitled to one vote on all matters; each fractional Unit is entitled to that fraction of one vote equal to the fractional interest in the Unit. In addition to the foregoing, at any time upon the request of Participants whose Agreed Subscriptions equal 10% or more of the Partnership Subscription. Participants whose Agreed Subscriptions equal a majority of the Partnership Subscription may, without the concurrence of the Managing General Partner or its Affiliates, vote without a meeting to: (1) amend the Partnership Agreement; provided however, any such amendment may not increase the duties or liabilities of any Participant or the Managing General Partner or increase or decrease the profit or loss sharing or required Capital Contribution of any Participant or the Managing General Partner without the approval of such Participant or the Managing General Partner. Furthermore, any such amendment may not affect the classification of Partnership income and loss for federal income tax purposes without the unanimous approval of all Participants; (2) dissolve the Partnership; (3) remove the Managing General Partner and elect a new Managing General Partner; (4) elect a new Managing General Partner if the Managing General Partner elects to withdraw from the Partnership; (5) remove the Operator and elect a new Operator; (6) approve or disapprove the sale of all or substantially all of the assets of the Partnership; and (7) cancel any contract for services with the Managing General Partner, or the Operator or their Affiliates without penalty upon 60 days notice. The Managing General Partner and its officers and directors and Affiliates may also subscribe for Units in the Partnership on the same basis as Limited Partners or Investor General Partners, except that they are not required to pay Sales Commissions, due diligence reimbursements or wholesaling fees. Also, the Managing General Partner may buy up to 10% of the Units, which will not be applied towards the minimum Partnership Subscription required for the Partnership to begin operations. Subject to the foregoing, any subscription by the Managing General Partner or its officers, directors or Affiliates will dilute the voting rights of the Participants. (Page 105) However, any Units owned by the Managing General Partner or its Affiliates will not be included with respect to the issues set forth in (3) and (5) above, and any other transaction between the Managing General Partner or its Affiliates and the Partnership. In determining the requisite percentage in interest of Units necessary to approve any Partnership matter on which the Managing General Partner and its Affiliates may not vote or consent, any Units owned by the Managing General Partner and its Affiliates shall not be included. (See 4.03(c)(1) of the Partnership Agreement.) ACCESS TO RECORDS Participants will have access to all records of the Partnership including a list of the Participants, after adequate notice, at any reasonable time, except that logs, well reports and other drilling and operating data may be kept confidential for reasonable periods of time. A Participant's ability to obtain the Participant List is subject to additional requirements set forth in the Partnership Agreement. (See ..4.03(b)(5) and 4.03(b)(6) of the Partnership Agreement.) WITHDRAWAL OF MANAGING GENERAL PARTNER At any time commencing ten years after the Offering Termination Date and the Partnership's primary drilling activities, the Managing General Partner may voluntarily withdraw as Managing General Partner for whatever reason upon giving 120 days' written notice of withdrawal to the Participants. The withdrawing Managing General Partner is not required to provide a substitute Managing General Partner. However, a new Managing General Partner may be substituted by the affirmative vote of Participants whose Agreed Subscriptions equal a majority of the Partnership Subscription. If Atlas would withdraw as Managing General Partner of the Partnership and the Participants failed to elect to continue the Partnership and to designate a substituted Managing General Partner of the Partnership, the Partnership would terminate and dissolve and adverse tax and other consequences could result. If the Partnership was dissolved the Participants may receive a distribution of direct property interests. As joint interest owners, Limited Partners would have joint and several liability for the obligations or liabilities arising out of joint owner operations and might find it desirable to obtain insurance protection or dispose of the property interests, which may be difficult. To reduce this risk the Managing General Partner will attempt upon liquidation and dissolution to use its best efforts to sell the Partnership's properties or to cause some type of entity which would preserve the limited liability of the former Limited Partners, such as a liquidating trust, to be established to hold the Partnership's properties. However, even if the properties were transferred to a liquidating trust upon dissolution of the Partnership, it might be difficult for the liquidating trust to deal with such assets and realize their full value. For example, to replace the management provided by the Managing General Partner, the trustee of the liquidating trust would need the services of professional operators. Further, after dissolution and the completion of payments to third party creditors, the Managing General Partner has priority in liquidation for any claims of indebtedness before the Participants. Such distributions may also have adverse income tax consequences to the Participants. (See Risk Factors - Special Risks of the Partnership - Unlimited Liability of Investor General Partners" and "Tax Aspects - Disposition of Partnership Interests".) The Managing General Partner may not partially withdraw a property interest held by the Partnership in the form of a Working Interest in the Partnership Wells equal to or less than its respective interest in the revenues of the Partnership unless such withdrawal is necessary to satisfy the bona fide request of its creditors or approved by Participants whose Agreed Subscriptions equal a majority of the Partnership Subscription. (See 4.04(a)(3) and 6.03 of the Partnership Agreement.) REMOVAL OF OPERATOR The Operator may be replaced at any time upon 60 days advance written notice to the outgoing Operator by the Managing General Partner acting on behalf of the Partnership upon the affirmative vote of Participants whose Agreed Subscriptions equal a majority of the Partnership Subscription. (See .4.04(a)(4) of the Partnership Agreement and "Summary of Drilling and Operating Agreement".) TERM AND DISSOLUTION The Partnership will continue in existence for 50 years unless earlier terminated by certain Final Terminating Events, including an election by the Managing General Partner or the affirmative vote of Participants whose Agreed Subscriptions equal a majority of the Partnership Subscription. The Partnership may terminate on the occurrence of various events, other than a Final Terminating Event, but a successor limited partnership will automatically be formed under those circumstances. (See ..7.01 and 7.02 of the Partnership Agreement.) SUMMARY OF DRILLING AND OPERATING AGREEMENT Atlas will serve as the Operator pursuant to the Drilling and Operating Agreement, Exhibit (II) to the Partnership Agreement, for wells situated in Pennsylvania, Atlas Energy will serve as the Operator for any wells situated in Ohio and Atlas, or an Affiliate will serve as the Operator for any wells situated in other areas of the Appalachian Basin. The Operator may be replaced at any time upon sixty days advance written notice to the outgoing Operator by the Managing General Partner acting on behalf of the Partnership upon the affirmative vote of Participants whose Agreed Subscriptions equal a majority of the Partnership Subscription. The Drilling and Operating Agreement provides a number of material provisions, including, without limitation, those set forth below. (1) The right of the Operator to resign after five years. (Page 106) (2) The right of the Operator of a Partnership well beginning three years after the well is placed into production to retain $200 per month to cover future plugging and abandonment of such well, although Atlas historically has never done this after only three years. (3) The grant of a first lien and security interest in the wells and related production to secure payment of amounts due to the Operator by the Partnership. (4) The prescribed insurance coverage to be maintained by the Operator. (5) Limitations on the Operator's authority to incur extraordinary costs with respect to producing wells in excess of $5,000 per well. (6) Restrictions on the Partnership's ability to transfer its interest in fewer than all wells, unless such transfer is of an equal undivided interest in all wells. (7) The limitation of the Operator's liability except for violations of law, negligence or misconduct by it, its employees, agents or subcontractors and breach of the Drilling and Operating Agreement. (8) The excuse for nonperformance by the Operator due to force majeure. The foregoing is only a summary of some of the many provisions of the proposed form of Drilling and Operating Agreement, and is qualified in its entirety by reference to such form attached to the Partnership Agreement as Exhibit (II). No prospective Participant should subscribe to the Partnership without first thoroughly reviewing the Drilling and Operating Agreement. REPORTS TO INVESTORS The Partnership will provide the reports set forth below to investors and to the state securities commissions which request the reports. (1) Commencing with the 1996 calendar year, the Partnership will provide each Participant an annual report within 120 days after the close of the calendar year, and commencing with the 1997 calendar year, a report within 75 days after the end of the first six months of its calendar year, containing, except as otherwise indicated, at least the following information: (a) Audited financial statements of the Partnership, including a balance sheet and statements of income, cash flow and Partners' equity prepared in accordance with generally accepted accounting principles. Semiannual reports need not be audited. (See .4.03(b)(1)(a) of the Partnership Agreement.) (b) A summary of the total fees and compensation paid by the Partnership to the Managing General Partner, the Operator and their Affiliates. In addition, Participants shall be provided the percentage that the annual unaccountable, fixed payment reimbursements for Administrative Costs bears to annual Partnership revenues. (See .4.03(b)(1)(b) of the Partnership Agreement.) (c) A description of each Prospect owned by the Partnership, including the Cost, location, number of acres and the Working Interest except succeeding reports need contain only material changes, if any. (See .4.03(b)(1)(c) of the Partnership Agreement.) (d) A list of the wells drilled or abandoned by the Partnership (indicating whether each of such wells has or has not been completed), and a statement of the Cost of each well completed or abandoned. (See .4.03(b)(1)(d) of the Partnership Agreement.) (e) A description of all farmins and joint ventures. (See .4.03(b)(1)(e) of the Partnership Agreement.) (f) A schedule reflecting the total Partnership costs, the costs paid by the Managing General Partner and the costs paid by the Participants, the total Partnership revenues, the revenues received or credited to the Managing General Partner and the revenues received or credited to the Participants. (See .4.03(b)(1)(f) of the Partnership Agreement.) (2) The Partnership will, within 75 days after the end of each fiscal year, transmit to each Partner such information as may be needed to enable such Partner to file his federal and state income tax returns. (See .4.03(b)(2) of the Partnership Agreement.) (3) Beginning January 1, 1998, and every year thereafter, Atlas shall provide a computation of the total oil and gas Proved Reserves of the Partnership and the dollar value thereof. The reserve computations shall be based upon engineering reports prepared by the Partnership and reviewed by an Independent Expert. (See .4.03(b)(3) of the Partnership Agreement.) (4) The cost of all such reports described above will be paid by the Partnership as Direct Costs. (See .4.03(b)(4) of the Partnership Agreement.) (Page 107) REPURCHASE OBLIGATION Beginning in 2000, Participants may present their interests for purchase by the Managing General Partner but are not obligated to do so. The Managing General Partner is obligated to purchase up to 5% of the Units in each calendar year unless the Managing General Partner determines, in its sole discretion, that it does not have the necessary cash flow or it is unable to borrow funds for such purpose on terms it deems reasonable, in which case the Managing General Partner may suspend its repurchase obligation by so notifying the Participants. Following such notice, if such notice is given, the Managing General Partner will not be contractually obligated to purchase any interests presented for repurchase. In addition, the Managing General Partner's repurchase of Units may be conditioned, in the Managing General Partner's sole discretion, on the receipt of an opinion of counsel that such transfers will not cause the Partnership to be treated as a "publicly traded partnership"under the Code The Managing General Partner will make a written offer to repurchase a Participant's interest in cash in every year beginning in 2000 within 120 days of the Partnership reserve report reviewed by an Independent Expert (the "Reserve Report") discussed below. A Participant may accept the repurchase offer by a written acceptance; however, the Participant is not obligated to accept such repurchase offer. No presentment will be considered effective until after the payment has been made to the Participant in cash. In addition, in accordance with Treas. Reg. .1.7704-1(f), no repurchase shall occur until at least 60 calendar days after the Participant notifies the Partnership in writing of the Participant's intention to exercise the repurchase right. The Managing General Partner will not purchase less than one Unit of a Participant's interest unless such lesser amount represents the entire amount of the Participant's interest. If less than all interests presented at any time are to be purchased, the Participants whose interests are to be purchased will be selected by lot and in any calendar year the Managing General Partner will not purchase more than 5% of the Units. The Managing General Partner may waive these limitations in its sole discretion, other than the limitations on its purchasing more than 5% of the Units in any calendar year. The Managing General Partner's obligation to purchase interests presented for purchase may be discharged for the benefit of the Managing General Partner by a third party or an Affiliate. The interests of the selling Participant will be transferred to the party who pays for it. A selling Participant will be required to deliver an executed assignment of his interests, together with such other documentation as the Managing General Partner may reasonably request. The amount attributable to Partnership reserves will be determined based upon the last Reserve Report. Beginning in 1998 and every year thereafter, the reserve computations will be based on an engineering report prepared by the Partnership and reviewed by an Independent Expert. The Participants will be provided a computation of the total oil and gas Proved Reserves of the Partnership and the present worth thereof as determined by the Partnership and reviewed by an Independent Expert. In making this estimate of the present worth of future net revenues, the Partnership and the Independent Expert will employ a discount rate equal to 10%, use a constant price for the oil and base the price of gas upon the existing gas contract(s) at the time of the repurchase. The Reserve Report must be within 120 days of the commencement of the repurchase offer. The purchase price to be paid to the Participant will be based upon the Participant's share of the net assets and liabilities of the Partnership and allocated pro rata to each Participant based upon his Agreed Subscription. The purchase price will include the sum of the following items: (i) an amount based on 70% of the present worth of future net revenues from the Partnership's Proved Reserves, determined as described above, (ii) Partnership cash on hand, (iii) prepaid expenses and accounts receivable of the Partnership, less a reasonable amount for doubtful accounts, and (iv) the estimated market value of all assets of the Partnership not separately specified above, determined in accordance with standard industry valuation procedures. There will be deducted from the foregoing sum the following items: (i) an amount equal to all Partnership debts, obligations and other liabilities, including accrued expenses, and (ii) any distributions made to the Participants between the date of the request and the actual payment; provided, however, that if any cash distributed was derived from the sale, subsequent to the request, of oil, gas or other mineral production or of a producing property owned by the Partnership, for purposes of determining the reduction of the purchase price, such distributions shall be discounted at the same rate used to take into account the risk factors employed to determine the present worth of the Partnership's Proved Reserves (see above). The purchase price may be further adjusted by the Managing General Partner for estimated changes therein from the date of such report to the date of payment of the purchase price to the Participants: (i) by reason of production or sales of, or additions to, reserves and lease and well equipment, sale or abandonment of leases, and similar matters occurring prior to payment of the purchase price to the selling Participant, and (ii) by reason of any of the following occurring prior to payment of the purchase price to the selling Participant: changes in well performance, increases or decreases in the market price of oil, gas or other minerals, revision of regulations relating to the importing of hydrocarbons, changes in income, ad valorem and other tax laws (e.g., material variations in the provisions for depletion) and similar matters. Because of the difficulty in accurately estimating oil and gas reserves, the purchase price may not reflect the full value of the Partnership property to which it relates. Such estimates are merely appraisals of value and may not correspond to realizable value. (Page 108) There can be no assurance that the revenues received by the Participant prior to the repurchase offer and the purchase price paid for the interests will be equal to the original price paid for such interests. The Participants are not obligated to tender their Units for repurchase and a Participant should recognize that he may realize a greater return if he retains rather than sells the Units as provided herein. The Managing General Partner has and will incur similar presentment obligations in connection with other oil and gas programs which it or its Affiliates may sponsor. There can be no assurance that the Managing General Partner will have any funds available to repurchase any interests presented. Also, the sale of interests pursuant to the Managing General Partner's repurchase obligation will be a taxable event for the Participants, and gain or loss generally will be recognized for federal income tax purposes. (See "Tax Aspects - Disposition of Partnership Interests".) TRANSFERABILITY OF UNITS IN GENERAL Transferability of the Units is restricted. The restrictions on transferability are as follows: (i) no sale, exchange, transfer or assignment may be made if it would, in the opinion of counsel for the Partnership, result in the termination of the Partnership within the meaning of Section 708 of the Code, or would result in materially adverse tax consequences to the Partnership or the Partners; and (ii) no sale, assignment, pledge, hypothecation or transfer of a Partnership interest other than by operation of law may be made in the absence of an effective registration of the Units under the Securities Act of 1933, as amended, and qualification under applicable state securities law or an opinion of counsel acceptable to the Managing General Partner that such registration and qualification are not required. The Managing General Partner and the Partnership have no obligation to register the Units for resale by any Participant. Subject to the foregoing and to the consent of the Managing General Partner the Partnership will recognize the assignment of one or more whole Units unless the Participant owns less than a whole Unit, in which case his entire fractional interest must be assigned. The Managing General Partner may delay the recognition of the assignment until the last day of the calendar month in which it is made. Such assignment must be properly executed by the assignor and assignee on a form satisfactory to the Managing General Partner and its terms must not contravene those of the Partnership Agreement. An assignee of Units only has the right to receive all or part of the share of profit, loss, income, gain, cash distributions or return of capital to which the assignor of the Units would otherwise be entitled. The Costs associated with a transfer or assignment are to be borne by the assignor Partner. An assignee may become a substituted Limited Partner or Investor General Partner only upon meeting certain further conditions, which include: (i) the assignor gives the assignee such right; (ii) the Managing General Partner consents to such substitution, which consent shall be in the Managing General Partner's absolute discretion; (iii) the assignee pays to the Partnership all costs and expenses incurred in connection with such substitution; and (iv) the assignee executes and delivers such instruments, in form and substance satisfactory to the Managing General Partner, necessary or desirable to effect such substitution and to confirm the agreement of the assignee to be bound by all terms and provisions of the Partnership Agreement. A substitute Limited Partner or Investor General Partner is entitled to all of the rights attributable to full ownership of the assigned Units, including the right to vote. The Partnership will amend its records at least once each calendar year to effect the substitution of substituted Participants. Any transfer permitted where the assignee does not become a substituted Limited Partner or Investor General Partner will be effective as of midnight of the last day of the calendar month in which it is made, or, at the Managing General Partner's election, 7:00 A.M. of the following day. CONVERSION OF UNITS BY INVESTOR GENERAL PARTNERS The Investor General Partners will have their Units automatically converted into Limited Partner interests and thereafter become Limited Partners of the Partnership after substantially all of the Partnership Wells have been drilled and completed. (See "Summary of the Offering - Actions to be Taken by Managing General Partner to Reduce Risks of Additional Payments by Investor General Partners".) PLAN OF DISTRIBUTION COMMISSIONS The Units will be offered by registered broker-dealers which are members of the NASD on a "best efforts" basis. (Best efforts means that the broker-dealer will not guarantee the sale of a certain amount of Units.) The broker-dealers will receive a 7.5% Sales Commission and will be entitled to reimbursement of their bona fide accountable due diligence expenses of .5% on each Agreed Subscription. In addition, Atlas has engaged three wholesalers who will be compensated in an amount not to exceed 2.5% of Agreed Subscriptions obtained through such wholesalers' efforts. The offering will be made in compliance with Rule 2810 of the NASD (Page 109) Conduct Rules and all compensation to broker-dealers and wholesalers, regardless of the source, will be limited to 10% of the gross proceeds of the offering, plus the reimbursement for bona fide accountable due diligence expenses of .5% on each Agreed Subscription. All Sales Commissions, due diligence reimbursements and wholesaling fees will be aggregated and paid by the Managing General Partner as a part of Organization and Offering Costs and will not be deducted from subscription proceeds. Notwithstanding, the broker-dealers and officers and directors of the Managing General Partner may purchase Units in the offering on the same terms and conditions as other investors net of Sales Commissions, due diligence reimbursements and wholesaling fees. Any Units purchased by the Managing General Partner and its Affiliates will be held for investment and not for resale. Subject to the receipt of the minimum Partnership Subscription and the checks having cleared the banking system, Sales Commissions, accountable due diligence reimbursements and wholesaling fees will be paid to the broker-dealers approximately every two weeks until the Offering Termination Date. (See "Terms of the Offering - Partnership Closing and Escrow".) INDEMNIFICATION The broker-dealers and wholesalers may be deemed underwriters, as that term is defined in the Securities Act of 1933, to the extent of their participation in the distribution and the compensation described above may be deemed underwriting compensation. It is anticipated that the Managing General Partner and each broker-dealer will agree to indemnify each other against certain liabilities, including liabilities under the Securities Act of 1933. SALES MATERIAL The Managing General Partner will utilize sales material in addition to the Prospectus in connection with the offering of the Units. The sales material will consist of a brochure entitled "Atlas-Energy for the Nineties-Public #5 Ltd." and Atlas Energy Group, Inc.'s corporate profile. (See "Management".) The Managing General Partner has not authorized the use of other sales material and the offering of Units is made only by means of this Prospectus. Sales material must be preceded or accompanied by this Prospectus. Although the information contained in the sales material does not conflict with any of the information set forth herein, such material does not purport to be complete. Sales material should not be considered a part of or incorporated into this Prospectus or the Registration Statement of which this Prospectus is a part. ATLAS ALSO HAS NOT AUTHORIZED ANY PERSON TO MAKE ANY REPRESENTATION OR STATEMENT TO BROKER-DEALERS, CONSULTANTS, ANY PROSPECTIVE SUBSCRIBER OR ANY OTHER PERSON WHICH IS NOT CONSISTENT WITH THIS PROSPECTUS. ACCORDINGLY, PROSPECTIVE SUBSCRIBERS SHOULD NOT BASE ANY INVESTMENT DECISION ON ANY SUCH REPRESENTATION BY ANY PERSON. LEGAL OPINIONS Kunzman & Bollinger, Inc., has issued its opinion to the Managing General Partner regarding the validity and due issuance of the Units offered hereby and its opinion on material tax consequences to individual investors in the Partnership, including an opinion that, under current federal income tax law, it is more likely than not that the Partnership will be classified as a partnership for federal income tax purposes and not as an association taxable as a corporation. Notwithstanding, the factual statements herein are those of the Managing General Partner, and counsel has not given any opinions with respect to any of the tax or other legal aspects of this offering except as expressly set forth above. EXPERTS The financial statements included in this Prospectus for the Partnership, AEGH and subsidiaries as of July 31, 1995 and 1994, and for Atlas as of July 31, 1995 and 1994, have been audited by McLaughlin & Courson, as of the date indicated in their reports thereon which appear elsewhere herein. The financial statements have been included in reliance on their reports given on their authority as experts in auditing and accounting. The geological report of United Energy Development Consultants, Inc., which is not affiliated with Atlas and its Affiliates, appearing in "Proposed Activities - Information Regarding Currently Proposed Prospects" has been included herein in reliance upon the authority of United Energy Development Consultants, Inc. as an expert with respect to the matters covered by such report and in the giving of such report. (Page 110) LITIGATION The Managing General Partner knows of no litigation pending or threatened to which the Managing General Partner or the Partnership is subject or may be a party, which it believes would have a material adverse effect upon the Partnership or its business, and no such proceedings are known to be contemplated by governmental authorities or other parties. Notwithstanding, on November 22, 1995, Winston Management Services Corporation ("Winston") and Professional Planning & Technologies, Inc. ("PPT") filed a complaint in the United States District Court for the District of Rhode Island against Atlas Resources, Inc., Atlas Energy Group, Inc., and others. The gist of the complaint is for the alleged breach of contract relating to the interpretation of broker- dealer agreements entered into between Winston and PPT and Atlas and Atlas Energy for the marketing of interest in limited partnerships in 1987, 1988, 1989 and 1990. The complaint seeks compensatory damages in an unspecified amount in excess of $50,000 plus an unspecified amount of punitive damages together with interest and costs of the lawsuit. Atlas believes the lawsuit is without merit and intends to fight it vigorously. ADDITIONAL INFORMATION A Registration Statement (together with amendments thereto, hereinafter referred to as the "Registration Statement") on Form SB-2 with respect to the Units offered hereby has been filed on behalf of the Partnership with the Securities and Exchange Commission, Washington, D.C. 20549, under the Securities Act of 1933, as amended. This Prospectus does not contain all of the information set forth in the Registration Statement, certain portions of which have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Reference is made to such Registration Statement, including exhibits, for further information. Statements contained in this Prospectus as to the contents of any document are not necessarily complete, and, in each instance, reference is hereby made to the copy of such document filed as an exhibit to the Registration Statement for full statements of the provisions thereof, and each such statement in this Prospectus is qualified in all respects by this reference. Copies of any materials filed as a part of the Registration Statement, including the Tax Opinion as set forth on Exhibit 8, may be obtained from the Securities and Exchange Commission by payment of the requisite fees therefor and may be examined in the offices of the Commission without charge. In addition, a copy of the Tax Opinion may be obtained by prospective investors or their advisors from the Managing General Partner at no cost. The delivery of this Prospectus at any time does not imply that the information contained herein is correct as of any time subsequent to the date hereof. Atlas is fully aware of its obligations under Rule 13e-4 of the Securities Exchange Act of 1934. It is fully the intention of Atlas to comply with Rule 13e-4 and to cause the Partnership to comply with Rule 13e-4. FINANCIAL INFORMATION CONCERNING THE MANAGING GENERAL PARTNER, AEGH AND THE PARTNERSHIP Financial information concerning the Partnership, Atlas and AEGH is reflected in the following financial statements. The financial statements of AEGH are included in this Prospectus because both Atlas and AEGH have agreed to indemnify each Investor General Partner from any liability incurred in connection with the Partnership which is in excess of such Investor General Partner's share of Partnership assets. Since July, 1995, Atlas is the wholly owned subsidiary of AIC, Inc. which is the wholly owned subsidiary of AEGH. (See "Management".) THE SECURITIES OFFERED BY THIS PROSPECTUS ARE NOT SECURITIES OF, NOR IS THE INVESTOR ACQUIRING AN INTEREST IN ATLAS, ATLAS ENERGY, AEGH, THEIR AFFILIATES, OR ANY OTHER ENTITY OTHER THAN THE PARTNERSHIP. - -------------------------------------------------------------------------- (Page 111) AUDITED FINANCIAL STATEMENT ATLAS-ENERGY FOR THE NINETIES-PUBLIC #5 LTD. A PENNSYLVANIA LIMITED PARTNERSHIP JULY 26, 1996 (Page 112) McLaughlin & Courson Certified Public Accountants 2002 Law & Finance Building Pittsburgh, PA 15219 412/261-0630 FAX 412/261-3582 INDEPENDENT AUDITORS' REPORT To the Partners Atlas-Energy for the Nineties-Public #5 Ltd. A Pennsylvania Limited Partnership We have audited the accompanying statement of assets and partner's capital of Atlas-Energy for the Nineties-Public #5 Ltd., A Pennsylvania Limited Partnership as of July 26, 1996. This financial statement is the responsibility of the Partnership's management. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statement referred to above presents fairly, in all material respects, the financial position of Atlas-Energy for the Nineties-Public #5 Ltd., A Pennsylvania Limited Partnership as of July 26, 1996 in conformity with generally accepted accounting principles. /s/ McLaughlin & Courson Pittsburgh, Pennsylvania August 6, 1996 ========================================================================= BALANCE SHEET ATLAS-ENERGY FOR THE NINETIES-PUBLIC #5 LTD. A PENNSYLVANIA LIMITED PARTNERSHIP JULY 26, 1996 ASSETS Receivable from managing general partner $100 PARTNER'S CAPITAL Partner's capital $100 See notes to financial statement - ------------------------------------------------------------------------ (Page 113) NOTES TO FINANCIAL STATEMENT ORGANIZATION AND DESCRIPTION OF BUSINESS Atlas-Energy for the Nineties-Public #5 Ltd. (the "Partnership"), is a Pennsylvania limited partnership which will include Atlas Resources, Inc. ("Atlas"), of Pittsburgh, Pennsylvania, as Managing General Partner and Operator, and subscribers to Units as either Limited Partners or Investor General Partners. The Partnership will be funded to drill gas wells which are proposed to be located primarily in Mercer County, Pennsylvania. Subscriptions at a cost of $10,000 per unit will be sold through wholesalers and broker-dealers which will be compensated in an amount equal to 10% of the subscription cost plus a .5% accountable due diligence fee. Commencement of Partnership operations is subject to the receipt of minimum Partnership subscriptions of $1,000,000 (to a maximum of $8,000,000) by December 31, 1996. PROPOSED ACCOUNTING POLICIES Financial statements are to be prepared in accordance with generally accepted accounting principles. The Partnership proposes to use the successful efforts method of accounting for oil and gas producing activities. Costs to acquire mineral interests in oil and gas properties and to drill and equip wells are capitalized. Capitalized costs are to be expensed at unit cost rates calculated annually based on the estimated volume of recoverable gas and the related costs. FEDERAL INCOME TAXES The Partnership is not treated as a taxable entity for federal income tax purposes. Any item of income, gain, loss, deduction or credit flows through to the partners as though each partner had incurred such item directly. As a result, each partner must take into account his pro rata share of all items of partnership income and deductions in computing his federal income tax liability. Many provisions of the federal income tax laws are complex and subject to various interpretations. PARTICIPATION IN REVENUES AND COSTS Atlas and the other partners will generally participate in revenues and costs in the following manner: OTHER ATLAS PARTNERS Organization and offering costs 100% 0% Lease costs 100% 0% Revenues 25% 75% Direct operating costs 25% 75% Intangible drilling costs 0% 100% Tangible costs 14% 86% Tax deductions: Intangible drilling and development costs 0% 100% Depreciation 14% 86% Depletion allowances 25% 75% TRANSACTIONS WITH ATLAS AND ITS AFFILIATES The Partnership intends to enter into the following significant transactions with Atlas and its affiliates. Drilling contracts to drill and complete Partnership wells at an anticipated cost of $37.39 per foot on completed wells. Administrative costs at $75 per well per month Well supervision fees initially of $275 per well per month plus the cost of third party materials and services Gas transportation and marketing charges at competitive rates which currently is 29 cents per MCF PURCHASE COMMITMENT Subject to certain conditions, investor partners may present their interests beginning in 2000 for purchase by Atlas. Atlas is not obligated to purchase more than 10% of the units in any calendar year. SUBORDINATION OF MANAGING GENERAL PARTNER'S REVENUE SHARE Atlas will subordinate a part of its partnership revenues in an amount up to 10% of production revenues of the Partnership net of related operating costs, administrative costs and well supervision fees to the receipt by participants of cash distributions from the Partnership equal to at least 10% of their agreed subscriptions, determined on a cumulative basis, in each of the first five years of Partnership operations, commencing with the first distribution of revenues to the Participants. INDEMNIFICATION In order to limit the potential liability of the investor general partners, Atlas and AEG Holdings, Inc. (parent company of Atlas) have agreed to indemnify each investor general partner from any liability incurred which exceeds such partner's share of Partnership assets. - -------------------------------------------------------------------------- (Page 114) AUDITED BALANCE SHEETS ATLAS RESOURCES, INC. JULY 31, 1995 (Page 115) McLaughlin & Courson Certified Public Accountants 2002 Law & Finance Building Pittsburgh, PA 15219 412/261-0630 FAX 412/261-3582 INDEPENDENT AUDITORS' REPORT Board of Directors Atlas Resources, Inc. Coraopolis, Pennsylvania We have audited the accompanying balance sheets of Atlas Resources, Inc. as of July 31, 1995 and 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the balance sheets are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the balance sheets. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall balance sheet presentation. We believe that our audits of the balance sheets provide a reasonable basis for our opinion. In our opinion, the balance sheets referred to above present fairly, in all material respects, the financial position of Atlas Resources, Inc. as of July 31, 1995 and 1994, in conformity with generally accepted accounting principles. /s/ McLaughlin & Courson Pittsburgh, Pennsylvania October 24, 1995 - -------------------------------------------------------------------------- (Page 116) BALANCE SHEETS ATLAS RESOURCES, INC. JULY 31, 1995 AND 1994 ASSETS 1995 1994 CURRENT ASSETS Cash $ 1,717,898 $ 2,488,007 Trade accounts and notes receivable 1,639,274 2,061,921 Costs in excess of billings of $-0- in 1995 and $16,255 in 1994 on uncompleted contracts 291,379 334,441 Inventories 495,063 568,555 Prepaid expenses and other current assets 145,602 34,233 ---------- ---------- TOTAL CURRENT ASSETS 4,289,216 5,487,157 OIL AND GAS PROPERTIES Oil and gas wells and leases 23,195,675 18,526,049 Less accumulated depreciation, depletion and amortization 6,454,328 5,281,366 ---------- ----------- 16,741,347 13,244,683 PROPERTY, PLANT AND EQUIPMENT Land 161,000 161,000 Building 1,636,990 1,513,071 Equipment 778,237 717,797 Gathering lines 994,953 924,564 --------- ---------- 3,571,180 3,316,432 Less accumulated depreciation 1,838,518 1,583,399 ---------- ---------- 1,732,662 1,733,033 $22,763,225 $20,464,873 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued expenses $ 2,427,385 $ 2,830,274 Working interests and royalties payable 1,741,474 1,174,227 Billings in excess of costs of $1,486,813 in 1995 and $2,445,622 in 1994 on uncompleted contract 5,455,355 4,997,543 Current maturities on long-term debt 60,300 475,000 ----------- ----------- TOTAL CURRENT LIABILITIES 9,684,514 9,477,044 LONG-TERM DEBT, net of current maturities -0- 38,244 OTHER LONG-TERM LIABILITIES 40,880 40,880 ADVANCES FROM PARENT COMPANY 5,847,024 6,405,924 STOCKHOLDERS' EQUITY Capital stock - stated value $10 per share: Authorized - 500 shares; issued and outstanding - 200 shares 2,000 2,000 Retained earnings 7,188,807 4,500,781 --------- ---------- 7,190,807 4,502,781 --------- ---------- $22,763,225 $20,464,873 =========== =========== See notes to financial statements - -------------------------------------------------------------------------- (Page 117) NOTES TO FINANCIAL STATEMENTS ATLAS RESOURCES, INC. 1. DESCRIPTION OF BUSINESS Atlas Resources, Inc. (the Company) is engaged in the exploration for, development, production, and marketing of natural gas and oil primarily in the Appalachian Basin Area. In addition, the Company performs contract drilling and well operation services. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AFFILIATED COMPANIES Atlas Resources, Inc. is a wholly owned subsidiary of AIC, Inc. which is a wholly owned subsidiary of AEG Holdings, Inc. (AEGH) formerly Atlas Energy Group, Inc. (parent company) and is affiliated with other companies controlled by AEGH. The Company's operations are dependent upon the resources and services provided by the parent company. INVESTMENT IN OIL AND GAS PARTNERSHIPS The Company's proportionate share of the assets and liabilities of affiliated oil and gas partnerships are included in the balance sheets. Inventories Inventories, consisting of oil and gas field materials and supplies, are stated at the lower of first-in, first-out cost or market. METHOD OF ACCOUNTING FOR OIL AND GAS PROPERTIES The Company uses the successful efforts method of accounting for oil and gas producing activities. Property acquisition costs are capitalized when incurred. Geological and geophysical costs and delay rentals are expensed when incurred. Development costs, including equipment and intangible drilling costs related to both producing wells and developmental dry holes, are capitalized. All capitalized costs are generally depreciated and depleted on the unit-of-production method using estimates of proven reserves. Oil and gas properties are periodically assessed and when unamortized costs exceed expected future net cash flows, a loss is recognized by recording a charge to income. On the sale or retirement of oil and gas properties, the cost and related accumulated depreciation, depletion and amortization are eliminated from the property accounts, and the resultant gain or loss is recognized. For tax purposes, intangible drilling costs are being written off as incurred. The greater of cost or percentage depletion as defined by the Internal Revenue Code, is used as a deduction from income. PROPERTY, PLANT AND EQUIPMENT Land, building, equipment and gathering lines are recorded at cost. Major additions and betterments are charged to the property accounts while replacements, maintenance and repairs which do not improve or extend the life of the respective assets are expensed currently. As property is retired or otherwise disposed of, the cost of the property is removed from the asset account, accumulated depreciation is charged with an amount equivalent to the depreciation provided, and the difference, if any, is charged or credited to income. Depreciation is computed over the estimated useful life of the assets generally by the straight-line method. REVENUE RECOGNITION The Company sells interests in oil and gas wells and retains therefrom a working interest and/or an overriding royalty in the producing wells. The income from the working interests and royalties is recorded when the natural gas and oil are produced. The Company also contracts to drill oil and gas wells. The income from these contracts is recorded upon substantial completion of the well. Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and depreciation costs. General and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Costs in excess of amounts billed are classified as current assets under costs in excess of billings on uncompleted contracts. Billings in excess of costs are classified under current liabilities as billings in excess of costs on uncompleted contracts. Contract retentions are included in accounts receivable. 3. INCOME TAXES Atlas Resources, Inc. files a consolidated federal income tax return with AEG Holdings, Inc. (parent company). Atlas Resources, Inc.'s allocations for federal income taxes are included in advances from parent company. The Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes" effective August 1, 1993. There was no cumulative effect of this change in accounting for income taxes as of August 1, 1993 as the method previously used by the Company does not differ significantly from the requirements of SFAS No. 109. - -------------------------------------------------------------------------- (Page118) 4. LONG-TERM DEBT Long-term debt on Atlas Resources, Inc.'s books at July 31, 1995 and 1994 consists of the following: 1995 1994 Other $ 60,300 $ 513,244 Less current maturities (60,300) 475,000 -------- ------- $ -0- $ 28,244 ========= ========= 5. REVOLVING CREDIT AND TERM LOAN AGREEMENT AND CONTINGENT LIABILITY On July 31, 1995 Atlas Resources, Inc. together with AEGH (parent company), renegotiated its bank revolving credit and term loan agreement. The new credit agreement enables the Company or AEGH to borrow $5,000,000 on a revolving credit basis until August 31, 1996. A commitment fee at a rate of three-eights of one percent (3/8%) is charged on the unused portion. During the revolving credit period, loans bear interest at or below prime rate plus one-quarter percent (1/4%). The interest rate at July 31, 1995 was 7.875%. The company may convert any outstanding borrowings into a 5-year term loan, repayable in equal monthly installments, plus interest at or below prime rate plus one-half percent (1/2%). At July 31, 1995 AEGH (parent company) had borrowed $4,750,000 under the revolving credit line. The revolving credit line and term loan agreements are secured by certain assets of the Company. The Company has pledged its building and equipment having a net book value of $1,317,165 at July 31, 1995 to secure a loan of $1,300,000 obtained by a subsidiary of AEGH. 6. OPTION ON BUILDING AEGH (parent company) has granted the majority shareholders of AEGH an option to acquire the land and building utilized as the Company's headquarters for a period of six months commencing on August 15, 2003 and ending February 15, 2004 for $500,000. 7. COMMITMENTS Atlas Resources, Inc., as general partner in several oil and gas limited partnerships, and AEGH have agreed to indemnify each investor general partner from any liability incurred which exceeds such partner's share of partnership assets. Management believes that any such liabilities that may occur will be covered by insurance and, if not covered by insurance, will not result in a significant loss to AEGH and its subsidiaries. Subject to certain conditions, investor general partners in certain oil and gas limited partnerships may present their interests beginning in 1995 for purchase by Atlas Resources, Inc., as managing general partner. Atlas Resources, Inc. is not obligated to purchase more than 5% of the units in any calendar year. Atlas Resources, Inc., as managing general partner in a certain oil and gas limited partnership, has also agreed to subordinate its share of production revenues to the receipt by investor partners of cash distributions equal to at least 10% of their subscriptions in each of the first five years of partnership operations. 8. GAIN ON SALE OF ASSETS Income for the year ended July 31, 1994 included a gain of $1,135,834 on the sale of the Company's interest in certain oil and gas properties for $1,260,000. - -------------------------------------------------------------------------- (Page 119) 9. NATURAL GAS AND OIL PRODUCING ACTIVITIES (UNAUDITED) The supplementary information summarized below presents the results of natural gas and oil activities in accordance with SFAS No. 69, "Disclosures About Oil and Gas Producing Activities." (1) Production Costs The following table presents the costs incurred relating to natural gas and oil production activities: 1995 1994 Capitalized costs at July 31: Capitalized costs $23,195,675 $18,526,049 Accumulated depreciation and depletion 6,454,328 5,281,366 ----------- ----------- Net capitalized costs $16,741,347 $13,244,683 =========== ============ Costs incurred during the year ended July 31: Property acquisition costs - proved undeveloped properties $ -0- $ 1,695 ========== =========== Development costs $ 4,669,626 $5,024,722 ========== =========== Property acquisition costs include costs to purchase, lease or otherwise acquire a property. Development costs include costs to gain access to and prepare development well locations for drilling, to drill and equip development wells and to provide facilities to extract, treat, gather and store oil and gas. (2) Results of Operations for Producing Activities The following table presents the results of operations related to natural gas and oil production for the years ended July 31, 1995 and 1994: 1995 1994 Revenues $ 2,991,813 $3,056,364 Production costs (185,356) (159,148) Depreciation and depletion (1,072,962) (1,510,966) Income tax expense (364,315) (380,386) ---------- --------- Results of operations from producing activities $ 1,369,180 $1,005,864 =========== ========== Depreciation, depletion and amortization of natural gas and oil properties are provided on the unit-of-production method. (3) Reserve Information The information presented below represents estimates of proved natural gas and oil reserves. Proved developed reserves represent only those reserves expected to be recovered from existing wells and support equipment. Proved undeveloped reserves represent proved reserves expected to be recovered from new wells after substantial development costs are incurred. All reserves are located in Eastern Ohio and Western Pennsylvania. 1995 1994 NATURAL GAS OIL NATURAL GAS OIL (Mcf) (Barrels) (Mcf) (Barrels) Proved developed and undeveloped reserves: Beginning of period 50,226,287 7,386 37,252,313 4,670 Revision of previous estimates (684,821) 6,816 2,687,590 3,409 Extensions, discoveries and other additions 21,535,654 -0- 24,612,144 -0- Production (1,499,244) (606) (1,431,572) (693) Sales of minerals in place (12,366,526) -0- (12,894,188) -0- ---------- ----- ---------- ---- End of period 57,211,350 13,596 50,226,287 7,386 ========== ===== ========== ===== Proved developed reserves: Beginning of period 14,603,407 7,386 11,605,013 4,670 ========== ===== ========== ===== End of period 17,378,470 13,596 14,603,407 7,386 ========== ===== ========== ===== - -------------------------------------------------------------------------- (Page 120) 9. NATURAL GAS AND OIL PRODUCING ACTIVITIES (UNAUDITED) (CONTINUED) (4) Standard Measure of Discounted Future Cash Flows Management cautions that the standard measure of discounted future cash flows should not be viewed as an indication of the fair market value of natural gas and oil producing properties, nor of the future cash flows expected to be generated therefrom. The information presented does not give recognition to future changes in estimated reserves, selling prices or costs and has been discounted at an arbitrary rate of 10%. Estimated future net cash flows from natural gas and oil reserves based on selling prices and costs at July 31, 1995 and July 31, 1994 price levels are as follows: 1995 1994 Future cash inflows $128,363,532 $119,960,569 Future production costs (27,812,401) (25,779,988) Future development costs (41,574,000) (36,300,000) Future income tax expense (11,406,096) (12,409,625) ------------- ------------ Future net cash flow 47,571,035 45,470,956 10% annual discount for estimated timing of cash flows (35,761,224) (33,597,945) ------------ ------------ Standardized measure of discounted future net cash flows $ 11,809,811 $ 11,873,011 ============ ============ Summary of changes in the standardized measure of discounted future net cash flows: 1995 1994 Sales of gas and oil produced - net $(1,369,180) $ (1,005,864) Net changes in prices, production and development costs (3,969,631) 243,724 Extensions, discoveries, and improved recovery, less related costs 58,615 1,125,162 Development costs incurred 5,081,411 1,905,750 Revisions of previous quantity estimates (330,491) (359,095) Sales of minerals in place (1,216,889) (2,948,236) Accretion of discount 1,006,878 1,674,640 Net change in income taxes 676,087 1,815,596 --------- ---------- Net increase (decrease) (63,200) 2,451,677 Beginning of period 11,873,011 9,421,334 ---------- ---------- End of period $11,809,811 $ 11,873,011 =========== ============= - -------------------------------------------------------------------------- (Page 121) ATLAS RESOURCES, INC. FINANCIAL STATEMENTS(UNAUDITED) May 31, 1996 - -------------------------------------------------------------------------- (Page 122) ATLAS RESOURCES, INC. CONSOLIDATED BALANCE SHEETS (Unaudited) As of May 31, 1996
ASSETS 1996 1995 CURRENT ASSETS Cash including short term cash investments $ 332,109 $ 85,082 Trade accounts receivable 2,232,480 1,925,983 Other receivables 634,303 890,283 Costs incurred on drilling contracts in excess of advances 407,849 309,942 Inventories 496,391 635,082 Other 20,701 58.071 ---------- --------- TOTAL CURRENT ASSETS 4,123,833 3,904,443 OTHER ASSETS Investment in Oil and gas wells and leases 28,558,094 22,769,504 Accumulated depreciation, (7,700,321) (6,240,630) ----------- Net investment in oil and gas wells and leases 20,857,773 16,528,874 Investment in other assets 2,613 3,323 ----------- ---------- TOTAL OTHER ASSETS 20,860,368 16,532,197 PROPERTY, PLANT AND EQUIPMENT Land 161,000 161,000 Buildings 1,641,671 1,636,990 Equipment 779,253 772,495 Pipeline 978,879 994,502 ---------- --------- 3,560,803 3,564,987 Accumulated depreciation (1,974,462) (1,765,154) ----------- ---------- NET PROPERTY, PLANT & EQUIPMENT 1,586,341 1,799,833 ----------- ---------- TOTAL ASSETS $26,570,560 $22,236,473 ============ =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued expenses $ 3,705,281 $ 2,412,764 Working interests and royalties payable 4,900,058 3,526,683 Advances on drilling contracts in excess of costs incurred 1,356,043 911,734 Current maturities on long-term debt: 185,714 56,624 Income taxes payable 885,868 322,269 ----------- --------- TOTAL CURRENT LIABILITIES 11,032,964 7,230,074 LONG-TERM DEBT, net of current maturities 959,524 -0- INTERCOMPANY PAYABLES 584,193 7,210,481 DEFERRED REVENUE AND OTHER LONG TERM LIABILITIES 708,801 -0- STOCKHOLDERS' EQUITY Capital stock, stated value $10.00 per share Authorized - 500 shares 2,000 2,000 Retained earnings 13,283,078 7,793,918 ----------- --------- TOTAL STOCKHOLDERS' EQUITY 13,285,078 7,795,918 ----------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $26,570,560 $22,236,473 ============ ========== See Notes to Unaudited Financial Statements (Page 123) ATLAS RESOURCES, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Ten Months Ended May 31, 1996 INCOME Sales-gas wells $16,302,706 $17,971,264 Purchased gas revenues 1,470 5,787 Well operating fees 1,841,788 1,491,756 Working interest and royalties 3,213,021 2,405,858 Non-recurring Income (Note 2) 2,059,179 -0- Interest 84,495 36,051 Other 542,066 63,800 ---------- ---------- TOTAL INCOME 24,044,725 21,974,516 COST OF SALES AND OTHER EXPENSES Costs of sales-gas wells 11,881,671 14,626,989 Cost of purchased gas 1,365 5,451 Gathering line operation and maintenance 298,533 425,293 General and administrative 2,003,215 1,465,282 Interest 181,431 33,707 Depreciation, depletion and amortization 1,381,937 1,141,018 ---------- --------- TOTAL COST OF SALES AND OTHER EXPENSES 15,748,152 17,697,740 ---------- ---------- INCOME BEFORE INCOME TAXES 8,296,573 4,276,776 INCOME TAXES 2,202,302 983,658 ---------- ---------- NET INCOME $6,094,271 $3,293,118 ========== ========== STATEMENT OF CASH FLOWS (Unaudited) Ten Months Ended May 31, 1996 Net cash provided by operating activities $ 8,144,146 $ 1,363,652 Cash flows used in investing activities: Investment in oil and gas wells and property , and equipment (5,352,042) (4,492,010) Cash flows (used in) provided by financing activities: Intercompany payables (5,262,831) 804,557 Proceeds from long term borrowings net (1,084,938) (79,124) ----------- ----------- Net cash (used in) provided by financing activities (4,177,893) 725,433 ----------- ----------- Net increase (decrease) in cash and cash equivalents (1,385,789) (2,402,925) Cash and cash equivalents at beginning of period 1,717,898 2,488,007 ----------- ---------- Cash and cash equivalents at end of period $ 332,109 $ 85,082 =========== ========== See Notes to Unaudited Financial Statements (Page 124) ATLAS RESOURCES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) May 31, 1996 1. INTERIM FINANCIAL STATEMENTS The consolidated financial statements as of May 31, 1996 and for the ten months then ended have been prepared by the management of the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the audited July 31, 1995 and 1994 consolidated financial statements. In the opinion of management, all adjustments (consisting of only normal recurring accruals) considered necessary for presentation have been included. 2. NON-RECURRING INCOME The non-recurring income item pertains to a settlement of certain claims with Columbia Gas Transmission Corporation. - ------------------------------------------------------------------------------ (Page 125) AUDITED CONSOLIDATED FINANCIAL STATEMENTS AEG HOLDINGS, INC. (FORMERLY ATLAS ENERGY GROUP, INC.) July 31, 1995 - ------------------------------------------------------------------------------ (Page 126) McLaughlin & Courson Certified Public Accountants 2002 Law & Finance Building Pittsburgh, PA 15219 412/261-0630 FAX 412/261-3582 INDEPENDENT AUDITORS' REPORT Board of Directors AEG Holdings, Inc. Coraopolis, Pennsylvania We have audited the accompanying consolidated statements of financial position of AEG Holdings, Inc. (formerly Atlas Energy Group, Inc.) and subsidiaries as of July 31, 1995 and 1994, and the related consolidated statements of income and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of AEG Holdings, Inc. as of July 31, 1995 and 1994, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ McLaughlin & Courson Pittsburgh, Pennsylvania October 24, 1995 - -------------------------------------------------------------------------- (Page 127) CONSOLIDATED STATEMENTS OF FINANCIAL POSITION AEG HOLDINGS, INC. JULY 31, 1995 AND 1994 ASSETS 1995 1994 CURRENT ASSETS Cash and cash equivalents $ 8,224,721 $ 6,495,318 Trade accounts and notes receivable, less allowance for doubtful accounts of $100,000 in 1995 and $25,000 in 1994 3,278,178 4,392,029 Other receivables 501,174 567,785 Costs in excess of billings of $-0- in 1995 and $16,255 in 1994 on uncompleted contracts 293,372 334,440 Inventories 495,063 568,555 Prepaid expenses and other current assets 409,969 265,727 ---------- ----------- TOTAL CURRENT ASSETS 13,202,477 12,623,854 OIL AND GAS PROPERTIES Oil and gas wells and leases 28,185,190 23,431,643 Less accumulated depreciation, depletion and amortization 10,518,131 9,204,137 ---------- ----------- 17,667,059 14,227,506 OTHER ASSETS 294,851 300,942 PROPERTY, PLANT AND EQUIPMENT Land 359,193 395,193 Buildings 1,785,776 1,657,202 Equipment 1,025,609 957,933 Gathering lines 16,666,091 15,447,425 ---------- ----------- 19,836,669 18,457,753 Less accumulated depreciation 11,695,999 10,298,479 ---------- ----------- 8,140,670 8,159,274 ---------- ---------- $39,305,057 $35,311,576 =========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued expenses $ 5,007,209 $ 5,301,064 Working interests and royalties payable 2,217,294 1,740,187 Billings in excess of costs of $1,636,992 in 1995 and $2,445,622 in 1994 on uncompleted contracts 5,472,266 4,997,543 Current maturities on long-term debt: Subordinated notes payable to stockholders 1,461,795 1,279,808 Other 246,014 475,000 Income taxes payable 234,057 410,352 --------- ---------- TOTAL CURRENT LIABILITIES 14,638,635 14,203,954 DEFERRED INCOME TAXES 1,330,000 1,100,000 LONG-TERM DEBT, net of current maturities: Subordinated notes payable to stockholders 4,924,934 6,386,729 Other 5,864,286 4,038,244 OTHER LONG-TERM LIABILITIES 265,640 354,121 STOCKHOLDERS' EQUITY Capital stock, no par; authorized 2,000,000 shares; issued 500,000 shares 1,250 1,250 Paid-in capital 560,093 560,093 Retained earnings 17,351,614 14,451,945 ---------- ----------- Treasury stock, at cost (140,919 shares and 144,619 shares, respectively) (5,631,395) (5,784,760) ----------- ---------- 12,281,562 9,228,528 ----------- ---------- $39,305,057 35,311,576 =========== =========== See notes to consolidated financial statements - ---------------------------------------------------------------------------- (Page 128) CONSOLIDATED STATEMENTS OF INCOME AEG HOLDINGS, INC. YEARS ENDED JULY 31, 1995 AND 1994 1995 1994 INCOME Sales - gas wells $22,707,513 $15,446,241 Purchased gas revenues 12,602,845 18,143,103 Well operating fees 3,132,886 2,692,782 Gathering line charges 1,970,964 2,051,191 Working interests and royalties 3,903,888 4,107,866 Interest 151,749 110,719 Gain on sale of assets -0- 1,454,048 Other 198,925 142,265 ----------- ----------- 44,668,770 44,148,215 COSTS OF SALES AND OTHER EXPENSES Costs of sales - gas wells 19,216,912 13,550,846 Cost of purchased gas 12,987,224 18,105,442 Gathering line operation and maintenance 1,592,691 1,556,756 General and administrative 3,221,659 3,978,639 Interest: Subordinated notes payable to stockholders 925,139 1,106,134 Other 268,162 118,228 Depreciation, depletion and amortization 2,711,514 2,972,213 ---------- ----------- 40,923,301 41,388,258 ---------- ----------- INCOME BEFORE INCOME TAXES 3,745,469 2,759,957 INCOME TAXES Current: Federal 380,000 340,000 State 240,000 256,000 Deferred 230,000 (36,000) --------- --------- 850,000 560,000 --------- --------- NET INCOME $ 2,895,469 $ 2,199,957 =========== ============ See notes to consolidated financial statements (Page 129) CONSOLIDATED STATEMENTS OF CASH FLOWS AEG HOLDINGS, INC. YEARS ENDED JULY 31, 1995 AND 1994 1995 1994 Cash flows from operating activities: Net income $ 2,895,469 $ 2,199,957 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation, depletion and amortization 2,711,514 2,972,213 Amortization of deferred compensation -0- 673,927 Expense funded by issuance of capital stock 172,200 87,810 Gain on sale of assets -0- (1,454,048) Other, net (3,579) 22,056 Change in assets and liabilities: Receivables 1,180,462 (115,821) Inventories 73,492 (13,935) Prepaid expenses and other current assets (144,242) (71,140) Accounts payable and accrued expenses and working interests and royalties payable 183,252 (698,316) Uncompleted contract billings, net 515,791 3,705,541 Income taxes payable (176,295) 357,631 Deferred income taxes 230,000 (36,000) Long-term liabilities (88,481) (189,750) ---------- ---------- Net cash provided by operating activities 7,549,583 7,440,125 Cash flows used in investing activities: Proceeds from sale of assets 47,000 1,768,327 Investment in oil and gas wells and leases (4,753,547) (5,080,777) Liquidations of other assets, net 6,091 2,658 Gathering line additions (1,218,666) (1,590,030) Other property additions (196,250) (152,474) ---------- ----------- Net cash used in investing activities (6,115,372) (5,052,296) Cash flows provided by financing activities: Proceeds from long-term borrowings 6,050,000 4,000,000 Principal payments on long-term borrowings (4,000,000) (1,500,000) Principal payments on notes payable to stockholders (1,279,808) (1,120,477) Principal payments on other term loans (475,000) (175,000) ----------- ---------- Net cash provided by financing activities 295,192 1,204,523 ----------- ---------- Net increase in cash and cash equivalents 1,729,403 3,592,352 Cash and cash equivalents at beginning of year 6,495,318 2,902,966 --------- ---------- Cash and cash equivalents at end of year $ 8,224,721 $ 6,495,318 =========== ============ Additional Cash Flow Information: Cash paid during the year for: Interest $ 1,196,345 $ 1,201,051 Income taxes 796,295 238,369 See notes to consolidated financial statements - ----------------------------------------------------------------------------- (Page 130) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AEG HOLDINGS, INC. 1. DESCRIPTION OF BUSINESS AEG Holdings, Inc. (AEGH) was formed in July, 1995 to hold, through its wholly owned subsidiary AIC, Inc. also formed in July, 1995, Atlas Energy Group and its subsidiaries, including Atlas Resources, Inc. and Atlas Gas Marketing, Inc. The purpose of the reorganization is to achieve more efficient concentration of funds of the Atlas group of companies, thereby minimizing transaction costs and maximizing returns on investment vehicles. No changes in the consolidated assets, liabilities or stockholders' equity occurred as a result of the reorganization. AEGH and subsidiaries are engaged in the exploration for, development, production, and marketing of natural gas and oil primarily in the Appalachian Basin area. In addition, the Company performs contract drilling and well operation services. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of AEG Holdings, Inc., and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. INVENTORIES: Inventories, consisting of oil and gas field materials and supplies, are stated at the lower of first-in, first-out cost or market. METHOD OF ACCOUNTING FOR OIL AND GAS PROPERTIES The Company uses the successful efforts method of accounting for oil and gas producing activities. Property acquisition costs are capitalized when incurred. Geological and geophysical costs and delay rentals are expensed when incurred. Development costs, including equipment and intangible drilling costs related to both producing wells and developmental dry holes, are capitalized. All capitalized costs are generally depreciated and depleted on the unit-of-production method using estimates of proven reserves. Oil and gas properties are periodically assessed and when unamortized costs exceed expected future net cash flows, a loss is recognized by recording a charge to income. On the sale or retirement of oil and gas properties, the cost and related accumulated depreciation, depletion and amortization are eliminated from the property accounts, and the resultant gain or loss is recognized. For tax purposes, intangible drilling costs are being written off as incurred. The greater of cost or percentage depletion as defined by the Internal Revenue Code, is used as a deduction from income. PROPERTY, PLANT AND EQUIPMENT Land, buildings, equipment and gathering lines are recorded at cost. Major additions and betterments are charged to the property accounts while replacements, maintenance and repairs which do not improve or extend the life of the respective assets are expensed currently. As property is retired or otherwise disposed of, the cost of the property is removed from the asset account, accumulated depreciation is charged with an amount equivalent to the depreciation provided, and the difference, if any, is charged or credited to income. Depreciation is computed over the estimated useful life of the assets generally by the straight-line method. REVENUE RECOGNITION The Company sells interests in oil and gas wells and retains therefrom a working interest and/or overriding royalty in the producing wells. The income from the working interests is recorded when the natural gas and oil are produced. The Company also contracts to drill oil and gas wells. The income from these contracts is recorded upon substantial completion of the well. Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and depreciation costs. General and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Costs in excess of amounts billed are classified as current assets under costs in excess of billings on uncompleted contracts. Billings in excess of costs are classified under current liabilities as billings in excess of costs on uncompleted contracts. Contract retentions are included in accounts receivable. WORKING INTERESTS AND ROYALTIES Revenues from working interests and royalties are recognized when the natural gas and oil are produced. For the year ended July 31, 1995, the Company recognized working interest income of $3,008,027 and royalty income of $895,861. Working interest and royalty income during the year ended July 31, 1994 amounted to $2,975,467 and $1,132,399, respectively. CASH EQUIVALENTS For purposes of the statements of cash flows, the Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. (Page 131) 3. AFFILIATED OIL AND GAS PARTNERSHIPS In connection with the sponsorship of oil and gas partnerships, the Company is reimbursed by the partnerships for certain operating and overhead costs incurred on their behalf. These reimbursements totaled approximately $265,000 and $250,000 during the years ended July 31, 1995 and 1994, respectively. In addition, as part of its duties as well operator, the Company receives proceeds from the sale of oil and gas and makes distributions to investors according to their working interest in the related oil and gas properties. 4. PLAN OF REORGANIZATION On November 8, 1990 the Company adopted a plan of reorganization whereby a substantial portion of the common stock of the two majority shareholders would be purchased by the Company and shares of the Company's stock would be granted to certain key employees of the Company (Management Investors) giving the Management Investors control of the Company. STOCK SPLIT Pursuant to that plan the stockholders approved an increase in the authorized number of shares of no par value common stock from 500 to 2,000,000 shares and declared a stock split on a 1,000 to 1 basis. All references in the consolidated financial statements to the number of shares have been adjusted for the stock split. PURCHASE OF TREASURY SHARES AND NOTES PAYABLE TO STOCKHOLDERS On November 14, 1990 the Company entered into an agreement effective as of August 16, 1990 to purchase 248,717 shares of common stock from its two majority shareholders at $40.00 per share ($9,948,680). The purchase price is evidenced by promissory notes bearing interest at 13.5%. Quarterly principal payments range from $100,574 on November 15, 1991 to a final payment of $856,103 on November 15, 1998. Payments may be deferred or accelerated under certain circumstances. Principal payments totaled $1,279,808 and $1,120,477 during the years ended July 31, 1995 and 1994 respectively. Interest expense amounted to $925,139 and $1,106,134 for the years ended July 31, 1995 and 1994, respectively. The notes are subordinate to all direct and indirect debt, past, present or future and all obligations, if any, to make contributions to any employee stock ownership plan now in existence or hereinafter created. The promissory notes are secured by warrants on the common stock of the Company that are exercisable upon an uncorrected event of default. At July 31, 1995 and 1994, the following warrants were outstanding: 1995 1994 Number of shares 643,824 927,030 Exercise price 9.92 8.27 The Company has options to purchase, and the majority shareholders had options to sell 131,425 shares of the Company's common stock at per share prices ranging from $63.25 to $74.10 commencing on the earlier of the satisfaction of all the Company's obligations under the foregoing promissory notes or November 14, 1999. The shareholders also had an option on November 14, 2004 to sell 87,356 shares to the Company. The shareholder options to sell the 218,781 shares of common stock to the Company were waived on November 24, 1992 and the waiver has been retroactively applied in the accompanying financial statements. STOCK GRANTS On November 14, 1990 certain management investors of the Company were granted 92,098 shares of restricted common stock. The shares may not be transferred or sold until these restrictions lapse. Restricted shares may be forfeited in the event the investor's employment with the Company terminates for reasons other than death, retirement, disability or termination without cause. These restrictions lapse with respect to 25% of the shares on each of the following dates: November 14, 1990, 1991, 1992 and 1993. The fair value of the granted shares at the time of the grant has been determined by management to be $29.27 per share ($2,695,708). A corresponding amount representing unearned compensation is reflected as a reduction of stockholders' equity and is to be reported as compensation expense ($673,927 per year) over the restriction period. The Company has established a management employee stock option consisting of an aggregate of options to acquire 47,578 shares of common stock at $1.00 per share. No options have been granted as of July 31, 1995. The option will terminate August 15, 2012. There are restrictions on the sale of the vested Management Investor and ESOP shares of common stock which include among other restrictions, that shares may not be sold until obligations to the majority shareholders are satisfied. Shares offered for sale must first be offered to the Company and then to other shareholders before being offered to a third party. Further conditions apply to sales that would result in a third party owning 5% or more of the total shares of the Company. (Page 132) 5. OTHER LONG-TERM DEBT AND CREDIT FACILITY Long-term debt at July 31, 1995 and 1994 consists of the following: 1995 1994 Revolving credit loan payable to bank $4,750,000 $4,000,000 Note payable to bank in monthly installments through August 2002 of $15,476, plus interest at or below prime rate plus one-half percent (1/2%) (8.125% at July 31, 1995). Secured by building and equipment having a net book value of $1,347,592 at July 31, 1995 1,300,000 -0- Other 60,300 513,244 ----------- ---------- 6,110,300 4,513,244 Less current maturities (246,014) (475,000) ------------ ---------- $5,864,286 $4,038,244 ============ ========== On July 31, 1995, AEGH renegotiated its revolving credit and term loan agreement. The new credit agreement enables the Company to borrow $5,000,000 on a revolving basis until August 31, 1996. A commitment fee at a rate of three-eights of one percent (3/8%) is charged on the unused portion. During the revolving credit period, loans bear interest at or below prime rate plus one-quarter percent (1/4%). The interest rate at July 31, 1995 was 7.875%. The Company may convert any outstanding borrowings into a 5-year term loan, repayable in equal monthly installments, plus interest at or below prime rate plus one-half percent (1/2%). The loan agreements are secured by certain assets of the Company. 6. MATURITIES ON LONG-TERM DEBT Aggregate maturities on long-term debt at July 31, 1995 for the next five fiscal years are as follows: FISCAL SUBORDINATED OTHER YEAR NOTES PAYABLE LONG-TERM ENDING TO STOCKHOLDERS DEBT TOTAL - ----------------------------------------------------- 1996 $1,461,795 $ 246,014 $1,707,809 1997 1,669,661 1,056,547 2,726,208 1998 1,907,084 1,135,714 3,042,798 1999 1,348,189 1,135,714 2,483,903 2000 -0- 1,135,714 1,135,714 7. INCOME TAXES The Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes" effective August 1, 1993. There was no cumulative effect of this change in accounting for income taxes as of August 1, 1993 as the method previously used by the Company does not differ significantly from the requirements of SFAS No. 109. Net deferred tax liabilities consist of the following: JULY 31, 1995 1994 Exploration and development costs expensed for income tax reporting $1,782,000 $1,336,000 Tax depreciation in excess of book depreciation 256,000 418,000 Investment tax credit (235,000) (367,000) Alternative minimum tax (366,000) (225,000) Other (107,000) (62,000) ----------- ---------- $1,330,000 $1,100,000 ========== =========== A reconciliation between the Company's effective tax rate and the U.S. statutory rate is as follows: 1994 1995 U.S. statutory rate 34.0 % 34.0 % State income taxes net of federal income tax benefit 5.8 6.1 Depletion (7.0) (8.9) Nonconventional fuels and alternative minimum tax credits (10.0) (9.4) Other (0.1) (1.5) ------ ------ Effective tax rate 22.7 %20.3 % ====== ======= (Page 133) 8. PROFIT SHARING PLAN The Company maintains a defined contribution 401 (K) profit sharing plan covering substantially all of its employees. The Plan Administrator set the maximum allowable employee contribution at the lesser of 15% of their compensation or $9,240 for the calendar years 1995 and 1994. The Company matches employee contributions by contributing an amount equal to 30% of each employee's contribution. Pension expense under the 401 (K) profit sharing plan was $67,974 and $60,895 for the years ended July 31, 1995 and 1994, respectively. 9. OPTION ON BUILDING The majority shareholders were granted an option to acquire the land and building utilized as the Company's headquarters for a period of six months commencing on August 15, 2003 and ending February 15, 2004 for $500,000. 10. CHANGES IN STOCKHOLDERS' EQUITY Changes in stockholders' equity during the years ended July 31, 1994 and 1995 were as follows:
CAPTION> CAPITAL PAID-IN RETAINED TREASURY DEFERRED STOCK CAPITAL EARNINGS STOCK COMPENSATION BALANCE AT JULY 31, 1993 $1,250 $560,093 $12,284,178 $(5,904,760) $673,927) Treasury stock issued to ESOP (3,000 shares) (32,190) 120,000 Amortization of deferred compensation 673,927 Net income for the year 2,199,957 --------- --------- ---------- ---------- -------- BALANCE AT JULY 31, 1994 1,250 560,093 14,451,945 (5,784,760) -0- Treasury stock issued to ESOP (3,000 shares) 3,000 120,000 Other (700 shares net) 1,200 33,365 Net income for the year 2,895,469 -------- --------- ----------- --------- ---------- BALANCE AT JULY 31, 1995 $1,250 $560,093 $17,351,614 $(5,631,395)$ -0- ======== ========= =========== ========== =========
11. EMPLOYEE STOCK OWNERSHIP PLAN Effective August 1, 1990 the Company established a non- contributory employee stock ownership plan (ESOP) covering substantially all employees except the Company's two majority shareholders. The Company contributed 3,000 shares of common stock with a fair market value of $41.00 ($123,000) and $29.27 ($87,810) to the plan during the years ended July 31, 1995 and 1994, respectively. The Company contributed $26,418 and $25,304 in cash during the years ended July 31, 1995 and 1994, respectively. Employee benefits vest after five years of service, including service prior to establishment of the plan. There are restrictions on the sale of the stock (see Plan of Reorganization). 12. GAIN ON SALE OF ASSETS Gain on sale of assets for the year ended July 31, 1994 included a gain of $1,135,834 on the sale of the Company's interest in certain oil and gas properties for $1,260,000 and a gain of $290,231 on the sale of stock in an unrelated company for $481,647. 13. FUTURES CONTRACTS The Company enters into natural gas future contracts to reduce the exposure to changes in gas prices. Futures gains or losses are included in cost of purchased gas. 14. COMMITMENTS Atlas Resources, Inc., as general partner in several oil and gas limited partnerships, and AEG Holdings, Inc. have agreed to indemnify each investor general partner from any liability incurred which exceeds such partner's share of partnership assets. Management believes that such liabilities that may occur will be covered by insurance and, if not covered by insurance, will not result in a significant loss to AEG Holdings, Inc. and its subsidiaries. Subject to certain conditions, investor general partners in certain oil and gas limited partnerships may present their interests beginning in 1995 for purchase by Atlas Resources, Inc., as managing general partner. Atlas Resources, Inc. is not obligated to purchase more than 5% of the units in any calendar year. Atlas Resources, Inc., as managing general partner in certain oil and gas limited partnerships has also agreed to subordinate its share of production revenues to the receipt by investor partners of cash distributions equal to at least 10% of their subscriptions in each of the first five years of partnership operations. (Page 134 15. NATURAL GAS AND OIL PRODUCING ACTIVITIES (UNAUDITED) The supplementary information summarized below presents the results of natural gas and oil activities in accordance with SFAS No. 69, "Disclosures About Oil and Gas Producing Activities." (1) Production Costs The following table presents the costs incurred relating to natural gas and oil production activities: 1995 1994 Capitalized costs at July 31: Capitalized costs $28,185,190 $23,431,643 Accumulated depreciation and depletion 10,518,131 9,204,137 ----------- ------------ Net capitalized costs $17,667,059 $14,227,506 =========== ============ Costs incurred during the year ended July 31: Property acquisition costs - proved undeveloped properties $ 500 $ 1,695 =========== ============= Developed costs $ 4,753,047 $ 5,079,082 =========== ============= Property acquisition costs include costs to purchase, lease or otherwise acquire a property. Development costs include costs to gain access to and prepare development well locations for drilling, to drill and equip development wells and to provide facilities to extract, treat, gather and store oil and gas. (2) Results of Operations for Producing Activities The following table presents the results of operations related to natural gas and oil production for the years ended July 31, 1995 and 1994: 1995 1994 Revenues $ 3,903,888 $ 4,107,866 Production costs (230,256) (213,909) Depreciation and depletion (1,313,993) (1,711,393) Income tax expense (631,545) (642,217) ------------- ----------- Results of operations from producing activities $ 1,728,094 $ 1,540,347 ============= ============ Depreciation, depletion and amortization of natural gas and oil properties are provided on the unit-of production method. (3) Reserve Information The information presented below represents estimates of proved natural gas and oil reserves. Proved developed reserves represent only those reserves expected to be recovered from existing wells and support equipment. Proved undeveloped reserves represent proved reserves expected to be recovered from new wells after substantial development costs are incurred. All reserves are located in Eastern Ohio and Western Pennsylvania.
1995 1994 NATURAL GAS OIL NATURAL GAS OIL (Mcf) (Barrels) (Mcf) (Barrels) Proved developed and undeveloped reserves: Beginning of period 55,084,369 86,390 40,721,177 41,221 Revision of previous estimates (1,604,824) (1,833) 4,365,530 53,751 Extensions, discoveries and other additions 22,723,456 121,285 24,612,144 -0- Production (1,875,795) (6,728) (1,819,122) (8,042) Sales of minerals in place (13,380,243)(107,854) (12,795,360) (540) ----------- ------- ----------- -------- End of period 60,946,963 91,260 55,084,369 86,390 =========== ======= =========== ======== Proved developed reserves: Beginning of period 19,461,489 86,390 15,073,877 41,221 ========== ======== =========== ======== End of period 21,114,083 91,260 19,461,489 86,390 ========== ======== =========== ========
- ------------------------------------------------------------------- (Page 135) 15. NATURAL GAS AND OIL PRODUCING ACTIVITIES (UNAUDITED) (CONTINUED) (4) Standard Measure of Discounted Future Cash Flows Management cautions that the standard measure of discounted future cash flows should not be viewed as an indication of the fair market value of natural gas and oil producing properties, nor of the future cash flows expected to be generated therefrom. The information presented does not give recognition to future changes in estimated reserves, selling prices or costs and has been discounted at an arbitrary rate of 10%. Estimated future net cash flows from natural gas and oil reserves based on selling prices and costs at July 31, 1995 and July 31, 1994 price levels are as follows:
1995 1994 Future cash inflows $139,389,034 $134,367,458 Future production costs (30,822,109) (29,671,518) Future development costs (41,574,000) (36,300,000) Future income tax expense (13,691,210) (15,488,911) ------------ ----------- Future net cash flow 53,301,715 52,907,029 10% annual discount for estimated timing of cash flows (38,511,020) (37,449,112) ------------- ----------- Standardized measure of discounted future net cash flows $ 14,790,695 $ 15,457,917 ============ ============ Summary of changes in the standardized measure of discounted future net cash flows: 1995 1994 Sales of gas and oil produced - net $ (1,728,094)$ (1,540,347) Net changes in prices, production and development costs (4,087,588) 818,263 Extensions, discoveries, and improved recovery, less related costs 792,963 1,125,162 Development costs incurred 5,081,411 1,905,750 Revisions of previous quantity estimates (961,361) 1,069,732 Sales of minerals in place (1,843,660) (3,158,806) Accretion of discount 1,376,058 1,633,244 Net change in income taxes 703,049 1,659,590 ----------- ------------- Net (decrease) increase (667,222) 3,512,588 Beginning of period 15,457,917 11,945,329 ------------ ------------- End of period $ 14,790,695 $ 15,457,917 ============ =============
- ----------------------------------------------------------------------------- (Page 136) AEG HOLDINGS, INC. FINANCIAL STATEMENTS (UNAUDITED) May 31, 1996 ========================================================================== (Page 137) AEG HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (unaudited As of May 31, 1996
ASSETS 1996 1995 CURRENT ASSETS Cash and cash equivalents $6,021,315 $ 316,104 Trade accounts and notes receivable, 6,411,167 3,684,985 Other receivables 828,880 982,178 Costs in excess of billings on uncompleted contracts 403,989 309,942 Inventories 496,391 635,082 Prepaid expenses and other current assets 837,090 412,369 ----------- --------- TOTAL CURRENT ASSETS 14,998,832 6,340,660 OTHER ASSETS Investment in oil and gas wells and leases 33,548,231 28,073,761 Accumulated depreciation (11,858,870) (10,281,026) ----------- ----------- Net investment in oil and gas wells and leases 21,689,361 17,792,735 Investments in other assets 275,682 283,936 ----------- ----------- TOTAL OTHER ASSETTS 21,965,043 18,076,671 PROPERTY, PLANT AND EQUIPMENT Land 365,568 359,193 Buildings 1,790,457 1,785,776 Equipment 1,153,733 1,019,867 Pipeline 18,223,327 16,576,700 ----------- ----------- 21,533,085 19,741,536 Accumulated depreciation (12,825,255) (11,580,885) ------------ ----------- NET PROPERTY, PLANT AND EQUIPMENT 8,707,830 8,160,651 ----------- ----------- TOTAL ASSETS $45,671,705 $32,577,982 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILTIIES Accounts payable and accrued expenses $8,014,373 $ 4,992,355 Working interests and royalties payable 3,629,596 2,930,777 Advanaces on drilling contracts in excess of costs incurred 1,386,987 978,189 Current maturities on long-term debt: 185,714 75,000 Income taxes payable 864,522 1,150,872 Current maturities on stockholders subordinated long term debt 1,669,661 1,279,808 ----------- ----------- TOTAL CURRENT LIABILITIES 15,750,853 11,407,001 DEFERRED INCOME TAXES 1,330,000 1,100,000 LONG-TERM DEBT, net of current maturities SUBORDINATED notes Payable to stockholders 3,255,274 5,106,921 Other 5,709,524 2,792,641 ----------- ---------- TOTAL LONG-TERM DEBT 8,964,798 7,899,562 DEFERRED REVENUE AND OTHER LONG-TERM LIABILITIES 1,210,613 -0- STOCKHOLDERS' EQUITY Capital stock, no par; authorized 2,000,000 shares; issued 500,000 shares 1,250 1,250 Paid-in capital 560,093 560,093 Retained earnings 23,342,993 17,241,471 Treasury stock,(137,419 & 140,919 shares, respectively) (5,488,895) (5,631,395) ----------- ----------- TOTAL STOCKHOLDERS' EQUITY 18,415,441 12,171,419 ----------- ----------- TOTAL LIABILITIES AND EQUITY $45,671,705 $32,577,982 =========== =========== (Page 138) AEG HOLDINGS, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Ten Months Ended May 31, 1996 1996 1995 INCOME Sales-gas wells $16,302,706 $19,312,160 Purchased gas revenues 34,917,254 11,664,744 Well operating fees 2,685,711 2,339,641 Gathering line charges 2,172,349 1,678,289 Working interest and royalties 3,858,537 3,183,516 Non-recurring Income (Note 2) 2,924,146 -0- Interest Income 198,529 137,947 Other 851,512 740,498 ------------ ----------- TOTAL INCOME 63,910,744 39,056,795 COST OF SALES AND OTHER EXPENSES Costs of sales-gas wells 13,693,934 16,594,309 Cost of purchased gas 34,932,992 11,641,479 Gathering line operation and maintenance 2,187,450 2,030,592 General and administrative 1,595,695 1,204,322 Interest: Subordinated notes payable to stockholders 638,658 785,153 Other 345,292 241,975 Depreciation, depletion and amortization 2,469,995 2,259,624 ----------- ---------- TOTAL COST OF SALES AND OTHER EXPENSES 55,864,016 34,857,454 ----------- ---------- INCOME BEFORE INCOME TAXES 8,046728 4,199,341 INCOME TAXES 2,070,349 1,411,015 ----------- ---------- NET INCOME $5,976,379 $ 2,788,326 =========== =========== AEG HOLDINGS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) Ten Months Ended May 31, 1996 NET CASH PROVIDED BY OPERATING ACTIVITIES $ 6,532,907 $ 2,826,495 CASH FLOW FROM INVESTING ACTIVITIES: Investment in oil and gas wells and leases (5,363,041) (4,642,118) Other property additions (1,696,416) (1,283,783) -------------- ----------- Net cash used in investing activities (7,059,457) (5,925,901) CASH FLOWS USED IN FINANCING ACTIVITIES: Principal payments on notes payable to stockholders (1,461,794) (1,279,808) Principal payments on other term loans net (215,062) (1,800,000) -------------- ----------- Net cash used in financing activities (1,676,856) (3,079,808) -------------- ----------- Net decrease in cash and cash equivalents (2,203,406) (6,179,214) Cash and cash equivalents at beginning of period 8,224,721 6,495,318 ------------ ------------ Cash and cash equivalents at end of period $6,021,315 316,104 ============= ============ See Notes to Unaudited Financial Statements
(Page 139) AEG HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) May 31, 1996 1. INTERIM FINANCIAL STATEMENTS The consolidated financial statements as of May 31, 1996 and for the ten months then ended have been prepared by the management of the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the audited July 31, 1995 and 1994 consolidated financial statements. In the opinion of management, all adjustments (consisting of only normal recurring accruals considered necessary for presentation have been included. 2. NON-RECURRING INCOME The non-recurring income item pertains to a settlement of certain claims with Columbia Gas Transmission Corporation. (Page I) EXHIBIT (A) AMENDED AND RESTATED CERTIFICATE AND AGREEMENT OF LIMITED PARTNERSHIP ATLAS-ENERGY FOR THE NINETIES-PUBLIC #5 LTD. TABLE OF CONTENTS SECTION NO. DESCRIPTION PAGE I. FORMATION 1.01 Formation 1 1.02 Certificate of Limited Partnership 1 1.03 Name, Principal Office and Residence 1 1.04 Purpose 1 II. DEFINITION OF TERMS 2.01 Definitions 1 III. SUBSCRIPTIONS AND FURTHER CAPITAL CONTRIBUTIONS 3.01 Designation of Managing General Partner and Participants 7 3.02 Participants 7 3.03 Subscriptions to the Partnership 7 3.04 Capital Contributions 8 3.05 Payment of Subscriptions 9 3.06 Partnership Funds 9 IV. CONDUCT OF OPERATIONS 4.01 Acquisition of Leases 10 4.02 Conduct of Operations 11 4.03 General Rights and Obligations of the Participants and Restricted and Prohibited Transactions 14 4.04 Designation, Compensation and Removal of Managing General Partner and Removal of Operator 20 4.05 Indemnification and Exoneration 21 4.06 Other Activities 22 V. PARTICIPATION IN COSTS AND REVENUES, CAPITAL ACCOUNTS, ELECTIONS AND DISTRIBUTIONS 5.01 Participation in Costs and Revenues 23 5.02 Capital Accounts and Allocations Thereto 24 5.03 Allocation of Income, Deductions and Credits 25 5.04 Elections 26 5.05 Distributions 26 VI. TRANSFER OF INTERESTS 6.01 Transferability 27 6.02 Special Restrictions on Transfers 28 6.03 Right of Managing General Partner to Hypothecate and/or Withdraw Its Interests 28 6.04 Repurchase Obligation 29 VII. DURATION, DISSOLUTION, AND WINDING UP 7.01 Duration 30 7.02 Dissolution and Winding Up 30 VIII. MISCELLANEOUS PROVISIONS 8.01 Notices 31 8.02 Time 31 8.03 Applicable Law 31 8.04 Agreement in Counterparts 31 8.05 Amendment 31 8.06 Additional Partners 31 8.07 Legal Effect 32 EXHIBITS EXHIBIT (I-A) - Managing General Partner Signature Page EXHIBIT (I-B) - Subscription Agreement EXHIBIT (II) - Drilling and Operating Agreement - -------------------------------------------------------------------------- (Page -1) AMENDED AND RESTATED CERTIFICATE AND AGREEMENT OF LIMITED PARTNERSHIP ATLAS-ENERGY FOR THE NINETIES-PUBLIC #5 LTD. THIS AMENDED AND RESTATED CERTIFICATE AND AGREEMENT OF LIMITED PARTNERSHIP ("AGREEMENT"), amending and restating the original Certificate of Limited Partnership, is made and entered into as of , 1996, by and among Atlas Resources, Inc., hereinafter referred to as "Atlas" or the "Managing General Partner", and the remaining parties from time to time signing a Subscription Agreement for Limited Partner Units, such parties hereinafter sometimes referred to as "Limited Partners," or for Investor General Partner Units, such parties hereinafter sometimes referred to as "Investor General Partners". ARTICLE I FORMATION 1.01. FORMATION. The parties hereto form a limited partnership pursuant to the Pennsylvania Revised Uniform Limited Partnership Act, upon the terms and conditions set forth herein. 1.02. CERTIFICATE OF LIMITED PARTNERSHIP. This document shall constitute not only the agreement among the parties hereto, but also shall constitute the Amended and Restated Certificate and Agreement of Limited Partnership of the Partnership and shall be filed or recorded in such public offices as is required under applicable law or deemed advisable in the discretion of the Managing General Partner. Amendments to the certificate of limited partnership shall be filed or recorded in such public offices as required under applicable law or deemed advisable in the discretion of the Managing General Partner. 1.03. NAME, PRINCIPAL OFFICE AND RESIDENCE. The name of the Partnership is Atlas-Energy for the Nineties-Public #5 Ltd. The residence of Atlas shall be its principal place of business at 311 Rouser Road, Moon Township, Pennsylvania 15108, which shall also serve as the principal place of business of the Partnership. The residence of each Participant shall be as set forth on the Subscription Agreement executed by each such party. All such addresses shall be subject to change upon notice to the parties. The name and address of the agent for service of process shall be Mr. J.R. O'Mara at Atlas Resources, Inc., 311 Rouser Road, Moon Township, Pennsylvania 15108. 1.04. PURPOSE. The Partnership shall engage in all phases of the oil and gas business, including, without limitation, exploration for, development and production of oil and gas upon the terms and conditions hereinafter set forth and any other proper purpose under the Pennsylvania Revised Uniform Limited Partnership Act. The Managing General Partner may not, without the affirmative vote of Participants whose Agreed Subscriptions equal a majority of the Partnership Subscription, change the investment and business purpose of the Partnership or cause the Partnership to engage in activities outside the stated business purposes of the Partnership through joint ventures with other entities. No operations of the Partnership shall be commenced until the receipt of the minimum Partnership Subscription set forth in .3.02(d) and the Offering Termination Date. ARTICLE II DEFINITION OF TERMS 2.01. DEFINITIONS. As used in this Agreement, the following terms shall have the meanings hereinafter set forth: 1. "Administrative Costs" shall mean all customary and routine expenses incurred by the Sponsor for the conduct of Partnership administration, including: legal, finance, accounting, secretarial, travel, office rent, telephone, data processing and other items of a similar nature. No Administrative Costs charged shall be duplicated under any other category of expense or cost. No portion of the salaries, benefits, compensation or remuneration of controlling persons of Atlas will be reimbursed by the Partnership as Administrative Costs. Controlling persons include directors, executive officers and those holding five percent or more equity interest in the Managing General Partner or a person having power to direct or cause the direction of the Managing General Partner, whether through the ownership of voting securities, by contract, or otherwise. 2. "Administrator" shall mean the official or agency administering the securities laws of a state. (Page-2) 3. "AEGH" shall mean AEG Holdings, Inc., a Pennsylvania corporation whose principal executive offices are located at 311 Rouser Road, Moon Township, Pennsylvania 15108. 4. "Affiliate" shall mean with respect to a specific person (a) any person directly or indirectly owning, controlling, or holding with power to vote 10 per cent or more of the outstanding voting securities of such specified person; (b) any person 10 per cent or more of whose outstanding voting securities are directly or indirectly owned, controlled, or held with power to vote, by such specified person; (c) any person directly or indirectly controlling, controlled by, or under common control with such specified person; (d) any officer, director, trustee or partner of such specified person; and (e) if such specified person is an officer, director, trustee or partner, any person for which such person acts in any such capacity. 5. "Agreed Subscription" shall mean that amount so designated on the Subscription Agreement executed by the Participant, or, in the case of the Managing General Partner, its subscription under .3.03(b) and its subsections. 6. "Agreement" shall mean this Amended and Restated Certificate and Agreement of Limited Partnership, including all exhibits hereto. 7. "Assessments" shall mean additional amounts of capital which may be mandatorily required of or paid voluntarily by a Participant beyond his subscription commitment. 8. "Atlas" shall mean Atlas Resources, Inc., a Pennsylvania corporation, whose principal executive offices are located at 311 Rouser Road, Moon Township, Pennsylvania 15108. 9. "Atlas Energy" shall mean Atlas Energy Group, Inc., an Ohio corporation, whose principal executive offices are located at 311 Rouser Road, Moon Township, Pennsylvania 15108. 10. "Capital Account" or "account" shall mean the account established for each party hereto, maintained as provided in .5.02 and its subsections. 11. "Capital Contribution" shall mean the amount agreed to be contributed to the Partnership by a party pursuant to ..3.04 and 3.05 and their subsections. 12. "Carried Interest" shall mean an equity interest in the Partnership issued to a Person without consideration, in the form of cash or tangible property, in an amount proportionately equivalent to that received from the Participants. 13. "Code" shall mean the Internal Revenue Code of 1986, as amended. 14. "Cost", when used with respect to the sale of property to the Partnership, shall mean (a) the sum of the prices paid by the seller to an unaffiliated person for such property, including bonuses; (b) title insurance or examination costs, brokers' commissions, filing fees, recording costs, transfer taxes, if any, and like charges in connection with the acquisition of such property; (c) a pro rata portion of the seller's actual necessary and reasonable expenses for seismic and geophysical services; and (d) rentals and ad valorem taxes paid by the seller with respect to such property to the date of its transfer to the buyer, interest and points actually incurred on funds used to acquire or maintain such property, and such portion of the seller's reasonable, necessary and actual expenses for geological, engineering, drafting, accounting, legal and other like services allocated to the property cost in conformity with generally accepted accounting principles and industry standards, except for expenses in connection with the past drilling of wells which are not producers of sufficient quantities of oil or gas to make commercially reasonable their continued operations, and provided that the expenses enumerated in this subsection (d) hereof shall have been incurred not more than 36 months prior to the purchase by the Partnership. When used with respect to services, "cost" shall mean the reasonable, necessary and actual expense incurred by the seller on behalf of the Partnership in providing such services, determined in accordance with generally accepted accounting principles. As used elsewhere, "cost" shall mean the price paid by the seller in an arm's-length transaction. 15. "Development Well" shall mean a well drilled within the proved area of an oil or gas reservoir to the depth of a stratigraphic Horizon known to be productive. - --------------------------------------------------------------------- (Page-3) 16. "Direct Costs" shall mean all actual and necessary costs directly incurred for the benefit of the Partnership and generally attributable to the goods and services provided to the Partnership by parties other than the Sponsor or its Affiliates. Direct Costs shall not include any cost otherwise classified as Organization and Offering Costs, Administrative Costs, Intangible Drilling Costs, Tangible Costs, Operating Costs or costs related to the Leases. Direct Costs may include the cost of services provided by the Sponsor or its Affiliates if such services are provided pursuant to written contracts and in compliance with .4.03(d)(7). 17. "Distribution Interest" shall mean an undivided interest in the assets of the Partnership after payments to creditors of the Partnership or the creation of a reasonable reserve therefor, in the ratio the positive balance of a party's Capital Account bears to the aggregate positive balance of the Capital Accounts of all of the parties determined after taking into account all Capital Account adjustments for the taxable year during which liquidation occurs (other than those made pursuant to liquidating distributions or restoration of deficit Capital Account balances); provided, however, after the Capital Accounts of all of the parties have been reduced to zero, such interest in the remaining assets of the Partnership shall equal a party's interest in the related revenues of the Partnership as set forth in .5.01 and its subsections of this Agreement. 18. "Drilling and Operating Agreement" shall mean the proposed Drilling and Operating Agreement between Atlas, Atlas Energy or Atlas Energy Corporation as Operator, and the Partnership as Developer, a copy of the proposed form of which is attached hereto as Exhibit (II). 19. "Exploratory Well" shall mean a well drilled to find commercially productive hydrocarbons in an unproved area, to find a new commercially productive Horizon in a field previously found to be productive of hydrocarbons at another Horizon, or to significantly extend a known prospect. 20. "Farmout" shall mean an agreement whereby the owner of the leasehold or Working Interest agrees to assign his interest in certain specific acreage to the assignees, retaining some interest such as an Overriding Royalty Interest, an oil and gas payment, offset acreage or other type of interest, subject to the drilling of one or more specific wells or other performance as a condition of the assignment. 21. "Final Terminating Event" shall mean any one of the following: (i) the expiration of the fixed term of the Partnership; (ii) the giving of notice to the Participants by the Managing General Partner of its election to terminate the affairs of the Partnership; (iii) the giving of notice by the Participants to the Managing General Partner of their similar election through the affirmative vote of Participants whose Agreed Subscriptions equal a majority of the Partnership Subscription; or (iv) the termination of the Partnership under .708(b)(1)(A) of the Code or the Partnership ceases to be a going concern. 22. "Horizon" shall mean a zone of a particular formation; that part of a formation of sufficient porosity and permeability to form a petroleum reservoir. 23. "Independent Expert" shall mean a person with no material relationship to the Sponsor or its Affiliates who is qualified and who is in the business of rendering opinions regarding the value of oil and gas properties based upon the evaluation of all pertinent economic, financial, geologic and engineering information available to the Sponsor or its Affiliates. 24. "Intangible Drilling Costs"or "Non-Capital Expenditures" shall mean those expenditures associated with property acquisition and the drilling and completion of oil and gas wells that under present law are generally accepted as fully deductible currently for federal income tax purposes; and includes all expenditures made with respect to any well prior to the establishment of production in commercial quantities for wages, fuel, repairs, hauling, supplies and other costs and expenses incident to and necessary for the drilling of such well and the preparation thereof for the production of oil or gas, that are currently deductible pursuant to Section 263(c) of the Code and Treasury Reg. Section 1.612-4, which are generally termed "intangible drilling and development costs," including the expense of plugging and abandoning any well prior to a completion attempt. 25. "Investor General Partners" shall mean the persons signing the Subscription Agreement as Investor General Partners and the Managing General Partner to the extent of any optional subscription under .3.03(b)(2). All Investor General Partners shall be of the same class and have the same rights. - ------------------------------------------------------------------------- (Page-4) 26. "Landowner's Royalty Interest" shall mean an interest in production, or the proceeds therefrom, to be received free and clear of all costs of development, operation, or maintenance, reserved by a landowner upon the creation of an oil and gas Lease. 27. "Leases" shall mean full or partial interests in oil and gas leases, oil and gas mineral rights, fee rights, licenses, concessions, or other rights under which the holder is entitled to explore for and produce oil and/or gas, and further includes any contractual rights to acquire any such interest. 28. "Limited Partners" shall mean the persons signing the Subscription Agreement as Limited Partners, the Managing General Partner to the extent of any optional subscription under .3.03(b)(2), the Investor General Partners upon the conversion of their Investor General Partner Units to Limited Partner interests pursuant to .6.01(c), and any other persons who are admitted to the Partnership as additional or substituted Limited Partners. Except as provided in .3.05(b), with respect to the required additional Capital Contributions of Investor General Partners, all Limited Partners shall be of the same class and have the same rights. 29. "Managing General Partner" shall mean Atlas Resources, Inc. or any Person admitted to the Partnership as a general partner other than as an Investor General Partner pursuant to this Agreement who is designated to exclusively supervise and manage the operations of the Partnership. 30. "Managing General Partner Signature Page" shall mean an execution and subscription instrument in the form attached as Exhibit (I-A) to this Agreement, which is incorporated herein by reference. 31. "Offering Termination Date" shall mean the date after the minimum Partnership Subscription has been received on which the Managing General Partner determines, in its sole discretion, the Partnership's subscription period is closed and the acceptance of subscriptions ceases, which shall not be later than December 31, 1996. 32. "Operating Costs" shall mean expenditures made and costs incurred in producing and marketing oil or gas from completed wells, including, in addition to labor, fuel, repairs, hauling, materials, supplies, utility charges and other costs incident to or therefrom, ad valorem and severance taxes, insurance and casualty loss expense, and compensation to well operators or others for services rendered in conducting such operations. Subject to the foregoing, Operating Costs also include reworking, workover, subsequent equipping and similar expenses relating to any well. 33. "Operator" shall mean Atlas, as operator of Partnership Wells in Pennsylvania, Atlas Energy as operator of Partnership Wells in Ohio and Atlas or an Affiliate as Operator of Partnership Wells in other areas of the Appalachian Basin. 34. "Organization and Offering Costs" shall mean all costs of organizing and selling the offering including, but not limited to, total underwriting and brokerage discounts and commissions (including fees of the underwriters' attorneys), expenses for printing, engraving, mailing, salaries of employees while engaged in sales activities, charges of transfer agents, registrars, trustees, escrow holders, depositaries, engineers and other experts, expenses of qualification of the sale of the securities under federal and state law, including taxes and fees, accountants' and attorneys' fees and other front-end fees. 35. "Overriding Royalty Interest" shall mean an interest in the oil and gas produced pursuant to a specified oil and gas lease or leases, or the proceeds from the sale thereof, carved out of the working interest, to be received free and clear of all costs of development, operation, or maintenance. 36. "Participants" shall mean the Managing General Partner to the extent of its optional subscription under .3.03(b)(2); the Limited Partners, and the Investor General Partners. 37. "Partners" shall mean the Managing General Partner, the Investor General Partners and the Limited Partners. 38. "Partnership" shall mean Atlas-Energy for the Nineties-Public #5 Ltd., the Pennsylvania limited partnership formed pursuant to this Agreement. - -------------------------------------------------------------------------- (Page-5) 39. "Partnership Net Production Revenues" shall mean gross revenues after deduction of the related Operating Costs, Direct Costs, Administrative Costs and all other Partnership costs not specifically allocated. 40. "Partnership Subscription" shall mean the aggregate Agreed Subscriptions of the parties to this Agreement; provided, however, with respect to Participant voting rights under this Agreement, the term "Partnership Subscription" shall be deemed not to include the Managing General Partner's required subscription under .3.03(b)(1). 41. "Partnership Well" shall mean a well, some portion of the revenues from which is received by the Partnership. 42. "Person" shall mean a natural person, partnership, corporation, association, trust or other legal entity. 43. "Program" shall mean one or more limited or general partnerships or other investment vehicles formed, or to be formed, for the primary purpose of exploring for oil, gas and other hydrocarbon substances or investing in or holding any property interests which permit the exploration for or production of hydrocarbons or the receipt of such production or the proceeds thereof. 44. "Prospect" shall mean an area covering lands which are believed by the Managing General Partner to contain subsurface structural or stratigraphic conditions making it susceptible to the accumulations of hydrocarbons in commercially productive quantities at one or more Horizons. The area, which may be different for different Horizons, shall be designated by the Managing General Partner in writing prior to the conduct of Partnership operations and shall be enlarged or contracted from time to time on the basis of subsequently acquired information to define the anticipated limits of the associated hydrocarbon reserves and to include all acreage encompassed therein. A "Prospect" with respect to a particular Horizon may be limited to the minimum area permitted by state law or local practice, whichever is applicable, to protect against drainage from adjacent wells if the well to be drilled by the Partnership is to a Horizon containing Proved Reserves. Subject to the foregoing sentence, with respect to the Clinton/Medina geological formation in Ohio and Pennsylvania "Prospect" shall be deemed the drilling or spacing unit. 45. "Proved Reserves" shall mean the estimated quantities of crude oil, natural gas, and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, i.e., prices and costs as of the date the estimate is made. Prices include consideration of changes in existing prices provided only by contractual arrangements, but not on escalations based upon future conditions. (i) Reservoirs are considered proved if economic producibility is supported by either actual production or conclusive formation test. The area of a reservoir considered proved includes (a) that portion delineated by drilling and defined by gas-oil and/or oil-water contacts, if any; and (b) the immediately adjoining portions not yet drilled, but which can be reasonably judged as economically productive on the basis of available geological and engineering data. In the absence of information on fluid contacts, the lowest known structural occurrence of hydrocarbons controls the lower proved limit of the reservoir. (ii) Reserves which can be produced economically through application of improved recovery techniques (such as fluid injection) are included in the "proved" classification when successful testing by a pilot project, or the operation of an installed program in the reservoir, provides support for the engineering analysis on which the project or program was based. (iii) Estimates of proved reserves do not include the following: (a) oil that may become available from known reservoirs but is classified separately as "indicated additional reserves"; (b) crude oil, natural gas, and natural gas liquids, the recovery of which is subject to reasonable doubt because of uncertainty as to geology, reservoir characteristics, or economic factors; (c) crude oil, natural gas, and natural gas liquids, that may occur in undrilled prospects; and (d) crude oil, natural gas, and natural gas liquids, that may be recovered from oil shales, coal, gilsonite and other such sources. 46. "Proved Developed Oil and Gas Reserves" shall mean reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Additional oil and gas expected to be obtained through the application of fluid injection or other improved recovery techniques for supplementing the natural forces and - -------------------------------------------------------------------------- (Page-6) mechanisms of primary recovery should be included as "proved developed reserves" only after testing by a pilot project or after the operation of an installed program has confirmed through production response that increased recovery will be achieved. 47. "Proved Undeveloped Reserves" shall mean reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion. Reserves on undrilled acreage shall be limited to those drilling units offsetting productive units that are reasonably certain of production when drilled. Proved reserves for other undrilled units can be claimed only where it can be demonstrated with certainty that there is continuity of production from the existing productive formation. Under no circumstances should estimates for proved undeveloped reserves be attributable to any acreage for which an application of fluid injection or other improved recovery technique is contemplated, unless such techniques have been proved effective by actual tests in the area and in the same reservoir. 48. "Roll-Up" shall mean a transaction involving the acquisition, merger, conversion or consolidation, either directly or indirectly, of the Partnership and the issuance of securities of a Roll-Up Entity. Such term does not include: (a) a transaction involving securities of the Partnership that have been listed for at least twelve months on a national exchange or traded through the National Association of Securities Dealers Automated Quotation National Market System; or (b) a transaction involving the conversion to corporate, trust or association form of only the Partnership if, as a consequence of the transaction, there will be no significant adverse change in any of the following: voting rights; the term of existence of the Partnership; the Managing General Partner's compensation; and the Partnership's investment objectives. 49. "Roll-Up Entity" shall mean a partnership, trust, corporation or other entity that would be created or survive after the successful completion of a proposed roll-up transaction. 50. "Sales Commissions" shall mean all underwriting and brokerage discounts and commissions incurred in the sale of Units in the Partnership payable to registered broker-dealers, excluding reimbursement for bona fide accountable due diligence expenses and wholesaling fees. 51. "Sponsor" shall mean any person directly or indirectly instrumental in organizing, wholly or in part, a program or any person who will manage or is entitled to manage or participate in the management or control of a program. "Sponsor" includes the managing and controlling general partner(s) and any other person who actually controls or selects the person who controls 25% or more of the exploratory, development or producing activities of the program, or any segment thereof, even if that person has not entered into a contract at the time of formation of the program. "Sponsor" does not include wholly independent third parties such as attorneys, accountants, and underwriters whose only compensation is for professional services rendered in connection with the offering of units. Whenever the context so requires, the term "sponsor" shall be deemed to include its affiliates. 52. "Subscription Agreement" shall mean an execution and subscription instrument in the form attached as Exhibit (I-B) to this Agreement, which is incorporated herein by reference. 53. "Tangible Costs" or "Capital Expenditures" shall mean those costs associated with the drilling and completion of oil and gas wells which are generally accepted as capital expenditures pursuant to the provisions of the Internal Revenue Code; and includes all costs of equipment, parts and items of hardware used in drilling and completing a well, and those items necessary to deliver acceptable oil and gas production to purchasers to the extent installed downstream from the wellhead of any well and which are required to be capitalized pursuant to applicable provisions of the Code and regulations promulgated thereunder. 54. "Tax Matters Partner" shall mean the Managing General Partner. 55. "Units" or "Units of Participation" shall mean the Limited Partner interests and the Investor General Partner interests purchased by Participants in the Partnership under the provisions of .3.03 and its subsections. 56. "Working Interest" shall mean an interest in an oil and gas leasehold which is subject to some portion of the Cost of development, operation, or maintenance. - ------------------------------------------------------------------------- (Page-7) ARTICLE III SUBSCRIPTIONS AND FURTHER CAPITAL CONTRIBUTIONS 3.01. DESIGNATION OF MANAGING GENERAL PARTNER AND PARTICIPANTS. Atlas shall serve as Managing General Partner of the Partnership. Atlas shall further serve as a Participant to the extent of any subscription made by it pursuant to .3.03(b)(2). Limited Partners and Investor General Partners, including Affiliates of the Managing General Partner, shall serve as Participants; and except as provided under the Pennsylvania Revised Uniform Limited Partnership Act, the Limited Partners shall not be bound by the obligations of the Partnership. 3.02. PARTICIPANTS. 3.02(a). LIMITED PARTNER AT FORMATION. Atlas Energy Group, Inc., as Original Limited Partner, has acquired one Unit and has made a Capital Contribution of $100. Upon the admission of Limited Partners and Investor General Partners pursuant to .3.02(c) below, the Partnership shall return to such Original Limited Partner its Capital Contribution and shall reacquire its Unit and such Original Limited Partner shall cease to be a Limited Partner in the Partnership with respect to such Unit. 3.02(b). OFFERING OF INTERESTS. The Partnership is authorized to admit to the Partnership at or prior to the Offering Termination Date additional Limited Partners and Investor General Partners whose Agreed Subscriptions for Units are accepted by the Managing General Partner if, after the admission of such additional Limited Partners and Investor General Partners, the Agreed Subscriptions of all Limited Partners and Investor General Partners do not exceed the number of Units set forth in .3.03(c)(1). The Managing General Partner may refuse to admit any person as a Limited Partner or Investor General Partner for any reason whatsoever pursuant to .3.03(d). 3.02(c). ADMISSION OF LIMITED PARTNERS AND/OR INVESTOR GENERAL PARTNERS. No action or consent by the Participants shall be required for the admission of additional Limited Partners and Investor General Partners pursuant to .3.02(b). All subscribers' funds shall be held by an independent interest bearing escrow holder and shall not be released to the Partnership until the receipt of the minimum Partnership Subscription in .3.03(c)(2). Thereafter, subscriptions may be paid directly to the Partnership Account. 3.02(d). MINIMUM CAPITALIZATION AND DURATION OF OFFERING. The offering of Units shall be terminated not later than the earlier of (i) December 31, 1996; or (ii) at such time as Agreed Subscriptions for the maximum Partnership Subscription set forth in .3.03(c)(1) shall have been received and accepted by the Managing General Partner. The offering may be terminated earlier at the option of the Managing General Partner. If at the time of termination Agreed Subscriptions for fewer than 100 Units have been received and accepted, all monies deposited by subscribers shall be promptly returned to them with the interest earned thereon from the date such monies were deposited in escrow through the date of refund. 3.03. SUBSCRIPTIONS TO THE PARTNERSHIP. 3.03(a). SUBSCRIPTIONS BY PARTICIPANTS. 3.03(a)(1). AGREED SUBSCRIPTION. A Participant's Agreed Subscription to the Partnership shall be the amount so designated on his Subscription Agreement. 3.03(a)(2). SUBSCRIPTION PRICE AND MINIMUM AGREED SUBSCRIPTION. The subscription price of a Unit in the Partnership shall be $10,000, payable as set forth herein. The minimum Agreed Subscription per Participant shall be one Unit ($10,000); however, the Managing General Partner, in its discretion, may accept one-half Unit ($5,000) subscriptions. Larger Agreed Subscriptions shall be accepted in $1,000 increments. 3.03(a)(3). EFFECT OF SUBSCRIPTION. Execution of a Subscription Agreement shall serve as an agreement by such Limited Partner or Investor General Partner to be bound by each and every term of this Agreement. 3.03(b). SUBSCRIPTIONS BY MANAGING GENERAL PARTNER. 3.03(b)(1). MANAGING GENERAL PARTNER'S REQUIRED SUBSCRIPTION. The Managing General Partner, as a general partner and not as a Limited Partner or Investor General Partner, shall contribute to the Partnership the Leases which will be drilled by the Partnership - -------------------------------------------------------------------------- (Page-8) on the terms set forth in .4.01(a)(3) and shall pay the costs charged to it pursuant to .5.01(a). Such amounts shall be paid as set forth in .3.05(a). 3.03(b)(2). MANAGING GENERAL PARTNER'S OPTIONAL ADDITIONAL SUBSCRIPTION. In addition to the Managing General Partner's required subscription under .3.03(b)(1), the Managing General Partner may subscribe to up to 10% of the Units on the same basis as a Participant may subscribe to Units under the provisions of .3.03(a) and its subsections, and, subject to the limitations on voting rights set forth in .4.03(c)(1), to that extent shall be deemed a Participant in the Partnership for all purposes under this Agreement. Notwithstanding the foregoing, broker-dealers and the Managing General Partner and its officers and directors and Affiliates shall not be required to pay any Sales Commission, accountable due diligence expense or wholesaling fee. 3.03(b)(3). EFFECT OF AND EVIDENCING SUBSCRIPTION. The Managing General Partner has executed a Managing General Partner Signature Page which evidences the Managing General Partner's required subscription under .3.03(b)(1) and which may be amended to reflect the amount of any optional subscription under .3.03(b)(2). Execution of the Managing General Partner Signature Page serves as an agreement by the Managing General Partner to be bound by each and every term of this Agreement. 3.03(c). MAXIMUM AND MINIMUM PARTNERSHIP SUBSCRIPTION. 3.03(c)(1). MAXIMUM PARTNERSHIP SUBSCRIPTION. The maximum Partnership Subscription excluding the Managing General Partner's required subscription under .3.03(b)(1) may not exceed $7,000,000 (700 Units). However, if subscriptions for all 700 Units being offered are obtained, the Managing General Partner, in its sole discretion, may offer not more than 100 additional Units and increase the maximum aggregate subscriptions with which the Partnership may be funded to not more than 800 Units ($8,000,000). 3.03(c)(2). MINIMUM PARTNERSHIP SUBSCRIPTION. The minimum Partnership Subscription shall equal at least $1,000,000 (100 Units). The Managing General Partner and its Affiliates may purchase up to 10% of the Partnership Subscription, none of which shall be applied to satisfy the $1,000,000 minimum. 3.03(d). ACCEPTANCE OF SUBSCRIPTIONS. Acceptance of subscriptions shall be discretionary with Atlas and Atlas may reject any subscription for any reason it deems appropriate. A Participant's subscription to the Partnership and Atlas' acceptance thereof shall be evidenced by the execution of a Subscription Agreement by the Limited Partner or the Investor General Partner and by Atlas. Agreed Subscriptions shall be accepted or rejected by the Partnership within thirty days of their receipt; if rejected, all funds shall be returned to the subscriber immediately. Upon the original sale of Units, the Participants shall be admitted as Partners not later than fifteen days after the release from escrow of Participants' funds to the Partnership, and thereafter Participants shall be admitted into the Partnership not later than the last day of the calendar month in which their Agreed Subscriptions were accepted by the Partnership. 3.04. CAPITAL CONTRIBUTIONS. 3.04(a). CAPITAL CONTRIBUTIONS. Each Participant shall make a Capital Contribution to the Partnership equal to the sum of: (i) the Agreed Subscription of such Participant; and (ii) in the case of Investor General Partners, but not the Limited Partners, the additional Capital Contributions required in .3.05(b). Participants shall not be required to restore any deficit balances in their Capital Accounts except as set forth in .5.03(h). 3.04(b). ADDITIONAL MANAGING GENERAL PARTNER CAPITAL CONTRIBUTIONS. 3.04(b)(1). ADDITIONAL CAPITAL CONTRIBUTIONS OF THE MANAGING GENERAL PARTNER. In addition to any Capital Contribution required of the Managing General Partner as provided in .3.03(b)(1) and any optional Capital Contribution as a Participant as provided in .3.03(b)(2), the Managing General Partner shall further contribute cash sufficient to pay all costs charged to it under this Agreement to the extent such costs exceed: (i) its Capital Contribution pursuant to .3.03(b); and (ii) its share of undistributed revenues. In any event, the Managing General Partner's aggregate Capital Contributions to the Partnership (including Leases contributed pursuant to .3.03(b)(1)) shall not be less than 15% of all Capital Contributions to the Partnership. Any payments by the Managing General Partner in excess of the costs set forth in .3.03(b)(1) shall be used to pay Partnership costs which would otherwise be charged to the Participants. Such Capital Contributions shall be paid by the Managing General Partner at the time such costs are required to be paid by the Partnership, but, in no event, later than December 31, 1997. Upon liquidation of the Partnership or its interest in the Partnership, the Managing General Partner shall contribute to the Partnership any deficit balance in its Capital Account, determined - ------------------------------------------------------------------------- (Page-9) after taking into account all adjustments for the Partnership's taxable year during which such liquidation occurs (other than adjustments made pursuant to this requirement), by the end of the taxable year in which its interest in the Partnership is liquidated (or, if later, within 90 days after the date of such liquidation), to be paid to creditors of the Partnership or distributed to the other parties hereto in accordance with .7.02 upon liquidation of the Partnership. The Managing General Partner shall maintain a minimum Capital Account balance equal to 1% of total positive Capital Account balances for the Partnership. 3.04(b)(2). INTEREST FOR CONTRIBUTIONS. The interest of the Managing General Partner in the capital and revenues of the Partnership is in consideration for, and is the only consideration for, its Capital Contribution to the Partnership. 3.04(c). LIMITATION ON AMOUNT OF REQUIRED CAPITAL CONTRIBUTIONS OF LIMITED PARTNERS. In no event shall a Limited Partner be required to make contributions to the Partnership greater than his required Capital Contribution under .3.04(a). 3.05. PAYMENT OF SUBSCRIPTIONS. 3.05(a). MANAGING GENERAL PARTNER'S SUBSCRIPTIONS. The Managing General Partner shall contribute to the Partnership the Leases pursuant to .3.03(b)(1) and pay the costs charged to it when incurred by the Partnership, subject to .3.04(b)(1). Any optional subscription under .3.03(b)(2) shall be paid by the Managing General Partner in the same manner as provided for the payment of Participant subscriptions under .3.05(b). 3.05(b). PARTICIPANT SUBSCRIPTIONS AND ADDITIONAL CAPITAL CONTRIBUTIONS OF THE INVESTOR GENERAL PARTNERS. A Participant shall pay his Agreed Subscription 100% in cash at the time of subscribing. A Participant shall receive interest on his Agreed Subscription up until the Offering Termination Date. Investor General Partners are obligated to make Capital Contributions to the Partnership when called by the Managing General Partner, in addition to their Agreed Subscriptions, for their pro rata share of any Partnership obligations and liabilities which are recourse to the Investor General Partners and are represented by their ownership of Units prior to the conversion of Investor General Units to Limited Partner interests pursuant to .6.01(c). The failure of an Investor General Partner to timely make a required additional Capital Contribution pursuant to this section results in his personal liability to the other Investor General Partners for the amount in default. The remaining Investor General Partners, pro rata, must pay such defaulting Investor General Partner's share of Partnership liabilities and obligations. In that event, the remaining Investor General Partners shall have a first and preferred lien on the defaulting Investor General Partner's interest in the Partnership to secure payment of the amount in default plus interest at the legal rate; shall be entitled to receive 100% of the defaulting Investor General Partner's cash distributions directly from the Partnership until the amount in default is recovered in full plus interest at the legal rate; and may commence legal action to collect the amount due plus interest at the legal rate. 3.06. PARTNERSHIP FUNDS. 3.06(a). FIDUCIARY DUTY. The Managing General Partner shall have a fiduciary responsibility for the safekeeping and use of all funds and assets of the Partnership, whether or not in the Managing General Partner's possession or control, and the Managing General Partner shall not employ, or permit another to employ, such funds and assets in any manner except for the exclusive benefit of the Partnership. Neither this Agreement nor any other agreement between the Sponsor and the Partnership shall contractually limit any fiduciary duty owed to the Participants by the Sponsor under applicable law, except as provided in ..4.01, 4.02, 4.04, 4.05 and 4.06 of this Agreement. 3.06(b). SPECIAL ACCOUNT AFTER THE RECEIPT OF THE MINIMUM PARTNERSHIP SUBSCRIPTION. Following the receipt of the minimum Partnership Subscription, the funds of the Partnership shall be held in a separate interest-bearing account maintained for the Partnership and shall not be commingled with funds of any other entity. 3.06(c). INVESTMENT. Partnership funds may not be invested in the securities of another person except in the following instances: (1) investments in Working Interests or undivided Lease interests made in the ordinary course of the Partnership's business; (2) temporary investments made as set forth below; (3) multi-tier arrangements meeting the requirements of .4.03(d)(15); (4) investments involving less than 5% of the Partnership Subscription which are a necessary and incidental part of a property acquisition transaction; and (5) investments in entities established solely to limit the Partnership's liabilities associated with the ownership or operation of property or equipment, provided, in such instances duplicative fees and expenses shall be prohibited. After the Offering Termination Date and until proceeds from the public offering are invested in the Partnership's operations, such proceeds may be temporarily invested in income producing short-term, highly liquid investments, where there is appropriate safety of principal, such as U.S. Treasury Bills. (Page-10) ARTICLE IV CONDUCT OF OPERATIONS 4.01. ACQUISITION OF LEASES. 4.01(a). ASSIGNMENT TO PARTNERSHIP. 4.01(a)(1). GENERAL. The Managing General Partner shall select, acquire and assign or cause to have assigned to the Partnership full or partial interests in Leases, by any method customary in the oil and gas industry, subject to the terms and conditions set forth below. The Partnership shall acquire only Leases reasonably expected to meet the stated purposes of the Partnership. No Leases shall be acquired for the purpose of a subsequent sale unless the acquisition is made after a well has been drilled to a depth sufficient to indicate that such an acquisition would be in the Partnership's best interest. 4.01(a)(2). FEDERAL AND STATE LEASES. The Partnership is authorized to acquire Leases on federal and state lands. 4.01(a)(3). TERMS AND OBLIGATIONS. Subject to the provisions of .4.03(d) and its subsections, such acquisitions of Leases or other property may be made under any terms and obligations, including any limitations as to the Horizons to be assigned to the Partnership, and subject to any burdens, as the Managing General Partner deems necessary in its sole discretion. Provided, however, that any Lease acquired from the Managing General Partner, the Operator or their Affiliates shall be credited towards the Managing General Partner's required Capital Contribution set forth in .3.03(b)(1) at the Cost of such Lease, unless the Managing General Partner shall have cause to believe that Cost is materially more than the fair market value of such property, in which case the credit for such contribution will be made at a price not in excess of the fair market value. A determination of fair market value must be supported by an appraisal from an Independent Expert. Such opinion and any associated supporting information must be maintained in the Partnership's records for six years. To the extent the Partnership does not acquire a full interest in a Lease from the Managing General Partner, the remainder of the interest in such Lease may be held by the Managing General Partner which may either retain and exploit it for its own account or sell or otherwise dispose of all or a part of such remaining interest. Profits from such exploitation and/or disposition shall be for the benefit of the Managing General Partner to the exclusion of the Partnership. 4.01(a)(4). NO BREACH OF DUTY. Subject to the provisions of .4.03 and its subsections, acquisition of Leases from the Managing General Partner, the Operator or their Affiliates shall not be considered a breach of any obligation owed by the Managing General Partner, the Operator, or their Affiliates to the Partnership or the Participants. 4.01(b). OVERRIDING ROYALTY INTERESTS. Neither the Managing General Partner nor any Affiliate shall acquire or retain any Overriding Royalty Interest on the Lease interests acquired by the Partnership. 4.01(c). TITLE AND NOMINEE ARRANGEMENTS. 4.01(c)(1). LEGAL TITLE. Legal title to all Leases acquired by the Partnership shall be held on a permanent basis in the name of the Partnership. However, Partnership properties may be held temporarily in the name of the Managing General Partner, the Operator or their Affiliates or in the name of any nominee designated by the Managing General Partner to facilitate the acquisition of the properties. 4.01(c)(2). TITLE. The Managing General Partner shall take such steps as are necessary in its best judgment to render title to the Leases to be acquired by the Partnership acceptable for the purposes of the Partnership. No operation shall be commenced on Leases acquired by the Partnership unless the Managing General Partner is satisfied that necessary title requirements have been satisfied. The Managing General Partner shall be free, however, to use its own best judgment in waiving title requirements and shall not be liable to the Partnership or to the other parties for any mistakes of judgment; nor shall the Managing General Partner be deemed to be making any warranties or representations, express or implied, as to the validity or merchantability of the title to the Leases assigned to the Partnership or the extent of the interest covered thereby except as otherwise may be provided in the Drilling and Operating Agreement. 4.02. CONDUCT OF OPERATIONS. 4.02(a). IN GENERAL. The Managing General Partner shall establish a program of operations for the Partnership. Subject to the limitations contained in Article III of this Agreement concerning the maximum Capital Contribution which can be required of a - ------------------------------------------------------------------------- (Page 11) Limited Partner, the Managing General Partner, the Limited Partners and the Investor General Partners agree to participate in the program so established by the Managing General Partner. 4.02(b). MANAGEMENT. Subject to any restrictions contained in this Agreement, the Managing General Partner shall exercise full control over all operations of the Partnership. 4.02(c). GENERAL POWERS OF THE MANAGING GENERAL PARTNER. 4.02(c)(1). IN GENERAL. Subject to the provisions of .4.03 and its subsections, and to any authority which may be granted the Operator under .4.02(c)(3)(b), the Managing General Partner shall have full authority to do all things deemed necessary or desirable by it in the conduct of the business of the Partnership. Without limiting the generality of the foregoing, the Managing General Partner is expressly authorized to engage in: (i) the making of all determinations of which Leases, wells and operations will be participated in by the Partnership, which Leases are developed and which Leases are abandoned, or at its sole discretion, sold or assigned to other parties, including other investor ventures organized by the Managing General Partner, the Operator or any of their Affiliates; (ii) the negotiation and execution on any terms deemed desirable in its sole discretion of any contracts, conveyances, or other instruments, considered useful to the conduct of such operations or the implementation of the powers granted it under this Agreement, including, without limitation, the making of agreements for the conduct of operations or the furnishing of equipment, facilities, supplies and material, services, and personnel and the exercise of any options, elections, or decisions under any such agreements; (iii) the exercise, on behalf of the Partnership or the parties, in such manner as the Managing General Partner in its sole judgment deems best, of all rights, elections and options granted or imposed by any agreement, statute, rule, regulation, or order; (iv) the making of all decisions concerning the desirability of payment, and the payment or supervision of the payment, of all delay rentals and shut-in and minimum or advance royalty payments; (v) the selection of full or part-time employees and outside consultants and contractors and the determination of their compensation and other terms of employment or hiring; (vi) the maintenance of such insurance for the benefit of the Partnership and the parties as it deems necessary, but, subject to .6.01(c), in no event less in amount or type than the following: worker's compensation insurance in full compliance with the laws of the Commonwealth of Pennsylvania, and any other applicable state laws; liability insurance (including automobile) which has a $1,000,000 combined single limit for bodily injury and property damage in any one accident or occurrence and in the aggregate; and such excess liability insurance as to bodily injury and property damage with combined limits of $20,000,000, per occurrence or accident and in the aggregate, which includes $250,000 of seepage, pollution and contamination insurance which protects and defends the insured against property damage or bodily injury claims from third parties (other than a co-owner of the Working Interest) alleging seepage, pollution or contamination damage resulting from an accident. Such excess liability insurance shall be in place and effective no later than the Offering Termination Date and shall be for the sole benefit of the Partnership and no other Program in which Atlas serves as Managing General Partner until the Investor General Partners are converted to Limited Partners, at which time coverage for the exclusive benefit of the Partnership will lapse. The Partnership shall continue to enjoy the non- exclusive benefit of Atlas' $11,000,000 liability insurance on the same basis as Atlas and its Affiliates, including other Programs in which Atlas serves as Managing General Partner; (vii) the use of the funds and revenues of the Partnership, and the borrowing on behalf of, and the loan of money to, the Partnership, on any terms it sees fit, for any purpose, including without limitation the conduct or financing, in whole or in part, of the drilling and other activities of the Partnership or the conduct of additional operations, and the repayment of any such borrowings or loans used initially to finance such operations or activities; (viii) the disposition, hypothecation, sale, exchange, release, surrender, reassignment or abandonment of any or all assets of the Partnership (including, without limitation, the Leases, wells, equipment and production therefrom) provided that the sale of all or substantially all of the assets of the Partnership shall only be made as provided in .4.03(d)(6); (ix) the formation of any further limited or general partnership, tax partnership, joint venture, or other relationship which it deems desirable with any parties who it, in its sole and absolute discretion, selects, including any of its Affiliates; - ------------------------------------------------------------------------- (Page-12) (x) the control of any matters affecting the rights and obligations of the Partnership, including the employment of attorneys to advise and otherwise represent the Partnership, the conduct of litigation and other incurring of legal expense, and the settlement of claims and litigation; (xi) the operation of producing wells drilled on the Leases owned by the Partnership, or on a Prospect which includes any part of the Leases; (xii) the exercise of the rights granted to it under the power of attorney created pursuant to this Agreement; and (xiii) the incurring of all costs and the making of all expenditures in any way related to any of the foregoing. 4.02(c)(2). SCOPE OF POWERS. The Managing General Partner's powers shall extend to any operation participated in by the Partnership or affecting its Leases, or other property or assets, irrespective of whether or not the Managing General Partner is designated operator of such operation by any outside persons participating therein. 4.02(c)(3). DELEGATION OF AUTHORITY. 4.02(c)(3)(a). IN GENERAL. The Managing General Partner may subcontract and delegate all or any part of its duties hereunder to any entity chosen by it, including an entity related to it, and such party shall have the same powers in the conduct of such duties as would the Managing General Partner; but such delegation shall not relieve the Managing General Partner of its responsibilities hereunder. 4.02(c)(3)(b). DELEGATION TO OPERATOR. The Managing General Partner is specifically authorized to delegate any or all of its duties to the Operator by executing the Drilling and Operating Agreement, but such delegation shall not relieve the Managing General Partner of its responsibilities hereunder. In no event shall any consideration received for operator services be in excess of the competitive rates or duplicative of any consideration or reimbursements received pursuant to this Agreement. The Managing General Partner may not benefit by interpositioning itself between the Partnership and the actual provider of operator services. 4.02(c)(4). RELATED PARTY TRANSACTIONS. Subject to the provisions of .4.03 and its subsections, any transaction which the Managing General Partner is authorized to enter into on behalf of the Partnership under the authority granted in this section and its subsections, may be entered into by the Managing General Partner with itself or with any other general partner, the Operator or any of their Affiliates. 4.02(d). ADDITIONAL POWERS. In addition to the powers granted the Managing General Partner under .4.02(c) and its subsections or elsewhere in this Agreement, the Managing General Partner, where specified, shall have the following additional express powers. 4.02(d)(1). DRILLING CONTRACTS. Partnership Wells drilled in Pennsylvania, and other areas of the Appalachian Basin may be drilled pursuant to the Drilling and Operating Agreement on a per-foot basis with Atlas or its Affiliates based on $37.39 per foot or, with respect to a well which the Partnership elects not to complete, $20.60 per foot. In no event shall Atlas or its Affiliates, as drilling contractor, receive a per foot rate which is not competitive with the rates charged by unaffiliated contractors in the same geographic region. No turnkey drilling contracts shall be made between the Managing General Partner or its Affiliates and the Partnership. Neither the Managing General Partner nor its Affiliates shall profit by drilling in contravention of its fiduciary obligations to the Partnership. The Managing General Partner may not benefit by interpositioning itself between the Partnership and the actual provider of drilling contractor services. 4.02(d)(2). POWER OF ATTORNEY. 4.02(d)(2)(a). IN GENERAL. Each party hereto hereby makes, constitutes and appoints the Managing General Partner his true and lawful attorney-in-fact for him and in his name, place and stead and for his use and benefit, from time to time: 1. to create, prepare, complete, execute, file, swear to, deliver, endorse and record any and all documents, certificates or other instruments required or necessary to amend this Agreement as authorized under the terms of this Agreement, or to qualify the Partnership as a limited partnership or partnership in commendam and to conduct business under the laws of any jurisdiction in which the Managing General Partner elects to qualify the Partnership or conduct business; and 2. to create, prepare, complete, execute, file, swear to, deliver, endorse and record any and all instruments, assignments, security agreements, financing statements, certificates and other documents as may be necessary from time to time to implement the borrowing powers granted under this Agreement. - -------------------------------------------------------------------------- (Page-13) 4.02(d)(2)(b). FURTHER ACTION. Each party hereto hereby authorizes such attorney-in-fact to take any further action which such attorney-in-fact shall consider necessary or advisable in connection with any of the foregoing and acknowledges that the power of attorney granted under this section is a special power of attorney coupled with an interest and is irrevocable and shall survive the assignment by a party of the whole or a portion of his interest in the Partnership; except that where such assignment is of such party's entire interest in the Partnership and the purchaser, transferee or assignee thereof, with the consent of the Managing General Partner, is admitted as a successor Limited Partner or Investor General Partner, the power of attorney shall survive the delivery of such assignment for the sole purpose of enabling such attorney-in-fact to execute, acknowledge and file any such agreement, certificate, instrument or document necessary to effect such substitution. 4.02(d)(2)(c). POWER OF ATTORNEY TO OPERATOR. The Managing General Partner is hereby authorized to grant a Power of Attorney to the Operator on behalf of the Partnership. 4.02(e). BORROWINGS AND USE OF PARTNERSHIP REVENUES. 4.02(e)(1). POWER TO BORROW OR USE PARTNERSHIP REVENUES. If additional funds over the Partners' Capital Contributions are needed for Partnership operations, the Managing General Partner may: (i) use Partnership revenues allocable to the accounts of the Partners on whose behalf such Partnership revenues are expended for such purposes; or (ii) the Managing General Partner and its Affiliates may advance to the Partnership the funds necessary pursuant to .4.03(d)(8)(b) which borrowings (other than credit transactions on open account customary in the industry to obtain goods and services) shall be without recourse to the Investor General Partners and the Limited Partners except as otherwise provided herein. Also, the amount that may be borrowed at any one time (other than credit transactions on open account customary in the industry to obtain goods and services) shall not exceed an amount equal to 5% of the Partnership Subscription. Notwithstanding, the Managing General Partner and it Affiliates shall not be obligated to advance the funds to the Partnership. 4.02(e)(2). IMPLEMENTATION OF BORROWING PROVISIONS. 4.02(e)(2)(a). INDEMNIFICATION AND HOLD HARMLESS. Each party hereto for whose account an interest in Partnership assets is mortgaged, pledged or otherwise encumbered hereby indemnifies and agrees to hold harmless every other party from any loss resulting from such mortgage, pledge or encumbrance, limited to the amount of his agreed Capital Contribution. 4.02(e)(2)(b). FORECLOSURE. Should a foreclosure of a mortgage, pledge or security interest permitted hereunder occur, any revenues, proceeds and all taxable gain or loss resulting from such foreclosure shall be allocated entirely to the party for whose account such interest was pledged; and such party's interest in the remaining revenues of the Partnership shall be reduced to take into account the foreclosure of the interests foreclosed. 4.02(f). DESIGNATION OF TAX MATTERS PARTNER. Atlas is hereby designated the Tax Matters Partner of the Partnership pursuant to .6231(a)(7) of the Code and is authorized to act in such capacity on behalf of the Partnership and the Participants and to take such action, including settlement or litigation, as it in its sole discretion deems to be in the best interest of the Partnership. Costs incurred by the Tax Matters Partner shall be considered a Direct Cost of the Partnership. The Tax Matters Partner shall notify all Participants of any partnership administrative proceedings commenced by the Internal Revenue Service, and thereafter shall furnish all Participants periodic reports at least quarterly on the status of such proceedings. Each Partner agrees as follows: (1) he will not file the statement described in Section 6224(c)(3)(B) of the Code prohibiting the Managing General Partner as the Tax Matters Partner for the Partnership from entering into a settlement on his behalf with respect to partnership items (as such term is defined in Section 6231(a)(3) of Code) of the Partnership; (2) he will not form or become and exercise any rights as a member of a group of Partners having a 5% or greater interest in the profits of the Partnership under Section 6223(b)(2) of the Code; and (3) the Managing General Partner is authorized to file a copy of this Agreement (or pertinent portions hereof) with the Internal Revenue Service pursuant to Section 6224(b) of the Code if necessary to perfect the waiver of rights under this Subsection 4.02(f). 4.03. GENERAL RIGHTS AND OBLIGATIONS OF THE PARTICIPANTS AND RESTRICTED AND PROHIBITED TRANSACTIONS. 4.03(a)(1). LIMITED LIABILITY OF LIMITED PARTNERS. Limited Partners shall not be bound by the obligations of the Partnership and shall not be personally liable for any debts of the Partnership or any of the obligations or losses thereof beyond the amount of their agreed Capital Contributions, except to the extent such parties also subscribe to the Partnership as Investor General Partners, or, in the case of Atlas, as Managing General Partner. (Page-14) 4.03(a)(2). NO MANAGEMENT AUTHORITY OF PARTICIPANTS. Participants, as such, shall have no power over the conduct of the affairs of the Partnership; and no Participant, as such, shall take part in the management of the business of the Partnership, or have the power to sign for or to bind the Partnership. 4.03(b). REPORTS AND DISCLOSURES. (1) Commencing with the 1996 calendar year, the Partnership shall provide each Participant an annual report within 120 days after the close of the calendar year, and commencing with the 1997 calendar year, a report within 75 days after the end of the first six months of its calendar year, containing, except as otherwise indicated, at least the information set forth below: (a) Audited financial statements of the Partnership, including a balance sheet and statements of income, cash flow and Partners' equity, all of which shall be prepared in accordance with generally accepted accounting principles and accompanied by an auditor's report containing an opinion of an independent public accountant selected by the Managing General Partner stating that his audit was made in accordance with generally accepted auditing standards and that in his opinion such financial statements present fairly the financial position, results of operations, partners' equity and cash flows in accordance with generally accepted accounting principles. Semiannual reports need not be audited. (b) A summary itemization, by type and/or classification of the total fees and compensation including any unaccountable, fixed payment reimbursements for Administrative Costs and Operating Costs, paid by the Partnership, or indirectly on behalf of the Partnership, to the Managing General Partner, the Operator and their Affiliates. In addition, Participants shall be provided the percentage that the annual unaccountable, fixed fee reimbursement for Administrative Costs bears to annual Partnership revenues. (c) A description of each Prospect in which the Partnership owns an interest, including the Cost, location, number of acres under lease and the Working Interest owned therein by the Partnership, except succeeding reports need contain only material changes, if any, regarding such Prospects. (d) A list of the wells drilled or abandoned by the Partnership during the period of the report (indicating whether each of such wells has or has not been completed), and a statement of the Cost of each well completed or abandoned. Justification shall be included for wells abandoned after production has commenced. (e) A description of all farmins and joint ventures, made during the period of the report, including the Managing General Partner's justification for the arrangement and a description of the material terms. (f) A schedule reflecting the total Partnership costs, the costs paid by the Managing General Partner and the costs paid by the Participants, the total Partnership revenues, the revenues received or credited to the Managing General Partner and the revenues received and credited to the Participants and a reconciliation of such expenses and revenues in accordance with the provisions of Article V. (2) The Partnership shall, by March 15 of each year, prepare, or supervise the preparation of, and transmit to each Partner such information as may be needed to enable such Partner to file his federal income tax return, any required state income tax return and any other reporting or filing requirements imposed by any governmental agency or authority. (3) Annually, beginning January 1, 1998, a computation of the total oil and gas Proved Reserves of the Partnership and the present worth of such reserves determined using a discount rate of 10%, a constant price for the oil and basing the price of gas upon the existing gas contracts shall be provided to each Participant along with each Participant's interest therein. The reserve computations shall be based upon engineering reports prepared by the Partnership and reviewed by an Independent Expert. There shall also be included an estimate of the time required for the extraction of such reserves and a statement that because of the time period required to extract such reserves the present value of revenues to be obtained in the future is less than if immediately receivable. In addition to the foregoing computation and required estimate, as soon as possible, and in no event more than ninety days after the occurrence of an event leading to reduction of such reserves of the Partnership of 10% or more, excluding reduction as a result of normal production, sales of reserves or product price changes, a computation and estimate shall be sent to each Participant. (Page-15) (4) The cost of all such reports described in this .4.03(b) shall be paid by the Partnership as Direct Costs. (5) The Participants and/or their representatives shall be permitted access to all records of the Partnership, after adequate notice, at any reasonable time and may inspect and copy any of them. The Managing General Partner will provide a copy of this Agreement or other documents to the Participants after the Partnership's documents have been filed with the Commonwealth of Pennsylvania upon request. The Managing General Partner shall maintain and preserve during the term of the Partnership and for six years thereafter all accounts, books and other relevant documents, including a record that a Participant meets the suitability standards established in connection with an investment in the Partnership and of fair market value as set forth in .4.01(a)(3). Notwithstanding the foregoing, the Managing General Partner may keep logs, well reports and other drilling and operating data confidential for reasonable periods of time. The Managing General Partner may release information concerning the operations of the Partnership to such sources as are customary in the industry or required by rule, regulation, or order of any regulatory body. (6) The following provisions apply regarding access to the list of Participants: (a) an alphabetical list of the names, addresses and business telephone numbers of the Participants along with the number of Units held by each of them (the "Participant List") shall be maintained as a part of the books and records of the Partnership and shall be available for inspection by any Participant or its designated agent at the home office of the Partnership upon the request of the Participant; (b) the Participant List shall be updated at least quarterly to reflect changes in the information contained therein; (c) a copy of the Participant List shall be mailed to any Participant requesting the Participant List within ten days of the written request. The copy of the Participant List shall be printed in alphabetical order, on white paper, and in a readily readable type size (in no event smaller than 10-point type). A reasonable charge for copy work shall be charged by the Partnership; (d) the purposes for which a Participant may request a copy of the Participant List include, without limitation, matters relating to Participant's voting rights under this Agreement and the exercise of Participant's rights under the federal proxy laws; and (e) if the Managing General Partner neglects or refuses to exhibit, produce, or mail a copy of the Participant List as requested, the Managing General Partner shall be liable to any Participant requesting the list for the costs, including attorneys fees, incurred by that Participant for compelling the production of the Participant List, and for actual damages suffered by any Participant by reason of such refusal or neglect. It shall be a defense that the actual purpose and reason for the requests for inspection or for a copy of the Participant List is to secure the list of Participants or other information for the purpose of selling such list or information or copies thereof, or of using the same for a commercial purpose other than in the interest of the applicant as a Participant relative to the affairs of the Partnership. The Managing General Partner shall require the Participant requesting the Participant List to represent in writing that the list was not requested for a commercial purpose unrelated to the Participant's interest in the Partnership. The remedies provided hereunder to Participants requesting copies of the Participant List are in addition to, and shall not in any way limit, other remedies available to Participants under federal law, or the laws of any state. (7) Concurrently with their transmittal to Participants, and as required, the Managing General Partner shall file a copy of each report provided for in this .4.03(b) with the Arkansas Securities Department, the California Commissioner of Corporations, the Kentucky Department of Financial Institutions, the Virginia State Corporation Commission and with the securities commissions of other states which request the report. 4.03(c). MEETINGS OF PARTICIPANTS. Meetings of the Participants may be called by the Managing General Partner or by Participants whose Agreed Subscriptions equal 10% or more of the Partnership Subscription for any matters for which Participants may vote. Such call for a meeting shall be deemed to have been made upon receipt by the Managing General Partner of a written request from holders of the requisite percentage of Agreed Subscriptions stating the purpose(s) of the meeting. The Managing General Partner shall deposit in the United States mail within fifteen days after the receipt of said request, written notice to all Participants of the meeting and the purpose of such meeting, which shall be held on a date not less than thirty days nor more than sixty days after the date of the mailing of said notice, at a reasonable time and place. Provided, however, that the date for notice of such a meeting may be extended for a period of up to sixty days, if in the opinion of the Managing General Partner such additional time is necessary to permit preparation of proxy or information statements or other documents required to be delivered in connection with such meeting by the Securities and Exchange Commission or other regulatory authorities. Participants shall have the right to vote in person or by proxy at any meetings of the Participants. 4.03(c)(1). SPECIAL VOTING RIGHTS. At the request of Participants whose Agreed Subscriptions equal 10% or more of the Partnership Subscription, the Managing General Partner shall call for a vote by Participants. Each Unit is entitled to one vote on all matters; each fractional Unit is entitled to that fraction of one vote equal to the fractional interest in the Unit. Participants whose Agreed (Page-16) Subscriptions equal a majority of the Partnership Subscription may, without the concurrence of the Managing General Partner or its Affiliates, vote to: (a) amend this Agreement; provided however, any such amendment may not increase the duties or liabilities of any Participant or the Managing General Partner or increase or decrease the profit or loss sharing or required Capital Contribution of any Participant or the Managing General Partner without the approval of such Participant or the Managing General Partner. Furthermore, any such amendment may not affect the classification of Partnership income and loss for federal income tax purposes without the unanimous approval of all Participants; (b) dissolve the Partnership; (c) remove the Managing General Partner and elect a new Managing General Partner; (d) elect a new Managing General Partner if the Managing General Partner elects to withdraw from the Partnership; (e) remove the Operator and elect a new Operator; (f) approve or disapprove the sale of all or substantially all of the assets of the Partnership; and (g) cancel any contract for services with the Managing General Partner, or the Operator or their Affiliates, without penalty upon sixty days notice. With respect to Units owned by the Managing General Partner or its Affiliates, the Managing General Partner and its Affiliates may not vote or consent on the matters set forth in (c) or (e) above, or regarding any transaction between the Partnership and the Managing General Partner or its Affiliates. In determining the requisite percentage in interest of Units necessary to approve any Partnership matter on which the Managing General Partner and its Affiliates may not vote or consent, any Units owned by the Managing General Partner and its Affiliates shall not be included. 4.03(c)(2). RESTRICTIONS ON LIMITED PARTNER VOTING RIGHTS. The exercise by the Limited Partners of the rights granted Participants under .4.03(c), except for the special voting rights granted Participants under .4.03(c)(1), shall be subject to the prior legal determination that the grant or exercise of such powers will not adversely affect the limited liability of Limited Partners, unless in the opinion of counsel to the Partnership, such legal determination is not necessary under Pennsylvania law to maintain the limited liability of the Limited Partners. A legal determination under this paragraph may be made either pursuant to an opinion of counsel, such counsel being independent of the Partnership and selected upon the vote of Limited Partners whose Agreed Subscriptions equal a majority of the Agreed Subscriptions held by Limited Partners, or a declaratory judgment issued by a court of competent jurisdiction. The Investor General Partners may exercise the rights granted to the Participants whether or not the Limited Partners can participate in such vote if the Investor General Partners represent the requisite percentage of the Participants necessary to take such action. 4.03(d). RESTRICTED AND PROHIBITED TRANSACTIONS. 4.03(d)(1). EQUAL PROPORTIONATE INTEREST. If the Managing General Partner or an Affiliate, excluding another program in which the interest of the Managing General Partner or its Affiliates is substantially similar to or less than their interest in the Partnership, sells, transfers or conveys any oil, gas or other mineral interests or property to the Partnership, it must, at the same time, sell to the Partnership an equal proportionate interest in all its other property in the same Prospect. Notwithstanding, a Prospect shall be deemed to consist of the drilling or spacing unit on which such well will be drilled by the Partnership if the geological feature to which such well will be drilled contains Proved Reserves and the drilling or spacing unit protects against drainage. With respect to an oil and gas Prospect located in Ohio and Pennsylvania on which a well will be drilled by the Partnership to test the Clinton/Medina geologic formation a Prospect shall be deemed to consist of the drilling and spacing unit if it meets the test in the preceding sentence. Neither the Managing General Partner nor its Affiliates may drill any well within 1,650 feet of an existing Partnership Well in the Clinton/Medina formation in Pennsylvania or within 1,100 feet of an existing Partnership Well in Ohio within five years of the drilling of the Partnership Well. In the event the Partnership abandons its interest in a well, this restriction will continue for one year following the abandonment. If the area constituting the Partnership's Prospect is subsequently enlarged to encompass any area wherein the Managing General Partner or an Affiliate, excluding another Program in which the interest of the Managing General Partner or its Affiliates is substantially similar to or less than their interest in the Partnership, owns a separate property interest, such separate property interest or a portion thereof shall be sold, transferred or conveyed to the Partnership as set forth in ..4.01(a)(3), 4.03(d)(1) and 4.03(d)(2) if the activities of the Partnership were material in establishing the existence of Proved Undeveloped Reserves which are attributable - ------------------------------------------------------------------------- (Page-17) to such separate property interest. Notwithstanding, Prospects in the Clinton/Medina geological formation shall not be enlarged or contracted if the Prospect was limited to the drilling or spacing unit because the well was being drilled to Proved Reserves in the Clinton/Medina geological formation and the drilling or spacing unit protected against drainage. 4.03(d)(2). TRANSFER OF LESS THAN THE MANAGING GENERAL PARTNER'S AND ITS AFFILIATES' ENTIRE INTEREST. A sale, transfer or a conveyance to the Partnership of less than all of the ownership of the Managing General Partner or an Affiliate, excluding another Program in which the interest of the Managing General Partner or its Affiliates is substantially similar to or less than their interest in the Partnership, in any Prospect shall not be made unless the interest retained by the Managing General Partner or the Affiliate is a proportionate Working Interest, the respective obligations of the Managing General Partner or its Affiliates and the Partnership are substantially the same after the sale of the interest by the Managing General Partner or its Affiliates, and the Managing General Partner's interest in revenues does not exceed the amount proportionate to its retained Working Interest. Neither the Managing General Partner nor any Affiliate will retain any Overriding Royalty Interests or other burdens on an interest sold by it to the Partnership. With respect to its retained interest the Managing General Partner shall not Farmout a Lease for the primary purpose of avoiding payment of its costs relating to drilling the Lease. This section does not prevent the Managing General Partner or its Affiliates from subsequently dealing with their retained interest as they may choose with unaffiliated parties or Affiliated partnerships. 4.03(d)(3). TRANSFER OF LEASES TO THE MANAGING GENERAL PARTNER. The Managing General Partner and its Affiliates shall not purchase any producing or non-producing oil and gas properties from the Partnership. 4.03(d)(4). LIMITATIONS ON ACTIVITIES OF THE MANAGING GENERAL PARTNER AND ITS AFFILIATES ON LEASES ACQUIRED BY THE PARTNERSHIP. During a period of five years from the Offering Termination Date of the Partnership, if the Managing General Partner or any of its Affiliates, excluding another Program in which the interest of the Managing General Partner or its Affiliates is substantially similar to or less than their interest in the Partnership, proposes to acquire an interest, from an unaffiliated person, in a Prospect in which the Partnership possesses an interest or in a Prospect in which the Partnership's interest has been terminated without compensation within one year preceding such proposed acquisition, the following conditions shall apply: (a) if the Managing General Partner or the Affiliate, excluding another Program in which the interest of the Managing General Partner or its Affiliates is substantially similar to or less than their interest in the Partnership, does not currently own property in the Prospect separately from the Partnership, then neither the Managing General Partner nor the Affiliate shall be permitted to purchase an interest in the Prospect; and (b) if the Managing General Partner or the Affiliate, excluding another Program in which the interest of the Managing General Partner or its Affiliates is substantially similar to or less than their interest in the Partnership, currently own a proportionate interest in the Prospect separately from the Partnership, then the interest to be acquired shall be divided between the Partnership and the Managing General Partner or the Affiliate in the same proportion as is the other property in the Prospect; provided, however, if cash or financing is not available to the Partnership to enable it to consummate a purchase of the additional interest to which it is entitled, then neither the Managing General Partner nor the Affiliate shall be permitted to purchase any additional interest in the Prospect. 4.03(d)(5). TRANSFER OF LEASES BETWEEN AFFILIATED LIMITED PARTNERSHIPS. The Partnership shall not purchase properties from or sell properties to any other affiliated partnership. This prohibition, however, shall not apply to joint ventures among such affiliated partnerships, provided that the respective obligations and revenue sharing of all parties to the transaction are substantially the same and the compensation arrangement or any other interest or right of either the Managing General Partner or its Affiliates is the same in each affiliated partnership, or, if different, the aggregate compensation of the Managing General Partner or the Affiliate is reduced to reflect the lower compensation arrangement. 4.03(d)(6). SALE OF ALL ASSETS. The sale of all or substantially all of the assets of the Partnership (including, without limitation, Leases, wells, equipment and production therefrom) shall be made only with the consent of Participants whose Agreed Subscriptions equal a majority of the Partnership Subscription. 4.03(d)(7). SERVICES. The Managing General Partner and any Affiliate shall not render to the Partnership any oil field, equipage or other services nor sell or lease to the Partnership any equipment or related supplies unless such person is engaged, independently of the Partnership and as an ordinary and ongoing business, in the business of rendering such services or selling or leasing such equipment and supplies to a substantial extent to other persons in the oil and gas industry in addition to the partnerships in which the Managing General Partner or an Affiliate has an interest; and the compensation, price or rental therefor is competitive with the compensation, - ----------------------------------------------------------------------- (Page -18) price or rental of other persons in the area engaged in the business of rendering comparable services or selling or leasing comparable equipment and supplies which could reasonably be made available to the Partnership. If such person is not engaged in such a business then such compensation, price or rental will be the Cost of such services, equipment or supplies to such person or the competitive rate which could be obtained in the area, whichever is less. Any such services for which the Managing General Partner or an Affiliate is to receive compensation other than those described in this Prospectus shall be embodied in a written contract which precisely describes the services to be rendered and all compensation to be paid. Such contracts are cancellable without penalty upon sixty days written notice by Participants whose Agreed Subscriptions equal a majority of the Partnership Subscription. 4.03(d)(8). LOANS. 4.03(d)(8)(a). LOANS FROM THE PARTNERSHIP. No loans or advances shall be made by the Partnership to the Managing General Partner or any Affiliate. 4.03(d)(8)(b). LOANS TO THE PARTNERSHIP. Neither the Managing General Partner nor any Affiliate shall loan money to the Partnership where the interest to be charged exceeds the Managing General Partner's or the Affiliate's interest cost or where the interest to be charged exceeds that which would be charged to the Partnership (without reference to the Managing General Partner's or the Affiliate's financial abilities or guarantees) by unrelated lenders, on comparable loans for the same purpose, and neither the Managing General Partner nor any Affiliate shall receive points or other financing charges or fees, regardless of the amount, although the actual amount of such charges incurred from third-party lenders may be reimbursed to the Managing General Partner or the Affiliate. 4.03(d)(9). FARMOUTS. The Partnership shall not Farmout its Leases. 4.03(d)(10). COMPENSATING BALANCES. Neither the Managing General Partner nor any Affiliate shall use the Partnership's funds as compensating balances for its own benefit. 4.03(d)(11). FUTURE PRODUCTION. Neither the Managing General Partner nor any Affiliate shall commit the future production of a well developed by the Partnership exclusively for its own benefit. 4.03(d)(12). MARKETING ARRANGEMENTS. All benefits from marketing arrangements or other relationships affecting property of the Managing General Partner or its Affiliates and the Partnership shall be fairly and equitably apportioned according to the respective interests of each in such property. The Managing General Partner shall treat all wells in a geographic area equally concerning to whom and at what price the Partnership's gas will be sold and to whom and at what price the gas of other oil and gas Programs which the Managing General Partner has sponsored or will sponsor will be sold. The Managing General Partner calculates a weighted average selling price for all of the gas sold in a geographic area by taking all money received from the sale of all of the gas sold to its customers in a geographic area and dividing by the volume of all gas sold from the wells in that geographic area. Notwithstanding, the Managing General Partner and its Affiliates are parties to, and contract for, the sale of natural gas with industrial end-users and will continue to enter into such contracts on their own behalf, and the Partnership will not be a party to such contracts. The Managing General Partner and its Affiliates also have a substantial interest in certain pipeline facilities and compression facilities which access interstate pipeline systems, which it is anticipated will be used to transport the Partnership's gas production as well as Affiliated partnership and third-party gas production, and the Partnership will not receive any interest in the Managing General Partner's and its Affiliates' pipeline or gathering system or compression facilities. 4.03(d)(13). ADVANCE PAYMENTS. Advance payments by the Partnership to the Managing General Partner and its Affiliates are prohibited, except where advance payments are required to secure the tax benefits of prepaid drilling costs and for a business purpose. These advance payments, if any, shall not include nonrefundable payments for completion costs prior to the time that a decision was made that the well or wells warrant a completion attempt. 4.03(d)(14). NO REBATES. No rebates or give-ups may be received by the Managing General Partner or any Affiliate nor may the Managing General Partner or any Affiliate participate in any reciprocal business arrangements which would circumvent these guidelines. 4.03(d)(15). PARTICIPATION IN OTHER PARTNERSHIPS. If the Partnership participates in other partnerships or joint ventures (multi-tier arrangements), the terms of any such arrangements shall not result in the circumvention of any of the requirements or prohibitions contained in this Agreement, including the following: (i) there shall be no duplication or increase in organization and offering expenses, the Managing General Partner's compensation, Partnership expenses or other fees and costs; (ii) there shall be no substantive - ----------------------------------------------------------------------- (Page-19) alteration in the fiduciary and contractual relationship between the Managing General Partner and the Participants; and (iii) there shall be no diminishment in the voting rights of the Participants. 4.03(d)(16). ROLL-UP LIMITATIONS. In connection with a proposed Roll-Up, the following shall apply: (a) An appraisal of all Partnership assets shall be obtained from a competent Independent Expert. If the appraisal will be included in a prospectus used to offer securities of a Roll-Up Entity, the appraisal shall be filed with the Securities and Exchange Commission and the Administrator as an exhibit to the registration statement for the offering. Accordingly, an issuer using the appraisal shall be subject to liability for violation of Section 11 of the Securities Act of 1933 and comparable provisions under state law for any material misrepresentations or material omissions in the appraisal. Partnership assets shall be appraised on a consistent basis. The appraisal shall be based on all relevant information, including current reserve estimates prepared by an independent petroleum consultant, and shall indicate the value of the Partnership's assets as of a date immediately prior to the announcement of the proposed Roll-Up transaction. The appraisal shall assume an orderly liquidation of the Partnership's assets over a twelve month period. The terms of the engagement of the Independent Expert shall clearly state that the engagement is for the benefit of the Partnership and the Participants. A summary of the independent appraisal, indicating all material assumptions underlying the appraisal, shall be included in a report to the Participants in connection with a proposed Roll-Up. (b) In connection with a proposed Roll-Up, Participants who vote "no" on the proposal shall be offered the choice of: (1) accepting the securities of the Roll-Up Entity offered in the proposed Roll-Up; (2) remaining as Participants in the Partnership and preserving their interests therein on the same terms and conditions as existed previously; or (3) receiving cash in an amount equal to the Participants' pro rata share of the appraised value of the net assets of the Partnership. (c) The Partnership shall not participate in any proposed Roll-Up which, if approved, would result in the diminishment of any Participant's voting rights under the Roll-Up Entity's chartering agreement. In no event shall the democracy rights of Participants in the Roll-Up Entity be less than those provided for under ..4.03(c) and 4.03(c)(1) of this Agreement. If the Roll-Up Entity is a corporation, the democracy rights of Participants shall correspond to the democracy rights provided for in this Agreement to the greatest extent possible. (d) The Partnership shall not participate in any proposed Roll-Up transaction which includes provisions which would operate to materially impede or frustrate the accumulation of shares by any purchaser of the securities of the Roll-Up Entity (except to the minimum extent necessary to preserve the tax status of the Roll-Up Entity); nor shall the Partnership participate in any proposed Roll-Up transaction which would limit the ability of a Participant to exercise the voting rights of its securities of the Roll-Up Entity on the basis of the number of Units held by that Participant. (e) The Partnership shall not participate in a Roll-Up in which Participants' rights of access to the records of the Roll-Up Entity will be less than those provided for under ..4.03(b)(5) and 4.03(b)(6) of this Agreement. (f) The Partnership shall not participate in any proposed Roll-Up transaction in which any of the costs of the transaction would be borne by the Partnership if less than 75% in interest of the Participants vote to approve the proposed Roll-Up. (g) The Partnership shall not participate in a Roll-Up transaction unless the Roll-Up transaction is approved by Participants whose Agreed Subscriptions equal 75% of the Partnership Subscription. 4.03(d)(17). DISCLOSURE OF BINDING AGREEMENTS. Any agreement or arrangement which binds the Partnership must be disclosed in the Prospectus. 4.03(d)(18) FAIR AND REASONABLE. Neither the Managing General Partner nor any Affiliate will sell, transfer, or convey any property to or purchase any property from the Partnership, directly or indirectly, except pursuant to transactions that are fair and reasonable, nor take any action with respect to the assets or property of the Partnership which does not primarily benefit the Partnership. - ------------------------------------------------------------------------ (Page-20) 4.04. DESIGNATION, COMPENSATION AND REMOVAL OF MANAGING GENERAL PARTNER AND REMOVAL OF OPERATOR. 4.04(a). MANAGING GENERAL PARTNER. 4.04(a)(1). TERM OF SERVICE. Atlas shall serve as the Managing General Partner of the Partnership until it is removed pursuant to .4.04(a)(3). 4.04(a)(2). COMPENSATION OF MANAGING GENERAL PARTNER. Charges by the Managing General Partner for goods and services must be fully supportable as to the necessity thereof and the reasonableness of the amount charged. All actual and necessary expenses incurred by the Partnership may be paid out of the Partnership Subscription and out of Partnership revenues. In addition to the compensation set forth in ..4.01(a)(3) and 4.02(d)(1) Atlas, as Managing General Partner and its Affiliates shall be reimbursed for all Direct Costs and credited pursuant to .5.01(a) for Organization and Offering Costs not exceeding 15% of the Partnership Subscription; provided, however, Direct Costs shall be billed directly to and paid by the Partnership to the extent practicable. In addition, subject to the above paragraph, Atlas shall receive an unaccountable, fixed payment reimbursement for its Administrative Costs of $75 per well per month, which shall be proportionately reduced to the extent the Partnership acquires less than 100% of the Working Interest in the well. The unaccountable, fixed payment reimbursement of $75 per well per month shall not be increased in amount during the term of the Partnership. Further, Atlas, as Managing General Partner, shall not be reimbursed for any additional Partnership Administrative Costs and the unaccountable, fixed payment reimbursement of $75 per well per month shall be the entire payment to reimburse Atlas for the Partnership's Administrative Costs. Finally, Atlas, as Managing General Partner, shall not receive the unaccountable, fixed payment reimbursement of $75 per well per month for plugged or abandoned wells. Atlas and its Affiliates shall also receive a combined transportation and marketing fee at a competitive rate for transporting and marketing the Partnership's gas. The Managing General Partner and its Affiliates may enter into transactions pursuant to .4.03(d)(7) and shall be entitled to compensation pursuant to such section. In addition, the Managing General Partner and its Affiliates shall receive compensation as set forth in the Drilling and Operating Agreement. 4.04(a)(3). REMOVAL OF MANAGING GENERAL PARTNER. The Managing General Partner may be removed and a new Managing General Partner or Managing General Partners may be substituted at any time upon sixty days advance written notice to the outgoing Managing General Partner, by the affirmative vote of Participants whose Agreed Subscriptions equal a majority of the Partnership Subscription. Should Participants vote to remove the Managing General Partner from the Partnership, Participants must elect by an affirmative vote of Participants whose Agreed Subscriptions equal a majority of the Partnership Subscription either to terminate, dissolve and wind up the Partnership or to continue as a successor limited partnership under all the terms of this Partnership Agreement, as provided in .7.01(c). If the Participants elect to continue as a successor limited partnership, the Managing General Partner shall not be removed until a substituted Managing General Partner has been selected by an affirmative vote of Participants whose Agreed Subscriptions equal a majority of the Partnership Subscription and installed as such. In the event the Managing General Partner is removed, the Managing General Partner's interest in the Partnership shall be determined by appraisal by a qualified Independent Expert selected by mutual agreement between the removed Managing General Partner and the incoming Managing General Partner, such appraisal to take into account an appropriate discount, to reflect the risk of recovery of oil and gas reserves, but not less than that utilized in the most recent repurchase offer, if any. The cost of such appraisal shall be borne equally by the removed Managing General Partner and the Partnership. The incoming Managing General Partner shall have the option to purchase 20% of the removed Managing General Partner's interest for the value determined by the Independent Expert. The method of payment for such interest must be fair and must protect the solvency and liquidity of the Partnership. Where the termination is voluntary, the method of payment shall be a non-interest bearing unsecured promissory note with principal payable, if at all, from distributions which the Managing General Partner otherwise would have received under the Partnership Agreement had the Managing General Partner not been terminated. Where the termination is involuntary, the method of payment shall be an interest bearing promissory note coming due in no less than five years with equal installments each year. The interest rate shall be that charged on comparable loans. The removed Managing General Partner, at the time of its removal shall cause, to the extent it is legally possible, its successor to be transferred or assigned all its rights, obligations and interests as Managing General Partner of the Partnership in contracts entered into by it on behalf of the Partnership. In any event, the removed Managing General Partner shall cause its rights, obligations and interests as Managing General Partner of the Partnership in any such contract to terminate at the time - ------------------------------------------------------------------------- (Page-21) of its removal. Notwithstanding any other provision in this Agreement, the Partnership or the successor Managing General Partner shall not be a party to any gas purchase agreement that Atlas or its Affiliates enters into with a third party and shall not have any rights pursuant to such gas purchase agreement. Further, the Partnership or the successor Managing General Partner shall not receive any interest in Atlas' and its Affiliates' pipeline or gathering system or compression facilities. At any time commencing ten years after the Offering Termination Date of the Partnership and the Partnership's primary drilling activities, the Managing General Partner may voluntarily withdraw as Managing General Partner upon giving 120 days' written notice of withdrawal to the Participants and its interest in the Partnership shall be determined as provided above with respect to removal. Such interest shall be distributed to the Managing General Partner as described above with respect to voluntary removal, subject to the option of any successor Managing General Partner to purchase 20% of such interest at the value determined as described above with respect to removal. The Managing General Partner has the right at any time to withdraw a property interest held by the Partnership in the form of a Working Interest in the Partnership Wells equal to or less than its respective interest in the revenues of the Partnership pursuant to the conditions set forth in .6.03. The Managing General Partner shall fully indemnify the Partnership against any additional expenses which may result from a partial withdrawal of its interests and such withdrawal may not result in a greater amount of Direct Costs or Administrative Costs being allocated to the Participants. The expenses of withdrawing shall be borne by the withdrawing Managing General Partner. 4.04(a)(4). REMOVAL OF OPERATOR. The Operator may be removed and a new Operator may be substituted at any time upon 60 days advance written notice to the outgoing Operator by the Managing General Partner acting on behalf of the Partnership upon the affirmative vote of Participants whose Agreed Subscriptions equal a majority of the Partnership Subscription. The Operator shall not be removed until a substituted Operator has been selected by an affirmative vote of Participants whose Agreed Subscriptions equal a majority of the Partnership Subscription and installed as such. 4.05. INDEMNIFICATION AND EXONERATION. 4.05(a). GENERAL STANDARDS. The Managing General Partner, the Operator and their Affiliates shall have no liability whatsoever to the Partnership or to any Participant for any loss suffered by the Partnership or Participants which arises out of any action or inaction of the Managing General Partner, the Operator or their Affiliates if the Managing General Partner, the Operator and their Affiliates, determined in good faith that such course of conduct was in the best interest of the Partnership, the Managing General Partner, the Operator and their Affiliates were acting on behalf of or performing services for the Partnership and such course of conduct did not constitute negligence or misconduct of the Managing General Partner, the Operator or their Affiliates. The Managing General Partner, the Operator and their Affiliates shall be indemnified by the Partnership against any losses, judgments, liabilities, expenses and amounts paid in settlement of any claims sustained by them in connection with the Partnership, provided that the Managing General Partner, the Operator and their Affiliates determined in good faith that the course of conduct which caused the loss or liability was in the best interest of the Partnership, the Managing General Partner, the Operator and their Affiliates were acting on behalf of or performing services for the Partnership and such course of conduct was not the result of negligence or misconduct of the Managing General Partner, the Operator or their Affiliates. Provided, however, payments arising from such indemnification or agreement to hold harmless are recoverable only out of the tangible net assets of the Partnership, including any insurance proceeds. Notwithstanding anything to the contrary contained in the above, the Managing General Partner, the Operator and their Affiliates and any person acting as a broker-dealer shall not be indemnified for any losses, liabilities or expenses arising from or out of an alleged violation of federal or state securities laws by such party unless (1) there has been a successful adjudication on the merits of each count involving alleged securities law violations as to the particular indemnitee; (2) such claims have been dismissed with prejudice on the merits by a court of competent jurisdiction as to the particular indemnitee, or (3) a court of competent jurisdiction approves a settlement of the claims against a particular indemnitee and finds that indemnification of the settlement and the related costs should be made, and the court considering the request for indemnification has been advised of the position of the Securities and Exchange Commission, the Massachusetts Securities Division, and the position of any state securities regulatory authority in which plaintiffs claim they were offered or sold Partnership Units, with respect to the issue of indemnification for violation of securities laws. - ------------------------------------------------------------------------- (Page-22) The advancement of Partnership funds to the Managing General Partner or its Affiliates for legal expenses and other costs incurred as a result of any legal action for which indemnification is being sought is permissible only if the Partnership has adequate funds available and the following conditions are satisfied: (1) the legal action relates to acts or omissions with respect to the performance of duties or services on behalf of the Partnership; (2) the legal action is initiated by a third party who is not a Participant, or the legal action is initiated by a Participant and a court of competent jurisdiction specifically approves such advancement; and (3) the Managing General Partner or its Affiliates undertake to repay the advanced funds to the Partnership, together with the applicable legal rate of interest thereon, in cases in which such party is found not to be entitled to indemnification. The Partnership shall not bear the cost of that portion of insurance which insures the Managing General Partner, the Operator or their Affiliates for any liability for which the Managing General Partner, the Operator or their Affiliates could not be indemnified pursuant to the first two paragraphs of this .4.05(a). 4.05(b). LIABILITY OF PARTNERS. Pursuant to the Pennsylvania Revised Uniform Limited Partnership Act the Investor General Partners are liable jointly and severally for all liabilities and obligations of the Partnership. Notwithstanding the foregoing, as among themselves, the Investor General Partners hereby agree that each shall be solely and individually responsible only for his pro rata share of the liabilities and obligations of the Partnership. In addition, Atlas and AEGH agree to use their corporate assets and not the assets of the Partnership to indemnify each of the Investor General Partners against all Partnership related liabilities which exceed such Investor General Partner's interest in the undistributed net assets of the Partnership and insurance proceeds, if any. Further, Atlas and AEGH agree to indemnify each Investor General Partner against any personal liability as a result of the unauthorized acts of another Investor General Partner. Upon such indemnification by Atlas and AEGH, each Investor General Partner who has been indemnified shall and does hereby transfer and subrogate his rights for contribution from or against any other Investor General Partner to Atlas and/or AEGH. 4.05(c). ORDER OF PAYMENT. Claims shall be paid first out of any insurance proceeds, next out of the assets and revenues of the Partnership, and finally by the Managing General Partner as provided in ..3.05(b) and 4.05(b). No Limited Partner shall be required to reimburse the Managing General Partner, the Operator or their Affiliates or the Investor General Partners for any liability in excess of his agreed Capital Contribution, except for a liability resulting from such Limited Partner's unauthorized participation in Partnership management, or from some other breach by such Limited Partner of this Agreement. 4.05(d). AUTHORIZED TRANSACTIONS. No transaction entered into or action taken by the Partnership or the Managing General Partner, the Operator or their Affiliates, which is authorized by this Agreement to be entered into or taken with such party shall be deemed a breach of any obligation owed by the Managing General Partner, the Operator or their Affiliates to the Partnership or the Participants. 4.06. OTHER ACTIVITIES. The Managing General Partner, the Operator and their Affiliates are now engaged, and will engage in the future, for their own account and for the account of others, including other investors, in all aspects of the oil and gas business, including, without limitation, the evaluation, acquisition and sale of producing and nonproducing Leases, and the exploration for and production of oil, gas, and other minerals. The Managing General Partner is required to devote only so much of its time as is necessary to manage the affairs of the Partnership. Except as expressly provided to the contrary in this Agreement, and subject to fiduciary duties, such parties may continue such activities, or initiate further such activities, individually, jointly with others, or as a part of any other limited or general partnership, tax partnership, joint venture, or other entity or activity to which they are or may become a party, in any locale and in the same fields, areas of operation or prospects in which the Partnership may likewise be active; may reserve partial interests in Leases being assigned to the Partnership or any other interests not expressly prohibited by this Agreement; may deal with the Partnership as independent parties or through any other entity in which they may be interested; may conduct business with the Partnership as set forth herein; may participate in such other investor operations, as investors or otherwise; and shall not be required to permit the Partnership or the Participants to participate in any such operations in which they may be interested or share in any profits or other benefits therefrom. However, except as otherwise provided herein, the Managing General Partner and any of its Affiliates may pursue business opportunities that are consistent with the Partnership's investment objectives for their own account only after they have determined that such opportunity either cannot be pursued by the Partnership because of insufficient funds or because it is not appropriate for the Partnership under the existing circumstances. Atlas or its Affiliates may manage multiple programs simultaneously. Notwithstanding any other provision in this Agreement, the Partnership shall not be a party to any gas supply agreement that Atlas or its Affiliates enters into with a third party and shall not have any rights pursuant to such gas supply agreement. Further, the Partnership shall not receive any interest in Atlas' and its Affiliates' pipeline or gathering system or compression facilities. - ------------------------------------------------------------------------ (Page-23) ARTICLE V PARTICIPATION IN COSTS AND REVENUES, CAPITAL ACCOUNTS, ELECTIONS AND DISTRIBUTIONS 5.01. PARTICIPATION IN COSTS AND REVENUES. Except as otherwise provided in this Agreement, costs and revenues shall be charged and credited to the Managing General Partner and the Participants as set forth in this .5.01 and its subsections. 5.01(a). COSTS. Costs shall be charged as follows: (1) Organization and Offering Costs shall be charged 100% to the Managing General Partner. For purposes of sharing in revenues, pursuant to .5.01(b)(4), the Managing General Partner shall be credited with Organization and Offering Costs up to and including 15% of the Partnership Subscription which were paid by the Managing General Partner. Notwithstanding, Organization and Offering Costs in excess of 15% of the Partnership Subscription shall be charged 100% to the Managing General Partner without recourse to the Partnership and the Managing General Partner shall not be credited with such amounts towards its required Capital Contribution. (2) Intangible Drilling Costs shall be charged 100% to the Participants. (3) Tangible Costs shall be charged 14% to the Managing General Partner and 86% to the Participants. (4) Operating Costs, Direct Costs, Administrative Costs and all other Partnership costs not specifically allocated shall be charged 75% to the Participants and 25% to the Managing General Partner. Provided, however, in the event a portion of the Managing General Partner's Partnership Net Production Revenues are subordinated pursuant to .5.01(b)(4), all such Operating Costs, Direct Costs, Administrative Costs and all other Partnership costs not specifically allocated shall be charged between the Managing General Partner and the Participants in the same ratio as the related production revenues are being credited. 5.01(b). REVENUES. Revenues of the Partnership from all sources and wells shall be commingled and credited as follows: (1) If the Partners' Capital Accounts are adjusted to reflect the simulated depletion of an oil or gas property of the Partnership, the portion of the total amount realized by the Partnership upon the taxable disposition of such property that represents recovery of its simulated tax basis therein shall be allocated to the Partners in the same proportion as the aggregate adjusted tax basis of such property was allocated to such Partners (or their predecessors in interest). lf the Partners' Capital Accounts are adjusted to reflect the actual depletion of an oil or gas property of the Partnership, the portion of the total amount realized by the Partnership upon the taxable disposition of such property that equals the Partners' aggregate remaining adjusted tax basis therein shall be allocated to the Partners in proportion to their respective remaining adjusted tax bases in such property. Thereafter, any excess shall be allocated to Atlas in an amount equal to the difference between the fair market value of the Lease at the time it was contributed to the Partnership and its simulated or actual adjusted tax basis at such time. Finally, any excess shall be credited to the parties in accordance with the sharing ratios provided in (4), below. In the event of a sale of developed oil and gas properties with equipment thereon, the Managing General Partner may make any reasonable allocation of proceeds between the equipment and the Leases. (2) Interest earned on Agreed Subscriptions before the Offering Termination Date pursuant to .3.05(b) shall be credited to the accounts of the respective subscribers who paid such subscriptions to the Partnership and paid approximately six weeks after the Offering Termination Date. After the Offering Termination Date and until proceeds from the offering are invested in the Partnership's oil and gas operations, any interest income from temporary investments shall be allocated pro rata to the Participants providing such Agreed Subscriptions. All other interest income, including interest earned on the deposit of production revenues, shall be credited as provided in (4), below. (3) Proceeds from the sale or disposition of equipment shall be credited to the parties charged with the costs of such equipment in the ratio in which such costs were charged. (4) All other revenues of the Partnership shall be credited 75% to the Participants and 25% to the Managing General Partner. Notwithstanding, the Managing General Partner shall subordinate a part of its Partnership production revenues in (Page-24) an amount up to 10% of the Partnership's Net Production Revenues net of the related costs as provided in 5.01(a)(4), to the receipt by Participants of cash distributions from the Partnership equal to 10% of their Agreed Subscriptions in each of the first five twelve-month periods of Partnership operations commencing with the first distribution of revenues to the Participants. In this regard, however, the Managing General Partner shall not subordinate an amount greater than 10% of the Partnership's production revenues net of the related costs as provided in 5.01(a)(4) in any such distribution period. The subordination shall be determined by: (i) carrying forward to subsequent twelve-month periods the amount, if any, by which cumulative cash distributions to Participants (including any subordination payments) are less than 10% of Participants' Agreed Subscriptions in the first twelve- month period, 20% of Participants' Agreed Subscriptions in the second twelve-month period, 30% of Participants' Agreed Subscriptions in the third twelve-month period, or 40% of Participants' Agreed Subscriptions in the fourth twelve-month period (no carry forward is required if such distributions are less than 50% of Participants' Agreed Subscriptions in the fifth twelve- month period because the Managing General Partner's subordination obligation terminates upon the expiration of the fifth twelve-month period) ; and (ii) reimbursing the Managing General Partner for any previous subordination payments to the extent cumulative cash distributions to Participants (including any subordination payments) would exceed 10% of Participants' Agreed Subscriptions in the first twelve-month period, 20% of Participants' Agreed Subscriptions in the second twelve-month period, 30% of Participants' Agreed Subscriptions in the third twelve-month period, 40% of Participants' Agreed Subscriptions in the fourth twelve-month period, or 50% of Participants' Agreed Subscriptions in the fifth twelve-month period. The Managing General Partner's subordination obligation shall be determined and paid at the time of each Partnership distribution during the subordination period, and may be prorated in the Managing General Partner's discretion (e.g. in the case of a quarterly distribution, the Managing General Partner will not have any subordination obligation if the distributions to Participants equal 2.5% or more of their Agreed Subscriptions assuming there is no subordination owed for any preceding periods). The Managing General Partner shall not be required to return Partnership distributions previously received by it, even though a subordination obligation arises subsequent to such distributions, and no subordination payments to Participants or reimbursements to the Managing General Partner shall be made after the expiration of the fifth twelve-month subordination period. Subject to the foregoing provisions of this 5.01 (b)(4), only Partnership revenues in the current distribution period shall be debited or credited to the Managing General Partner as may be necessary to provide, to the extent possible, such distributions to the Participants and reimbursements to the Managing General Partner. 5.01(c). ALLOCATIONS. 5.01(c)(1). ALLOCATIONS AMONG PARTICIPANTS. Except as provided otherwise in this Agreement, costs and revenues shared or credited to the Participants as a group shall be allocated among the Participants (including the Managing General Partner to the extent of any optional subscription pursuant to .3.03(b)(2)) in the ratio of their respective Agreed Subscriptions. 5.01(c)(2). COSTS AND REVENUES NOT DIRECTLY ALLOCABLE TO A PARTNERSHIP WELL. Costs and revenues not directly allocable to a particular Partnership Well or additional operation shall be allocated among the Partnership Wells or additional operations in any manner the Managing General Partner in its reasonable discretion, shall select, and shall then be charged or credited in the same manner as costs or revenues directly applicable to such Partnership Well or additional operation are being charged or credited. 5.01(c)(3). DISCRETION IN MAKING ALLOCATIONS. In determining the proper method of allocating charges or credits among the parties, or in making any other allocations hereunder, the Managing General Partner may adopt any method of allocation which it, in its reasonable discretion, selects, if, in its sole discretion based on advice from its legal counsel or accountants, a revision to such allocations is required for such allocations to be recognized for federal income tax purposes either because of the promulgation of Treasury Regulations or other developments in the tax law. Any new allocation provisions shall be provided by an amendment to this Agreement and shall be made in a manner that would result in the most favorable aggregate consequences to the Participants as nearly as possible consistent with the original allocations described herein. - -------------------------------------------------------------------------- (Page-25) 5.02. CAPITAL ACCOUNTS AND ALLOCATIONS THERETO. 5.02(a). CAPITAL ACCOUNTS. A single, separate Capital Account shall be established for each party to this Agreement, regardless of the number of interests owned by such party, the class of the interests and the time or manner in which such interests were acquired. 5.02(b). CHARGES AND CREDITS. Except as otherwise provided in this Agreement, the Capital Account of each party shall be determined and maintained in accordance with Treas. Reg. .1.704-l(b)(2)(iv) and shall be increased by: (i) the amount of money contributed by him to the Partnership; (ii) the fair market value of property contributed by him (without regard to .7701(g) of the Code) to the Partnership (net of liabilities secured by the contributed property that the Partnership is considered to assume or take subject to under .752 of the Code); and (iii) allocations to him of Partnership income and gain (or items thereof), including income and gain exempt from tax and income and gain described in Treas. Reg. .1.704-l(b)(2)(iv)(g), but excluding income and gain described in Treas. Reg. .1.704-l(b)(4)(i); and shall be decreased by (iv) the amount of money distributed to him by the Partnership; (v) the fair market value of property distributed to him (without regard to .7701(g) of the Code) by the Partnership (net of liabilities secured by the distributed property that he is considered to assume or take subject to under .752 of the Code); (vi) allocations to him of Partnership expenditures described in .705(a)(2)(B) of the Code; and (vii) allocations to him of Partnership loss and deduction (or items thereof), including loss and deduction described in Treas. Reg. .1.704-l(b)(2)(iv)(g), but excluding items described in (vi) above, and loss or deduction described in Treas. Reg. .1.704-l(b)(4)(i) or (iii). If Treas. Reg. .1.704-l(b)(2)(iv)fails to provide guidance, Capital Account adjustments shall be made in a manner that: (i) maintains equality between the aggregate governing Capital Accounts of the Partners and the amount of Partnership capital reflected on the Partnership's balance sheet, as computed for book purposes; (ii) is consistent with the underlying economic arrangement of the Partners; and (iii) is based, wherever practicable, on federal tax accounting principles. 5.02(c). PAYMENTS TO THE MANAGING GENERAL PARTNER. The Capital Account of the Managing General Partner shall be reduced by payments to it pursuant to .4.04(a)(2) only to the extent of the Managing General Partner's distributive share of any Partnership deduction, loss, or other downward Capital Account adjustment resulting from such payments. 5.02(d). DISCRETION OF MANAGING GENERAL PARTNER. Notwithstanding any other provisions of this Agreement, the method of maintaining Capital Accounts may be changed from time to time, in the discretion of the Managing General Partner, to take into consideration .704 and other provisions of the Code and such rules, regulations and interpretations relating thereto as may exist from time to time. 5.02(e). REVALUATIONS OF PROPERTY. In the discretion of the Managing General Partner the Capital Accounts of the Partners may be increased or decreased to reflect a revaluation of Partnership property, including intangible assets such as goodwill, (on a property-by-property basis except as otherwise permitted under .704(c) of the Code and the regulations thereunder) on the Partnership's books, in accordance with Treas. Reg. .1.704-l(b)(2)(iv)(f). 5.02(f). AMOUNT OF BOOK ITEMS. In cases where .704(c) of the Code or .5.02(e) applies, Capital Accounts shall be adjusted in accordance with Treas. Reg. .1.704-l(b)(2)(iv)(g) for allocations of depreciation, depletion, amortization and gain and loss, as computed for book purposes, with respect to such property. 5.03. ALLOCATION OF INCOME, DEDUCTIONS AND CREDITS. 5.03(a). IN GENERAL. To the extent permitted by law and except as otherwise provided in this Agreement, nonrecourse deductions shall be allocated among the Partners in the ratio in which income and gain (other than minimum gain recognized by the Partnership) attributable to the property securing the nonrecourse liabilities are allocated among the Partners during the period in question. All other deductions and credits, including, but not limited to, intangible drilling and development costs and depreciation, shall be allocated to the party who has been charged with the expenditure giving rise to such deductions and credits; and to the extent permitted by law, such parties shall be entitled to such deductions and credits in computing taxable income or tax liabilities to the exclusion of any other party. Except as otherwise provided in this Agreement, all items of income and gain, including gain on disposition of assets, shall be allocated in accordance with the related revenue allocations set forth in .5.01(b) and its subsections. 5.03(b). TAX BASIS. Subject to .704(c) of the Code, the tax basis of each oil and gas property for computation of cost depletion and gain or loss on disposition shall be allocated and reallocated when necessary based upon the capital interest in the Partnership as to such property and the capital interest in the Partnership for such purpose as to each property shall be considered to be owned by the (Page-26) parties hereto in the ratio in which the expenditure giving rise to the tax basis of such property has been charged as of the end of the year. 5.03(c). GAIN OR LOSS ON OIL AND GAS PROPERTIES. Each party shall separately compute its gain or loss on the disposition of each oil and gas property in accordance with the provisions of .613A(c)(7)D) of the Code, and the calculation of such gain or loss shall consider the party's adjusted basis in his property interest computed as provided in .5.03(b) and the party's allocable share of the amount realized from the disposition of the property. 5.03(d). GAIN ON DEPRECIABLE PROPERTY. Gain from each sale or other disposition of depreciable property shall be allocated to each party whose share of the proceeds from such sale or other disposition exceeds its contribution to the adjusted basis of the property in the ratio that such excess bears to the sum of the excesses of all parties having such an excess. 5.03(e). LOSS ON DEPRECIABLE PROPERTY. Loss from each sale, abandonment or other disposition of depreciable property shall be allocated to each party whose contribution to the adjusted basis of the property exceeds its share of the proceeds from such sale, abandonment or other disposition in the proportion that such excess bears to the sum of the excesses of all parties having such an excess. 5.03(f). RECAPTURE. Any recapture treated as an increase in ordinary income by reason of ..1245, 1250, or 1254 of the Code shall be allocated to the parties in the amounts in which such recaptured items were previously allocated to them; provided that to the extent recapture allocated to any party is in excess of such party's gain from the disposition of the property, such excess shall be allocated to the other parties but only to the extent of such other parties' gain from the disposition of the property. 5.03(g). TAX CREDITS. If a Partnership expenditure (whether or not deductible) that gives rise to a tax credit in a Partnership taxable year also gives rise to valid allocations of Partnership loss or deduction (or other downward Capital Account adjustments) for such year, then the Partners' interests in the Partnership with respect to such credit (or the cost giving rise thereto) shall be in the same proportion as such Partners' respective distributive shares of such loss or deduction (and adjustments). Identical principles shall apply in determining the Partners' interests in the Partnership with respect to tax credits that arise from receipts of the Partnership (whether or not taxable). 5.03(h). DEFICIT CAPITAL ACCOUNTS AND QUALIFIED INCOME OFFSET. Notwithstanding any provisions of this Agreement to the contrary, an allocation of loss or deduction which would result in a Partner having a deficit Capital Account balance as of the end of the taxable year to which such allocation relates, if charged to such Partner, (to the extent such Partner is not required to restore such deficit to the Partnership), taking into account: (i) adjustments that, as of the end of such year, reasonably are expected to be made to such Partner's Capital Account for depletion allowances with respect to the Partnership's oil and gas properties; (ii) allocations of loss and deduction that, as of the end of such year, reasonably are expected to be made to such Partner pursuant to ..704(e)(2) and 706(d) of the Code and Treas. Reg. .1.751-1(b)(2)(ii); and (iii) distributions that, as of the end of such year, reasonably are expected to be made to such Partner to the extent they exceed offsetting increases to such Partner's Capital Account (assuming for this purpose that the fair market value of Partnership property equals its adjusted tax basis) that reasonably are expected to occur during (or prior to) the Partnership taxable years in which such distributions reasonably are expected to be made, shall be charged to the Managing General Partner; provided further, the Managing General Partner shall be credited with an additional amount of Partnership income or gain equal to the amount of such loss or deduction as quickly as possible (to the extent such chargeback does not cause or increase deficit balances in the Partners' Capital Accounts which are not required to be restored to the Partnership). Notwithstanding any provisions of this Agreement to the contrary, if such Partner unexpectedly receives an adjustment, allocation, or distribution described in (i), (ii), or (iii) above, or any other distribution, which causes or increases a deficit balance in such Partner's Capital Account which is not required to be restored to the Partnership, such Partner shall be allocated items of income and gain (consisting of a pro rata portion of each item of Partnership income, including gross income, and gain for such year) in an amount and manner sufficient to eliminate such deficit balance as quickly as possible. 5.03(i). PARTNERS' ALLOCABLE SHARES. Except as otherwise provided in this Agreement, each Partner's allocable share of Partnership income, gain, loss, deductions and credits shall be determined by the use of any method prescribed or permitted by the Secretary of the Treasury by regulations or other guidelines and selected by the Managing General Partner which takes into account the varying interests of the Partners in the Partnership during the taxable year. In the absence of such regulations or guidelines, except as otherwise provided in this Agreement, such allocable share shall be based on actual income, gain, loss, deductions and credits economically accrued each day during the taxable year in proportion to each Partner's varying interest in the Partnership on each day during the taxable year. (Page-27) 5.04. ELECTIONS. 5.04(a). INTANGIBLES ELECTION. The Partnership's federal income tax return shall be made in accordance with an election under the option granted by the Code to deduct intangible drilling and development costs. 5.04(b). NO ELECTION OUT OF SUBCHAPTER K. No election shall be made by the Partnership, any Partner, or the Operator for the Partnership to be excluded from the application of the provisions of Subchapter K of the Code. 5.04(c). CONTINGENT INCOME. If it is determined that any taxable income results to any party by reason of its entitlement to a share of profits or revenues of the Partnership before such profit or revenue has been realized by the Partnership, the resulting deduction as well as any resulting gain, shall not enter into Partnership net income or loss but shall be separately allocated to such party. 5.04(d). .754 ELECTION. In the event of the transfer of an interest in the Partnership, or upon the death of an individual party hereto, or in the event of the distribution of property to any party hereto, the Managing General Partner may choose for the Partnership to file an election in accordance with the applicable Treasury Regulations to cause the basis of the Partnership's assets to be adjusted for federal income tax purposes as provided by ..734 and 743 of the Code. 5.05. DISTRIBUTIONS. 5.05(a). IN GENERAL. The Managing General Partner shall review the accounts of the Partnership at least quarterly to determine whether cash distributions are appropriate and the amount to be distributed, if any. The Partnership shall distribute funds to the Managing General Partner and the Participants allocated to their accounts which the Managing General Partner deems unnecessary to retain by the Partnership. In no event, however, shall funds be advanced or borrowed for purposes of distributions, if the amount of such distributions would exceed the Partnership's accrued and received revenues for the previous four quarters, less paid and accrued Operating Costs with respect to such revenues. The determination of such revenues and costs shall be made in accordance with generally accepted accounting principles, consistently applied. Cash distributions from the Partnership to the Managing General Partner shall only be made in conjunction with distributions to Participants and only out of funds properly allocated to the Managing General Partner's account. At any time after three years from the date each Partnership Well is placed into production, the Managing General Partner shall have the right to deduct each month from the Partnership's proceeds of the sale of the production from the well up to $200 for the purpose of establishing a fund to cover the estimated costs of plugging and abandoning said well. All such funds shall be deposited in a separate interest bearing account for the benefit of the Partnership, and the total amount so retained and deposited shall not exceed the Managing General Partner's reasonable estimate of such costs. 5.05(b). DISTRIBUTION OF UNCOMMITTED SUBSCRIPTION PROCEEDS. Any net subscription proceeds not expended or committed for expenditure, as evidenced by a written agreement, by the Partnership within twelve months of the Offering Termination Date of the Partnership, except necessary operating capital, shall be distributed pro rata to the Participants in the ratio of their Agreed Subscriptions to the Partnership, as a return of capital and the Managing General Partner shall reimburse the Participants for the selling or other offering expenses allocable to the return of capital. For purposes of this subsection, "committed for expenditure" shall mean contracted for, actually earmarked for or allocated by the Managing General Partner to the Partnership's drilling operations, and "necessary operating capital" shall mean those funds which, in the opinion of the Managing General Partner, should remain on hand to assure continuing operation of the Partnership. 5.05(c). DISTRIBUTIONS ON WINDING UP. Upon the winding up of the Partnership distributions shall be made as provided in .7.02. 5.05(d). INTEREST AND RETURN OF CAPITAL. It is agreed among the parties hereto that no party shall under any circumstances be entitled to any interest on amounts retained by the Partnership, and that each Participant shall look only to his share of distributions, if any, from the Partnership for a return of his Capital Contribution. - ------------------------------------------------------------------------ (Page-28) ARTICLE VI TRANSFER OF INTERESTS 6.01. TRANSFERABILITY. 6.01(a). IN GENERAL. In addition to other restrictions on transferability provided in this Agreement, interests in the Partnership (and any rights to income or other attributes of Units in the Partnership) shall be nontransferable except transfers to or with the consent of the Managing General Partner where the transfer of a Participant's interest is involved, and, except as otherwise provided in this Agreement, the consent of Participants whose Agreed Subscriptions equal a majority of the Partnership Subscription where a transfer by the Managing General Partner is involved. Unless an assignee becomes a substituted Partner in accordance with the provisions set forth below, he shall not be entitled to any of the rights granted to a Partner hereunder, other than the right to receive all or part of the share of the profits, losses, income, gain, credits and cash distributions or returns of capital to which his assignor would otherwise be entitled. 6.01(b). OBJECTIONS TO TRANSFER. Failure to notify the transferring party of an objection to any proposed or completed transfer of the transferor's interest hereunder within thirty days following the receipt of notice thereof shall conclusively serve as a consent to such transfer. 6.01(c). CONVERSION OF INVESTOR GENERAL PARTNER UNITS TO LIMITED PARTNER INTERESTS. After substantially all of the Partnership Wells have been drilled and completed the Managing General Partner shall file an amended certificate of limited partnership with the Secretary of State of the Commonwealth of Pennsylvania for the purpose of converting the Investor General Partner Units to Limited Partner interests. Upon such conversion the Investor General Partners shall be Limited Partners entitled to limited liability; however, they shall remain liable to the Partnership for any additional Capital Contribution required for their proportionate share of any Partnership obligation or liability arising prior to the conversion of their Units as provided in .3.05(b). Such conversion shall not affect the allocation to any Partner of any item of Partnership income, gain, loss, deduction or credit or other item of special tax significance (other than Partnership liabilities, if any) and shall not affect any Partner's interest in the Partnership's oil and gas properties and unrealized receivables. Notwithstanding the foregoing, the Managing General Partner shall notify all Participants at least thirty days prior to the effective date of any adverse material change in the Partnership's insurance coverage. If the insurance coverage is to be materially reduced, the Investor General Partners shall have the right to convert their Units into Limited Partner interests prior to such reduction by giving written notice to the Managing General Partner. 6.02. SPECIAL RESTRICTIONS ON TRANSFERS. 6.02(a). IN GENERAL. Only whole Units may be assigned unless the Participant owns less than a whole Unit, in which case his entire fractional interest must be assigned. The costs and expenses associated with the assignment must be paid by the assignor Partner and the assignment must be in a form satisfactory to the Managing General Partner. The terms of the assignment must not contravene those of this Agreement. Transfers of interest in the Partnership are subject to the following additional restrictions. 6.02(a)(1). SECURITIES LAWS RESTRICTION. Subject to transfers permitted by .6.04 and transfers by operation of law, no interest in the Partnership shall be sold, assigned, pledged, hypothecated or transferred in the absence of an effective registration of the Units under the Securities Act of 1933, as amended and qualification under applicable state securities laws or an opinion of counsel acceptable to the Managing General Partner that such registration and qualification are not required. Transfers are also subject to any conditions contained in the Subscription Agreement and Exhibit (B) to the Prospectus. 6.02(a)(2). TAX LAW RESTRICTIONS. No sale, exchange, transfer or assignment shall be made which, in the opinion of counsel to the Partnership, would result in the Partnership being considered to have been terminated for purposes of Section 708 of the Code or would result in materially adverse tax consequences to the Partnership or the Partners. 6.02(a)(3). SUBSTITUTE PARTNER. An assignee of a Limited Partner's or Investor General Partner's interest in the Partnership shall become a substituted Limited Partner or Investor General Partner entitled to all the rights of a Limited Partner or Investor General Partner, as the case may be, if, and only if: (i) the assignor gives the assignee such right; (ii) the Managing General Partner consents to such substitution, which consent shall be in the Managing General Partner's absolute discretion; (iii) the assignee pays to the Partnership all costs and expenses incurred in connection with such substitution; and (iv) the assignee executes and delivers such (Page-29) instruments, in form and substance satisfactory to the Managing General Partner, necessary or desirable to effect such substitution and to confirm the agreement of the assignee to be bound by all of the terms and provisions of this Agreement. A substitute Limited Partner or Investor General Partner is entitled to all of the rights attributable to full ownership of the assigned Units including the right to vote. 6.02(b). EFFECT OF TRANSFER. The Partnership shall amend its records at least once each calendar quarter to effect the substitution of substituted Participants. Any transfer permitted hereunder where the assignee does not become a substituted Limited Partner or Investor General Partner shall be effective as of midnight of the last day of the calendar month in which it is made, or, at the Managing General Partner's election, 7:00 A.M. of the following day. No such transfer, including a transfer of less than all of a party's rights hereunder or the transfer of rights hereunder to more than one party, shall relieve the transferor of its responsibility for its proportionate part of any expenses, obligations and liabilities hereunder related to the interest so transferred, whether arising prior or subsequent to such transfer, nor shall any such transfer require an accounting by the Managing General Partner, or the granting of rights hereunder as between such parties and the remaining parties hereto, including the exercise of any elections hereunder, to more than one party unanimously designated by the transferees and, if he should have retained an interest hereunder, the transferor. Until a proper designation acceptable to it is received by the Managing General Partner, it shall continue to account only to the person to whom it was furnishing notices prior to such time pursuant to .8.01 and its subsections; and such party shall continue to exercise all rights applicable to the entire interest previously owned by the transferor. 6.03. RIGHT OF MANAGING GENERAL PARTNER TO HYPOTHECATE AND/OR WITHDRAW ITS INTERESTS. The Managing General Partner shall have the authority (without the consent of the Participants and without affecting the allocation of costs and revenues received or incurred hereunder), to hypothecate, pledge, or otherwise encumber, on any terms it sees fit, its Partnership interest (or an undivided interest in the assets of the Partnership equal to or less than its respective interest in the revenues of the Partnership) to obtain funds for use by it for its own general purposes. All repayments of such borrowings and costs and interest or other charges related thereto shall be borne and paid separately by the Managing General Partner; and in no event shall such repayments, costs, interest, or other charges be charged to the account of the Participants. In addition, subject to a required participation of not less than 1% of the Partnership Subscription, the Managing General Partner may withdraw a property interest held by the Partnership in the form of a Working Interest in the Partnership Wells equal to or less than its respective interest in the revenues of the Partnership if such withdrawal is necessary to satisfy the bona fide request of its creditors or approved by Participants whose Agreed Subscriptions equal a majority of the Partnership Subscription. 6.04. REPURCHASE OBLIGATION. 6.04(a). IN GENERAL. Participants shall have the right to present their interests to the Managing General Partner subject to the conditions and limitations set forth in this section. The Managing General Partner shall not purchase more than 5% of the Units in any calendar year and shall not purchase less than one Unit of a Participant's interests in the Partnership unless such lesser amount represents the entire amount of the Participant's interest. The Managing General Partner may waive these limitations in its sole discretion other than the limitation that it shall not purchase more than 5% of the Units in any calendar year. The Participant is not obligated to accept such repurchase offer. The Managing General Partner shall offer to repurchase a Participant's interest in cash in the second quarter of every year beginning in 2000. The commencement of the offer must be made within 120 days of the reserve report set forth in .4.03(b)(3). A Participant may accept the repurchase offer by a written acceptance. No repurchase shall be considered effective until after the payment has been made to the Participant in cash. In addition, in accordance with Treas. Reg. .1.7704-1(f), no repurchase shall occur until at least 60 calendar days after the Participant notifies the Partnership in writing of the Participant's intention to exercise the repurchase right. 6.04(b). INDEPENDENT PETROLEUM CONSULTANT. The amount attributable to Partnership reserves shall be determined based upon the last reserve report of the Partnership reviewed by the Independent Expert. The Partnership and the Independent Expert shall estimate the present worth of future net revenues attributable to the Partnership's interest in the Proved Reserves, and in making this estimate, they shall employ a discount rate equal to 10%, use a constant price for the oil and base the price of gas upon the existing gas contracts at the time of the repurchase. The calculation of the repurchase price shall be as set forth in .6.04(c). 6.04(c). CALCULATION OF REPURCHASE PRICE. The purchase price shall be based upon the Participant's share of the net assets and liabilities of the Partnership and allocated pro rata to each Participant based upon his Agreed Subscription. The repurchase price shall include the sum of the following items: (Page-30) (i) an amount based on 70% of the present worth of future net revenues from the Partnership's Proved Reserves determined as described in .6.04(b); (ii) Partnership cash on hand; (iii) prepaid expenses and accounts receivable of the Partnership, less a reasonable amount for doubtful accounts; and (iv) the estimated market value of all assets of the Partnership, not separately specified above, determined in accordance with standard industry valuation procedures. There shall be deducted from the foregoing sum the following items: (i) an amount equal to all Partnership debts, obligations, and other liabilities, including accrued expenses; and (ii) any distributions made to the Participants between the date of the request and the actual payment; provided, however, that if any cash distributed was derived from the sale, subsequent to the request, of oil, gas or other mineral production, or of a producing property owned by the Partnership, for purposes of determining the reduction of the purchase price, such distributions shall be discounted at the same rate used to take into account the risk factors employed to determine the present worth of the Partnership's Proved Reserves. The purchase price may be further adjusted by the Managing General Partner for estimated changes therein from the date of such report to the date of payment of the purchase price to the Participants: (i) by reason of production or sales of, or additions to, reserves and lease and well equipment, sale or abandonment of Leases, and similar matters occurring prior to the request for repurchase, and (ii) by reason of any of the following occurring prior to payment of the purchase price to the selling Participants: changes in well performance, increases or decreases in the market price of oil, gas, or other minerals, revision of regulations relating to the importing of hydrocarbons, changes in income, ad valorem, and other tax laws (e.g. material variations in the provisions for depletion) and similar matters. 6.04(d). SELECTION BY LOT. If less than all interests presented at any time are to be purchased, the Participants whose interests are to be purchased will be selected by lot. The Managing General Partner's obligation to purchase such interests may be discharged for the benefit of the Managing General Partner by a third party or an Affiliate. The interests of the selling Participant will be transferred to the party who pays for it. A selling Participant will be required to deliver an executed assignment of his interest, together with such other documentation as the Managing General Partner may reasonably request. 6.04(e). NO OBLIGATION OF THE MANAGING GENERAL PARTNER TO ESTABLISH A RESERVE. The Managing General Partner shall have no obligation to establish any reserve to satisfy the repurchase obligations under this section. 6.04(f). SUSPENSION OF REPURCHASE OBLIGATION. The Managing General Partner may suspend its repurchase obligation at any time if it does not have sufficient cash flow or is unable to borrow funds for such purpose on terms it deems reasonable, by so notifying the Participants. In addition, the Managing General Partner's repurchase obligation may be conditioned, in the Managing General Partner's sole discretion, on the Managing General Partner's receipt of an opinion of counsel that such transfers will not cause the Partnership to be treated as a "publicly traded partnership" under the Code. The Managing General Partner shall hold such repurchased Units for its own account and not for resale. ARTICLE VII DURATION, DISSOLUTION, AND WINDING UP 7.01. DURATION. 7.01(a). FIFTY YEAR TERM. The Partnership shall continue in existence for a term of fifty years from the effective date of this Agreement unless sooner terminated as hereinafter set forth. 7.01(b). TERMINATION. The Partnership shall terminate following the occurrence of a Final Terminating Event, or upon the occurrence of any event which under the Pennsylvania Revised Uniform Limited Partnership Act causes the dissolution of a limited partnership. 7.01(c). CONTINUANCE OF PARTNERSHIP. Except upon the occurrence of a Final Terminating Event, the Partnership or any successor limited partnership shall not be wound up, but shall be continued by the parties and their respective successors as a successor limited (Page-31) partnership under all the terms of this Agreement. Such successor limited partnership shall succeed to all of the assets of the Partnership. As used throughout this Agreement, the term "Partnership" shall include such successor limited partnerships and the parties thereto. 7.02. DISSOLUTION AND WINDING UP. Upon the occurrence of a Final Terminating Event, the affairs of the Partnership shall be wound up and there shall be distributed to each of the parties its Distribution Interest in the remaining assets of the Partnership. To the extent practicable and in accordance with sound business practices in the judgment of the Managing General Partner, liquidating distributions shall be made by the end of the taxable year in which liquidation occurs (determined without regard to .706(c)(2)(A) of the Code) or, if later, within ninety days after the date of such liquidation. Provided, however, amounts withheld for reserves reasonably required for liabilities of the Partnership and installment obligations owed to the Partnership need not be distributed within the foregoing time period so long as such withheld amounts are distributed as soon as practicable. Any in kind property distributions to the Participants shall be made to a liquidating trust or similar entity for the benefit of the Participants, unless at the time of the distribution: (1) the Managing General Partner shall offer the individual Participants the election of receiving in kind property distributions and the Participants accept such offer after being advised of the risks associated with such direct ownership; or (2) there are alternative arrangements in place which assure the Participants that they will not, at any time, be responsible for the operation or disposition of Partnership properties. It shall be presumed that a Participant has refused such consent if the Managing General Partner has not received such consent within thirty days after the Managing General Partner mailed the request for such consent. Any Partnership asset which would otherwise be distributed in kind to a Participant, but for the failure or refusal of such Participant to give his written consent to such distribution, may instead be sold by the Managing General Partner at the best price reasonably obtainable from an independent third party who is not an Affiliate of the Managing General Partner. ARTICLE VIII MISCELLANEOUS PROVISIONS 8.01. NOTICES. 8.01(a). METHOD. Any notice required hereunder shall be in writing, and given by mail or wire addressed to the party to receive such notice at the address designated in .1.03. 8.01(b). CHANGE IN ADDRESS. The address of any party hereto may be changed by written notice to the other parties hereto in the event of a change of address by the Managing General Partner or to the Managing General Partner in the event of a change of address by a Participant; provided, however, that in the event of a transfer of rights hereunder, no notice to any such transferee shall be required, nor shall such transferee have any rights hereunder, until notice thereof shall have been given to the Managing General Partner. Any transfer of rights hereunder shall not increase the duty to give notice, and in the event of a transfer of rights hereunder to more than one party, notice to any owner of any interest in such rights shall be notice to all owners thereof. 8.01(c). TIME NOTICE DEEMED GIVEN. Any notice shall be considered given, and any applicable time shall run, from the date such notice is placed in the mails or delivered to the telegraph company as to any notice given by the Managing General Partner and when received as to any notice given by any Participant. 8.01(d). EFFECTIVENESS OF NOTICE. Any notice to a party other than the Managing General Partner, including a notice requiring concurrence or nonconcurrence, shall be effective, and any failure to respond binding, irrespective of whether or not such notice is actually received, and irrespective of any disability or death on the part of the noticee, whether or not known to the party giving such notice. 8.01(e). FAILURE TO RESPOND. Except where this Agreement expressly requires affirmative approval of a Participant, any Participant who fails to respond in writing within the time specified for such response (which time shall be not less than fifteen business days from the date of mailing of such request) to a request by the Managing General Partner for approval of or concurrence in a proposed action shall be conclusively deemed to have approved such action. (Page-32) 8.02. TIME. Time is of the essence of each part of this Agreement. 8.03. APPLICABLE LAW. The terms and provisions hereof shall be construed under the laws of the Commonwealth of Pennsylvania, provided, however, this .8.03 shall not be deemed to limit causes of action for violations of federal or state securities law to the laws of the Commonwealth of Pennsylvania. Neither this Agreement nor the Subscription Agreement shall require mandatory venue or mandatory arbitration of any or all claims by Participants against the Sponsor. 8.04. AGREEMENT IN COUNTERPARTS. This Agreement may be executed in counterpart and shall be binding upon all parties executing this or similar agreements from and after the date of execution by each party. 8.05. AMENDMENT. No changes herein shall be binding unless proposed in writing by the Managing General Partner, and adopted with the consent of Participants whose Agreed Subscriptions equal a majority of the Partnership Subscription; or unless proposed in writing by Participants whose Agreed Subscriptions equal 10% or more of the Partnership Subscription and approved by an affirmative vote of Participants whose Agreed Subscriptions equal a majority of the Partnership Subscription; provided, however, that the Managing General Partner is authorized to amend this Agreement and its exhibits without such consent in any way deemed necessary or desirable by it: (i) to add or substitute (in the case of an assigning party) additional Limited Partners or Investor General Partners; (ii) to enhance the tax benefits of the Partnership to the parties; and (iii) to satisfy any requirements, conditions, guidelines, options, or elections contained in any opinion, directive, order, ruling, or regulation of the Securities and Exchange Commission, the Internal Revenue Service, or any other federal or state agency, or in any federal or state statute, compliance with which it deems to be in the best interest of the Partnership. Notwithstanding the foregoing, no amendment materially and adversely affecting the interests or rights of Participants shall be made without the consent of the Participants whose interests will be so affected. 8.06. ADDITIONAL PARTNERS. Each Participant hereby consents to the admission to the Partnership of such additional Limited Partners or Investor General Partners as the Managing General Partner, in its discretion, chooses to admit. - ------------------------------------------------------------------------ (Page 32) 8.07. LEGAL EFFECT. This Agreement shall be binding upon and inure to the benefit of the parties, their heirs, devisees, personal representatives, successors and assigns, and shall run with the interests subject hereto. The terms "Partnership," "Limited Partner," "Investor General Partner," "Participant," "Partner," "Managing General Partner," "Operator," or "parties" shall equally apply to any successor limited partnership, and any heir, devisee, personal representative, successor or assign of a party. IN WITNESS WHEREOF, the parties hereto set their hands and seal as of the day and year hereinabove shown. ATLAS: ATLAS RESOURCES, INC. Managing General Partner By: --------------------- Attest: - ----------------------------------- (SEAL) Secretary EXHIBIT (I-A) MANAGING GENERAL PARTNER SIGNATURE PAGE - -------------------------------------------------------------------------- EXHIBIT (I-A) MANAGING GENERAL PARTNER SIGNATURE PAGE Attached to and made a part of the AMENDED AND RESTATED CERTIFICATE AND AGREEMENT OF LIMITED PARTNERSHIP of ATLAS-ENERGY FOR THE NINETIES-PUBLIC #5 LTD. The undersigned agrees: 1. to serve as the Managing General Partner of ATLAS-ENERGY FOR THE NINETIES-PUBLIC #5 LTD. (the "Partnership"), and hereby executes, swears to and agrees to all the terms of the Partnership Agreement; 2. to pay the required subscription of the Managing General Partner under 3.03(b)(1) of the Partnership Agreement; and 3. to subscribe to the Partnership as follows: (a)$___________________ [________] Unit(s)] under 3.03(b)(2) of the Partnership Agreement as a Limited Partner; or (b)$___________________ [________] Unit(s)] under 3.03(b)(2) of the Partnership Agreement as an Investor General Partner. Managing General Partner: Atlas Resources, Inc. Address: By: 311 Rouser Road J.R. O'Mara, President and CEO Moon Township, Pennsylvania 15108 ACCEPTED this ________ day of __________________ , 1996. ATLAS RESOURCES, INC. MANAGING GENERAL PARTNER By: ______________________________________ J.R. O'Mara, President and CEO Attest ______________________________________________ (SEAL) Secretary - -------------------------------------------------------------------------- EXHIBIT (I-B) SUBSCRIPTION AGREEMENT ATLAS-ENERGY FOR THE NLNETLES-PUBLLC #5 LTD. SUBSCRIPTION AGREEMENT The undersigned hereby offers to purchase Units of Atlas-Energy for the Nineties-Public #5 Ltd. in the amount set forth on the Signature Page of this Subscription Agreement and on the terms described in the current Prospectus for Atlas-Energy for the Nineties-Public #5 Ltd. (as supplemented or amended from time to time). The undersigned acknowledges and agrees that his execution of this Subscription Agreement also constitutes his execution of the Amended and Restated Certificate and Agreement of Limited Partnership (the "Partnership Agreement" the form of which is attached as Exhibit (A) to the Prospectus and the undersigned agrees to be bound by all of the terms and conditions of the Partnership Agreement if his Agreed Subscription is accepted by the Managing General Partner. The undersigned understands and agrees that this offer may not be assigned or withdrawn by the undersigned. The undersigned hereby irrevocably constitutes and appoints Atlas Resources, Inc. (and its duly authorized agents) the undersigned's agent and attorney-in-fact, in the undersigned's name, place and stead, to make, execute, acknowledge, swear to, file, record and deliver the Amended and Restated Certificate and Agreement of Limited Partnership and any certificates related thereto. In order to induce Atlas to accept this subscription, the undersigned hereby represents, warrants, covenants and agrees as follows: INVESTOR'S INITIALS _____ The undersigned has received the Prospectus. _____ The undersigned (other than Minnesota residents) recognizes that prior to this offering there has been no public market for the Units and that it is not likely that after the offering there will be any such market. In addition, the undersigned understands that the transferability of the Units is restricted and that he cannot expect to be able to readily liquidate his investment in the Units in case of emergency or other change in circumstances. _____ The undersigned is purchasing the Units for his own account, for investment purposes and not for the account of others and he is not purchasing the Units with the present intention of reselling them. _____ The undersigned, if he is an individual, is a citizen of the United States of America and is at least twenty-one years of age, or, if a partnership, corporation or trust, the members, stockholders or beneficiaries thereof are citizens of the United States and each is at least twenty-one years of age. _____ The undersigned, if he is not an individual, is empowered and duly authorized under a governing document, trust instrument, pension plan, charter, certificate of incorporation, by-law provision or the like to enter into this Subscription Agreement and to perform the transactions contemplated by the Prospectus, including the exhibits thereto. _____ (a) The undersigned has: (i) a net worth of at least $225,000 (exclusive of home, furnishings and automobiles); or (ii) a net worth (exclusive of home, furnishings and automobiles) of at least $60,000 and had during the last tax year, or estimates that he will have during the current tax year, "taxable income" as defined in Section 63 of the Code of at least $60,000, without regard to an investment in the Partnership. (B) IN ADDITION, IF A RESIDENT OF ALABAMA, ARIZONA, CALIFORNIA, INDIANA, IOWA,KENTUCKY, MAINE, MASSACHUSETTS, MICHIGAN, MINNESOTA, MISSISSIPPI, MISSOURI, NEW HAMPSHIRE, NEW MEXICO, NORTH CAROLINA, OHIO, OKLAHOMA, PENNSYLVANIA, SOUTH DAKOTA, TENNESSEE, TEXAS, VERMONT OR WASHINGTON, THE UNDERSIGNED REPRESENTS THAT HE IS AWARE OF AND MEETS THAT STATE'S QUALIFICATIONS AND SUITABILITY STANDARDS SET FORTH IN EXHIBIT (B) TO THE PROSPECTUS. (c) If a fiduciary, I am purchasing for a person or entity having the appropriate income and/or net worth specified in (a) or (b) above. (d) If a resident of Michigan or Ohio, the undersigned's investment does not exceed 10% of his net worth (exclusive of home, furnishings and automobiles). THE ABOVE REPRESENTATIONS DO NOT CONSTITUTE A WAIVER OF ANY RIGHTS THAT I MAY HAVE UNDER THE ACTS ADMINISTERED BY THE SECURITIES AND EXCHANGE COMMISSION OR BY ANY STATE REGULATORY AGENCY ADMINISTERING STATUTES BEARING ON THE SALE OF SECURITIES. An Investor General Partner will have unlimited joint and several liability for Partnership obligations and liabilities including amounts in excess of his Agreed Subscription to the extent such obligations and liabilities exceed the Partnership's insurance proceeds, the Partnership's assets and indemnification by the Managing General Partner and AEGH. Insurance may be inadequate to cover such liabilities and there is no insurance coverage for certain claims. Partnership losses allocable to a Limited Partner generally may be used only to the extent of his net passive income from passive activities in such year, with any excess losses being deferred. No state or federal governmental authority has made any finding or determination relating to the fairness for public investment of the Units and that no state or federal governmental authority has recommended or endorsed or will recommend or endorse the Units. The Soliciting Dealer or registered representative is required to inform potential investors of all pertinent facts relating to the Units, including the following: (a) the risks involved in the offering, including the speculative nature of the investment and the speculative nature of drilling for oil and gas; (b) the financial hazards involved in the offering, including the risk of losing the entire investment; (c) the lack of liquidity of this investment; (d) the restrictions of transferability of the Units; (e) the background of the Managing General Partner and the Operator; (f) the tax consequences of the investment; and (g) the unlimited joint and several liability of the Investor General Partners. Investors are required to execute their own Subscription Agreements. The Managing General Partner will not accept any Subscription Agreement that has been executed by someone other than the investor unless such person has been given the legal power of attorney to sign on the investor's behalf and the investor meets all of the conditions herein. In the case of sales to fiduciary accounts, the minimum standards set forth herein shall be met by the beneficiary, the fiduciary account, or by the donor or grantor who directly or indirectly supplies the funds to purchase the Partnership interests if the donor or grantor is the fiduciary. The execution of the Subscription Agreement by a subscriber constitutes a binding offer to buy Units in the Partnership and an agreement to hold the offer open until the Agreed Subscription is accepted or rejected by the Managing General Partner. Once an investor subscribes he will not have any revocation rights. The Managing General Partner has the discretion to refuse to accept any Agreed Subscription without liability to the subscriber. Agreed Subscriptions will be accepted or rejected by the Partnership within thirty days of their receipt; if rejected, all funds will be returned to the subscriber immediately. Upon the original sale of Units, the Participants will be admitted as Partners not later than fifteen days after the release from escrow of Participants' funds to the Partnership, and thereafter Participants will be admitted into the Partnership not later than the last day of the calendar month in which their Agreed Subscriptions were accepted by the Partnership. The Managing General Partner may not complete a sale of Units to an investor until at least five business days after the date the investor receives a final Prospectus. In addition, the Managing General Partner will send each investor a confirmation of purchase. NOTICE TO CALIFORNIA RESIDENTS: This offering deviates in certain respects from various requirements of Title 10 of the California Administrative Code. These deviations include, but are not limited to the following: the definition of Prospect in the Prospectus, unlike Rule 260.140.127.2(b) and Rule 260.140.121(1) does not require enlarging or contracting of the size of the area on the basis of geological data in all cases. If a resident of California the undersigned acknowledges the receipt of California Rule 260.141.11 set forth in Exhibit (B) to the Prospectus. SIGNATURE PAGE OF SUBSCRIPTION AGREEMENT The undersigned agrees to purchase ________ Units of Participation at $10,000 per Unit in ATLAS-ENERGY FOR THE NINETIES-PUBLIC #5 LTD. (the "Partnership") as (check one): INVESTOR GENERAL PARTNER AGREED SUBSCRIPTION LIMITED PARTNER $ ___________________________ (_________________ ______ # Units) Make check payable to: "National City Bank, Escrow Agent, Atlas Public #5 Ltd." Minimum Subscription: one Unit ($10,000), however, the Managing General Partner, in its discretion, may accept one-half Unit ($5,000) subscriptions; and Additional Subscriptions in $1,000 increments. Subscriber (All individual investors must personally Address sign this Signature Page.) _________________________________________________ ____________________________________________________ Print Name _________________________________________________ ____________________________________________________ Signature _________________________________________________ ____________________________________________________ Print Name _________________________________________________ Signature _________________________________________________ Name of Entity if a Trust, Corporation or Partnership is Subscribing Address for Distributions if Different from Above _________________________________ ___________________ _________________________________ ___________________ Date: __________________ Telephone No.: Business ______________________________ Home _________________________ Tax I.D. No. (Social Security No.): _________________________________________________________________________ ____ (CHECK ONE): Calendar Year Taxpayer __________ Fiscal Year Taxpayer __________ (CHECK ONE): OWNERSHIP - Tenants-in-Common ________ Partnership ________ Joint Tenancy ________ C Corporation ________ Individual ________ S Corporation ________ Trust ________ Community Property ________ Other ________ TO BE COMPLETED BY REGISTERED REPRESENTATIVE (FOR COMMISSION AND OTHER PURPOSES) I hereby represent that I have discharged my affirmative obligations under Rule 2810(b)(2)(B) and (b)(3)(D) of the NASD's Conduct Rules and specifically have obtained information from the above-named subscriber concerning his/her age, net worth, annual income, federal income tax bracket, investment objectives, investment portfolio and other financial information and have determined that an investment in the Partnership is suitable for such subscriber, that such subscriber is or will be in a financial position to realize the benefits of this investment, and that such subscriber has a fair market net worth sufficient to sustain the risks for this investment. I have also informed the subscriber of all pertinent facts relating to the liquidity and marketability of an investment in the Partnership, of the risks of unlimited liability regarding an investment as an Investor General Partner, and of the passive loss limitations for tax purposes of an investment as a Limited Partner. _________________________________________________ ____________________________________________________ Registered Representative Name and Number Name of Broker-Dealer Registered Representative Office Address: _________________________________________________ ____________________________________________________ Company Name (if other than Broker-Dealer Name) _________________________________________________ _________________________________________________ Phone Number; Facsimile Number NOTICE TO BROKER-DEALER: Send complete and signed DOCUMENTS Send CHECK and COPY OF SUBSCRIPTION and a COPY OF CHECK to: AGREEMENT to: Mr. J. R. O'Mara National City Bank of Pennsylvania Atlas Resources, Inc. Corporate Trust Department 311 Rouser Road 300 Fourth Avenue Moon Township, Pennsylvania 15108 Pittsburgh, Pennsylvania 15278-2331 (412) 262-2830 TO BE COMPLETED BY ATLAS RESOURCES, INC. ACCEPTED THIS ______ day of _________________ , 1996 Attest (SEAL) Secretary ATLAS RESOURCES, INC., MANAGING GENERAL PARTNER By: J.R. O'Mara, President - -------------------------------------------------------------------------- EXHIBIT (II) DRILLING AND OPERATING AGREEMENT ATLAS-ENERGY FOR THE NINETIES-PUBLIC #5 LTD. INDEX SECTION PAGE 1. Assignment of Well Locations; Representations; Designation of Additional Well Locations; Outside Activities 1 2. Drilling of Wells; Interest of Developer; Right of Substitution 2 3. Operator - Responsibilities in General; Term 3 4. Operator's Charges for Drilling and Completing Wells; Completion Determination 3 5. Title Examination of Well Locations; Liability for Title Defects 4 6. Operations Subsequent to Completion of the Wells; Price Determinations; Plugging and Abandonment 5 7. Billing and Payment Procedure with Respect to Operation of Wells; Records, Reports and Information 6 8. Operator's Lien 7 9. Successors and Assigns; Transfers; Appointment of Agent 7 10. Insurance; Operator's Liability 7 11. Internal Revenue Code Election, Relationship of Parties; Right to Take Production in Kind 8 12. Force Majeure 9 13. Term 9 14. Governing Law and Invalidity 9 15. Integration 9 16. Waiver of Default or Breach 9 17. Notices 9 18. Interpretation 10 19. Counterparts 10 Signature Page 10 Exhibit A Description of Leases and Initial Well Locations Exhibits A-l through A-___ Maps of Initial Well Locations Exhibit B Form of Assignment Exhibit C Form of Addendum DRILLING AND OPERATING AGREEMENT THIS AGREEMENT made this ______ day of _______________, 1996, by and between ATLAS RESOURCES, INC., a Pennsylvania corporation (hereinafter referred to as "Atlas" or "Operator"), and ATLAS-ENERGY FOR THE NINETIES-PUBLIC #5 LTD., a Pennsylvania limited partnership, (hereinafter referred to as the "Developer"). WITNESSETH THAT: WHEREAS, Atlas, by virtue of the Oil and Gas Leases (the "Leases") described on Exhibit A attached hereto and made a part hereof, has certain rights to develop the ____________ (______) initial well locations identified on the maps attached hereto as Exhibits A-l through A-______ (the "Initial Well Locations"); WHEREAS, the Developer, subject to the terms and conditions hereof, desires to acquire certain of Atlas' rights to develop the aforesaid ____________ (______) Initial Well Locations and to provide for the development upon the terms and conditions herein set forth of additional well locations ("Additional Well Locations") which the parties may from time to time designate; and WHEREAS, Operator is in the oil and gas exploration and development business, and the Developer desires that Operator, as its independent contractor, perform certain services in connection with its efforts to develop the aforesaid Initial and Additional Well Locations (hereinafter collectively referred to as the "Well Locations") and to operate the wells completed thereon, on the terms and conditions herein set forth; NOW THEREFORE, in consideration of the mutual covenants herein contained and subject to the terms and conditions hereinafter set forth, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Assignment of Well Locations; Representations; Designation of Additional Well Locations; Outside Activities. (a) Atlas shall execute an assignment of an undivided percentage of Working Interest in the Well Location acreage for each well to the Developer as shown on Exhibit A attached hereto, which assignment shall be limited to a depth from the surface to the top of the Queenston formation in Mercer County, Pennsylvania and Ohio. The assignment shall be substantially in the form of Exhibit B attached hereto and made a part hereof. The amount of acreage included in each Initial Well Location and the configuration thereof are indicated on the maps attached hereto as Exhibits A-l through A-______. The amount of acreage included in each Additional Well Location and the configuration thereof shall be indicated on the maps to be attached as exhibits to the applicable addendum as provided in sub-section (c) below. (b) As of the date hereof, Atlas represents and warrants to the Developer that Atlas is the lawful owner of said Lease and rights and interest thereunder and of the personal property thereon or used in connection therewith; that Atlas has good right and authority to sell and convey the same, and that said rights, interest and property are free and clear from all liens and encumbrances, and that all rentals and royalties due and payable thereunder have been duly paid. The foregoing representations and warranties shall also be made by Atlas at the time of each recorded assignment of the acreage included in each Initial Well Location and at the time of each recorded assignment of the acreage included in each Additional Well Location designated pursuant to sub-section (c) below, such representations and warranties to be included in each recorded assignment substantially in the manner set forth in the form of assignment attached hereto and made a part hereof as Exhibit B. Atlas agrees to indemnify, protect and hold the Developer and its successors and assigns harmless from and against all costs (including but not limited to reasonable attorneys' fees), liabilities, claims, penalties, losses, suits, actions, causes of action, judgments or decrees resulting from the breach of any of the aforesaid representations and warranties. It is understood and agreed that, except as specifically set forth above, Atlas makes no warranty or representation, express or implied, as to its title or the title of the lessors in and to the lands or oil and gas interests covered by said Leases. (c) In the event that the parties hereto desire to designate Additional Well Locations to be developed in accordance with the terms and conditions of this Agreement, each of said parties shall execute an addendum substantially in the form of Exhibit C attached hereto and made a part hereof specifying the undivided percentage of Working Interest and the Oil and Gas Leases to be included as Leases hereunder, specifying the amount and configuration of acreage included in each such Additional Well Location on maps attached as exhibits to such addendum and setting forth their agreement that such Additional Well Locations shall be developed in accordance with the terms and conditions of this Agreement. (d) It is understood and agreed that the assignment of rights under the Leases and the oil and gas development activities contemplated by this Agreement relate only to the Initial Well Locations described herein and to the Additional Well Locations designated pursuant to sub-section (c) above. Nothing contained in this Agreement shall be interpreted to restrict in any manner the right of each of the parties hereto to conduct without the participation of any other party hereto any additional activities relating to exploration, development, drilling, production or delivery of oil and gas on lands adjacent to or in the immediate vicinity of the aforesaid Initial and Additional Well Locations or elsewhere. 2. Drilling of Wells; Interest of Developer; Right of Substitution. (a) Operator, as Developer's independent contractor, agrees to drill, complete (or plug) and operate ____________ (_____) natural gas wells on the ____________ (______) Initial Well Locations in accordance with the terms and conditions of this Agreement, and Developer, as a minimum commitment, agrees to participate in and pay the Operator's charges for drilling and completing the wells and any extra costs pursuant to Section 4 hereof in proportion to the share of the Working Interest owned by the Developer in the wells with respect to all ___________ (______) initial wells, it being expressly understood and agreed that, subject to sub-section (e) below, Developer does not reserve the right to decline participation in the drilling of any of the ____________ (______) initial wells to be drilled hereunder. (b) Operator will use its best efforts to commence drilling the first well within thirty (30) days after the date of this Agreement and to commence the drilling of each of said ______________ (_____) initial wells for which payment is made pursuant to Section 4(b) of this Agreement, on or before March 31, 1997. Subject to the foregoing time limits, Operator shall determine the timing of and the order of the drilling of said ____________ (______) Initial Well Locations. (c) The ____________ (______) initial wells to be drilled on the Initial Well Locations designated pursuant to this Agreement and any additional wells drilled hereunder on any Additional Well Locations designated pursuant to Section l(c) above shall be drilled and completed (or plugged) in accordance with the generally accepted and customary oil and gas field practices and techniques then prevailing in the geographical area of the Well Locations and shall be drilled to a depth sufficient to test thoroughly the objective formation or the deepest assigned depth, whichever is less. (d) Except as otherwise provided herein, all costs, expenses and liabilities incurred in connection with the drilling and other operations and activities contemplated by this Agreement shall be borne and paid, and all wells, gathering lines of up to approximately 1,500 feet on the Prospect, equipment, materials, and facilities acquired, constructed or installed hereunder shall be owned, by the Developer in proportion to the share of the Working Interest owned by the Developer in the wells. Subject to the payment of lessor's royalties and other royalties and overriding royalties, if any, production of oil and gas from the wells to be drilled hereunder shall be owned by the Developer in proportion to the share of the Working Interest owned by the Developer in the wells. (e) Notwithstanding the provisions of sub-section (a) above, in the event the Operator or Developer determines in good faith, with respect to any Well Location, before operations commence hereunder with respect to such Well Location, based upon the production (or failure of production) of any other wells which may have been recently drilled in the immediate area of such Well Location, or upon newly discovered title defects, or upon such other evidence with respect to the Well Location as may be obtained, that it would not be in the best interest of the parties hereto to drill a well on such Well Location, then the party making the determination shall notify the other party hereto of such determination and the basis therefor and, unless otherwise instructed by Developer, such well shall not be drilled. If such well is not drilled, Operator shall promptly propose a new well location (including such information with respect thereto as Developer may reasonably request) within Pennsylvania or Ohio to be substituted for such original Well Location and Developer shall thereafter have the option for a period of seven (7) business days to either reject or accept the proposed new well location. If the new well location is rejected, Operator shall promptly propose another substitute well location pursuant to the provisions hereof. Once the Developer accepts a substitute well location or does not reject it within said seven (7) day period, this Agreement shall terminate as to the original Well Location and the substitute well location shall become subject to the terms and conditions hereof. 3. Operator - Responsibilities in General; Term. (a) Atlas shall be the Operator of the wells and Well Locations subject to this Agreement and, as the Developer's independent contractor, shall, in addition to its other obligations hereunder, (i) make the necessary arrangements for the drilling and completion of wells and the installation of the necessary gas gathering line systems and connection facilities; (ii) make the technical decisions required in drilling, testing, completing and operating such wells; (iii) manage and conduct all field operations in connection with the drilling, testing, completing, equipping, operating and producing of the wells; (iv) maintain all wells, equipment, gathering lines and facilities in good working order during the useful life thereof; and (v) perform the necessary administrative and accounting functions. In the performance of work contemplated by this Agreement, Operator is an independent contractor with authority to control and direct the performance of the details of the work. (b) Operator covenants and agrees that (i) it shall perform and carry on (or cause to be performed and carried on) its duties and obligations hereunder in a good, prudent, diligent and workmanlike manner using technically sound, acceptable oil and gas field practices then prevailing in the geographical area of the aforesaid Well Locations; (ii) all drilling and other operations conducted by, for and under the control of Operator hereunder shall conform in all respects to federal, state and local laws, statutes, ordinances, regulations, and requirements; (iii) unless otherwise agreed in writing by the Developer, all work performed hereunder pursuant to a written estimate shall conform to the technical specifications set forth in such written estimate and all equipment and materials installed or incorporated in the wells and facilities hereunder shall be new or used and of good quality; (iv) in the course of conducting operations hereunder, it shall comply with all terms and conditions of the Leases (and any related assignments, amendments, subleases, modifications and supplements) other than any minimum drilling commitments contained therein; (v) it shall keep the Well Locations subject to this Agreement and all wells, equipment and facilities located thereon, free and clear of all labor, materials and other liens or encumbrances arising out of operations hereunder; (vi) it shall file all reports and obtain all permits and bonds required to be filed with or obtained from any governmental authority or agency in connection with the drilling or other operations and activities which are the subject of this Agreement; and (vii) it will provide competent and experienced personnel to supervise the drilling, completing (or plugging), and operating of the wells and use the services of competent and experienced service companies to provide any third party services necessary or appropriate in order to perform its duties hereunder. (c) Atlas shall serve as Operator hereunder until the earliest of (i) the termination of this Agreement pursuant to Section 13 hereof; (ii) the termination of Atlas as Operator by the Developer which may be effected by the Developer at any time in its discretion, with or without cause; upon sixty (60) days advance written notice to the Operator; or (iii) the resignation of Atlas as Operator hereunder which may occur upon ninety (90) days' written notice to the Developer at any time after five (5) years from the date hereof, it being expressly understood and agreed that Atlas shall have no right to resign as Operator hereunder prior to the expiration of the aforesaid five-year period. Any successor Operator hereunder shall be selected by the Developer. Nothing contained in this sub-section (c) shall relieve or release Atlas or the Developer from any liability or obligation hereunder which accrued or occurred prior to Atlas' removal or resignation as Operator hereunder. Upon any change in Operator pursuant to this provision, the then present Operator shall deliver to the successor Operator possession of all records, equipment, materials and appurtenances used or obtained for use in connection with operations hereunder and owned by the Developer. 4. Operator's Charges for Drilling and Completing Wells; Completion Determination (a) All natural gas wells which are drilled and completed hereunder shall be drilled and completed on a footage basis for a price of $37.39 per foot to the depth of the well at its deepest penetration as recorded by Operator. The aforesaid footage price for each of said natural gas wells shall be set forth in an AFE which shall be attached to this Agreement as an Exhibit, and shall cover all ordinary costs which may be incurred in drilling and completing each such well for production of natural gas, including without limitation, site preparation, permits and bonds, roadways, surface damages, power at the site, water, Operator's overhead and profit, rights-of-way, drilling rigs, equipment and materials, costs of title examination, logging, cementing, fracturing, casing, meters (other than utility purchase meters), connection facilities, salt water collection tanks, separators, siphon string, rabbit, tubing, an average of 1,500 feet of gathering line per well, geological and engineering services and completing two (2) zones; provided, that such footage price shall not include the cost of (i) completing more than two (2) zones; (ii) completion procedures, equipment, or any facilities necessary or appropriate for the production and sale of oil and/or natural gas liquids; and (iii) equipment or materials necessary or appropriate to collect, lift or dispose of liquids for efficient gas production, except that the cost of saltwater collection tanks, separators, siphon string and tubing shall be included in the aforesaid footage price. Any such extra costs shall be billed to Developer in proportion to the share of the Working Interest owned by the Developer in the wells on a direct cost basis equal to the sum of (i) Operator's invoice costs of third party services performed and materials and equipment purchased plus ten percent (10%) to cover supervisory services and overhead; and (ii) Operator's standard charges for services performed directly by it. (b) In order to enable Operator to commence site preparation for ________________ (______) initial wells, to obtain suitable subcontractors for the drilling and completion of such wells at currently prevailing prices, and to insure the availability of equipment and materials, the Developer shall pay to Operator, in proportion to the share of the Working Interest owned by the Developer in the wells, one hundred percent (100%) of the estimated price for all _________________ (______) initial wells upon execution of this Agreement, such payment to be nonrefundable in all events, except that Developer shall not be required to pay completion costs prior to the time that a decision is made that the well warrants a completion attempt and Atlas' share of such payments as Managing General Partner of the Developer shall be paid within five (5) business days of notice from Operator that such costs have been incurred. With respect to each additional well drilled on the Additional Well Locations, if any, in order to enable Operator to commence site preparation, to obtain suitable subcontractors for the drilling and completion of such wells at currently prevailing prices, and to insure the availability of equipment and materials, Developer shall pay Operator, in proportion to the share of the Working Interest owned by the Developer in the wells, one hundred percent (100%) of the estimated price for such well upon execution of the applicable addendum pursuant to Section l(c) above, except that Developer shall not be required to pay completion costs prior to the time that a decision is made that the well warrants a completion attempt and Atlas' share of such payments as Managing General Partner of the Developer shall be paid within five (5) business days of notice from Operator that such costs have been incurred. With respect to each well, Developer shall pay to Operator, in proportion to the share of the Working Interest owned by the Developer in the wells, all other costs for such well within five (5) business days of receipt of notice from Operator that such well has been drilled to the objective depth and logged and is to be completed. Developer shall pay, in proportion to the share of the Working Interest owned by the Developer in the wells, any extra costs incurred with respect to each well pursuant to sub-section (a) above within ten (10) business days of its receipt of Operator's statement therefor. (c) Operator shall determine whether or not to run the production casing for an attempted completion or to plug and abandon any well drilled hereunder; provided, however, that a well shall be completed only if Operator has made a good faith determination that there is a reasonable possibility of obtaining commercial quantities of oil and/or gas. (d) If Operator determines at any time during the drilling or attempted completion of any well hereunder, in accordance with the generally accepted and customary oil and gas field practices and techniques then prevailing in the geographic area of the well location, that such well should not be completed, it shall promptly and properly plug and abandon the same. In such event, such well shall be deemed a dry hole and the dry hole footage price for each well drilled hereunder shall be $20.60 per foot multiplied by the depth of the well, as specified in sub-section (a) above, and shall be charged to the Developer in proportion to the share of the Working Interest owned by the Developer in the well. Any amounts paid by the Developer with respect to such dry hole which exceed the aforesaid dry hole footage price shall be retained by Operator and shall be applied to the costs for an additional well or wells to be drilled on the Additional Well Locations. 5. Title Examination of Well Locations; Liability for Title Defects. (a) The Developer hereby acknowledges that Operator has furnished Developer with the title opinions identified on Exhibit A, and other documents and information which Developer or its counsel has requested in order to determine the adequacy of the title to the Initial Well Locations and leased premises subject to this Agreement. The Developer hereby accepts the title to said Initial Well Locations and leased premises and acknowledges and agrees that, except for any loss, expense, cost or liability caused by the breach of any of the warranties and representations made by Atlas in Section l(b) hereof, any loss, expense, cost or liability whatsoever caused by or related to any defect or failure of such title shall be the sole responsibility of and shall be borne entirely by the Developer. (b) Prior to commencing the drilling of any well on any Additional Well Location designated pursuant to this Agreement, Operator shall conduct, or cause to be conducted, a title examination of such Additional Well Location, in order to obtain appropriate abstracts, opinions and certificates and other information necessary to determine the adequacy of title to both the applicable Lease and the fee title of the lessor to the premises covered by such Lease. The results of such title examination and such other information as is necessary to determine the adequacy of title for drilling purposes shall be submitted to the Developer for its review and acceptance, and no drilling shall be commenced until such title has been accepted in writing by the Developer. After any title has been accepted by the Developer, any loss, expense, cost or liability whatsoever, caused by or related to any defect or failure of such title shall be the sole responsibility of and shall be borne entirely by the Developer, unless such loss, expense, cost or liability was caused by the breach of any of the warranties and representations made by Atlas in Section l(b) of this Agreement. 6. Operations Subsequent to Completion of the Wells; Price Determinations; Plugging and Abandonment. (a) Commencing with the month in which a well drilled hereunder begins to produce, Operator shall be entitled to an operating fee of $275 per month for each well being operated under this Agreement, proportionately reduced to the extent the Developer owns less than 100% of the Working Interest in the wells, in lieu of any direct charges by Operator for its services or the provision by Operator of its equipment for normal superintendence and maintenance of such wells and related pipelines and facilities. Such operating fees shall cover all normal, regularly recurring operating expenses for the production, delivery and sale of natural gas, including without limitation well tending, routine maintenance and adjustment, reading meters, recording production, pumping, maintaining appropriate books and records, preparing reports to the Developer and government agencies, and collecting and disbursing revenues, but shall not cover costs and expenses related to the (i) production and sale of oil, (ii) collection and disposal of salt water or other liquids produced by the wells, (iii) rebuilding of access roads, and (iv) purchase of equipment, materials or third party services, which, subject to the provisions of sub-section (c) of this Section 6, shall be paid by the Developer in proportion to the share of the Working Interest owned by the Developer in the wells. Any well which is temporarily abandoned or shut-in continuously for the entire month shall not be considered a producing well for purposes of determining the number of wells in such month subject to the aforesaid operating fee. (b) The monthly operating fee set forth in sub-section (a) above may in the following manner be adjusted annually as of the first day of January (the "Adjustment Date") each year beginning January l, 1998. Such adjustment, if any, shall not exceed the percentage increase in the average weekly earnings of "Crude Petroleum, Natural Gas, and Natural Gas Liquids" workers, as published by the U.S. Department of Labor, Bureau of Labor Statistics, and shown in Employment and Earnings Publication, Monthly Establishment Data, Hours and Earning Statistical Table C-2, Index Average Weekly Earnings of "Crude Petroleum, Natural Gas, and Natural Gas Liquids" workers, SIC Code #131-2, or any successor index thereto, since January l, 1996, in the case of the first adjustment, and since the previous Adjustment Date, in the case of each subsequent adjustment. (c) Without the prior written consent of the Developer, pursuant to a written estimate submitted by Operator, Operator shall not undertake any single project or incur any extraordinary cost with respect to any well being produced hereunder reasonably estimated to result in an expenditure of more than $5,000, unless such project or extraordinary cost is necessary to safeguard persons or property or to protect the well or related facilities in the event of a sudden emergency. In no event, however, shall the Developer be required to pay for any project or extraordinary cost arising from the negligence or misconduct of Operator, its agents, servants, employees, contractors, licensees or invitees. All extraordinary costs incurred and the cost of projects undertaken with respect to a well being produced hereunder shall be billed at the invoice cost of third party services performed or materials purchased together with a reasonable charge by Operator for services performed directly by it, in proportion to the share of the Working Interest owned by the Developer in the wells. Operator shall have the right to require the Developer to pay in advance of undertaking any such project all or a portion of the estimated costs thereof in proportion to the share of the Working Interest owned by the Developer in the wells. (d) Developer shall have no interest in the pipeline gathering system, which gathering system shall remain the sole property of Operator and shall be maintained at Operator's sole cost and expense. (e) Notwithstanding anything herein to the contrary, the Developer shall have full responsibility for and bear all costs in proportion to the share of the Working Interest owned by the Developer in the wells with respect to obtaining price determinations under and otherwise complying with the Natural Gas Policy Act of 1978 and the implementing state regulations. Such responsibility shall include, without limitation, preparing, filing, and executing all applications, affidavits, interim collection notices, reports and other documents necessary or appropriate to obtain price certification, to effect sales of natural gas, or otherwise to comply with said Act and the implementing state regulations. Operator agrees to furnish such information and render such assistance as the Developer may reasonably request in order to comply with said Act and the implementing state regulations without charge for services performed by its employees. (f) The Developer shall have the right to direct Operator to plug and abandon any well which has been completed hereunder as a producer, and Operator shall not plug and abandon any such well prior to obtaining the written consent of the Developer; provided, however, that if Operator in accordance with the generally accepted and customary oil and gas field practices and techniques then prevailing in the geographic area of the well location, determines that any such well should be plugged and abandoned and makes a written request to the Developer for authority to plug and abandon any such well and the Developer fails to respond in writing to such request within forty-five (45) days following the date of such request, then the Developer shall be deemed to have consented to the plugging and abandonment of such well(s). All costs and expenses related to plugging and abandoning the wells which have been drilled and completed as producing wells hereunder shall be borne and paid by the Developer in proportion to the share of the Working Interest owned by the Developer in the wells. At any time after three (3) years from the date each well drilled and completed hereunder is placed into production, Operator shall have the right to deduct each month from the proceeds of the sale of the production from the well operated hereunder up to $200, in proportion to the share of the Working Interest owned by the Developer in the wells, for the purpose of establishing a fund to cover the estimated costs of plugging and abandoning said well. All such funds shall be deposited in a separate interest bearing escrow account for the account of the Developer, and the total amount so retained and deposited shall not exceed Operator's reasonable estimate of such costs. 7. Billing and Payment Procedure with Respect to Operation of Wells; Records, Reports and Information. (a) Operator shall promptly and timely pay and discharge on behalf of the Developer, in proportion to the share of the Working Interest owned by the Developer in the wells, all severance taxes, royalties, overriding royalties, operating fees, pipeline gathering charges and other expenses and liabilities payable and incurred by reason of its operation of the wells in accordance with this Agreement and shall pay, in proportion to the share of the Working Interest owned by the Developer in the wells, on or before the due date any third party invoices rendered to Operator with respect to such costs and expenses; provided, however, that Operator shall not be required to pay and discharge as aforesaid any such costs and expenses which are being contested in good faith by Operator. Operator shall deduct the foregoing costs and expenses from the Developer's share of the proceeds of the oil and/or gas sold from the wells operated hereunder and shall keep an accurate record of the Developer's account hereunder, showing expenses incurred and charges and credits made and received with respect to each well. In the event that such proceeds are insufficient to pay said costs and expenses, Operator shall promptly and timely pay and discharge the same, in proportion to the share of the Working Interest owned by the Developer in the wells, and prepare and submit an invoice to the Developer each month for said costs and expenses, such invoice to be accompanied by the form of statement specified in sub-section (b) below. Any such invoice shall be paid by the Developer within ten (10) business days of its receipt. (b) Operator shall disburse to the Developer, on a monthly basis, the Developer's share of the proceeds received from the sale of oil and/or gas sold from the wells operated hereunder, less (i) the amounts charged to the Developer under sub-section (a) hereof, and (ii) such amount, if any, withheld by Operator for future plugging costs pursuant to sub-section (f) of Section 6. Each such disbursement made and/or invoice submitted pursuant to sub-section (a) above shall be accompanied by a statement itemizing with respect to each well (i) the total production of oil and/or gas since the date of the last disbursement or invoice billing period, as the case may be, and the Developer's share thereof, (ii) the total proceeds received from any sale thereof, and the Developer's share thereof, (iii) the costs and expenses deducted from said proceeds and/or being billed to the Developer pursuant to sub-section (a) above, (iv) the amount withheld for future plugging costs, and (v) such other information as Developer may reasonably request, including without limitation copies of all third party invoices listed thereon for such period. Operator agrees to deposit all proceeds from the sale of oil and/or gas sold from the wells operated hereunder in a separate checking account maintained by Operator, which account shall be used solely for the purpose of collecting and disbursing funds constituting proceeds from the sale of production hereunder. (c) In addition to the statements required under sub-section (b) above, Operator, within seventy-five (75) days after the completion of each well drilled hereunder, shall furnish the Developer with a detailed statement itemizing with respect to such well the total costs and charges under Section 4(a) hereof and the Developer's share thereof, and such information as is necessary to enable the Developer (i) to allocate any extra costs incurred with respect to such well between tangible and intangible and (ii) to determine the amount of investment tax credit, if applicable. (d) Upon request, Operator shall promptly furnish the Developer with such additional information as it may reasonably request, including without limitation geological, technical and financial information, in such form as may reasonably be requested, pertaining to any phase of the operations and activities governed by this Agreement. The Developer and its authorized employees, agents and consultants, including independent accountants shall, at Developer's sole cost and expense, (i) upon at least ten (10) days' written notice have access during normal business hours to all of Operator's records pertaining to operations hereunder, including without limitation, the right to audit the books of account of Operator relating to all receipts, costs, charges and expenses under this Agreement, and (ii) have access, at its sole risk, to any wells drilled by Operator hereunder at all times to inspect and observe any machinery, equipment and operations. 8. Operator's Lien. (a) The Developer hereby grants Operator a first and preferred lien on and security interest in the interest of the Developer covered by this Agreement, and in the Developer's interest in oil and gas produced and the proceeds thereof, and upon the Developer's interest in materials and equipment, to secure the payment of all sums due from Developer to Operator under the provisions of this Agreement. (b) In the event that the Developer fails to pay any amount owing hereunder by it to the Operator within the time limit for payment thereof, Operator, without prejudice to other existing remedies, is authorized at its election to collect from any purchaser or purchasers of oil or gas and retain the proceeds from the sale of the Developer's share thereof until the amount owed by the Developer, plus twelve percent (12%) interest on a per annum basis and any additional costs (including without limitation actual attorneys' fees and costs) resulting from such delinquency, has been paid. Each purchaser of oil or gas shall be entitled to rely upon Operator's written statement concerning the amount of any default. 9. Successors and Assigns; Transfers; Appointment of Agent. (a) This Agreement shall be binding upon and shall inure to the benefit of the undersigned parties and their respective successors and permitted assigns; provided, however, that Operator may not assign, transfer, pledge, mortgage, hypothecate, sell or otherwise dispose of any of its interest in this Agreement, or any of the rights or obligations hereunder, without the prior written consent of the Developer, except that such consent shall not be required in connection with (i) the assignment of work to be performed for Operator by subcontractors, it being understood and agreed, however, that any such assignment to Operator's subcontractors shall not in any manner relieve or release Operator from any of its obligations and responsibilities under this Agreement, or (ii) any lien, assignment, security interest, pledge or mortgage arising under or pursuant to Operator's present or future financing arrangements, or (iii) the liquidation, merger, consolidation or sale of substantially all of the assets of Operator or other corporate reorganization; and provided, further, that in order to maintain uniformity of ownership in the wells, production, equipment, and leasehold interests covered by this Agreement, and notwithstanding any other provisions to the contrary, the Developer shall not, without the prior written consent of Operator, sell, assign, transfer, encumber, mortgage or otherwise dispose of any of its interest in the wells, production, equipment or leasehold interests covered hereby unless such disposition encompasses either (i) the entire interest of the Developer in all wells, production, equipment and leasehold interests subject hereto or (ii) an equal undivided interest in all such wells, production, equipment, and leasehold interests. (b) Subject to the provisions of sub-section (a) above, any sale, encumbrance, transfer or other disposition made by the Developer of its interests in the wells, production, equipment, and/or leasehold interests covered hereby shall be made (i) expressly subject to this Agreement, (ii) without prejudice to the rights of the other party, and (iii) in accordance with and subject to the provisions of the Lease. (c) If at any time the interest of the Developer is divided among or owned by co-owners, Operator may, at its discretion, require such co-owners to appoint a single trustee or agent with full authority to receive notices, reports and distributions of the proceeds from production, to approve expenditures, to receive billings for and approve and pay all costs, expenses and liabilities incurred hereunder, to exercise any rights granted to such co-owners under this Agreement, to grant any approvals or authorizations required or contemplated by this Agreement, to sign, execute, certify, acknowledge, file and/or record any agreements, contracts, instruments, reports, or documents whatsoever in connection with this Agreement or the activities contemplated hereby, and to deal generally with, and with power to bind, such co-owners with respect to all activities and operations contemplated by this Agreement; provided, however, that all such co-owners shall continue to have the right to enter into and execute all contracts or agreements for their respective shares of the oil and gas produced from the wells drilled hereunder in accordance with sub-section (c) of Section 11 hereof. 10. Insurance; Operator's Liability. (a) Operator shall obtain and maintain at its own expense so long as it is Operator hereunder all required Workmen's Compensation Insurance and comprehensive general public liability insurance in amounts and coverage not less than $1,000,000 per person per occurrence for personal injury or death and $1,000,000 for property damage per occurrence, which insurance shall include coverage for blow-outs and total liability coverage of not less than $10,000,000. Subject to the aforesaid limits, the Operator's general public liability insurance shall be in all respects comparable to that generally maintained in the industry with respect to services of the type to be rendered and activities of the type to be conducted under this Agreement; Operator's general public liability insurance shall, if permitted by Operator's insurance carrier, (i) name the Developer and all of Developer's Investor General Partners as additional insured parties, and (ii) provide that at least thirty (30) days' prior notice of cancellation and any other adverse material change in the policy shall be given to the Developer and its Investor General Partners; provided, that the Developer shall reimburse Operator for the additional cost, if any, of including it and its Investor General Partners as additional insured parties under the Operator's insurance. Current copies of all policies or certificates thereof shall be delivered to the Developer upon request. It is understood and agreed that Operator's insurance coverage may not adequately protect the interests of the Developer hereunder and that the Developer shall carry at its expense such excess or additional general public liability, property damage, and other insurance, if any, as the Developer deems appropriate. (b) Operator shall require all of its subcontractors to carry all required Workmen's Compensation Insurance and to maintain such other insurance, if any, as Operator in its discretion may require. (c) Operator's liability to the Developer as Operator hereunder shall be limited to, and Operator shall indemnify the Developer and hold it harmless from, claims, penalties, liabilities, obligations, charges, losses, costs, damages or expenses (including but not limited to reasonable attorneys' fees) relating to, caused by or arising out of (i) the noncompliance with or violation by Operator, its employees, agents, or subcontractors of any local, state or federal law, statute, regulation, or ordinance; (ii) the negligence or misconduct of Operator, its employees, agents or subcontractors; or (iii) the breach of or failure to comply with any provisions of this Agreement. 11. Internal Revenue Code Election; Relationship of Parties; Right to Take Production in Kind. (a) With respect to this Agreement, each of the parties hereto elects, under the authority of Section 761 (a) of the Internal Revenue Code of 1986, as amended, to be excluded from the application of all of the provisions of Subchapter K of Chapter 1 of Sub Title A of the Internal Revenue Code of 1986, as amended. If the income tax laws of the state or states in which the property covered hereby is located contain, or may hereafter contain, provisions similar to those contained in the Subchapter of the Internal Revenue Code of 1986, as amended, referred to under which a similar election is permitted, each of the parties agrees that such election shall be exercised. Beginning with the first taxable year of operations hereunder, each party agrees that the deemed election provided by Section 1.761-2(b)(2)(ii) of the Regulations under the Internal Revenue Code of 1986, as amended, will apply; and no party will file an application under Section 1.761-2 (b)(3)(i) and (ii) of said Regulations to revoke such election. Each party hereby agrees to execute such documents and make such filings with the appropriate governmental authorities as may be necessary to effect such election. (b) It is not the intention of the parties hereto to create, nor shall this Agreement be construed as creating, a mining or other partnership or association or to render the parties liable as partners or joint venturers for any purpose. Operator shall be deemed to be an independent contractor and shall perform its obligations as set forth herein or as otherwise directed by the Developer. (c) Subject to the provisions of Section 8 hereof, the Developer shall have the exclusive right to sell or dispose of its proportionate share of all oil and gas produced from the wells to be drilled hereunder, exclusive of production which may be used in development and producing operations, production unavoidably lost, and production used to fulfill any free gas obligations under the terms of the applicable Lease or Leases; and Operator shall not have any right to sell or otherwise dispose of such oil and gas. The Developer shall have the exclusive right to execute all contracts relating to the sale or disposition of its proportionate share of the production from the wells drilled hereunder. Developer shall have no interest in any gas purchase agreements of Operator, except the right to receive Developer's share of the proceeds received from the sale of any gas or oil from wells developed hereunder. The Developer agrees to designate Operator or Operator's designated bank agent as the Developer's collection agent in any such contract. Upon request, Operator shall render assistance in arranging such sale or disposition and shall promptly provide the Developer with all relevant information which comes to Operator's attention regarding opportunities for sale of production. In the event Developer shall fail to make the arrangements necessary to take in kind or separately dispose of its proportionate share of the oil and gas produced hereunder, Operator shall have the right, subject to the revocation at will by the Developer, but not the obligation, to purchase such oil and gas or sell it to others at any time and from time to time, for the account of the Developer at the best price obtainable in the area for such production, however, Operator shall have no liability to Developer should Operator fail to market such production. Any such purchase or sale by Operator shall be subject always to the right of the Developer to exercise at any time its right to take in kind, or separately dispose of, its share of oil and gas not previously delivered to a purchaser. Any purchase or sale by Operator of any other party's share of oil and gas shall be only for such reasonable periods of time as are consistent with the minimum needs of the Industry under the particular circumstance, but in no event for a period in excess of one (1) year. 12. Force Majeure. (a) If Operator is rendered unable, wholly or in part, by force majeure (as hereinafter defined) to carry out its obligations under this Agreement, the Operator shall give to the Developer prompt written notice of the force majeure with reasonably full particulars concerning it; thereupon, the obligations of the Operator, so far as it is affected by the force majeure, shall be suspended during but no longer than, the continuance of the force majeure. Operator shall use all reasonable diligence to remove the force majeure as quickly as possible to the extent the same is within reasonable control. (b) The term "force majeure" shall mean an act of God, strike, lockout, or other industrial disturbance, act of the public enemy, war, blockade, public riot, lightning, fire, storm, flood, explosion, governmental restraint, unavailability of equipment or materials, plant shut-downs, curtailments by purchasers and any other causes whether of the kind specifically enumerated above or otherwise, which directly precludes Operator's performance hereunder and is not reasonably within the control of the Operator. (c) The requirement that any force majeure shall be remedied with all reasonable dispatch shall not require the settlement of strikes, lockouts, or other labor difficulty affecting the Operator, contrary to its wishes; the method of handling all such difficulties shall be entirely within the discretion of the Operator. 13. Term. This Agreement shall become effective when executed by Operator and the Developer and, except as provided in sub-section (c) of Section 3, shall continue and remain in full force and effect for the productive lives of the wells being operated hereunder. 14. Governing Law and Invalidity. This Agreement shall be governed by, construed and interpreted in accordance with the laws of the Commonwealth of Pennsylvania. The invalidity or unenforceability of any particular provision of this Agreement shall not affect the other provisions hereof, and this Agreement shall be construed in all respects as if such invalid or unenforceable provision were omitted. 15. Integration. This Agreement, including the Exhibits hereto, constitutes and represents the entire understanding and agreement of the parties with respect to the subject matter hereof and supersedes all prior negotiations, understandings, agreements, and representations relating to the subject matter hereof. No change, waiver, modification, or amendment of this Agreement shall be binding or of any effect unless in writing duly signed by the party against which such change, waiver, modification, or amendment is sought to be enforced. 16. Waiver of Default or Breach. No waiver by any party hereto to any default of or breach by any other party under this Agreement shall operate as a waiver of any future default or breach, whether of like or different character or nature. 17. Notices. Unless otherwise provided herein, all notices, statements, requests, or demands which are required or contemplated by this Agreement shall be in writing and shall be hand-delivered or sent by registered or certified mail, postage prepaid, to the following addresses until changed by certified or registered letter so addressed to the other party: (i) If to Atlas, to: Atlas Resources, Inc. 311 Rouser Road Moon Township, Pennsylvania 15108 Attention: President (ii) If to Developer, to: Atlas-Energy for the Nineties-Public #5 Ltd. c/o Atlas Resources, Inc. 311 Rouser Road Moon Township, Pennsylvania 15108 Notices which are served by registered or certified mail upon the parties hereto in the manner provided in this Section shall be deemed sufficiently served or given for all purposes under this Agreement at the time such notice shall be mailed as provided herein in any post office or branch post office regularly maintained by the United States Postal Service or any successor to the functions thereof. All payments hereunder shall be hand-delivered or sent by United States mail, postage prepaid to the addresses set forth above until changed by certified or registered letter so addressed to the other party. 18. Interpretation. Whenever this Agreement makes reference to "this Agreement" or to any provision "hereof," or words to similar effect, such reference shall be construed to refer to the within instrument unless the context clearly requires otherwise. The titles of the Sections herein have been inserted as a matter of convenience of reference only and shall not control or affect the meaning or construction of any of the terms and provisions hereof. As used in this Agreement, the plural shall include the singular and the singular shall include the plural whenever appropriate. 19. Counterparts. The parties hereto may execute this Agreement in any number of separate counterparts, each of which, when executed and delivered by the parties hereto, shall have the force and effect of an original; but all such counterparts shall be deemed to constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement under their respective seals as of the day and year first above written. Attest Secretary [Corporate Seal] Attest Secretary [Corporate Seal] ATLAS RESOURCES, INC. By: President ATLAS-ENERGY FOR NINETIES-PUBLIC #5 LTD. By its Managing General Partner: ATLAS RESOURCES, INC. By: President - ------------------------------------------------------------------------- DESCRIPTION OF LEASES AND INITIAL WELL LOCATIONS [To be completed as information becomes available] 1. WELL LOCATION (a) Oil and Gas Lease from _________________________________________ dated _____________________ and recorded in Deed Book Volume __________, Page __________ in the Recorder's Office of County, ____________, covering approximately_________acres in ________________________________ Township, ___________________ County, __________________________. (b) The portion of the leasehold estate constituting the ________________________________________________ No. __________ Well Location is described on the map attached hereto as Exhibit A-l. (c) Title Opinion of ____________________________________, _____________________________________, ________________________________________, ________________________________________, dated ___________________, 19_____. (d) The Developer's interest in the leasehold estate constituting this Well Location is an undivided % Working Interest to those oil and gas rights from the surface to the bottom of the Medina/Whirlpool Formation, subject to the landowner's royalty interest and Overriding Royalty Interests. Ehibit A (Page 1) - ------------------------------------------------------------------------- STATE OF ) ) ASSIGNMENT OF OIL AND GAS LEASE COUNTY OF ) KNOW ALL MEN BY THESE PRESENTS THAT the undersigned (hereinafter called Assignor), for and in consideration of One Dollar and other valuable consideration ($1.00 ovc), the receipt whereof is hereby acknowledged, does hereby sell, assign, transfer and set over unto (hereinafter called Assignee), an undivided in, and to, the oil and gas lease described as follows: -------------------------- together with the rights incident thereto and the personal property thereto, appurtenant thereto, or used, or obtained, in connection therewith. And for the same consideration, the assignor covenants with the said assignee his or its heirs, successors, or assigns that assignor is the lawful owner of said lease and rights and interest thereunder and of the personal property thereon or used in connection therewith; that the undersigned ___________________________ good right and authority to sell and convey the same, and that said rights, interest and property are free and clear from all liens and incumbrances, and that all rentals and royalties due and payable thereunder have been duly paid. In Witness Whereof, The undersigned owner________________ and assignor ha____ signed and sealed this instrument the _________ day of ____________________, 19_____. Signed and acknowledged in presence of ________________________________________ ACKNOWLEDGEMENT BY INDIVIDUAL STATE OF ) ) BEFORE ME, a Notary Public, in and for said COUNTY OF ) County and State, on this day personally appeared who acknowledged to me that __he did sign the foregoing instrument and that the same is ____________________free act and deed. In Testimony Whereof, I have hereunto set my hand and offical seal, at ______________________________. This _____ day of ____________________________, A.D. 19____. ____________________________________ Notary Public CORPORATION ACKNOWLEDGEMENT STATE OF ) ) BEFORE ME, a Notary Public, in and for said COUNTY OF ) County and State, on this day personally appeared known to me to be the person and officer whose name is subscribed to the foregoing instrument and acknowledged that the same was the act of the said a corporation, and he executed the same as the act of such corporation for the purposes and consideration therein expressed, and in the capacity therein stated. In Testimony Whereof, I have herewith set my hand and offical seal, at ______________________________. This _____ day of ____________________________, A.D. 19____. ____________________________________ Notary Public - ------------------------------------------------------------------------- ADDENDUM NO. __________ TO DRILLING AND OPERATING AGREEMENT DATED ___________________ , 1996 THIS ADDENDUM NO. __________ made and entered into this ______ day of ________________, 1996, by and between ATLAS RESOURCES, INC., a Pennsylvania corporation (hereinafter referred to as "Operator"), and ATLAS-ENERGY FOR THE NINETIES-PUBLIC #5 LTD., a Pennsylvania limited partnership, (hereinafter referred to as the Developer). WITNESSETH THAT: WHEREAS, Operator and the Developer have entered into a Drilling and Operating Agreement dated ___________________, 1996, (the "Agreement"), which Agreement relates to the drilling and operating of ________________ (______) natural gas wells on the ________________ (______) Initial Well Locations in Mercer County, Pennsylvania, identified on the maps attached as Exhibits A-l through A-______ to said Agreement, and provides for the development upon the terms and conditions therein set forth of such Additional Well Locations as the parties may from time to time designate; and WHEREAS, pursuant to Section l(c) of said Agreement, Operator and Developer presently desire to designate ________________ Additional Well Locations hereinafter described to be developed in accordance with the terms and conditions of said Agreement. NOW, THEREFORE, in consideration of the mutual covenants herein contained and intending to be legally bound hereby, the parties hereto agree as follows: 1. Pursuant to Section l(c) of the aforesaid Agreement, the Developer hereby authorizes Operator to drill, complete (or plug) and operate, upon the terms and conditions set forth in said Agreement and this Addendum No.__________, ________________ additional natural gas wells on the ________________ Additional Well Locations described on Exhibit A hereto and on the maps attached hereto as Exhibits A-______ through A-______. 2. Operator, as Developer's independent contractor, agrees to drill, complete (or plug) and operate said additional natural gas wells on said Additional Well Locations in accordance with the terms and conditions of said Agreement and further agrees to use its best efforts to commence drilling the first such additional well within thirty (30) days after the date hereof and to commence drilling all said ________________ additional wells on or before March 31, 1997. 3. Developer hereby acknowledges that Operator has furnished Developer with the title opinions identified on Exhibit A hereto, and such other documents and information which Developer or its counsel has requested in order to determine the adequacy of the title to the aforesaid Additional Well Locations. The Developer hereby accepts the title to the aforesaid Additional Well Locations and leased premises in accordance with the provisions of Section 5 of the Agreement. 4. The drilling and operation of said ________________ additional natural gas wells on the aforesaid ________________ Additional Well Locations shall be in accordance with and subject to the terms and conditions set forth in the aforesaid Agreement as supplemented by this Addendum No. __________ and except as previously supplemented, all terms and conditions of the aforesaid Agreement shall remain in full force and effect as originally written. 5. This Addendum No. __________ shall be legally binding upon, and shall inure to the benefit of, the parties hereto and their respective heirs, personal representatives, successors and assigns. WITNESS the due execution hereof on the day and year first above written. Attest: ATLAS RESOURCES, INC. ________________________________________ By ____________________________________________ Secretary President [Corporate Seal] ATLAS ENERGY FOR THE NINETIES-PUBLIC #5 LTD. By its Managing General Partner: Attest: ATLAS RESOURCES, INC. _____________________________________________ By ____________________________________________ Secretary President [Corporate Seal] - ------------------------------------------------------------------------- EXHIBIT (B) SPECIAL SUITABILITY REQUIREMENTS AND DISCLOSURES TO INVESTORS SPECIAL SUITABILITY REQUIREMENTS AND DISCLOSURES TO INVESTORS Prospective investors, if a resident of one of the following states, must meet that state's qualification and suitability standards as follows: SUBSCRIBERS TO LIMITED PARTNER UNITS. If a Michigan or North Carolina resident (1) a net worth of not less than $225,000 (exclusive of home, furnishings and automobiles), or (2) a net worth of not less than $60,000 (exclusive of home, furnishings and automobiles) and estimated current year taxable income as defined in Section 63 of the Internal Revenue Code of 1986 of $60,000 or more without regard to an investment in the Partnership. In addition, a resident of Michigan or Ohio shall not make an investment in the Partnership in excess of 10% of his net worth (exclusive of home, furnishings and automobiles). If a resident of California (1) a net worth of not less than $250,000 (exclusive of home, furnishings and automobiles) and expects to have gross income in the current year of $65,000 or more, or (2) a net worth of not less than $500,000 (exclusive of home, furnishings and automobiles), or (3) a net worth of not less than $1,000,000, or (4) expects to have gross income in the current year of not less than $200,000. SUBSCRIBERS TO INVESTOR GENERAL PARTNER UNITS. If a resident of California: (1) a net worth of not less than $250,000 (exclusive of home, furnishings and automobiles) and expects to have annual gross income in the current year of $120,000 or more; or (2) a net worth of not less than $500,000 (exclusive of home, furnishings and automobiles); or (3) a net worth of not less than $1,000,000; or (4) expects to have gross income in the current year of not less than $200,000. If a resident of Alabama, Maine, Massachusetts, Minnesota, Mississippi, North Carolina, Pennsylvania, Tennessee, or Texas, (1) an individual or joint net worth with my spouse of $225,000 or more, without regard to the investment in the Partnership, (exclusive of home, home furnishings and automobiles) and a combined gross income of $100,000 or more for the current year and for the two previous years; or (2) an individual or joint net worth with my spouse in excess of $1,000,000, inclusive of home, home furnishings and automobiles; or (3) an individual or joint net worth with my spouse in excess of $500,000, exclusive of home, home furnishings and automobiles; or (4) a combined "gross income" as defined in Section 61 of the Internal Revenue Code of 1986, as amended, in excess of $200,000 in the current year and the two previous years. If a resident of Arizona, Indiana, Iowa, Kentucky, Michigan, Missouri, New Mexico, Ohio, Oklahoma, South Dakota, Vermont, or Washington, (1) an individual or joint net worth with my spouse of $225,000 or more, without regard to the investment in the Partnership, (exclusive of home, home furnishings and automobiles) and a combined "taxable income" of $60,000 or more for the previous year and expects to have a combined "taxable income" of $60,000 or more for the current year and for the succeeding year; or (2) an individual or joint net worth with my spouse in excess of $1,000,000, inclusive of home, home furnishings and automobiles; or (3) an individual or joint net worth with my spouse in excess of $500,000, exclusive of home, home furnishings and automobiles; or (4) a combined "gross income" as defined in Section 61 of the Internal Revenue Code of 1986, as amended, in excess of $200,000 in the current year and the two previous years. In addition, a resident of Michigan or Ohio shall not make an investment in the Partnership in excess of 10% of his net worth (exclusive of home, furnishings and automobiles). If a resident of New Hampshire he must represent that he is an "accredited investor" as that term is defined in Regulation D promulgated by the Securities and Exchange Commission, which includes, but is not limited to: (1) a natural person whose individual net worth, or joint net worth with that person's spouse, at the time of his purchase exceeds $1,000,000; and (2) a natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year. If a resident of Missouri, I am aware that: THESE SECURITIES ARE NOT ELIGIBLE FOR ANY TRANSACTIONAL EXEMPTION UNDER THE MISSOURI UNIFORM SECURITIES ACT (SECTION 409.402(B), R.S.MO.(1978). UNLESS THESE SECURITIES ARE AGAIN - ------------------------------------------------------------------------- REGISTERED UNDER THE ACT, THEY MAY NOT BE REOFFERED FOR SALE OR RESOLD IN THE STATE OF MISSOURI (SECTION 409.301, R.S.MO.(1978)). If a resident of California, I am aware that: IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES. As a condition of qualification of the Units for sale in the State of California, the following rule is hereby delivered to each California purchaser. CALIFORNIA ADMINISTRATIVE CODE, TITLE 10, CH. 3, RULE 260.141.11. RESTRICTION ON TRANSFER. (a) The issuer of any security upon which a restriction on transfer has been imposed pursuant to Sections 260.102.6, 260.141.10 and 260.534 shall cause a copy of this section to be delivered to each issuee or transferee of such security at the time the certificate evidencing the security is delivered to the issuee or transferee. (b) It is unlawful for the holder of any such security to consummate a sale or transfer of such security, or any interest therein, without the prior written consent of the Commissioner (until this condition is removed pursuant to Section 260.141.12 of these rules), except: (1) to the issuer; (2) pursuant to the order or process of any court; (3) to any person described in Subdivision (i) of Section 25102 of the Code or Section 260.105.14 of these rules; (4) to the transferor's ancestors, descendants or spouse, or any custodian or trustee for the account of the transferor's ancestors, descendants or spouse, or to a transferee by a trustee or custodian for the account of the transferee or the transferee's ancestors, descendants or spouse; (5) to holders of securities of the same class of the same issuer; (6) by way of gift or donation inter vivos or on death; (7) by or through a broker-dealer licensed under the Code (either acting as such or as a finder) to a resident of a foreign state, territory or country who is neither domiciled in this state to the knowledge of the broker-dealer, nor actually present in this state if the sale of such securities is not in violation of any securities law of the foreign state, territory or country concerned; (8) to a broker-dealer licensed under the Code in a principal transaction, or as an underwriter or member of an underwriting syndicate or selling group; (9) if the interest sold or transferred is a pledge or other lien given by the purchaser to the seller upon a sale of the security for which the Commissioner's written consent is obtained or under this rule not required; (10) by way of a sale qualified under Sections 25111, 25112, 25113 or 25121 of the Code, of the securities to be transferred, provided that no order under Section 25140 or Subdivision (a) of Section 25143 is in effect with respect to such qualification; - ------------------------------------------------------------------------ (11) by a corporation or wholly-owned subsidiary of such corporation, or by a wholly-owned subsidiary of a corporation to such corporation; (12) by way of an exchange qualified under Section 25111, 25112 or 25113 of the Code, provided that no order under Section 25140 or Subdivision (a) of Section 25143 is in effect with respect to such qualification; (13) between residents of foreign states, territories or countries who are neither domiciled nor actually present in this state; (14) to the State Controller pursuant to the Unclaimed Property Law or to the administrator of the unclaimed property law of another state; (15) by the State Controller pursuant to the Unclaimed Property Law or by the administrator of the unclaimed property law of another state if, in either such case, such person (i) discloses to potential purchasers at the sale that transfer of the securities is restricted under this rule, (ii) delivers to each purchaser a copy of this rule, and (iii) advises the Commissioner of the name of each purchaser; (16) by a trustee to a successor trustee when such transfer does not involve a change in the beneficial ownership of the securities; (17) by way of an offer and sale of outstanding securities in an issuer transaction that is subject to the qualification requirement of Section 25110 of the Code but exempt from that qualification requirement by subdivision (f) of Section 25102; provided that any such transfer is on the condition that any certificate evidencing the security issued to such transferee shall contain the legend required by this section. (c) The certificates representing all such securities subject to such a restriction on transfer, whether upon initial issuance or upon any transfer thereof, shall bear on their face a legend, prominently stamped or printed thereon in capital letters of not less than 10-point size, reading as follows: "IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES." IF A RESIDENT OF NORTH CAROLINA, I AM AWARE THAT: IN MAKING AN INVESTMENT DECISION INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE PERSON OR ENTITY CREATING THE SECURITIES AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ========================================================================= TABLE OF CONTENTS Summary of the Offering 1 Risk Factors 8 Capitalization and Source of Funds and Use ofProceeds 15 Compensation 17 Estimate of Administrative Costs and Direct Costs to be Borne by the Partnership 19 Terms of the Offering 19 Conflicts of Interest 23 Fiduciary Responsibility of the Managing General Partner 30 Prior Activities 31 Management 38 Investment Objectives 43 Proposed Activities 44 Competition, Markets and Regulation 75 Participation in Costs and Revenues 77 Tax Aspects 80 Definitions 93 Summary of Partnership Agreement 98 Summary of Drilling and Operating Agreement 100 Reports to Investors 101 Repurchase Obligation 101 Transferability of Units 103 Plan of Distribution 104 Sales Material 104 Legal Opinions 104 Experts 104 Litigation 105 Additional Information 105 Financial Information Concerning the Man- aging General Partner, AEGH and the Partnership 105 EXHIBIT (A) - Amended and Restated Certificate and Agreement of Limited Partnership EXHIBIT (I-A) - Managing General Partner Signature Page EXHIBIT (I-B) - Subscription Agreement EXHIBIT (II) - Drilling and Operating Agreement EXHIBIT (B) - Special Suitability Requirements and Disclosures to Investors No dealer, salesman or other person has been authorized to give any information or make any representations other than those contained in this Prospectus in connection with this offering, and if given or made, such information or representations must not be relied upon as having been authorized by the Managing General Partner. The delivery of this Prospectus at any time does not imply that the information herein is correct as of any time subsequent to its date of issue. This Prospectus does not constitute an offer to buy any of these securities in any State to any person to whom it is unlawful to make such offer or solicitation in such State. ATLAS-ENERGY FOR THE NINETIES - PUBLIC #5 LTD. PROSPECTUS _______________, 1996 Until December 31, 1996, all dealers effecting transactions in the registered securities, whether or not participating in this distribution, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. - ------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 22. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 1410 of the Pennsylvania Business Corporation Law provides for indemnification of officers, directors, employees and agents by a corporation subject to certain limitations. Under Section 4.05 of the Amended and Restated Certificate and Agreement of Limited Partnership, the Participants, within the limits of their Capital Contributions, and the Partnership, generally agree to indemnify and exonerate the Managing General Partner, the Operator and their Affiliates from claims of liability to any third party arising out of operations of the Partnership, provided that they determined in good faith that the course of conduct which caused the loss or liability was in the best interest of the Partnership, they were acting on behalf of or performing services for the Partnership and such course of conduct was not the result of their negligence or misconduct. ITEM 23. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The expenses to be incurred in connection with the issuance and distribution of the securities to be registered, other than underwriting discounts, commissions and expense allowances, are estimated to be as follows: Accounting $ 2,000.00 * Legal Fees (including Blue Sky) 50,000.00 * Printing 95,000.00 * SEC Registration Fee 2,758.40 Blue Sky Filing Fees (excluding legal fees) 21,000.00 * NASD Filing Fee 1,300.00 Miscellaneous 187,941.60* Total $360,000.00 * *Estimated ITEM 24. RECENT SALES OF UNREGISTERED SECURITIES. None by the Registrant. Atlas Resources, Inc. ("Atlas"), an Affiliate of the Registrant, has made sales of unregistered and registered securities within the last three years. See the section of the Prospectus captioned "Prior Activities" regarding the sale of limited and general partner interests. In the opinion of Atlas, the foregoing unregistered securities in each case have been and/or are being offered and sold in compliance with exemptions from registration provided by the Securities Act of 1933, as amended, including the exemptions provided by Section 4(2) of that Act and certain rules and regulations promulgated thereunder. The securities in each case have been and/or are being offered and sold to a limited number of persons who had the sophistication to understand the merits and risks of the investment and who had the financial ability to bear such risks. The units of limited and general partner interests were sold to persons who were Accredited Investors, as that term is defined in Regulation D (17 CFR 230.501(a)), or who had, at the time of purchase, a net worth of at least $225,000 (exclusive of home, furnishings and automobiles) or a net worth (exclusive of home, furnishings and automobiles) of at least $125,000 and gross income of at least $75,000, or otherwise satisfied Atlas that that the investment was suitable. ITEM 25. EXHIBITS. 1(a) Proposed form of Soliciting Dealer Agreement 3(a) Articles of Incorporation of Atlas Resources, Inc. 3(b) Bylaws of Atlas Resources, Inc. 4(a) Certificate of Limited Partnership for Atlas-Energy for the Nineties-Public #5 Ltd. - ------------------------------------------------------------------------ 4(b) Amended and Restated Certificate and Agreement of Limited Partnership for Atlas-Energy for the Nineties-Public #5 Ltd. (See Exhibit (A) to Prospectus) 4(c) Release from Shareholders 5 Opinion of Kunzman & Bollinger, Inc. as to the legality of the Units registered hereby 8 Opinion of Kunzman & Bollinger, Inc. as to tax matters 10(a) Proposed Form of Escrow Agreement 10(b) Drilling and Operating Agreement (See Exhibit (II) to the Amended and Restated Certificate and Agreement of Limited Partnership, Exhibit (A) to Prospectus) 24(a) Consent of McLaughlin & Courson 24(b) Consent of United Energy Development Consultants, Inc. 24(c) Consent of Kunzman & Bollinger, Inc. (See Exhibits 5 and 8) 25 Power of Attorney ITEM 26. UNDERTAKINGS. (a) As required by Item 512(a) of Regulation S-B and Rule 415, the undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a Post-Effective Amendment to this Registration Statement to: (i) include any Prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) reflect in the Prospectus any facts or events arising after the effective date of the Registration Statement (or of the most recent Post-Effective Amendment thereof) which, individually or together, represent a fundamental change in the information set forth in the Registration Statement; and (iii) include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement; (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such Post-Effective Amendment shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; and (3) To remove from registration by means of a Post-Effective Amendment any of the securities being registered which remain unsold at the termination of the offering. (e) The undersigned Registrant undertakes: (1) Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to Atlas and its directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, Atlas and the Registrant have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by Atlas and its directors, officers and controlling persons in the successful defense of any action, suit or proceeding) is asserted by such party in connection with the securities being registered, Registrant will unless in the opinion of its counsel the matter has been settled by controlling precedent submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act, and will be governed by final adjudication of such issue. - ------------------------------------------------------------------------ SIGNATURES In accordance with the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form SB-2 and has authorized this Pre-Effective Amendment No.1 to the Form SB-2 Registration Statement to be signed on its behalf by the undersigned, thereto duly authorized, in Moon Township, Pennsylvania, on the 25th day of September, 1996 ATLAS-ENERGY FOR THE NINETIES- PUBLIC #5 LTD. (Registrant) By: Atlas Resources, Inc., Managing General Partner By: /s/ James R. O'Mara James R. O'Mara, President, Chief Executive Officer and Director By: /s/ Bruce M. Wolf Bruce M. Wolf, General Counsel, Secretary and Director James R. O'Mara and Bruce M. Wolf, pursuant to the Registration Statement have been granted Power of Attorney and are signing on behalf of the names shown below, in the capacities indicated In accordance with the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. Signature Title Charles T. Koval Co-Chairman of the Board and a Director Joseph R. Sadowski Co-Chairman of the Board and a Director James R. O'Mara President, Chief Executive Officer and a Director Bruce M. Wolf General Counsel, Secretary and a Director Donald P. Wagner Vice President of Operations James J. Kritzo Vice President of the Land Tony C. Banks Vice President of Finance and Chief Financial Officer Frank P. Carolas Vice President of Geology Barbara J. Krasnick Vice President of Administration Signed September 25, 1996 EX-99 2 As filed with the Securities and Exchange Commission on September 27, 1996 Registration No. 333-09991 Registration No. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------------------------- EXHIBITS TO PRE-EFFECTIVE AMENDMENT No.1 TO FORM SB-2 REGISTRATION STATEMENT Under THE SECURITIES ACT OF 1933 ---------------------------------------- ATLAS-ENERGY FOR THE NINETIES-PUBLIC #5 LTD. (Exact name of Registrant as Specified in its Charter) ---------------------------------------- JAMES R. O'MARA, PRESIDENT ATLAS RESOURCES, INC. 311 ROUSER ROAD, MOON TOWNSHIP, PENNSYLVANIA 15108 (412) 262-2830 (Name, Address and Telephone Number of Agent for Service) ----------------------------------------- Copies to: WALLACE W. KUNZMAN, JR., ESQ. JAMES R. O'MARA KUNZMAN & BOLLINGER, INC. ATLAS RESOURCES, INC. 5100 N. BROOKLINE, SUITE 600 311 ROUSER ROAD SIXTH FLOOR MOON TOWNSHIP, PENNSYLVANIA 15108 OKLAHOMA CITY, OKLAHOMA 73112 EXHIBIT INDEX Exhibit No. 1(a) Proposed form of Soliciting Dealer Agreement 3(a) Articles of Incorporation of Atlas Resources, Inc. 3(b) Bylaws of Atlas Resources, Inc. 4(a) Certificate of Limited Partnership for Atlas-Energy for the Nineties-Public #5 Ltd. 4(b) Amended and Restated Certificate and Agreement of Limited Partnership for Atlas-Energy for the Nineties-Public #5 Ltd. (See Exhibit (A) to Prospectus) 4(c) Release from Shareholders 5 Opinion of Kunzman & Bollinger, Inc. as to the legality of the Units registered hereby 8 Opinion of Kunzman & Bollinger, Inc. as to tax matters 10(a) Escrow Agreement 10(b) Proposed form of Drilling and Operating Agreement (See Exhibit (II) to the Amended and Restated Certificate and Agreement of Limited Partnership, Exhibit (A) to Prospectus) 24(a) Consent of McLaughlin & Courson 24(b) Consent of United Energy Development Consultants, Inc. 24(c) Consent of Kunzman & Bollinger, Inc. (See Exhibits 5 and 8 25 Power of Attorney EX-1 3 - ------------------------------------------------------------------------- PROPOSED FORM OF SOLICITING DEALER AGREEMENT - ------------------------------------------------------------------------- Exhibit 1(a) SOLICITING DEALER AGREEMENT (Best Efforts) RE: ATLAS-ENERGY FOR THE NINETIES-PUBLIC #5 LTD. ________________________ ________________________ ________________________ ________________________ Gentlemen: The undersigned, Atlas Resources, Inc. ("Atlas"), on behalf of ATLAS-ENERGY FOR THE NINETIES-PUBLIC #5 LTD., hereby confirms its agreement with you as follows: 1. Description of Units. Atlas, as Managing General Partner, has formed a limited partnership known as Atlas-Energy for the Nineties-Public #5 Ltd. (the "Partnership"), and will issue and sell Units of Participation in the Partnership (the "Units") at a price of $10,000 per Unit. The minimum Partnership Subscription is 100 Units ($1,000,000), excluding any optional subscription by the Managing General Partner. No subscriptions to the Partnership will be accepted after receipt of the maximum Partnership Subscription of $7,000,000 (which may be increased to $8,000,000 in Atlas' discretion) or December 31, 1996, whichever event occurs first (the "Offering Termination Date"). 2. Representations. Warranties and Agreements of Atlas. Atlas represents and warrants to and agrees with you that: (a) The Units have been or will be registered with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933 (the "Act"), as amended. (b) Atlas shall provide to you for delivery to all offerees and purchasers and their representatives such information and documents as Atlas deems appropriate to comply with the Act and applicable state securities ("blue sky") laws. (c) The Units when issued will be duly authorized and validly issued as set forth in the Amended and Restated Certificate and Agreement of Limited Partnership of the Partnership ("Partnership Agreement") set forth as Exhibit (A) to the offering circular (the "Prospectus") and subject only to the rights and obligations set forth in the Partnership Agreement or imposed by the laws of the state of formation of the Partnership or of any jurisdiction to the laws of which the Partnership is subject. (d) The Partnership was duly formed pursuant to the laws of the Commonwealth of Pennsylvania and is validly existing as a limited partnership in good standing under the laws of Pennsylvania with full power and authority to own its properties and conduct its business as described in the Prospectus. The Partnership will be qualified to do business as a limited partnership or similar entity offering limited liability in those jurisdictions where Atlas deems such qualification necessary to assure limited liability of the limited partners. (e) The Prospectus, as heretofore or hereafter supplemented or amended, does not contain an untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they are made, not misleading. 3. Grant of Authority. On the basis of the representations and warranties herein contained, and subject to the terms and conditions herein set forth, Atlas, as Managing General Partner of the Partnership, hereby appoints you as a Soliciting Dealer for the Partnership and gives you the non-exclusive right to solicit subscriptions for the Units, on a "best efforts" basis, subject to the terms and conditions set forth herein. 4. Compensation and Fees. (a) As compensation for this Agreement and for services rendered hereunder, you shall receive a Sales Commission in an amount equal to 7.5% and shall be entitled to reimbursement of your bona fide accountable due diligence expenses in an amount equal to .5% of each Unit sold by you and accepted by the Managing General Partner. Subject to receipt and acceptance of the minimum Partnership Subscription of 100 Units ($1,000,000), such payments will be made to you approximately every two weeks until the Offering Termination Date and all of your remaining fees shall be paid by Atlas no later than 14 days after the Offering Termination Date. (b) Pending receipt of the minimum Partnership Subscription ($1,000,000), all proceeds received by you from the sale of Units will be held in a separate interest bearing escrow account as provided in Section 15. Unless at least one hundred (100) Units ($10,000 per Unit) are sold by all duly authorized parties on or before December 31, 1996, the offering shall be terminated, in which event no fee shall be payable to you and all funds advanced by purchasers shall be returned to them with interest earned. In addition, you shall deliver a termination letter in the form provided to you by Atlas to each such subscriber and to each of the offerees previously solicited by you in connection with the offering of the Units. 5. Covenants of Atlas. Atlas covenants and agrees that: (a) Atlas will deliver to you ample copies of the Prospectus and of all amendments or supplements thereto, heretofore or hereafter made, including all exhibits and other documents included therein. (b) If any event affecting the Partnership or Atlas shall occur which should be set forth in a supplement to or an amendment of the Prospectus, Atlas will forthwith at its own expense prepare and furnish to you a sufficient number of copies of a supplement or amendment to the Prospectus so that it, as so supplemented or amended, will not contain an untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they are made, not misleading. 6. Representations and Warranties of Soliciting Dealer. You, as a Soliciting Dealer, represent and warrant to Atlas that: (a) You are a corporation duly organized, validly existing and in good standing under the laws of the state of your formation or of any jurisdiction to the laws of which you are subject, with all requisite power and authority to enter into this Agreement and to carry out your obligations hereunder. (b) This Agreement when accepted and approved will be duly authorized, executed and delivered by you and will be a valid and binding agreement on your part in accordance with its terms. (c) The consummation of the transactions contemplated by this Agreement and the Prospectus will not result in any breach of any of the terms or conditions of, or constitute a default under your Articles of Incorporation, Bylaws, any indenture, agreement or other instrument to which you are a party, or violate any order applicable to you of any court or any federal or state regulatory body or administrative agency having jurisdiction over you or over your affiliates. (d) You are duly registered pursuant to the provisions of the Securities Exchange Act of 1934 (the "Act of 1934") as a dealer and you are a member in good standing of the National Association of Securities Dealers, Inc. (the "NASD"), and are duly registered as a broker-dealer in such states as you are required to be registered in order to carry out your obligations as contemplated by this Agreement and the Prospectus. You agree to maintain all of the foregoing registrations in good standing throughout the term of the offer and sale of the Units and you agree to comply with all statutes and other requirements applicable to you as a broker-dealer pursuant to those registrations. (e) Pursuant to your appointment as a Soliciting Dealer, you shall conduct all your activities hereunder to comply with all of the provisions of the Act, insofar as the Act applies to you and your activities hereunder, and you shall not engage in any activity which would cause the offer and/or sale of Units not to comply with the Act, the Act of 1934 and the applicable rules and regulations of the Commission, the applicable state securities laws and regulations, this Agreement and the NASD Conduct Rules including Rules 2730, 2740, 2420 and 2750 and also including but not limited to, Rule 2810(b)(2) and (b)(3) of the NASD Conduct Rules, which provide as follows: Sec. (b)(2) SUITABILITY (A) A member or person associated with a member shall not underwrite or participate in a public offering of a direct participation program unless standards of suitability have been established by the program for participants therein and such standards are fully disclosed in the prospectus and are consistent with the provisions of subsection (B) of this section. (B) In recommending to a participant the purchase, sale or exchange of an interest in a direct participation program, a member or person associated with a member shall: (i) have reasonable grounds to believe, on the basis of information obtained from the participant concerning his investment objectives, other investments, financial situation and needs, and any other information known by the member or associated person, that: (a) the participant is or will be in a financial position appropriate to enable him to realize to a significant extent the benefits described in the prospectus, including the tax benefits where they are a significant aspect of the program; (b) the participant has a fair market net worth sufficient to sustain the risks inherent in the program, including loss of investment and lack of liquidity; and (c) the program is otherwise suitable for the participant; and (ii) maintain in the files of the member documents disclosing the basis upon which the determination of suitability was reached as to each participant. (C) Notwithstanding the provisions of subsections (A) and (B) hereof, no member shall execute any transaction in a direct participation program in a discretionary account without prior written approval of the transaction by the customer. Sec. (b)(3) DISCLOSURE (A) Prior to participating in a public offering of a direct participation program, a member or person associated with a member shall have reasonable grounds to believe, based on information made available to him by the sponsor through a prospectus or other materials, that all material facts are adequately and accurately disclosed and provide a basis for evaluating the program. (B) In determining the adequacy of disclosed facts pursuant to subsection (A) hereof, a member or person associated with a member shall obtain information on material facts relating at a minimum to the following, if relevant in view of the nature of the program: (i) items of compensation; (ii) physical properties; (iii) tax aspects; (iv) financial stability and experience of the sponsor; (v) the program's conflicts and risk factors; and (vi) appraisals and other pertinent reports. (C) For purposes of subsections (A) and (B) hereof, a member or person associated with a member may rely upon the results of an inquiry conducted by another member or members, provided that: (i) the member or person associated with a member has reasonable grounds to believe that such inquiry was conducted with due care; (ii) the results of the inquiry were provided to the member or person associated with a member with the consent of the member or members conducting or directing the inquiry; and (iii) no member that participated in the inquiry is a sponsor of the program or an affiliate of such sponsor. (D) Prior to executing a purchase transaction in a direct participation program, a member or person associated with a member shall inform the prospective participant of all pertinent facts relating to the liquidity and marketability of the program during the term of investment. (f) You have received copies of the Prospectus relating to the Units and you have relied only on the statements contained in such Prospectus and not on any other statements whatsoever, either written or oral, with respect to the details of the offering of Units. (g) You agree that you shall not place any advertisement or other solicitation with respect to the Units (including without limitation any material for use in any newspaper, magazine, radio or television commercial, telephone recording, motion picture, or other public media) without the prior written approval of Atlas, and without the prior written approval of the form and content thereof by the Commission, the NASD and the securities authorities of the states where such advertisement or solicitation is to be circulated. Any such advertisements or solicitations shall be at your expense. (h) If a supplement or amendment to the Prospectus is prepared and delivered to you by Atlas, you agree to distribute each such supplement or amendment to the Prospectus to every person who has previously received a copy of the Prospectus from you and you further agree to include such supplement or amendment in all future deliveries of any Prospectus, and to keep file memoranda indicating to whom each supplement or amendment was delivered. (i) You agree to advise Atlas in writing of each state in which you propose to offer or sell the Units and you agree not to offer or sell Units in any state until such time as you shall have been advised in writing by Atlas, or Atlas' special counsel, that such offer or sale has been qualified in such state or is exempt from the qualification requirements imposed by such state or such qualification is otherwise not required. (j) In connection with any offer or sale of the Units, you agree to comply in all respects with statements set forth in the Prospectus and the Partnership Agreement and you agree not to make any statement inconsistent with the statements in the Prospectus or the Partnership Agreement and you further agree that you will not provide any written information, statements or sales literature other than the Prospectus, the Brochure, and any supplements or amendments thereto unless approved in writing by Atlas; and you agree not to make any untrue or misleading statements of a material fact in connection with the Units. (k) You agree to use your best efforts in the solicitation and sale of said Units, including insuring that the prospective purchasers meet the suitability requirements set forth in the Prospectus and the Subscription Agreement and properly execute the Subscription Agreement, which has been provided as Exhibit (I-B) to the Partnership Agreement, Exhibit (A) of the Prospectus, together with any additional forms provided in any supplement or amendment to the Prospectus, or otherwise provided to you by Atlas to be completed by prospective purchasers. Executed Subscription Agreements shall be delivered or mailed immediately to Atlas and must be received by Atlas at or prior to the Offering Termination Date. Atlas shall have the right to reject any subscription at any time for any reason without liability to it. Investor funds shall be transmitted as set forth in Section 16. (l) Although not anticipated, in the event you assist in any transfers of the Units, you shall comply with the requirements of Sections (b)(2)(B) and (b)(3)(D) of Rule 2810 of the NASD Conduct Rules. 7. State Securities Registration. Incident to the offer and sale of the Units, Atlas will either use its best efforts in taking all necessary action and filing all necessary forms and documents deemed reasonable by it in order to qualify or register Units for sale under the securities laws of the states requested by you pursuant to Section 6(i) hereof or use its best efforts in taking any necessary action and filing any necessary forms deemed reasonable by it which are required to obtain an exemption from qualification or registration in such states; provided Atlas may elect not to qualify or register Units in any state in which it deems such qualification or registration is not warranted for any reason in its sole discretion. Atlas and its counsel will inform you as to the jurisdictions in which the Partnership Units have been qualified for sale or are exempt under the respective securities or blue sky laws of such jurisdictions; but Atlas has not assumed and will not assume any obligation or responsibility as to your right to act as a broker-dealer with respect to the Units in any such jurisdiction. Atlas will provide to you for delivery to all offerees and purchasers and their representatives, any additional information, documents and instruments which Atlas deems necessary to comply with the rules, regulations and judicial and administrative interpretations in those states and jurisdictions for the offer and sale of the Units in such states. Atlas will file all post-offering forms, documents or materials and take all other actions required by the states in which the offer and sale of Units have been qualified or are exempt or in which the Units have been registered; provided, Atlas shall not be required to take any actions, make any filings or prepare any documents necessary or required in connection with your status as a broker-dealer under the laws of such states. 8. Expense of Sale. Atlas will pay all expenses incident to the performance of its obligations hereunder, including the fees and expenses of Atlas' attorneys and accountants and all fees and expenses of registering or qualifying the Units for offer and sale in the states as set forth in Section 7 hereof, or obtaining exemptions therefrom, even in the event this offering is not successfully completed. You will pay the fees and expenses of your own counsel and accountants. 9. Conditions of Your Duties. Your obligations provided herein shall be subject to the accuracy, as of the date hereof and at the Offering Termination Date (as if made at the Offering Termination Date), of the representations and warranties of Atlas herein and to the performance by Atlas of its obligations hereunder. 10. Condition of Atlas' Duties. Atlas' obligations provided herein, including the duty to pay compensation as set forth in Section 4 hereof, shall be subject to the accuracy, as of the date hereof and at the Offering Termination Date (as if made at the Offering Termination Date) of your representations and warranties made herein, and to the performance by you of your obligations hereunder, and to the additional condition that Atlas shall have received, at or prior to the Offering Termination Date, the following documents: (a) a fully executed Subscription Agreement for each prospective purchaser; (b) certification to Atlas that you are registered as required by Section 6(d) and that such registrations were, during the term of the offering and through the Offering Termination Date, in full force and effect; and (c) a certificate from you, dated at the Offering Termination Date, to the effect that your representations and warranties made herein are true and correct as if made at the Offering Termination Date and that you have fulfilled all your obligations hereunder. 11. Indemnification. You shall indemnify and hold harmless Atlas, the Partnership and its attorneys, against any losses, claims, damages or liabilities, joint or several, to which such parties may become subject, under the Act, the Act of 1934 or otherwise insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon your breach of any of your duties and obligations, representations, or warranties under the terms or provisions of this Agreement and you will reimburse such parties for any legal or other expenses reasonably incurred in connection with investigating or defending such loss, claim, damage, liability or action. Atlas shall indemnify and hold you harmless against any losses, claims, damages or liabilities, joint or several, to which you may become subject, under the Act, the Act of 1934 or otherwise insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon Atlas' breach of any of its duties and obligations, representations, or warranties under the terms or provisions of this Agreement and Atlas will reimburse you for any legal or other expenses reasonably incurred in connection with investigating or defending such loss, claim, damage, liability or action. The foregoing indemnity agreements shall extend upon the same terms and conditions to, and shall inure to the benefit of, each person, if any, who controls each indemnified party within the meaning of the Act. Promptly after receipt by an indemnified party of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under this Section, notify the indemnifying party in writing of the commencement thereof; but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to any indemnified party. In case any such action shall be brought against such indemnified party, it shall notify the indemnifying party of the commencement thereof, and the indemnifying party shall be entitled to participate in, and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified and indemnifying parties, and after the indemnified party shall have received notice from the agreed upon counsel that the defense under such paragraph has been so assumed, the indemnifying party shall not be responsible for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof. 12. Representations and Agreements to Survive Delivery. All representations, warranties and agreements of Atlas and you herein or in certificates delivered pursuant hereto, and the indemnity agreements contained in Section 11 hereof, shall survive the delivery, execution and closing hereof, and shall remain operative and in full force and effect regardless of any investigation made by or on behalf of you or any person who controls you within the meaning of the Act, or by Atlas, or any of its officers, directors or any person who controls Atlas within the meaning of the Act, or any other indemnified party, and shall survive delivery of the Units hereunder. 13. Termination. You shall have the right to terminate this agreement other than the indemnification provisions of Section 11 by giving notice as hereinafter specified any time at or prior to the Offering Termination Date: (a) if Atlas shall have failed, refused, or been unable at or prior to the Offering Termination Date, to perform any of its obligations hereunder; or (b) there has occurred an event materially and adversely affecting the value of the Units. If you elect to terminate this Agreement other than the indemnification provisions of Section 11, Atlas shall be promptly notified by you by telephone, telecopier or telegram, confirmed by letter. Atlas may terminate this Agreement other than the indemnification provisions of Section 11 for any reason by promptly giving notice to you by telephone, telecopier or telegram, confirmed by letter as hereinafter specified at or prior to the Offering Termination Date. 14. Notices. All notices or communications hereunder, except as herein otherwise specifically provided, shall be in writing, and if sent to you shall be mailed, delivered or telegraphed and confirmed to you at the address set forth below your signature hereto or if sent to Atlas or on behalf of the Partnership, at 311 Rouser Road, Moon Township, Pennsylvania 15108. 15. Format of Checks/Escrow Agent. Pending receipt of the minimum Partnership Subscription, Atlas and the Soliciting Dealer agree that all subscribers will be instructed to make their checks payable solely to "National City Bank, Escrow Agent, Atlas Public #5 Ltd." as agent for the Partnership. Any Soliciting Dealer receiving a check not conforming to the foregoing instructions shall return such check directly to such subscriber not later than noon of the next business day following its receipt. Checks received by the Soliciting Dealer which conform to the foregoing instructions shall be transmitted for deposit by the Soliciting Dealer pursuant to Section 16 "Transmittal Procedures," below. The Soliciting Dealer represents that it has executed Appendix II to the Escrow Agreement and agrees that it is bound by the terms of the Escrow Agreement executed by Atlas, a copy of which is attached hereto as Exhibit "A". 16. Transmittal Procedures. Atlas and the Soliciting Dealer agree that transmittal of received investor funds will be made in accordance with the following procedures: Pending receipt of the minimum Partnership Subscription of $1,000,000, the Soliciting Dealer shall promptly, upon receipt of any and all checks, drafts, and money orders received from prospective purchasers of Units, transmit same together with a copy of the executed Subscription Agreement to the Escrow Agent by noon of the second business day after the Managing General Partner receives the subscription documents for purposes of a suitability determination, which documents, together with a copy of the check, draft or money order, were forwarded to the Managing General Partner by noon of the next business day following receipt of the check, draft or money order by the Soliciting Dealer. Upon receipt by the Soliciting Dealer of notice from Atlas that the minimum Partnership Subscription has been received, Atlas and the Soliciting Dealer agree that all subscribers thereafter may be instructed, in Atlas' sole discretion, to make their checks payable solely to "Atlas Public #5 Ltd." and that received investor funds shall be promptly transmitted by the Soliciting Dealer to Atlas as Managing General Partner on behalf of the Partnership by noon of the next business day following receipt of the check by the Soliciting Dealer, together with the executed Subscription Agreement. 17. Parties. This Agreement shall inure to the benefit of and be binding upon you, Atlas, and any respective successors and assigns and shall also inure to the benefit of the indemnified parties, their successors and assigns. This Agreement is intended to be and is for the sole and exclusive benefit of the parties hereto, including the Partnership, and their respective successors and assigns, and the indemnified parties and their successors and assigns, and for the benefit of no other person, and no other person shall have any legal or equitable right, remedy or claim under or in respect of this Agreement. No purchaser of any of the Units from you shall be construed a successor or assign merely by reason of such purchase. 18. Relationship. This Agreement shall not constitute you a partner of Atlas or the Partnership or any general partner thereof, nor render Atlas, the Partnership, or the Managing General Partner thereof liable for any of your obligations except as otherwise provided herein. 19. Effective Date. This Agreement is made effective between the parties as of the date accepted by you as indicated by your signature hereto. 20. Entire Agreement Waiver. This Agreement constitutes the entire agreement between the parties hereto and shall not be amended or modified in any way except by subsequent agreement executed in writing, and no party shall be liable or bound to the other by any agreement, except as specifically set forth herein. Any party hereto may waive, but only in writing, any term, condition, or requirement under this Agreement which is intended for its own benefit, and written waiver of any term or condition of this Agreement shall not operate as a waiver of any other breach of such term or condition, nor shall any failure to enforce any provision hereof operate as a waiver of such provision or any other provision hereof. If the foregoing correctly sets forth our understanding please so indicate in the space provided below for the purpose whereupon this letter shall constitute a binding agreement between us. Very truly yours, ATLAS RESOURCES, INC., a Pennsylvania corporation -------------------------- By: J. R. O'Mara, President - ----------------------------, 1996 Date ATTEST: - ---------------------------------- (SEAL) Secretary PARTNERSHIP ATLAS-ENERGY FOR THE NINETIES- PUBLIC #5 LTD. , 1996 By: Atlas Resources, Inc. Date Managing General Partner ATTEST: ------------------------ - ---------------------------------- By: J. R. O'Mara, President (SEAL) Secretary - ------------------------------------------------------------------------- ,---------------------------- 1996 SOLICITING DEALER Date a ______________________ corporation, ATTEST: By: - ---------------------------------- [Print Name, Title and Address] (SEAL) Secretary Wholesaler [Print Name] - ------------------------------------------------------------------------- EX-3. 4 - ------------------------------------------------------------------------- ARTICLES OF INCORPORATION OF ATLAS RESOURCES, INC. - ------------------------------------------------------------------------- Exhibit 3(a) COMMONWEALTH OF PENNSYLVANIA 688825 Department of State To All to Whom These Presents Shall Come, Greeting: WHEREAS, Under the provisions of the Business Corporation Law, approved the 5th day of May, Anno Domini one thousand nine hundred and thirty-three, P. L. 364, as amended, the Department of State is authorized and required to issue a CERTIFICATE OF INCORPORATION evidencing the incorporation of a business corporation organized under the terms of that law, and WHEREAS, The stipulations and conditions of that law have been fully complied with by the persons desiring to incorporate as ATLAS RESOURCES, INC. THEREFORE, KNOW YE, That subject to the Constitution of this Commonwealth and under the authority of the Business Corporation Law, I do by these presents, which I have caused to be sealed with the Great Seal of the Commonwealth, create, erect, and in-corporate the incorporators of and subscribers to the shares of the proposed corporation named above, their associates and successors, and also those who may thereafter become subscribers or holders of the shares of such corporation, into a body politic and corporate in deed and in law by the name chosen hereinbefore specified, which shall exist perpetually and shall be invested with and have and enjoy all the powers, privileges, and franchises incident to a business corporation and be subject to all the duties, requirements, and restrictions specified and enjoined in and by the Business Corporation Law and all other applicable laws of this Commonwealth. GIVEN under my Hand and the Great Seal of the Common-wealth, at the City of Harrisburg, this 9th day of July in the year of our Lord one thousand nine hundred and seventy-nine and of the Commonwealth the two hundred and fourth /s/ Ethel D. Allen, D.O. Secretary of the Commonwealth Filed this 9th day of July1979. Commonwealth of Pennsylvania Department of State /s/ Ethel D. Allen, D.O. Secretary of the Commonwealth 79:37 617 DSCB:BCL-204(Rev. 8-72) Filing Fee: $75 AIB-7 688825 Articles of Incorporation-- COMMONWEALTH OF PENNSYLVANIA Domestic Business Corporation DEPARTMENT OF STATE CORPORATION BUREAU In compliance with the requirements of section 204 of the Business Cor-poration Law, act of May 5, 1933 (P.L. 364) (15 P. S. .1204) the undersigned desiring to be incorporated as a business corporation, hereby certifies (certify) that: 1. The name of the corporation is ATLAS RESOURCES, INC. 2. The location and post office address of the initial registered office of the corporation in this Commonwealth is: 311 Rouser Road, Coraopolis, Pennsylvania 15108 3. The corporation is incorporated under the Business Corporation Law of the Commonwealth of Pennsylvania for the following purpose or purposes: To engage in and do any lawful act concerning any or all lawful business for which corporations may be incorporated under this act. 4. The term for which the corporation is to exist is perpetual. 5. The aggregate number of shares which the corporation shall have authority to issue is: Five Hundred (500) shares of capital stock without par value. 79:37 618 6. The name and post office address of each incorporator and the number and class of shares subscribed by such incorporator(s) is (are): Number and Name Address Class of Shares Ira S. Pimm, Jr. 2225 Land Title Building 1 Philadelphia, PA 19110 IN TESTIMONY WHEREOF, the incorporator(s) has (have) signed and sealed these Articles of Incorporation this 5th day of July , 1979. _________________________(SEAL) /s/ Ira S. Pimm, Jr ______________________(SEAL) RECEIVED `79 JUL 9 AM 9:09 DEPARTMENT OF STATE COMMONWEALTH OF PENNSYLVANIA DEPARTMENT OF STATE CORPORATION BUREAU Articles of Incorporation Domestic Business Corporation In compliance with the requirements of section 204 of the Business Corporation Law, act of May 5, 1993 (P. L. 364) ( 15 P. S. S1204) the undersigned, desiring to be incorporated as a business corporation, hereby certifies that: 1. The name of the corporation is ATLAS RESOURCES, INC. 2. The location and post office address of the initial registered office of the corporation in this Commonwealth is: 311 Rouser Road, Coraopolis, Pennsylvania 15108 3. The corporation is incorporated under the Business Corporation Law of the Commonwealth of Pennsylvania for the following purpose or purposes: To engage in and do any law- ful act concerning any or all lawful business for which cor- porations may be incorporated under this act. 4. The term for which the corporation is to exist is perpetual. 5. The aggregate number of shares which the corporation shall have authority to issue is: Five Hundred (500) shares of capital stock without par value. 6. The name and post office address of each incorporator and the number and class of shares subscribed by such incor- porator is: Name Address Number and Class of shares Ira S. Pimm, Jr. 2225 Land Title Building 1 Philadelphia, PA 19110 IN TESTIMONY WHEREOF, the incorporator has signed and sealed these Articles of Incorporation this 5th day of July, 1979. IRA S. PIMM, JR. (SEAL) Filed this 9th day of July, 1979. Commonwealth of Pennsylvania Department of State ETHEL D. ALLEN, D.O. Secretary of the Commonwealth COMMONWEALTH OF PENNSYLVANIA DEPARTMENT OF STATE TO ALL TO WHOM THESE PRESENTS SHALL COME, GREETING: WHEREAS, Under the provisions of the Business Corpora- tion Law, approved the 5th day of May, Anno Domini one thou- sand nine hundred and thirty - three, P. L. 364, as amended, the Department of State is authorized and required to issue a CERTIFICATE OF INCORPORATION evidencing the incorporation of a business corporation organ- ized under the terms of that law. AND WHEREAS, The stipulations and conditions of that law have been fully complied with by the persons desiring to incorporate as ATLAS RESOURCES, INC. THEREFORE, KNOW YE, That subject to the Constitution of this Commonwealth and under the authority of the Business Corporation Law, I do by these presents, which I have caused to be sealed with the Great Seal of the Commonwealth, create, erect, and incorporate the incorporators of and the subscribers to the shares of the proposed corporation named above, their associates and successors, and also those who may thereafter become subscribers or holders of the shares of such corpora- tion, into a body politic and corporate in deed and in law by the name chosen hereinbefore specified, which shall exist perpetually and shall be invested with and have and enjoy all the powers, privileges, and franchises incident to a business corporation and be subject to all the duties, re- quirements and restrictions specified and enjoined in and by the Business Corporation Law and all other applicable laws of this Commonwealth. GIVEN under my Hand and the Great Seal of the Commonwealth, at the City SEAL OF THE STATE OF of Harrisburg, this 9th day of PENNSYLVANIA July, in the year of our Lord one thousand nine hundred and seventy-nine and of the Common- wealth the two hundred and fourth. ETHEL D. ALLEN, D.O. Secretary of the Commonwealth EX-3.I 5 - ------------------------------------------------------------------------- BYLAWS OF ATLAS RESOURCES, INC. - ------------------------------------------------------------------------- Exhibit 3(b) ATLAS RESOURCES, INC. BY-LAWS ARTICLE I - OFFICES 1. Registered Office. The registered office of the Corporation shall be located within the Commonwealth of Pennsylvania, at such place as the Board of Directors shall, from time to time, determine. 2. Other Offices. The Corporation may also have offices at such other places as the Board of Directors may from time to time, determine. ARTICLE II - SHAREHOLDERS' MEETINGS 1. Place of Shareholders' Meetings. Meetings of Shareholders shall be held at such place within or without the Commonwealth of Pennsylvania as shall be fixed by the Board of Directors from time to time. If no such place is fixed by the Board of Directors, meetings of the Shareholders shall be held at the registered office of the Corporation. 2. Annual Meeting. A meeting of the Shareholders of the Corporation shall be held in each calendar year, commencing with the year 1980, on the at o'clock M., if not a legal holiday, and if such day is a legal holiday, then such meeting shall be held on the next business day. At such annual meeting, there shall be held an election for a Board of Directors to serve for the ensuing year and until their successors shall be duly elected. Unless the Board of Directors shall deem it advisable, financial reports of the Corporation's business need not be sent to the Shareholders and need not be presented at the annual meeting. If any report is deemed advisable by the Board of Directors, such report may contain such information as the Board of Directors shall determine and need not be certified by a Certified Public Accountant unless the Board of Directors shall so direct. 3. Special Meetings. Special meetings of the Shareholders may be called at any time. (a) By the President of the Corporation; or (b) By a majority of the Board of Directors; or (c) By the holders of not less than one-fifth of all the shares outstanding and entitled to vote. Upon the written request of any person entitled to call a special meeting, which request shall set forth the purpose for which the meeting is desired, it shall be the duty of the Secretary to give notice of such meeting to be held at such time, not less than ten (10) nor more than sixty (60) days after the receipt of such request, as the Secretary may fix. If the Secretary shall neglect or refuse to give such notice within ten (10) days after receipt of such request, the person or persons making such request may do so. 4. Notices of Shareholders' Meetings. Except as otherwise specifically provided by law, at least five days' written notice shall be given of the annual meeting and any special meeting of the Shareholders. Such notices shall be given in the name of the Secretary or the Assistant Secretary. 5. Quorum. The presence, in person or by proxy, of the holders of a majority of the outstanding shares entitled to vote shall constitute a quorum. The Shareholders present at a duly organized meeting can continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum. If a meeting cannot be organized because of the absence of a quorum, those present may, except as otherwise provided by law, adjourn the meeting to such time and place as they may determine. In the case of any meeting for the election of Directors, those Shareholders who attend the second of such adjourned meetings, although less than a quorum as fixed in this section, shall nevertheless constitute a quorum for the purpose of electing Directors. 6. Voting. The officer or agent having charge of the transfer books of the Corporation shall make, at least five days before any meeting of Shareholders, a complete list of the Shareholders entitled to vote at such meeting, arranged in alphabetical order, with the address of and the number of shares held by each, which list shall be kept on file at the registered office of the Corporation and shall be subject to inspection by any Shareholder at any time during usual business hours. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any Shareholder during the whole time of the meeting. At all Shareholders' meetings, Shareholders entitled to vote may attend and vote either in person or by proxy. All proxies shall be in writing and shall be filed with the Secretary of the Corporation. No unrevoked proxy shall be valid after eleven months from the date of execution, unless a longer time is expressly provided therein; but in no event shall a proxy, unless coupled with an interest, be valid after three years after the date of its execution. Except as otherwise specifically provided by law, all matters coming before the meeting shall be determined by a vote by shares. Such vote may be taken by voice unless a Shareholder demands that it be taken by ballot, in which event the vote shall be taken by written ballot, and the Judge or Judges of Election or, if none, the Secretary of the meeting, shall tabulate and certify the results of such vote. 7. Informal Action by Shareholders. Any action which may be taken at a meeting of the Shareholders may be taken without a meeting, if a consent in writing, setting forth the action so taken, shall be signed by all of the Shareholders who would be entitled to vote at a meeting for such purpose and shall be filed with the Secretary of the Corporation. ARTICLE III - BOARD OF DIRECTORS 1. Number. The business and affairs of the Corporation shall be managed by a Board of two Directors. 2. Place of Meeting. Meetings of the Board of Directors may be held at such place within the Commonwealth of Pennsylvania, or elsewhere, as a majority of the Directors may from time to time appoint, or as may be designated in the notice calling the meeting. 3. Regular Meetings. A regular meeting of the Board of Directors shall be held annually, immediately following the annual meeting of Shareholders at the place where such meeting of the Shareholders is held or at such other place, date and hour as a majority of the newly elected Directors may designate. At such meeting the Board of Directors shall elect officers of the Corporation. In addition to such regular meeting, the Board of Directors shall have the power to fix by resolution the place, date and hour of other regular meetings of the Board. 4. Special Meetings. Special meetings of the Board of Directors shall be held whenever ordered by the President or by a majority of the Directors in office. 5. Notices of Meetings of Board of Directors. (a) Regular Meetings. No notice shall be required to be given of any regular meeting, unless the same be held at other than the time or place for holding such meetings as fixed in accordance with Article III, Paragraph 3 of these By-Laws, in which event one day's notice shall be given of the time and place of such meeting. (b) Special Meetings. At least one days notice shall be given of the time when, place where, and purpose for which any special meeting of the Board of Directors is to be held. 6. Quorum. A majority of the Directors in office shall be necessary to constitute a quorum for the transaction of business, and the acts of a majority of the Directors present at a meeting at which a quorum is present shall be the acts of the Board of Directors. If there be less than a quorum present, the majority of those present may adjourn the meeting from time to time and place to place and shall cause notice of each such adjourned meeting to be given to all absent Directors. 7. Informal Action by the Board of Directors. If all the Directors shall severally or collectively consent in writing to any action to be taken by the Corporation, such action shall be as valid corporate action as though it had been authorized at a meeting of the Board of Directors. 8. Powers. (a) General Powers. The Board of Directors shall have all the power and authority granted by law to the Board, including all powers necessary or appropriate to the management of the business and affairs of the Corporation. (b) Specific Powers. Without limiting the general powers conferred by the last preceding clause and the powers conferred by the Articles and By-Laws of the Corporation, it is hereby expressly declared that the Board of Directors shall have the following powers: (1) To confer upon any officer or officers of the Corporation, the power to choose, remove or suspend assistant officers, agents or servants. (2) To appoint any person, firm or corporation to accept and hold in trust for the Corporation any property belonging to the Corporation, or in which it is interested, and to authorize any such person, firm or corporation to execute any documents and perform any duties that may be requisite in relation to any such trust. (3) To appoint a person or persons to vote shares of another corporation held and owned by the Corporation. (4) By resolution adopted by a majority of the whole Board of Directors, to delegate two or more of its number to constitute an executive committee which, to the extent provided in such resolution, shall have and exercise the authority of the Board of Directors in the management of the business of the corporation. (5) To fix the place, time and purpose of meetings of Shareholders. (6) To determine who shall be authorized on the Corporation's behalf to sign bills, notes, receipts, acceptances, endorsements, checks, releases, contracts and documents. 9. Compensation of Directors. Compensation of Directors, if any, shall be as determined from time to time by resolution of the Board of Directors. 10. Removal of Directors by Shareholders. The entire Board of Directors or any individual Director may be removed from office without assigning any cause by a majority vote of the holders of the outstanding shares entitled to vote at an election of Directors. In case the Board of Directors or any one or more Directors be so removed, new Directors may be elected at the same time. Unless the entire Board of Directors be removed, no individual Director shall be removed in case the votes of a sufficient number of shares are cast against the resolution for his removal which, if voted at an election of the full Board of Directors, would be sufficient to elect one or more Directors. 11. Vacancies. Vacancies in the Board of Directors, including vacancies resulting from an increase in the number of Directors, shall be filled by a majority of the remaining members of the Board of Directors through less than a quorum, and each person so elected shall be a Director until his successor is elected by the Shareholders, who may make such election at the next annual meeting of the Shareholders or at any special meeting duly called for that purpose and held prior thereto. ARTICLE IV - OFFICERS 1. Election and Office. The Corporation shall have a President, a Secretary and a Treasurer, who shall be elected by the Board of Directors. The Board of Directors may elect as additional officers, a Chairman of the Board of Directors, one or more Vice-Presidents, and one or more assistant officers. Any two or more offices may be held by the same person. 2. Term. The President, the Secretary and the Treasurer shall each serve for a term of one year and until their respective successors are duly elected and qualified, unless removed from office by the Board of Directors during their respective tenures. The term of office of any other officer shall be as specified by the Board of Directors. 3. Powers and Duties of the President. Unless otherwise determined by the Board of Directors, the President shall have the usual duties of an executive officer with general supervision over and direction of the affairs of the Corporation. In the exercise of these duties and subject to the limitations of the laws of the Commonwealth of Pennsylvania, these By-Laws, and the actions of the Board of Directors, he may appoint, suspend and discharge employees and agents, shall preside at all meetings of the Shareholders at which he shall be present, and unless there is a Chairman of the Board of Directors, shall preside at all meetings of the Board of Directors and shall be a member of all committees. He shall also do and perform such other duties as from time to time may be assigned to him by the Board of Directors. Unless otherwise determined by the Board of Directors, the President shall have full power and authority on behalf of the Corporation, to attend and to act and to vote at any meeting of the Shareholders of any corporation in which the Corporation may hold stock, and, at any such meeting, shall possess and may exercise any and all the rights and powers incident to the ownership of such stock and which, as the owner thereof, the Corporation might have possessed and exercised. 4. Powers and Duties of the Secretary. Unless otherwise determined by the Board of Directors, the Secretary shall keep the minutes of all meetings of the Board of Directors, Shareholders and all committees, in books provided for that purpose, and shall attend to the giving and serving of all notices for the Corporation. He shall have charge of the corporate seal, the stock certificate books, transfer books and stock ledgers, and such other books and papers as the Board of Directors may direct. He shall perform all other duties ordinarily incident to the office of Secretary and shall have such other powers and perform such other duties as may be assigned to him by the Board of Directors. 5. Powers and Duties of the Treasurer. Unless otherwise determined by the Board of Directors, the Treasurer shall have charge of all the funds and securities of the Corporation which may come into his hands. When necessary or proper, unless otherwise ordered by the Board of Directors, he shall endorse for collection on behalf of the Corporation, checks, notes and other obligations, and shall deposit the same to the credit of the Corporation in such banks or depositories as the Board of Directors may designate and shall sign all receipts and vouchers for payments made to the Corporation. He shall enter regularly, in books of the Corporation to be kept by him for the purpose, full and accurate account of all moneys received and paid by him on account of the Corporation. Whenever required by the Board of Directors, he shall render a statement of the financial condition of the Corporation. He shall at all reasonable times exhibit his books and accounts to any Director of the Corporation, upon application at the office of the Corporation during business hours. He shall have such other powers and shall perform such other duties as may be assigned to him from time to time by the Board of Directors. He shall give such bond, if any, for the faithful performance of his duties as shall be required by the Board of Directors and any such bond shall remain in the custody of the President. 6. Powers and Duties of the Chairman of the Board of Directors. Unless otherwise determined by the Board of Directors, the Chairman of the Board of Directors, if any, shall preside at all meetings of Directors and shall serve ex officio as a member of every committee of the Board of Directors. He shall have such other powers and perform such further duties as may be assigned to him by the Board of Directors. 7. Powers and Duties of Vice-Presidents and Assistant Officers. Unless otherwise determined by the Board of Directors, each Vice- President and each assistant officer shall have the powers and perform the duties of his respective superior officer. Vice-Presidents and Assistant officers shall have such rank as shall be designated by the Board of Directors and each, in the order of rank, shall act for such superior officer in his absence or upon his disability or when so directed by such superior officer or by the Board of Directors. The President shall be the superior officer of the Vice-Presidents. The Treasurer and Secretary shall be the superior officers of the Assistant Treasurers and Assistant Secretaries, respectively. 8. Delegation of Office. The Board of Directors may delegate the powers or duties of any officer of the Corporation to any other officer or to any Director from time to time. 9. Vacancies. The Board of Directors shall have the power to fill any vacancies in any office occurring from whatever reason. ARTICLE V - CAPITAL STOCK 1. Share Certificates. Every share certificate shall be signed by the President or a Vice-President and by the Treasurer, Assistant Treasurer, Secretary or Assistant Secretary and sealed with the corporate seal, which may be a facsimile, engraved or printed, but where such certificate is signed by a transfer agent or by a transfer clerk and a registrar, the signature of any corporate officer upon such certificate may be a facsimile, engraved or printed. 2. Transfer of Shares. Transfers of shares shall be made on the books of the Corporation only upon surrender of the share certificate, duly endorsed and otherwise in proper form for transfer, which certificate shall be cancelled at the time of the transfer. 3. Determination of Shareholders of Record and Closing Transfer Books. The Board of Directors may fix a time, not more than fifty days prior to the date of any meeting of Shareholders, or the date fixed for the payment of any divided or distribution, or the date for the allotment of rights, or the date when any change or conversion or exchange of shares will be made or go into effect, as a record date for the determination of the Shareholders entitled to notice of or to vote at any such meeting, or entitled to receive payment of any such dividend or distribution, or to receive any such allotment of rights, or to exercise the rights in respect to any such change, conversion or exchange of shares or otherwise. In such case, only such Shareholders as shall be Shareholders of record on the date so fixed shall be entitled to notice of or to vote at such meeting, or to receive payment of such dividend, or to receive such allotment of rights, or to exercise such rights, as the case may be, notwithstanding any transfer of any shares on the books of the Corporation after any record date fixed as aforesaid. The Board of Directors may close the books of the Corporation against transfers of shares during the whole or any part of such period, and in such case written or printed notice thereof shall be mailed at least ten (10) days before the closing thereof to each Shareholder of record at the address appearing on the records of the Corporation or supplied by him to the Corporation for the purpose of notice. While the stock transfer books of the Corporation are closed, no transfer of shares hall be made thereon. Unless a record date is fixed by the Board of Directors for the determination of Shareholders entitled to receive notice of or vote at, a Shareholders' Meeting, transferees of shares which are transferred on the books of the corporation within ten (10) days next preceding the date of such meeting shall not be entitled to notice of or to vote at such meeting. The Corporation may treat the registered owner of each share of stock as the person exclusively entitled to vote, to receive notifications and otherwise, to exercise all the rights and powers of the owner thereof. 4. Lost Share Certificates. Unless waived in whole or in part by the Board of Directors from time to time, any person requesting the issuance of a new certificate in lieu of an alleged lost, destroyed, mislaid or wrongfully taken certificate, shall (1) make an affidavit or affirmation of the facts and circumstances surrounding the same; (2) advertise such facts to the extent and in such manner as the Board of Directors may require; (3) give the Corporation a bond of indemnity in form, and with one or more sureties satisfactory to the Board, in an amount to be determined by the Board, whereupon the proper officers may issue a new certificate. ARTICLE VI - NOTICES 1. Contents of Notice. Whenever any notice of a meeting is required to be given pursuant to these By-Laws or the Articles, or otherwise, the notice shall specify the place, day and hour of the meeting and, in the case of a special meeting or where otherwise required by law, the general nature of the business to be transacted at such meeting. 2. Method of Notice. All notices shall be given to each person entitled thereto, either personally or be sending a copy thereof through the mail or by telegraph, charges prepaid, to his address appearing on the books of the Corporation, or supplied by him to the Corporation for the purpose of notice. If notice is sent by mail or telegraph, it shall be deemed to have been given to the person entitled thereto when deposited in the United States Mail or with the telegraph office for transmission. If no address for a Shareholder appears on the books of the Corporation and such Shareholder has not supplied the Corporation with an address for the purpose of notice, notice deposited in the United States Mail addressed to such shareholder, care of General Delivery in the City in which the Registered Office of the Corporation is located, shall be sufficient. 3. Waiver of Notice. Whenever any written notice is required to be given by the Articles or these By-Laws, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. Except in the case of a special meeting, neither the business to be transacted at nor the purpose of the meeting need be specified in the waiver of notice of such meeting. ARTICLE VII - INDEMNIFICATION OF DIRECTORS, OFFICERS AND OTHER PERSONS. 1. Each Director and each officer and former Directors or officers, and any person who may have served, at its request, as a Director or officer of another corporation in which is owns shares of capital stock or of which it is a creditor, shall be indemnified by the Corporation against expenses actually and necessarily incurred by them in connection with the defense of any action, suit or proceeding in which they, or any of them are made parties or a party by reason of being or having been directors or officers or a Director or officer of the Corporation or of such other corporation, except in relations to matters as to which any such Director or officer or former Director or officer or person shall be adjudged, in such action, suit, or proceeding, to be liable for negligence or misconduct in the performance of duty. Such indemnification shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any By-Law, Agreement, vote of Shareholders, or otherwise. ARTICLE VIII - FISCAL YEAR 1. The Board of Directors shall have the power by resolution to fix the fiscal year of the Corporation. If the Board of Directors shall fail to do so, the President shall fix the fiscal year. ARTICLE IX - AMENDMENTS 1. The Shareholders entitled to vote thereon shall have the power to alter, amend or repeal these By-Laws, by a majority of those voting, at any regular or special meeting, duly convened after notice to the Shareholders of such purpose. The Board of Directors, by a majority vote of those voting, shall have the power to alter, amend and repeal these By-Laws, at any regular or special meeting duly convened after notice of such purpose, subject always to the power of the Shareholders to change such action. EX-99.1 6 - ------------------------------------------------------------------------ CERTIFICATE OF LIMITED PARTNERSHIP FOR ATLAS-ENERGY FOR THE NINETIES-PUBLIC #5 LTD. - ------------------------------------------------------------------------ Exhibit 4(a) Microfilm Number Filed with the Department of State on July 26, 1996 Entity Number 2707198 Secretary of the Commonwealth CERTIFICATE OF LIMITED PARTNERSHIP DSCB:15-8511 (Rev 90) In compliance with the requirements of 15 Pa.C.S. . 8511 (relating to certificate of limited partnership), the undersigned, desiring to form a limited partnership, hereby certifies that: 1. The name of the limited partnership is: Atlas-Energy for the Nineties-Public #5 Ltd. 2. The (a) address of this limited partnership's initial registered office in this Commonwealth or (b) name of its commercial registered office provider and the county of venue is: (a) 311 Rouser Road Moon Township Pennsylvania 15108 Allegheny Number and Street City State Zip County (b)c/o N/A Name of Commercial Registered Office Provider County For a limited partnership represented by a commercial registered office provider, the county in (b) shall be deemed the county in which the limited partnership is located for venue and official publication purposes. 3. The name and business address of each general partner of the partnership is: Name Address Atlas Resources, Inc. 311 Rouser Road, Moon Township, Pennsylvania 15108 4. (Check, and if appropriate complete, one of the following): X The formation of the limited partnership shall be be effective upon filing this Certificate of Limited Partnership in the Department of State. The formation of the limited partnership shall be effective on: at Date Hour IN TESTIMONY WHEREOF, the undersigned general partner(s) of the limited partnership has (have) executed this Certificate of Limited Partnership this 22nd day of July, 1996. Atlas Resources, Inc. /s/ J.R. O'Mara (Signature) J.R. O'Mara (Signature) EX-99.2 7 - ------------------------------------------------------------------------ RELEASE FROM SHAREHOLDERS - ------------------------------------------------------------------------ Exhibit 4(c) FIRST AMENDMENT TO SHARE ACQUISITION AGREEMENT THIS FIRST AMENDMENT TO SHARE ACQUISITION AGREEMENT made and entered into as of this 24 day of November, 1992, by and between ATLAS ENERGY GROUP, INC. (the "Company"), an Ohio corporation, and JOSEPH R. SADOWSKI ("Shareholder"). WITNESSETH THAT: WHEREAS, the Company and the Shareholder executed that certain Share Acquisition Agreement dated as of November 14, 1990 (the "Share Acquisition Agreement"), providing for the purchase by the Company of certain shares of common stock of the Company (the "Common Stock") and the grant of certain options as set forth in Sections 5.3, 5.4 and 5.5 of the Share Acquisition Agreement (the "Shareholder Put Options") pursuant to which the Shareholder may require the Company to buy additional shares of Common Stock, held by Shareholder in the future; and WHEREAS, the Company and the Shareholder believe the existence of the Shareholder Put Options impairs the ability of the Company to raise capital for the Company's oil and gas drilling operations; and WHEREAS, the Company and the Shareholder believe said oil and gas drilling operations are necessary for the continued growth of the Company; and WHEREAS, the Shareholder will benefit from the Company's continued growth; and WHEREAS, the parties hereto desire to amend the provisions of the Share Acquisition Agreement. NOW THEREFORE, in consideration of the premises herein and intending to be legally bound hereby, the parties hereto agree as follows: 1. Shareholder hereby agrees to unconditionally waive any and all rights under the Shareholder Put Options and hereby acknowledges and agrees that the execution of this First Amendment will extinguish any and all rights under said Shareholder Put Options. 2. Sections 5.3, 5.4 and 5.5 of the Share Acquisition Agreement are deleted. 3. Sections 5.6, 5.7, 5.8 and 5.9 of the Share Acquisition Agreement are renumbered 5.3, 5.4, 5.5 and 5.6, respectively. 4. The reference to "First Shareholder Option" in Section 5.2 of the Share Acquisition Agreement is deleted. 5. The reference to "Section 5.7(a)" in Sections 5.1 and 5.2 of the Share Acquisition Agreement is amended to read "Section 5.4 (a)". 6. The reference to "Sections 5.3, 5.4 or 5.5" in newly renumbered Sections 5.3 and 5.4 of the Share Acquisition Agreement is deleted. 7. The reference to "Section 5.7" in newly renumbered Section 5.5 of the Share Acquisition Agreement is amended to read "Section 5.4". 8. Except as expressly amended hereby, the provisions of the Share Acquisition Agreement are hereby affirmed in all respects. WITNESS the due execution hereof as of the date first above written. ATLAS ENERGY GROUP, INC. By: /s/ J. R. O'Mara J.R. O'Mara, Executive Vice President /s/ Joseph R. Sadowski Joseph R. Sadowski FIRST AMENDMENT TO SHARE ACQUISITION AGREEMENT THIS FIRST AMENDMENT TO SHARE ACQUISITION AGREEMENT made and entered into as of this 24 day of November, 1992, by and between ATLAS ENERGY GROUP, INC. (the "Company"), an Ohio corporation, and CHARLES KOVAL ("Shareholder"). WITNESSETH THAT: WHEREAS, the Company and the Shareholder executed that certain Share Acquisition Agreement dated as of November 14, 1990 (the "Share Acquisition Agreement"), providing for the purchase by the Company of certain shares of common stock of the Company (the "Common Stock") and the grant of certain options as set forth in Sections 5.3, 5.4 and 5.5 of the Share Acquisition Agreement (the "Shareholder Put Options") pursuant to which the Shareholder may require the Company to buy additional shares of Common Stock, held by Shareholder in the future; and WHEREAS, the Company and the Shareholder believe the existence of the Shareholder Put Options impairs the ability of the Company to raise capital for the Company's oil and gas drilling operations; and WHEREAS, the Company and the Shareholder believe said oil and gas drilling operations are necessary for the continued growth of the Company; and WHEREAS, the Shareholder will benefit from the Company's continued growth; and WHEREAS, the parties hereto desire to amend the provisions of the Share Acquisition Agreement. NOW THEREFORE, in consideration of the premises herein and intending to be legally bound hereby, the parties hereto agree as follows: 1. Shareholder hereby agrees to unconditionally waive any and all rights under the Shareholder Put Options and hereby acknowledges and agrees that the execution of this First Amendment will extinguish any and all rights under said Shareholder Put Options. 2. Sections 5.3, 5.4 and 5.5 of the Share Acquisition Agreement are deleted. 3. Sections 5.6, 5.7, 5.8 and 5.9 of the Share Acquisition Agreement are renumbered 5.3, 5.4, 5.5 and 5.6, respectively. 4. The reference to "First Shareholder Option" in Section 5.2 of the Share Acquisition Agreement is deleted. 5. The reference to "Section 5.7(a)" in Sections 5.1 and 5.2 of the Share Acquisition Agreement is amended to read "Section 5.4 (a)". 6. The reference to "Sections 5.3, 5.4 or 5.5" in newly renumbered Sections 5.3 and 5.4 of the Share Acquisition Agreement is deleted. 7. The reference to "Section 5.7" in newly renumbered Section 5.5 of the Share Acquisition Agreement is amended to read "Section 5.4". 8. Except as expressly amended hereby, the provisions of the Share Acquisition Agreement are hereby affirmed in all respects. WITNESS the due execution hereof as of the date first above written. ATLAS ENERGY GROUP, INC. By: /s/ J. R. O'Mara J.R. O'Mara, Executive Vice President /s/ Charles Koval Charles Koval EX-5 8 OPINION OF KUNZMAN & BOLLINGER, INC AS TO THE LEGALITY OF THE UNITS REGISTERED HEREBY - ------------------------------------------------------------------------ Exhibit 5 KUNZMAN & BOLLINGER, INC Attorneys At Law 5100 N. Brookline, Suite 600 Oklahoma City, Oklahoma 73112 Phone 405.942.3501 Fax 405.942.3527 September 25, 1996 Atlas Resources, Inc. 311 Rouser Road Moon Township, Pennsylvania 15108 RE: ATLAS-ENERGY FOR THE NINETIES-PUBLIC #5 LTD. Gentlemen: You have requested our opinion on certain issues pertaining to Atlas-Energy for the Nineties-Public #5 Ltd. (the "Partnership") formed under the Limited Partnership Laws of Pennsylvania. Atlas Resources, Inc. ("Atlas"), a Pennsylvania corporation, is the Managing General Partner of the Partnership. Basis of Opinion Our opinion is based on our review of a certain Registration Statement on Form SB-2 and any amendments thereto, including any post- effective amendments, for the Partnership (the "Registration Statement") as filed with the Securities and Exchange Commission (the "Commission"), including the Certificate of Limited Partnership for the Partnership, the Prospectus and the Amended and Restated Certificate and Agreement of Limited Partnership for the Partnership (the "Partnership Agreement"), the Subscription Agreement and the Drilling and Operating Agreement contained therein, and on our review of such other documents and records as we have deemed necessary to review for purposes of rendering our opinion. As to various questions of fact material to our opinion which we have not independently verified, we have relied on certain representations made to us by officers and directors of Atlas. In rendering the opinion herein provided, we have assumed the due authorization, execution and delivery of all relevant documents by all parties thereto. Opinion Based upon the foregoing, we are of the opinion that: The Units, when sold in accordance with the Registration Statement as amended at the time it becomes effective with the Commission, will be legally issued pursuant to Pennsylvania partnership law, fully paid and nonassessable except as described in the Registration Statement with respect to the Investor General Partner Units. We hereby consent to the use of this opinion as an Exhibit to the Registration Statement and to the reference to this firm in the Prospectus included in the Registration Statement. Yours very truly, /s/ Kunzman & Bollinger, Inc. KUNZMAN & BOLLINGER, INC. EX-8 9 OPINION OF KUNZMAN & BOLLINGER, INC. AS TO TAX MATTERS Exhibit 8 KUNZMAN & BOLLINGER, INC. ATTORNEYS-AT-LAW 5100 N. BROOKLINE, SUITE 600 OKLAHOMA CITY, OKLAHOMA 73112 Telephone (405) 942-3501 Fax (405) 942-3527 September 25, 1996 Atlas Resources, Inc. 311 Rouser Road Moon Township, Pennsylvania 15108 RE: ATLAS-ENERGY FOR THE NINETIES-PUBLIC #5 LTD. Gentlemen: You have requested our opinions on the material federal income tax issues pertaining to Atlas-Energy for the Nineties-Public #5 Ltd. (the "Partnership"), a limited partnership formed under the Revised Uniform Limited Partnership Act of Pennsylvania. We have acted as Special Counsel to the Partnership with respect to the offering of interests in the Partnership. Atlas Resources, Inc. ("Atlas") will be the Managing General Partner of the Partnership.Terms used and not otherwise defined herein have the respective meanings assigned to them in the Prospectus under the caption "DEFINITIONS." Basis of Opinion Our opinions are based upon our review of: (1) a certain Registration Statement on Form SB-2 for Atlas-Energy for the Nineties-Public #5 Ltd., as originally filed with the United States Securities and Exchange Commission, and amendments thereto, including the Prospectus, the Drilling and Operating Agreement and the Amended and Restated Certificate and Agreement of Limited Partnership for the Partnership (the "Partnership Agreement") included as exhibits to the Prospectus; and (2) such corporate records, certificates, agreements, instruments and other documents as we have deemed relevant and necessary to review as a basis for the opinions herein provided. Our opinions also are based upon our interpretation of existing statutes, rulings and regulations, as presently interpreted by judicial and administrative bodies. Such statutes, rulings, regulations and interpretations are subject to change; and such changes could result in different tax consequences than those set forth herein and could render our opinions inapplicable. In rendering our opinions, we have obtained from you certain representations with respect to the Partnership. Any material inaccuracy in such representations may render our opinions inapplicable. Included among such representations are the following: (1) The Partnership Agreement to be entered into by and among Atlas, as Managing General Partner, and the Participants will be duly executed by all parties thereto. The Partnership Agreement will be duly recorded in all places required under the Revised Uniform Limited Partnership Act of Pennsylvania for the due formation of the Partnership and for the continuation thereof in accordance with the terms of the Partnership Agreement. The Partnership will at all times be operated in accordance with the terms of the Partnership Agreement, the Prospectus, and the Revised Uniform Limited Partnership Act of Pennsylvania. (2) No election will be made by the Partnership or any Partner for the Partnership to be excluded from the application of the provisions of Subchapter K of the Code. (3) The Partnership will own record or legal title to the Working Interest in all of its Prospects. (4) The Managing General Partner will be independent of the Participants and will not be merely a "dummy" acting as an agent for the Participants. The Managing General Partner has and will continue to have at all times during the existence of the Partnership a substantial net worth (excluding its interest in the Partnership and any other limited partnerships). (5) The respective amounts that will be paid to Atlas or its Affiliates pursuant to the Partnership Agreement and the Drilling and Operating Agreement are amounts that would ordinarily be paid for similar services in similar transactions between Persons having no affiliation and dealing with each other "at arms' length." (6) The Partnership will elect to deduct currently all intangible drilling and development costs. (7) The Partnership will have a calendar year taxable year. (8) The Drilling and Operating Agreement and any amendments thereto entered into by and between Atlas and the Partnership will be duly executed and will govern the drilling and, if warranted, the completion and operation of the wells in accordance with its terms. (9) Based upon Atlas' review of its previous drilling programs for the past several years and upon the intended operations of the Partnership, Atlas reasonably believes that the aggregate deductions, including depletion deductions, and 350% of the aggregate credits, if any, which will be claimed by Atlas and the Participants, will not during the first five tax years following the funding of the Partnership exceed twice the amounts invested by Atlas and the Participants, respectively. (10) The Investor General Partner Units will not be converted to Limited Partner interests before substantially all of the Partnership Wells have been drilled and completed. (11) The Units will not be traded on an established securities market. In rendering our opinions we have further assumed that (1) each of the Participants has an objective to carry on the business of the Partnership for profit; (2) any amount borrowed by a Participant and contributed to the Partnership will not be borrowed from a Person who has an interest in the Partnership (other than as a creditor) or a related person, as defined in .465 of the Code, to a person (other than the Participant) having such interest and such Participant will be severally, primarily, and personally liable for such amount; and (3) no Participant will have protected himself from loss for amounts contributed to the Partnership through nonrecourse financing, guarantees, stop loss agreements or other similar arrangements. We have considered the provisions of the American Bar Association's Revised Formal Opinion 346 on Tax Law Opinions ("ABA Opinion 346") and 31 CFR, Part 10, .10.33 (Treasury Department Circular No. 230) on tax law opinions and we believe that this opinion letter addresses all material federal income tax issues associated with an investment in the Units by an individual Participant who is a resident citizen of the United States. We consider material those issues which would affect significantly a Participant's deductions, credits or losses arising from his investment in the Units and with respect to which, under present law, there is a reasonable possibility of challenge by the IRS, or those issues which are expected to be of fundamental importance to a Participant but as to which a challenge by the IRS is unlikely. The issues which involve a reasonable possibility of challenge by the IRS have not been definitely resolved by statute, rulings or regulations, as interpreted by judicial or administrative bodies. Subject to the foregoing, however, in our opinion it is more likely than not that the following tax treatment will be upheld if challenged by the IRS and litigated: Partnership Classification. The Partnership will be classified as a partnership for federal income tax purposes, and not as an association taxable as a corporation; the Partnership, as such, will not pay any federal income taxes, and all items of income, gain, loss, deduction, and credit of the Partnership will be reportable by the Partners in the Partnership. (See "- Partnership Classification.") Intangible Drilling and Development Costs. Intangible drilling and development costs paid by the Partnership under the terms of bona fide drilling contracts for the Partnership's wells will be deductible in the taxable year in which the payments are made and the drilling services are rendered, assuming such amounts are fair and reasonable consideration and subject to certain restrictions summarized below (including basis and "at risk" limitations and the passive activity loss limitation with respect to the Limited Partners). (See "- Intangible Drilling and Development Costs" and "- Drilling Contracts.") Prepayments of Intangible Drilling and Development Costs. Depending primarily on when the Partnership Subscription is received, it is anticipated that the Partnership will prepay in 1996 most, if not all, of the intangible drilling and development costs related to Partnership Wells the drilling of which will be commenced in 1997. Assuming that such amounts are fair and reasonable, and based in part on the factual assumptions set forth below, in our opinion such prepayments of intangible drilling and development costs will be deductible for the 1996 taxable year even though all Working Interest owners in the well may not be required to prepay such amounts, subject to certain restrictions summarized in "Tax Aspects" (including basis and "at risk" limitations, and the passive activity loss limitation with respect to the Limited Partners). (See "- Drilling Contracts", below.) The foregoing opinion is based in part on the assumptions that: (1) such costs will be required to be prepaid in 1996 for specified wells pursuant to the Drilling and Operating Agreement; (2) pursuant to the Drilling and Operating Agreement the wells are required to be, and actually are, Spudded on or before March 31, 1997, and continuously drilled thereafter until completed, if warranted, or abandoned; and (3) the required prepayments are not refundable to the Partnership and any excess prepayments are applied to intangible drilling and development costs of substitute wells. Not a Publicly Traded Partnership. Assuming that no more than 10% of the Units are transferred in any taxable year of the Partnership (other than in private transfers described in Treas. Reg. .1.7704-1(e)), it is more likely than not that the Partnership will not be treated as a "publicly traded partnership" under the Code. (See "- Limitations on Passive Activities".) Passive Activity Classification. Oil and gas production income generated by the Partnership's oil and gas properties held as Working Interests, together with gain, if any, from the disposition of such properties and allocable to Limited Partners who are individuals, estates, trusts, closely held corporations or personal service corporations more likely than not will be characterized as income from a passive activity which may be offset by passive activity losses (as defined in .469(d) of the Code). Income or gain attributable to investments of working capital of the Partnership will be characterized as portfolio income, which cannot be offset by passive activity losses. To the extent the Partnership's oil and gas properties are held as Working Interests, it is more likely than not that the passive activity limitations on losses under .469 will not be applicable to Investor General Partners prior to the conversion of Investor General Partner Units to Limited Partner interests. (See - Limitations on Passive Activities.") Tax Basis of Participant's Interest. Each Participant's adjusted tax basis in his Partnership interest will be increased by his total Agreed Subscription. (See "- Tax Basis of Participants' Interests.") At Risk Limitation on Losses. Each Participant initially will be "at risk" to the full extent of his Agreed Subscription. (See "- `At Risk' Limitation For Losses.") Depletion Allowance. The greater of cost depletion or percentage depletion will be available to qualified Participants as a current deduction against Partnership income from oil and gas production revenues on properties of the Partnership, subject to certain restrictions summarized below. (See "- Depletion Allowance.") ACRS. The Partnership's reasonable costs for recovery property (tangible depreciable property used in a trade or business or held for the production of income) which cannot currently be deducted but must be capitalized will be eligible for cost recovery deductions under the modified Accelerated Cost Recovery System, generally over a seven year "cost recovery period", subject to certain restrictions summarized below (including basis and "at risk" limitations and the passive activity loss limitation in the case of Limited Partners). (See "- Depreciation - Accelerated Cost Recovery System.") Availability of Certain Deductions. Business expenses, including payments for personal services actually rendered in the taxable year in which accrued, which are reasonable, ordinary and necessary and do not include amounts for items such as Lease acquisition costs, organization and syndication fees and other items which are required to be capitalized, are currently deductible. (See "- 1996 Expenditures", "- Availability of Certain Deductions" and "- Partnership Organization and Syndication Fees.") Allocations. Assuming the effect of the allocations of income, gain, loss, deduction and credit (or items thereof) set forth in the Partnership Agreement, including the allocations of basis and amount realized with respect to oil and gas properties, is substantial in light of a Participant's tax attributes that are unrelated to the Partnership, it is more likely than not that such allocations will have "substantial economic effect" and will govern each Participant's distributive share of such items to the extent such allocations do not cause or increase deficit balances in the Participants' Capital Accounts. (See "- Allocations.") Agreed Subscription. No gain or loss will be recognized by the Participants on payment of their Agreed Subscriptions. Profit Motive. Based on the Managing General Partner's representation that the Partnership will be conducted as described in the Prospectus, it is more likely than not that the Partnership will possess the requisite profit motive and will not be properly characterized as a tax shelter for purposes of the tax shelter registration requirement and the substantial understatement of income tax liability penalty. (See "- Disallowance of Deductions Under Section 183 of the Code" and "- Penalties and Interest.") IRS Anti-Abuse Rule. Based on the Managing General Partner's representation that the Partnership will be conducted as described in the Prospectus, it is more likely than not that the Partnership will not be subject to the anti-abuse rule set forth in Treas. Reg. .1.701-2. (See "- Penalties and Interest - IRS Anti-Abuse Rule.") Overall Evaluation of Tax Benefits. Based on our conclusion that substantially more than half of the material tax benefits of the Partnership, in terms of their financial impact on a typical Participant, more likely than not will be realized if challenged by the IRS, it is our opinion that the tax benefits of the Partnership, in the aggregate, which are a significant feature of an investment in the Partnership by a typical original Participant more likely than not will be realized as contemplated by the Prospectus. Special Counsel intends that the foregoing "more likely than not" opinion also is a "probably will" opinion under the standard set forth in ABA Opinion 346. The discussion in the Prospectus under the caption "TAX ASPECTS," insofar as it contains statements of federal income tax law, is correct in all material respects. (See "Tax Aspects" in the Prospectus.) * * * * * * * * * * * * * Our opinion is limited to the opinions expressed above. With respect to some of the matters discussed in this opinion, existing law provides little guidance. Although our opinions express what we believe a court would probably conclude if presented with the applicable issues, there is no assurance that the IRS will not challenge our interpretations or that such a challenge would not be sustained in the courts and cause adverse tax consequences to the Participants. It should be noted that taxpayers bear the burden of proof to support claimed deductions and opinions of counsel are not binding on the IRS or the courts. In General The following is a summary of some of the principal features under present federal income tax law which will apply to the Partnership and typical Participants. However, there is no assurance that the present laws or regulations will not be changed and adversely affect a Participant. The IRS may challenge the deductions claimed by the Partnership or a Participant, or the taxable year in which such deductions are claimed, and no guaranty can be given that any such challenge would not be upheld if litigated. The practical utility of the tax aspects of any investment depends largely on the income tax position of the particular Participant in the year in which items of income, gain, loss, deduction or credit are properly taken into account in computing his federal income tax liability. In addition, except as otherwise noted, different tax considerations may apply to foreign persons, corporations partnerships, trusts and other prospective Participants which are not treated as individuals for federal income tax purposes. EACH PROSPECTIVE PARTICIPANT SHOULD SATISFY HIMSELF AS TO THE TAX CONSEQUENCES OF PARTICIPATING IN THE PARTNERSHIP BY OBTAINING ADVICE FROM HIS OWN TAX ADVISOR. Partnership Taxation For federal income tax purposes, a partnership is not a taxable entity but rather a conduit through which all items of income, gain, loss, deduction, credit and tax preference are passed through to the partners and are required to be reported on their federal income tax returns for the taxable years in which or with which the partnership's taxable year ends. I.R.C. .706a). Thus, the partners, rather than the partnership, receive any tax deductions and credits, as well as the income, from the operations engaged in by the partnership. In the event the Partnership were treated as an association taxable as a corporation, the income and deductions of the Partnership would be reported by the Partnership as if it were a corporation, and not by each Partner. The Partnership would be taxed directly on its income at corporate tax rates, and distributions to Partners would be treated as taxable dividends to shareholders to the extent of current and accumulated earnings and profits of the Partnership. Partnership Classification It is the opinion of Special Counsel that, under currently existing laws, rules and regulations, all of which are subject to change with or without retroactive application, the Partnership will be treated as a partnership for federal income tax purposes and not as an association taxable as a corporation. This opinion is based in part on the conclusion that the Partnership will not have at least three of the four corporate characteristics used in the Treasury Regulations (the "regulations") as a basis for distinguishing an association taxable as a corporation from a partnership. Treas. Reg. .301.7701-2 (a)(1),(2) and (3) and Treas. Reg. .301.7701-3(b). The regulations provide that limited partnerships formed pursuant to a statute corresponding to the original or revised Uniform Limited Partnership Act (the "ULPA") normally do possess the corporate characteristic of centralized management if substantially all the interests in the partnership are owned by the limited partners. Treas. Reg. .301.7701-2(c)(4). The Partnership Agreement allocates certain costs and revenues in a ratio different from the ratio of the Partners' Capital Contributions. This may or may not be interpreted as affecting the overall ownership of interests in the Partnership for purposes of the regulation. The Partnership was formed pursuant to the Revised Uniform Limited Partnership Act of Pennsylvania which substantially corresponds to the ULPA for this purpose. Rev. Rul. 94-10, 1994-6 IRB 12. However, assuming that the Partnership may possess centralized management, the Partnership will not have the corporate characteristic of continuity of life because under the regulations a limited partnership organized under a statute corresponding to the ULPA lacks the corporate characteristic of continuity of life. The corporate characteristic of limited liability exists if the general partner "has no substantial assets (other than his interest in the partnership) which could be reached by a creditor of the organization and when he is merely a `dummy' acting as the agent of the limited partners." Treas. Reg. .301.7701-2(d)(2). The Partnership should not have limited liability, because in our opinion the Managing General Partner currently has a substantial net worth and because the Managing General Partner has represented that it will not be a "dummy" acting as an agent of the Participants. (See "Financial Information Concerning the Managing General Partner, AEGH and the Partnership" in the Prospectus.) The Partnership Agreement does not contain any minimum net worth requirements or contingent liability limits with respect to Atlas' position as Managing General Partner. Consequently, the tax status of the Partnership as a partnership could be adversely affected should the net worth of Atlas materially diminish, or should the contingent liabilities of Atlas materially increase. The regulations provide that the corporate characteristic of free transferability of interests will exist if the members of the partnership have the power, without the consent of the other members of the partnership, to substitute a person who is not a member of the partnership in their place. Treas. Reg. .301.7701-2(e)(1). The Partnership will not have free transferability of interests, because under the Partnership Agreement, ..6.01(a), and 6.02(a)(3), a Participant's assignee may not become a substituted Participant without the consent of the Managing General Partner, and the Managing General Partner may not transfer its interest without the consent of a majority in interest of the Participants. The IRS requires a number of conditions to be met before a private ruling will be issued regarding the classification of a limited partnership as a partnership for federal income tax purposes. While these conditions are not rules to be applied on audited tax returns, they do indicate items of concern of the IRS. Revenue Procedure 89-12, 1989-7 I.R.B. 22, in general, requires that corporate general partners of a proposed limited partnership must have a net worth, based on current fair market value of their assets less the value of their interests in a particular limited partnership, equal to at least 10% of the total contributions to each limited partnership for which they so serve. If this test is not met, it must be demonstrated either that a general partner (or all general partners in the aggregate) has substantial assets (other than the partner's interest in the partnership) that could be reached by a creditor of the partnership or that the general partners individually and collectively will act independently of the limited partners. (See "Financial Information Concerning the Managing General Partner, AEGH and the Partnership" in the Prospectus.) Another requirement under the Revenue Procedure is that the general partners, in the aggregate, must maintain a minimum capital account balance equal to either 1% of total positive capital account balances for the partnership or $500,000, whichever is less, unless at least one general partner will contribute substantial services in its capacity as a partner, apart from services for which guaranteed payments under .707(c) of the Code are made. In addition, the partnership agreement must expressly provide that upon dissolution and termination of the partnership the general partners will contribute to the partnership an amount equal to: (a) the deficit balances, if any, in their capital accounts; or (b) the excess of 1.01% of the total capital contributions of the limited partners over the capital previously contributed by the general partners; or (c) the lesser of (a) or (b). The Managing General Partner is required to maintain a Capital Account balance in compliance with the Revenue Procedure and to restore any deficit balance in its Capital Account upon termination of the Partnership. (See .3.04(b)(1) of the Partnership Agreement.) The Revenue Procedure also states that the partnership agreement may not permit less than a majority in interest of limited partners to elect a new general partner to continue the partnership, or the IRS will not rule that the partnership lacks continuity of life. Under the Partnership Agreement, a majority vote of Participants is required for this purpose. (See .4.04(a)(3) of the Partnership Agreement.) The Revenue Procedure also requires that the general partners, in the aggregate, share at all times during the existence of the partnership in at least 1% of each material item of partnership income, gain, loss, deduction or credit (including interests owned as limited partners). This requirement will not be satisfied by the Partnership. (See .5.01 of the Partnership Agreement.) Although the Partnership will not satisfy all of the requirements set forth above, the IRS has stated regarding this Revenue Procedure: "...The provisions of this revenue procedure are not intended to be substantive rules for the determination of partner and partnership status and are not to be applied upon audit of taxpayers' returns." Rev. Proc. 89-12, 1989-7, I.R.B. 22. Special Counsel believes that the requirements of Revenue Procedure 89-12 are not applicable because an advance ruling is not being sought and such criteria are not requirements for classification as a partnership for federal income tax purposes, but merely requirements for obtaining an advance ruling. If the operations of the Partnership are continued under a successor or amended limited partnership following the removal or resignation of the Managing General Partner, the tax classification of the Partnership as a partnership could be adversely affected. This would depend upon the new general partner having substantial assets in addition to its interest in the partnership and the new general partner's relationship to the Participants. New standards, if adopted, could be applied retroactively and possibly could have an adverse effect on the classification of the Partnership as a partnership. AN ADVANCE TAX RULING CONFIRMING THE PARTNERSHIP'S STATUS AS A PARTNERSHIP FOR FEDERAL INCOME TAX PURPOSES HAS NOT BEEN OBTAINED FROM THE IRS AND THE MANAGING GENERAL PARTNER DOES NOT INTEND TO APPLY FOR SUCH AN ADVANCE RULING. SUCH A RULING WOULD NOT BE ISSUED IF SOUGHT, AND NO GUARANTY CAN BE GIVEN THAT THE IRS WILL NOT TAKE THE POSITION THAT THE PARTNERSHIP SHOULD BE CLASSIFIED FOR TAX PURPOSES AS AN ASSOCIATION TAXABLE AS A CORPORATION RATHER THAN A PARTNERSHIP. The following discussion assumes that the Partnership will be treated as a partnership for federal income tax purposes. Limitations on Passive Activities Under the passive activity rules, all income of a taxpayer who is subject to the rules is categorized as: (i) income from passive activities such as limited partners' interests in a business; (ii) active income (e.g., salary, bonuses, etc.); or (iii) portfolio income (e.g., dividends, royalties and interest not derived in the ordinary course of a trade or business). Losses generated by "passive activities" can offset only passive income and cannot be applied against active income or portfolio income. Similar rules apply with respect to tax credits. I.R.C. .469. The passive activity rules apply to individuals, estates, trusts, closely held C corporations (generally, if five or fewer individuals own directly or indirectly more than 50% of the stock) and personal service corporations (other than corporations where the owner-employees together own less than 10% of the stock). However, a closely held C corporation (other than a personal service corporation) may use passive losses and credits to offset taxable income of the company figured without regard to passive income or loss or portfolio income. Passive activities include: (i) any trade or business in which the taxpayer does not materially participate; and (ii) any rental activity, whether or not the taxpayer materially participates, subject to certain exceptions. Material participation is defined as a year-round active involvement in the operations of the activity on a regular, continuous, and substantial basis. Under the Partnership Agreement, Limited Partners will not have material participation in the Partnership and generally will be subject to the passive activity rules. A taxpayer who holds a working interest in an oil and gas property that is burdened with the cost of developing and operating the property is excepted from the passive activity rules, whether or not he materially participates in the activity. However, a taxpayer who holds a working interest directly or indirectly through an entity (e.g., a limited partnership interest or S corporation shares) which limits the liability of the taxpayer with respect to such interest is not treated as owning a working interest. Consequently, the exception is not available to Limited Partners in the Partnership, but in the opinion of Special Counsel it is more likely than not that the exception will be available to Investor General Partners prior to their conversion to Limited Partners to the extent the Partnership acquires Working Interests in its Leases, except as noted above. Contractual limitations on the liability of Investor General Partners under the Partnership Agreement (e.g. insurance, limited indemnification, etc.) will not prevent Investor General Partners from claiming deductions under the working interest exception to the passive activity loss rules. Overriding royalties, production payments and contract rights to extract or share in oil and gas profits without liability for a share of production costs are excluded from the definition of a working interest. Deductions disallowed by the at-risk limitation on losses under .465 of the Code become subject to the passive loss limitation only if the taxpayer's at-risk amount increases in future years. A taxpayer's at-risk amount is reduced by losses allowed under .465 even if the losses are suspended by the passive loss limitation. (See "- `At Risk' Limitation For Losses," below.) Similarly, a taxpayer's basis is reduced by deductions even if the deductions are disallowed under the passive loss limitation. (See "- Tax Basis of Participants' Interests," below.) Suspended losses and credits may be carried forward (but not back) and used to offset future years' passive activity income. A suspended loss (but not a credit) is allowed in full when the entire interest is sold to an unrelated third party in a taxable transaction and in part upon the disposition of substantially all of the passive activity if the suspended loss as well as current gross income and deductions can be allocated to the part disposed of with reasonable certainty. Upon such disposition the excess of suspended losses and any loss from the activity for the tax year (plus any loss on the sale) over net income or gain for the tax year from all passive activities (determined without regard to such losses) is not treated as a passive loss. Capital losses are limited to the amount of capital gain, plus $3,000 (in the case of married individuals filing joint returns). I.R.C. .1211. The capital-loss limit is applied before the determination is made of the amount of passive losses made available by a disposition. In an installment sale, passive losses become available in the same ratio that gain recognized each year bears to the total gain on the sale. Any suspended losses remaining at a taxpayer's death are allowed as deductions on his final return, subject to a reduction to the extent the basis of the property in the hands of the transferee exceeds the property's adjusted basis immediately prior to the decedent's death. If a taxpayer makes a gift of his entire interest in a passive activity, the donee's basis is increased by any suspended losses and no deductions are allowed. If the interest is later sold at a loss, the donee's basis is limited to the fair market value on the date the gift was made. Net losses and credits of a partner from each publicly traded partnership are suspended and carried forward to be netted against income from that publicly traded partnership only. In addition, net losses from other passive activities may not be used to offset net income from a publicly traded partnership. I.R.C. ..469(k)(2) and 7704. However, it is more likely than not that the Partnership will not be characterized as a publicly traded partnership under the Code, so long as no more than 10% of the Units are transferred in any taxable year of the Partnership (other than in private transactions described in Treas. Reg. .1.7704-1(e)). Characterization of the Partnership's Income. Income (e.g., interest) earned on working capital is treated as portfolio income which cannot be offset with passive losses by Limited Partners. "Portfolio income" consists of (i) interest, dividends and royalties (unless earned in the ordinary course of a trade or business); and (ii) gain or loss not derived in the ordinary course of a trade or business on the sale of property that generates portfolio income or is held for investment. In the opinion of Special Counsel, it is more likely than not that the Partnership's income from the Leases (excluding income attributable to investment of working capital), held as Working Interests, together with gain, if any, from the disposition of such property, will be characterized as passive income rather than portfolio income with respect to Limited Partners subject to the passive activity limitations. Conversion from Investor General Partner to Limited Partner. Investor General Partner Units will be converted to Limited Partner interests after substantially all of the Partnership Wells have been drilled and completed, which is anticipated to be in the late summer of 1997. Thereafter, each Investor General Partner will be deemed a Limited Partner in the Partnership and will enjoy the limited liability provided to limited partners under the Revised Uniform Limited Partnership Act of Pennsylvania with respect to his interest in the Partnership's oil and gas properties. Concurrently, the Investor General Partner will lose the availability of the working interest exception to the passive activity limitations. Except as provided below, an Investor General Partner's conversion of his Partnership interest into a Limited Partner interest should not have adverse tax consequences unless the Investor General Partner's share of any Partnership liabilities is reduced as a result of the conversion. Rev. Rul. 84-52, 1984-1 C.B. 157 and Prop. Reg. .1.1254-2. A reduction in a partner's share of liabilities is treated as a constructive distribution of cash to such partner, which reduces the basis of the partner's interest in the partnership and is taxable to the extent it exceeds such basis. In addition, if a taxpayer has a loss for a taxable year from a working interest in an oil and gas property which is treated as a loss which is not from a passive activity, then any net income from such property for any succeeding taxable year will be treated as income of the taxpayer which is not from a passive activity. Consequently, if an Investor General Partner has a non-passive loss in 1996 with respect to the Partnership's Working Interests in the Leases, which is anticipated, any net income from a Partnership Well allocable to such Investor General Partner in any subsequent taxable year (even though he may then be a Limited Partner) will be characterized as non-passive income which cannot be offset with passive losses. For this purpose the Partnership's Wells will be deemed to include any property the value of which is directly enhanced by any drilling, logging, or other activities any part of the costs of which were borne by the Investor General Partners as a result of holding the Working Interests in the Wells (and any property the basis of which is determined in whole or in part by reference to the basis of the property receiving the increase in value). Taxable Year The Partnership intends to adopt a calendar year taxable year. I.R.C. .706(b). The taxable year of the Partnership is important to a prospective Participant because the Partnership's deductions, income and other items of tax significance must be taken into account in computing the Participant's taxable income for his taxable year within or with which the Partnership's taxable year ends. The tax year of a partnership generally must be the tax year of one or more of its partners who have an aggregate interest in partnership profits and capital of greater than 50%. 1996 Expenditures It is anticipated that all of the Partnership's subscription proceeds will be expended in 1996 and that the income and deductions generated pursuant thereto will be reflected on the Participants' federal income tax returns for that period. (See "Capitalization and Source of Funds and Use of Proceeds" and "Participation in Costs and Revenues" in the Prospectus.) Depending primarily on when the Partnership Subscription is received, it is anticipated that the Partnership will prepay in 1996 most, if not all, of its intangible drilling and development costs for wells the drilling of which will be commenced in 1997. The deductibility in 1996 of such advance payments cannot be guaranteed. (See "- Drilling Contracts", below.) Availability of Certain Deductions The ordinary and necessary expenses of carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered, are deductible in the year incurred. The tests for deductibility in the case of compensation payments are whether the payments are: (i) reasonable; and (ii) purely for services actually rendered. Treasury Regulation .1.162-7(b)(3) provides that reasonable compensation is only such amount as would ordinarily be paid for like services by like enterprises under like circumstances. The Managing General Partner has represented to counsel that the amounts payable to the Managing General Partner and its Affiliates, including the amounts paid to Atlas as general drilling contractor, are the amounts which would ordinarily be paid for similar services in similar transactions. (See "- Drilling Contracts," below.) The fees paid to the Managing General Partner and its Affiliates will not be currently deductible to the extent it is determined that they are in excess of reasonable compensation, are properly characterized as organization or syndication fees, other capital costs such as the acquisition cost of the Leases, or not "ordinary and necessary" business expenses, or the services were rendered in tax years other than the tax year in which such fees were deducted by the Partnership. (See "- Partnership Organization and Syndication Fees," below.) In the event of an audit, payments to the Managing General Partner and its Affiliates by the Partnership will be scrutinized by the IRS to a greater extent than payments to an unrelated party. Intangible Drilling and Development Costs Assuming a proper election and subject to the passive activity loss rules in the case of Limited Partners, each Participant will be entitled to deduct his share of intangible drilling and development costs which include items which do not have salvage value, such as labor, fuel, repairs, supplies and hauling necessary to the drilling of a well. Treas. Reg. .1.612-4(a). (See "Participation in Costs and Revenues" in the Prospectus and "- Limitations on Passive Activities," above.) Such costs generally will be subject to ordinary income recapture if a property is sold at a gain and the amount to be recaptured is not reduced by the amount of additional depletion that could have been claimed if such costs had been capitalized and amortized. (See "- Sale of the Properties," below.) Also, productive-well intangible drilling and development costs may subject a Participant to an alternative minimum tax in excess of regular tax unless an election is made to deduct them on a straight-line basis over a 60 month period. (See "- Minimum Tax - Tax Preferences," below.) In the preparation of the Partnership's informational tax returns, Atlas will allocate Partnership costs paid by Atlas and the Participants among Intangible Drilling Costs, Tangible Costs, Direct Costs, Administrative Costs, Organization and Offering Costs and Operating Costs based upon guidance from advisors to Atlas. Atlas has allocated approximately 77% of the footage price paid by the Partnership for a completed well to intangible drilling and development costs. The IRS could challenge the characterization of costs claimed by Atlas to be deductible intangible drilling and development costs and recharacterize such costs as some other item which may be non-deductible however, this would have no effect on the allocation and payment of such costs under the Partnership Agreement. Where a Lease is acquired subject to an obligation to pay an excessive drilling price, such excess amounts may not qualify as deductible intangible drilling and development costs but may be treated as Lease acquisition costs or some other non-deductible expense. In the case of corporations, other than S corporations, which are "integrated oil companies," the amount allowable as a deduction for intangible drilling and development costs in any taxable year under .263(c) of the Code is reduced by 30%. I.R.C. .291(b)(1). Integrated oil companies are (i) those taxpayers who directly or through a related person engage in the retail sale of oil or gas and whose gross receipts for the calendar year from such activities exceed $5,000,000, or (ii) those taxpayers and related persons who have refinery production in excess of 50,000 barrels on any day during the taxable year. For these purposes, two persons are "related" if either has a 5% interest in the other or a third person has a 5% interest in both, determined under special ownership attribution rules. Amounts disallowed as a current deduction are allowable as a deduction ratably over the 60-month period beginning with the month in which the costs are paid or incurred. The portion of the adjusted basis of any property attributable to intangible drilling and development costs disallowed under .291(b)(1) of the Code cannot be taken into account to determine depletion under .611. Any deductions of intangible drilling and development costs over the 60-month period will be subject to recapture. Drilling Contracts The Partnership will enter into the Drilling and Operating Agreement with Atlas, as a third-party general drilling contractor, to drill and complete the Partnership's Development Wells on a footage basis of $37.39 per foot for each well that is drilled and completed. Under the footage drilling contracts, Atlas anticipates that it will have reimbursement of general and administrative overhead of $3,600 per well and a profit of approximately 11% to 15% per well assuming the well is drilled to 6,150 feet. However, the actual cost of the drilling of the wells may be more or less than the estimated amount, due primarily to the uncertain nature of drilling operations. Atlas believes the Drilling and Operating Agreement is at competitive rates in the proposed areas of operation. Nevertheless, the amount of the profit realized by Atlas under the drilling contract, if any, could be challenged by the IRS as unreasonable and disallowed as a deductible intangible drilling and development cost. (See "- Intangible Drilling and Development Costs", above, and "Proposed Activities" and "Compensation" in the Prospectus.) Depending primarily on when the Partnership Subscription is received, it is anticipated that the Partnership will prepay in 1996 most, if not all, of the intangible drilling and development costs for drilling activities that will be conducted in 1997. In Keller v. Commissioner, 79 T.C. 7 (1982), aff'd 725 F.2d 1173 (8th Cir. 1984), the Tax Court applied a two-part test for the current deductibility of prepaid intangible drilling and development costs: (1) the expenditure must be a payment rather than a refundable deposit; and (2) the deduction must not result in a material distortion of income taking into substantial consideration the business purpose aspects of the transaction. The drilling partnership in Keller entered into footage and daywork drilling contracts which permitted it to terminate the contracts at any time without default by the driller, and receive a return of the prepaid amounts less amounts earned by the driller. The Tax Court found that the right to receive, by unilateral action, a refund of the prepayments on such footage and daywork drilling contracts rendered such prepayments deposits instead of payments. Therefore, the prepayments were held to be nondeductible in the year they were paid to the extent they had not been earned by the driller. The Tax Court further found that the drilling partnership failed to show a convincing business purpose for prepayments under the footage and daywork drilling contracts. The drilling partnership in Keller also entered into turnkey drilling contracts which permitted it to stop work under the contract at any time and apply the unearned balance of the prepaid amounts to another well to be drilled on a turnkey basis. The Tax Court found that such prepayments constituted "payments" and not nondeductible deposits, despite the right of substitution. Further, the Tax Court noted that the turnkey drilling contracts obligated "the driller to drill to the contract depth for a stated price regardless of the time, materials or expenses required to drill the well," thereby locking in prices and shifting the risks of drilling from the drilling partnership to the driller. Since the drilling partnership, a cash basis taxpayer, received the benefit of the turnkey obligation in the year of prepayment, the Tax Court found that the amounts prepaid on turnkey drilling contracts clearly reflected income and were deductible in the year of prepayment. In Leonard T. Ruth, TC Memo 1983-586, a drilling program entered into nine separate turnkey contracts with a general contractor (the parent corporation of the drilling program's corporate general partner), to drill nine program wells. Each contract identified the prospect to be drilled, stated the turnkey price, and required the full price to be paid in 1974. The program paid the full turnkey price to the general contractor on December 31, 1974; the receipt of which was found by the court to be significant in the general contractor's financial planning. The program had no right to receive a refund of any of such payments. The actual drilling of the nine wells was subcontracted by the general contractor to independent contractors who were paid by the general contractor in accordance with their individual contracts. The drilling of all wells commenced in 1975 and all wells were completed that year. The amount paid by the general contractor to the independent driller for its work on the nine wells was approximately $365,000 less than the amount prepaid by the program to the general contractor. The program claimed a deduction for intangible drilling and development costs in 1974. The IRS challenged the timing of the deduction, contending that there was no business purpose for the payments in 1974, that the turnkey arrangements were merely "contracts of convenience" designed to create a tax deduction in 1974, and that the turnkey contracts constituted assets having a life beyond the taxable year and that to allow a deduction for their entire costs in 1974 distorted income. The Tax Court, relying on Keller, held that the program could deduct the full amount of the payments in 1974. The court found that the program entered into turnkey contracts, paid a premium to secure the turnkey obligations, and thereby locked in the drilling price and shifted the risks of drilling to the general contractor. Further, the court found that by signing and paying the turnkey obligation, the program got its bargained-for benefit in 1974, therefore the deduction of the payments in 1974 clearly reflected income. The Partnership will attempt to comply with the guidelines set forth in Keller with respect to prepaid intangible drilling and development costs. The Drilling and Operating Agreement will require the Partnership to prepay in 1996 intangible drilling and development costs for specified wells the drilling of which will be commenced in 1997. Although the Partnership is not required to prepay completion costs of a well prior to the time a decision has been made to complete the well, it is anticipated that all Partnership Wells will be required to be completed before an evaluation can be made as to their potential productivity. Prepayments should not result in a loss of current deductibility where there is a legitimate business purpose for the required prepayment, the contract is not merely a sham to control the timing of the deduction and there is an enforceable contract of economic substance. The Drilling and Operating Agreement will require the Partnership to prepay the intangible drilling and development costs of the wells in order to enable the Operator to commence site preparation for the wells, obtain suitable subcontractors at the then current prices and insure the availability of equipment and materials. Under the Drilling and Operating Agreement excess prepaid amounts, if any, will not be refundable to the Partnership but will be applied to intangible drilling and development costs to be incurred in drilling substitute wells. Under Keller, such a provision for substitute wells should not result in the prepayments being characterized as refundable deposits. The likelihood that prepayments will be challenged by the IRS on the grounds that there is no business purpose for the prepayment is increased in the event prepayments are not required with respect to 100% of the Working Interest. It is possible that less than 100% of the Working Interest will be acquired by the Partnership in one or more wells and prepayments may not be required of all holders of the Working Interest. However, in the view of Special Counsel, a legitimate business purpose for the required prepayments may exist under the guidelines set forth in Keller, even though prepayment is not required, or actually received, by the drilling contractor with respect to a portion of the Working Interest. In addition to the foregoing, a current deduction for prepaid intangible drilling and development costs is available only if the drilling of the wells is commenced within 90 days after the close of the taxable year. The Managing General Partner will attempt to cause prepaid Partnership Wells to be Spudded on or before March 31, 1997. However, the Spudding of any Partnership Well may be delayed due to circumstances beyond the control of the Partnership or the drilling contractor. Such circumstances include the unavailability of drilling rigs, weather conditions, inability to obtain drilling permits or access right to the drilling site, or title problems. Due to the foregoing factors no guaranty can be given that all prepaid Partnership Wells required by the Drilling and Operating Agreement to be Spudded on or before March 31, 1997, will actually be commenced by such date. In that event, deductions claimed in 1996 for prepaid intangible drilling and development costs would be disallowed and deferred to the 1997 taxable year. No assurance can be given that on audit the IRS would not disallow the current deductibility of a portion or all of any prepayments of intangible drilling and development costs under the Partnership's drilling contracts, thereby decreasing the amount of deductions allocable to the Participants for the current taxable year, or that such a challenge would not ultimately be sustained. In the event of disallowance, the deduction would be available in the year the work is actually performed. Depletion Allowance The Partnership intends to own an economic interest in all Partnership Wells that produce gas or oil. Proceeds from the sale of oil and gas production will constitute ordinary income. A certain portion of such income will not be taxable by virtue of the depletion allowance which permits the deduction from gross income for federal income tax purposes of either the percentage depletion allowance or the cost depletion allowance, whichever is greater. Accordingly, each Participant will be entitled to take into account on his own federal income tax return his share of allowable depletion as computed at the individual partner level, rather than the partnership level. Cost depletion for any year is determined by dividing the adjusted tax basis for the property by the total units of gas or oil expected to be recoverable therefrom and then multiplying the resultant quotient by the number of units actually sold during the year. Cost depletion cannot exceed the adjusted tax basis of the property to which it relates. Percentage depletion generally is available to taxpayers other than integrated oil companies. (See "- Intangible Drilling and Development Costs.") Percentage depletion generally is based on the Participant's share of gross income from the oil and gas producing property. Generally, percentage depletion is available with respect to 6 million cubic feet of average daily production of natural gas or 1,000 barrels of average daily production of domestic crude oil. Taxpayers who have both oil and gas production may allocate the production limitation between such production. The rate of percentage depletion is 15%. However, percentage depletion for marginal production increases 1% (up to a maximum increase of 10%) for each whole dollar that the domestic wellhead price of crude oil for the immediately preceding year is less than $20 per barrel (without adjustment for inflation). The term "marginal production" includes oil and gas produced from a domestic stripper well property, which is defined as any property which produces a daily average of 15 or less equivalent barrels of oil (90 MCF of natural gas) per producing well on the property in the calendar year. The rate of percentage depletion for marginal production presently is 20%. (See the model decline curve included in the United Energy Development Consultants, Inc. Geological Report in "Proposed Activities - - Information Regarding Currently Proposed Prospects" in the Prospectus.) Percentage depletion may not exceed 100% of the taxable income from each oil and gas property before the deduction for depletion and is limited to 65% of the taxpayer's taxable income for a year computed without regard to percentage depletion, net operating loss carrybacks and capital loss carrybacks. On disposition of an oil and gas property there is recapture of the lesser of: (i) the amounts that were deducted under .263 of the Code as intangible drilling and development costs rather than added to basis, plus depletion deductions that reduced the basis of the property; or (ii) the amount realized in the case of a sale, exchange or involuntary conversion or fair market value in all other cases, minus the property's adjusted basis. Furthermore, the amount of recapturable intangible drilling and development costs is not reduced by the amount by which depletion would have been increased if the expensed intangible drilling and development costs had been capitalized. Availability of the percentage depletion allowance and limitations thereon must be computed separately for each Participant and not by the Partnership, or for Participants as a whole. Potential Participants are urged to consult their own tax advisors with respect to the availability of the percentage depletion allowance to them. Depreciation - Accelerated Cost Recovery System Most equipment placed in service by the Partnership will be classified as "7-year" property and the cost of such property generally will be recovered over a seven year cost recovery period. I.R.C. .168(c). The depreciation method for property in the 7-year class is 200% declining balance, with a switch to straight-line to maximize the deduction. All property assigned to the 7-year class is treated as placed in service (or disposed of) in the middle of the year and in the case of a short tax year the ACRS deduction is prorated on a 12-month basis. The half-year convention effectively adds another year onto the cost-recovery period. No distinction is made between new and used property and salvage value is disregarded. Component depreciation is prohibited and an alternative depreciation system is used to compute the depreciation preference subject to the alternative minimum tax (using the 150% declining balance method, switching to straight-line, for most personal property). (See "- Minimum Tax - Tax Preferences," below.) All gain on a disposition of tangible personal property is treated as ordinary income to the extent of ACRS deductions claimed by the taxpayer and deductions allowed under .179 (expensing) are treated as depreciation deductions for recapture purposes. As under prior law (unless otherwise provided by regulations), the full amount of proceeds realized on a disposition of property from a mass asset account is treated as ordinary income (with no reduction for basis), however, no reduction is made in the depreciable basis remaining in the account. Cost recovery deductions allocable to the Participants in a taxable year may be reduced under certain circumstances to the extent foreign persons or tax-exempt entities subscribe to the Partnership. Section 179 provides an election to expense a portion of the cost of certain tangible personal property in the year such property is placed in service. The amount allowable as a deduction at the partnership level for each taxable year is $17,500. However, the deductible amount is reduced dollar-for-dollar by the cost of qualifying property in excess of $200,000 and the amount expensed cannot exceed the taxable income derived from the active conduct by the taxpayer of the trade or business in which the property is used. These limitations are applied at both the partnership and the partner level. I.R.C. .179(d)(8). Any excess expensed amount is carried forward. If this special election to expense is made, the basis of the property used to compute cost recovery deductions is reduced by the amount expensed and is subject to recapture if the property is not used predominately in a trade or business at any time. I.R.C. .179. Leasehold Costs and Abandonment The costs of acquiring oil and gas Lease interests, together with the related cost depletion deduction and any abandonment loss, are allocated under the Partnership Agreement 100% to Atlas, which will contribute the Leases to the Partnership as a part of its Capital Contribution. Tax Basis of Participants' Interests The adjusted basis for federal income tax purposes of a Participant's interest in the Partnership will be adjusted (but not below zero) for any gain or loss to the Participant from a disposition by the Partnership of an oil or gas property, and will be increased by: (i) his cash subscription payment and any additional Capital Contributions paid in cash to the Partnership, (ii) his share of any nonrecourse debt of the Partnership, (iii) his share of any recourse debt of the Partnership, (iv) his share of the taxable income of the Partnership; and (v) his share of tax exempt income of the Partnership. (See "Partnership Borrowings," below.) The adjusted basis of a Participant's interest in the Partnership will be reduced by: (i) his share of Partnership losses; (ii) his share of Partnership expenditures that are not deductible in computing its taxable income and are not properly chargeable to capital account; (iii) his deduction for depletion for any partnership oil and gas property (but not below zero); and (iv) cash distributions from the Partnership to him. The reduction in a Participant's share of recourse or nonrecourse liabilities is considered a cash distribution. Should cash distributions exceed the tax basis of the Participant's interest in the Partnership, taxable gain would result to the extent of the excess. (See "- Distributions From a Partnership," below.) A Participant's distributive share of Partnership loss is allowable only to the extent of the adjusted basis of such Participant's interest in the Partnership at the end of the Partnership's taxable year. Participants will not be personally liable on any Partnership loans; however, Investor General Partners will be liable for other obligations of the Partnership. (See "Risk Factors - Special Risks of the Partnership - Unlimited Liability of Investor General Partners" in the Prospectus.) Distributions From a Partnership Generally, a pro rata nonliquidating distribution from a partnership to its partners will result in gain being recognized by the partners only to the extent that any money distributed exceeds the adjusted basis of such partner's interest in the partnership immediately before the distribution. I.R.C. .731(a)(1). No loss is recognized by the partners on these types of distributions. I.R.C. .731(a)(2). No gain or loss is recognized by the Partnership on these types of distributions. I.R.C. .731(b). If property is distributed by the Partnership to the Managing General Partner and the Participants, certain basis adjustments may be made by the Partnership, the Managing General Partner and the Participants. [Partnership Agreement, .5.04(d).] I.R.C. ..732, 733, 734, and 754. Other distributions of cash, disproportionate distributions of property, and liquidating distributions may result in taxable gain or loss. (See "- Disposition of Partnership Interests" and "- Termination of a Partnership," below.) Sale of the Properties Under current law, a noncorporate taxpayer's ordinary income is taxed at a maximum rate of 39.6% but net capital gains of a noncorporate taxpayer are taxed at a maximum rate of 28%. The annual capital loss limitation for noncorporate taxpayers is the amount of capital gains plus the lesser of $3,000 ($1,500 for married persons filing separate returns) or the excess of capital losses over capital gains. Long-term losses (like short-term losses) offset ordinary income on a one-for-one basis. Section 1231 gain continues to be computed separately from long-term gain. Gains and losses from sales of oil and gas properties held for more than twelve months and not held primarily for sale to customers would be, except to the extent of depreciation recapture on equipment and recapture of any intangible drilling and development costs, depletion deductions and certain .1231 losses, gains and losses described in .1231 of the Code (in general, from sales or exchanges of real or depreciable property used in a trade or business). A Participant's net .1231 gain will be treated as a long-term capital gain while a net loss will be an ordinary deduction. However, ordinary income will result to the extent the net .1231 gain for any taxable year does not exceed the excess of the aggregate amount of the net .1231 losses for the five most recent preceding taxable years over the portion of such losses taken into account in determining the portion of net .1231 gain to be treated as ordinary income for such preceding taxable years. I.R.C. .1231(c). Other gains and losses on sales of oil and gas properties will generally result in ordinary gains or losses. Intangible drilling and development costs that are incurred in connection with an oil and gas property may be recaptured as ordinary income when the property is disposed of by the Partnership. Generally, the amount recaptured is the lesser of: (1) the aggregate amount of expenditures which have been deducted as intangible drilling and development costs with respect to the property and which (but for being deducted) would be reflected in the adjusted basis of the property; or (2) the excess of (i) the amount realized (in the case of a sale, exchange or involuntary conversion); or (ii) the fair market value of the interest (in the case of any other disposition) over the adjusted basis of the property. I.R.C. .1254(a). In addition, the deductions for depletion which reduced the adjusted basis of the property are subject to recapture as ordinary income. Disposition of Partnership Interests The sale or exchange of all or part of a Participant's interest in the Partnership held by him for more than twelve months will generally result in a recognition of long-term capital gain or loss except to the extent of ordinary income or loss, if any, from Partnership .751 assets (which consist of unrealized receivables or substantially appreciated inventory). I.R.C. .751. In the event the interest is held for twelve months or less, such gain or loss will generally be short-term gain or loss. A portion of any gain recognized by a Limited Partner on the sale or other disposition of his interest in the Partnership will also be characterized as portfolio income under .469 to the extent the gain is itself attributable to portfolio income (e.g. interest on investment of working capital). The recapturable portions of depreciation, depletion and intangible drilling and development costs constitute unrealized receivables. A Participant's pro rata share of the Partnership's nonrecourse liabilities, if any, as of the date of the sale or exchange must be included in the amount realized. Therefore, the gain recognized may result in a tax liability greater than the cash proceeds, if any, from such disposition. A gift of an interest in the Partnership may result in federal and/or state income tax and gift tax liability of the donor. A Participant who sells or exchanges all or part of his interest in the Partnership is required by the Code to notify the Partnership within 30 days or by January 15 of the following year, if earlier. I.R.C. .6050K. After receiving such notice, the Partnership is required to make a return with the IRS stating the name and address of the transferor and the transferee and such other information as may be required by the IRS. The Partnership must also provide each person whose name is set forth in the return a written statement showing the information set forth on the return with respect to such person. If a partner sells or exchanges his entire interest in a partnership, the taxable year of the partnership will close with respect to such partner (but not the remaining partners) on the date of sale or exchange, with a proration of partnership items for the partnership's taxable year. If a partner sells less than his entire interest in a partnership, the partnership year will not terminate with respect to the selling partner, but his proportionate share of items of income, gain, loss, deduction and credit will be determined by taking into account his varying interests in the partnership during the taxable year. Deductions or credits generally may not be allocated to a partner acquiring an interest from a selling partner for a period prior to the purchaser's admission to the partnership. I.R.C. .706(d). Other dispositions of a Participant's interest, including a repurchase of the interest by Atlas, may or may not result in recognition of taxable gain. Interests in different partnerships do not qualify for tax-free like-kind exchanges. I.R.C. .1031(a)(2)(D). However, no gain should be recognized by an Investor General Partner whose interest in the Partnership is converted to a Limited Partner interest so long as there is no change in his share of the Partnership's liabilities or .751 assets as a result of the conversion. Rev. Rul. 84-52, 1984-1 C.B. 157. No disposition of an interest in the Partnership (including repurchase of the interest by Atlas) should be made by any Participant prior to consultation with his tax advisor. Minimum Tax - Tax Preferences For taxpayers other than integrated oil companies (see "- Intangible Drilling and Development Costs"), the 1992 National Energy Bill repealed (1) the preference for excess intangible drilling and development costs and (2) the excess percentage depletion preference for oil and gas. The repeal of the excess intangible drilling and development costs preference, however, may not result in more than a 40% reduction in the amount of the taxpayer's alternative minimum taxable income computed as if the excess intangible drilling and development costs preference had not been repealed. These rules are summarized below. The alternative minimum tax is intended to insure that no one with substantial income can avoid tax liability by using deductions and credits, including the deductions for intangible drilling and development costs and accelerated depreciation. The alternative minimum tax rate for individuals is 26% on alternative minimum taxable income up to $175,000 ($87,500 for married individuals filing separate returns) and 28% thereafter. Individual tax preferences may include, but are not limited to: accelerated depreciation, intangible drilling and development costs, incentive stock options and passive activity losses. The exemption amount is $45,000 for married couples filing jointly and surviving spouses, $33,750 for single filers, and $22,500 for married persons filing separately, estates and trusts. These exemption amounts are reduced by 25% of the alternative minimum taxable income in excess of (1) $150,000 for joint returns and surviving spouses; (2) $75,000 for estates, trusts and married persons filing separately, and (3) $112,500 for single taxpayers. Married individuals filing separately must increase alternative minimum taxable income by the lesser of: (i) 25% of the excess of alternative minimum taxable income over $165,000; or (ii) $22,500. Regular tax personal exemptions are not available for purposes of the alternative minimum tax. The only itemized deductions allowed for minimum tax purposes are those for casualty and theft losses, gambling losses to the extent of gambling gains, charitable deductions, medical deductions (to the extent in excess of 10% of adjusted gross income), interest expenses (restricted to qualified housing interest as defined in .56(e) of the Code and investment interest expense not exceeding net investment income), and certain estate taxes. The net operating loss for alternative minimum tax purposes generally is the same as for regular tax purposes, except: (i) current year tax preference items are added back to taxable income, and (ii) individuals may use only those itemized deductions (as modified under .172(d)) allowable in computing alternative minimum taxable income. Code sections suspending losses, such as ..465 and 704(d), are recomputed for minimum tax purposes and the amount of the deductions suspended or recaptured may differ for regular and minimum tax purposes. Under the prior rules, the amount of intangible drilling and development costs which is not deductible for alternative minimum tax purposes is the excess of the "excess intangible drilling costs" over 65% of net income from oil and gas properties. Net oil and gas income is determined for this purpose without subtracting excess intangible drilling and development costs. Excess intangible drilling and development costs is the regular intangible drilling and development costs deduction minus the amount that would have been deducted under 120-month straight-line amortization, or (at the taxpayer's election) under the cost depletion method. There is no preference for costs of nonproductive wells and the preference for intangible drilling and development costs for productive wells is computed separately for each property. Taxpayers can elect to amortize the year's intangible drilling and development costs for productive wells ratably over a 60 month period for all tax purposes and then such costs are not treated as an item of tax preference. The passive loss disallowance is determined after all preferences ad adjustments have been computed, so the suspended loss amount may be different for minimum and regular tax purposes. I.R.C. .58(b). The likelihood of a Participant incurring, or increasing, any minimum tax liability by virtue of an investment in the Partnership, and the impact of such liability on his personal tax situation, must be determined on an individual basis, and requires consultation by a prospective Participant with his personal tax advisor. Limitations on Deduction of Investment Interest Investment interest is deductible by a noncorporate taxpayer only to the extent of net investment income each year (with an indefinite carryforward of disallowed investment interest). I.R.C. .163. Interest subject to the limitation generally includes all interest (except consumer interest and qualified residence interest) on debt not incurred in a person's active trade or business, provided the activity is not a "passive activity" under the passive loss rule. Accordingly, an Investor General Partner's allocable share of any interest expense incurred by the Partnership, will be subject to the investment interest limitation. In addition, an Investor General Partner's income and losses (including intangible drilling and development costs) from the Partnership will be considered investment income and losses for purposes of this limitation. Losses allocable to an Investor General Partner will reduce his net investment income and may affect the deductibility of his investment interest expense, if any. Net investment income is the excess of investment income over investment expenses. Investment income includes: gross income from interest, dividends, rents, and royalties; portfolio income under the passive activity rules (which includes working capital investment income and possibly royalty income of the Partnership, if any, in the case of Limited Partners); and income from a trade or business in which the taxpayer does not materially participate if the activity is not a "passive activity" under the passive loss rule (which includes the Partnership, at least prior to the conversion of Investor General Partner Units to Limited Partner interests, in the case of Investor General Partners). Gain from the disposition of investment property generally is not included unless the taxpayer elects to reduce the amount of net capital gain that qualifies for the 28% ceiling. Investment expenses include deductions (other than interest) that are directly connected with the production of net investment income (including actual depreciation or depletion deductions allowable). No item of income or expense subject to the passive activity loss rules of .469 of the Code is treated as investment income or investment expense. In determining deductible investment expenses, investment expenses are subject to a rule limiting deductions for miscellaneous expenses to those exceeding 2% of adjusted gross income, however, expenses that are not investment expenses are intended to be disallowed before any investment expenses are disallowed. Allocations The Partnership Agreement allocates to each Partner his share of the income, gains, credits and deductions (including the deductions for intangible drilling and development costs and depreciation) generated by the Partnership. Allocations of certain items are made in ratios that are different than allocations of other items. (See "Participation in Costs and Revenues" in the Prospectus.) The Capital Accounts of the Partners are adjusted to reflect such allocations and the Capital Accounts, as adjusted, will be given effect in distributions made to the Partners upon liquidation of the Partnership or any Partner's interest in the Partnership. Generally, the basis of oil and gas properties owned by the Partnership for computation of cost depletion and gain or loss on disposition will be allocated and reallocated when necessary in the ratio in which the expenditure giving rise to the tax basis of each property was charged as of the end of the year. [Partnership Agreement, .5.03(b).] Special allocations (those made in a manner that is disproportionate to the respective interests of the partners in a partnership), among partners of any item of partnership income, gain, loss, deduction or credit will not be given effect unless the special allocation has "substantial economic effect." I.R.C. .704(b). An allocation generally will have economic effect if throughout the term of the partnership: (1) the partners' capital accounts are maintained in accordance with rules set forth in the regulations (generally, tax accounting principles); (2) liquidation proceeds are distributed in accordance with the partners' capital accounts; and (3) any partner with a deficit balance in his capital account following the liquidation of his interest in the partnership is required to restore the amount of the deficit for distribution to partners with positive capital account balances or to be paid to creditors. Generally, a Participant's Capital Account is increased by the amount of money he contributes to the Partnership and allocations to him of income and gain, and decreased by the value of property or cash distributed to him and allocations to him of loss and deductions. The regulations also require that there must be a reasonable possibility that the allocation will affect substantially the dollar amounts to be received by the partners from the partnership, independent of tax consequences. Although Participants are not required to restore deficit balances in their Capital Accounts beyond the amount of their agreed Capital Contributions, an allocation which is not attributable to nonrecourse debt will be considered to have economic effect to the extent it does not cause or increase a deficit balance in a Participant's Capital Account, if requirements (1) and (2) described above are met and the partnership agreement provides that a partner who unexpectedly incurs a deficit balance in his Capital Account because of certain adjustments, allocations, or distributions will be allocated income and gain sufficient to eliminate such deficit balance as quickly as possible. Treas. Reg. .1.704-l(b)(2)(ii)(d). (See .5.03(h) of the Partnership Agreement.) In the event of a sale or transfer of a Partnership Unit or the admission of an additional Participant, Partnership income, gain, loss, deductions and credits generally will be allocated among the Partners on a daily basis according to their varying interests in the Partnership during the taxable year. In addition, in the discretion of the Managing General Partner Partnership property may be revalued upon the admission of additional Participants, or if certain distributions are made to the Partners, to reflect unrealized income, gain, loss or deduction inherent in the Partnership's property for purposes of adjusting the Partners' Capital Accounts. It should be noted that a reduction in a Participant's interest in the Partnership upon the admission of additional Participants could be viewed by the IRS as a deemed sale or exchange by the Participant of his share of ".751 assets" under .751 of the Code, which provides that to the extent a partner receives partnership property, including money, in exchange for all or part of his interest in the partnership's unrealized receivables, which includes any intangible drilling and development costs, depletion and cost recovery deductions recapture, and inventory items (".751 assets"), the transaction will be considered a sale or exchange of the property between the partner and the partnership. In Rev. Rul. 84-102, 1984-2 C.B. 119, the IRS ruled that upon the admission of a new partner to an existing partnership having both unrealized receivables and liabilities outstanding, the existing partners were considered to have received distributions to which .751(b) applies and were taxable on the gain resulting from such deemed sale. It should also be noted that each Partner's share of Partnership items of income, gain, loss, deduction and credit must be taken into account whether or not there is any distributable cash. A Participant's share of Partnership revenues applied to the repayment of loans or the reserve for plugging wells will be included in his gross income in a manner analogous to an actual distribution of the income to him. Thus, a Participant may have taxable income from the Partnership for a particular year in excess of any cash distributions from the Partnership to him with respect to that year. To the extent the Partnership has cash available for distribution, however, it is Atlas' policy that Partnership distributions will not be less than the Participants' estimated income tax liability with respect to Partnership income. No assurance can be given that, on audit, the IRS will not take the position that a portion of the deductions allocable to the Participants is not allowable to them. If such a position is taken, there can be no assurance that any resulting deficiency will not ultimately be sustained. However, assuming the effect of the special allocations set forth in the Partnership Agreement is substantial in light of a Participant's tax attributes that are unrelated to the Partnership, in the opinion of Special Counsel it is more likely than not that such allocations will have "substantial economic effect" and will govern each Participant's distributive share of such items to the extent such allocations do not cause or increase deficit balances in the Participants' Capital Accounts. If any allocation under the Partnership Agreement is not recognized for federal income tax purposes, each Participant's distributive share of the items subject to such allocation generally will be determined in accordance with his interest in the Partnership, determined by considering relevant facts and circumstances. To the extent such deductions as allocated by the Partnership Agreement, exceed deductions which would be allowed pursuant to such a reallocation, Participants may incur a greater tax burden. "At Risk" Limitation For Losses Subject to the limitations on "passive losses" generated by the Partnership in the case of Limited Partners, each Participant may use his share of the Partnership's losses to offset income from other sources. (See "- Limitations on Passive Activities," above.) However, any taxpayer (other than a corporation which is neither an S corporation nor a corporation in which five or fewer individuals own more than 50% of the stock) who sustains a loss in connection with his oil and gas activities may deduct such loss only to the extent of the amount he has "at risk" in such activities at the end of a taxable year. In determining whether five or fewer individuals own 50% or more of the stock of a corporation, the attribution rules of .544 apply. The "at risk" limitation applies to each activity engaged in and not on an aggregate basis for all activities. The amount "at risk" is limited to the amount of money and the adjusted basis of other property the taxpayer has contributed to the activity, and any amount he has borrowed with respect thereto for which he is personally liable or with respect to which he has pledged property other than property used in the activity; limited, however, to the net fair market value of his interest in such pledged property. I.R.C. .465(b)(1) and (2). However, amounts borrowed will not be considered "at risk" if such amounts are borrowed from any person who has an interest (other than as a creditor) in such activity or from a related person to a person (other than the taxpayer) having such an interest. "Loss" is defined as being the excess of allowable deductions for a taxable year from an activity over the amount of income actually received or accrued by the taxpayer during such year from the activity. The amount the taxpayer has "at risk" may not include the amount of any loss that the taxpayer is protected against through nonrecourse loans, guarantees, stop loss agreements, or other similar arrangements. The amount of any such loss that is disallowed in any taxable year will be carried over to the first succeeding taxable year, to the extent a Participant is "at risk." Further, a taxpayer's "at risk" amount in subsequent taxable years with respect to the activity involved will be reduced by that portion of the loss which is allowable as a deduction. Participants' Agreed Subscriptions are funded by a payment of cash (usually "at risk"). Since income, gains, losses, and distributions of the Partnership affect the amount considered to be "at risk," the extent to which a Participant is "at risk" must be determined annually. Further, conversion from recourse to nonrecourse liability would reduce the amount "at risk" and could result in taxable income to the Participant. Previously allowed losses must be recaptured (included in gross income) when the "at risk" amount is reduced below zero. However, the amount recaptured is limited by the amount the taxpayer's "at risk" amount is reduced below zero, with special computations to reflect previously recaptured losses. The amount included in income under this recapture provision may be deducted in the first succeeding taxable year to the extent of any increase in the amount which the Participant has "at risk." Partnership Borrowings Under the Partnership Agreement, the Managing General Partner and its Affiliates may make loans to the Partnership. The use of Partnership revenues taxable to Participants to repay Partnership borrowing will create income tax liability for such Participants in excess of cash distributions to them, since repayments of principal are not deductible for federal income tax purposes, and deductions for payment of interest will be subject to the "investment interest" and "passive loss" limitations previously discussed. In addition, interest paid (or imputed at the applicable Federal rate) on such loans will not be deductible unless such loans are bona fide loans that will not be treated as Capital Contributions. In Revenue Ruling 72-135, 1972-1 C.B. 200, the IRS ruled that a nonrecourse loan from a general partner to a limited partner or to a partnership engaged in oil and gas exploration represented a capital contribution by the general partner rather than a loan. Whether a "loan" to the Partnership represents in substance, debt or equity is a question of fact to be determined from all the surrounding facts and circumstances. (See Kingbay v. Commissioner, 46 T.C. 147 (1966); Hambuechen v. Commissioner, 43 T.C. 90 (1964).) Partnership Organization and Syndication Fees Expenses connected with the issuance and sale of interests in a partnership (i.e., promotional expense, selling expense, commissions, professional fees and printing costs) are not deductible. Further, except for certain expenses, amounts incurred to organize a partnership may not be claimed as deductions under the partnership provisions of the Code. However, expenses incident to the creation of a partnership which are chargeable to capital account and which, if expended in connection with the creation of a partnership having an ascertainable life, would be amortized over that period of time, may be deducted and amortized over a period of not less than 60 months. Such amortizable organization expenses are charged 100% to the Managing General Partner as part of the Partnership's Organization and Offering Costs and any related deductions will be allocated to the Managing General Partner. Tax Elections The Code permits partnerships to elect to adjust the basis of partnership property on the transfer of an interest in a partnership by sale or exchange or on the death of a partner, and on the distribution of property by the partnership to a partner (the .754 election). The general effect of such an election is that transferees of the partnership interests are treated, for purposes of depreciation and gain, as though they had acquired a direct interest in the partnership assets and the partnership is treated for such purposes, upon certain distributions to partners, as though it had newly acquired an interest in the partnership assets and therefore acquired a new cost basis for such assets. Any such election, once made, may not be revoked without the consent of the IRS. The Partnership Agreement, .5.04(d), provides that the Partnership may make the .754 election. The Partnership may also make various elections for federal tax reporting purposes which could result in various items of income, gain, loss, deduction and credit being treated differently for tax purposes than for accounting purposes. Code .195 permits taxpayers to elect to capitalize and amortize "start-up expenditures" over a 60-month period. Such items include amounts: (1) paid or incurred in connection with: (i) investigating the creation or acquisition of an active trade or business, (ii) creating an active trade or business, or (iii) any activity engaged in for profit and for the production of income before the day on which the active trade or business begins, in anticipation of such activity becoming an active trade or business; and (2) which would be allowed as a deduction if paid or incurred in connection with the expansion of an existing business. Start-up expenditures do not include amounts paid or incurred in connection with the sale of partnership interests. If it is ultimately determined that any of the Partnership's expenses constituted start-up expenditures and not deductible expenses under .162, the Partnership's deductions would be reduced. Disallowance of Deductions Under Section 183 of the Code Under .183 of the Code, a Participant's ability to deduct his share of the Partnership's losses on his federal income tax return could be lost if the Partnership lacks the appropriate profit motive as determined from an examination of all facts and circumstances at the time. Section 183 creates a presumption that an activity is engaged in for profit, if, in any three of five consecutive taxable years, the gross income derived from such activity exceeds the deductions attributable to such activity. Thus, if the Partnership fails to show a profit in at least three out of five consecutive years, this presumption will not be available. In that instance, the possibility that the IRS could successfully challenge the deductions claimed by a Participant would be substantially increased. The fact that the possibility of ultimately obtaining profits is uncertain, standing alone, does not appear to be sufficient grounds for the denial of losses under .183. (See Treas. Reg. .1.183-2(c), Example (5).) Based on Atlas' representation that the Partnership will be conducted as described in the Prospectus, in the opinion of Special Counsel it is more likely than not that the Partnership will possess the requisite profit motive. Termination of a Partnership Pursuant to .708(b) of the Code, a partnership will be considered as terminated for federal income tax purposes if within a twelve month period there is a sale or exchange of 50% or more of the total interest in partnership capital and profits. The closing of the partnership year may result in more than twelve months' income or loss of the partnership being allocated to certain partners for the year of termination (i.e., in the case of partners using fiscal years other than the calendar year). Under .731 of the Code, a partner will realize taxable gain on a termination of the partnership to the extent that money regarded as distributed to him exceeds the adjusted basis of his partnership interest. The conversion of Investor General Partner Units to Limited Partner interests will not result in a termination of the Partnership under .708 of the Code. Rev. Rul. 84-52, 1984-1 C.B. 157. Lack of Registration as a Tax Shelter Section 6111 of the Code generally requires an organizer of a "tax shelter" to register the tax shelter with the Secretary of the Treasury, and to obtain an identification number which must be included on the tax returns of investors in such a tax shelter. For purposes of these provisions, a "tax shelter" is generally defined to include investments with respect to which any person could reasonably infer that the ratio that (1) the aggregate amount of the potentially allowable deductions and 350% of the potentially allowable credits with respect to the investment during the first five years of the investment bears to (2) the amount of money and the adjusted basis of property contributed to the investment exceeds 2 to 1. Temporary Regulations promulgated by the IRS provide that the aggregate amount of gross deductions must be considered and determined without reduction for gross income derived, or to be derived, from the investment. Atlas does not believe that the Partnership will have a tax shelter ratio greater than 2 to 1. Also, because the purpose of the Partnership is to locate, produce and market natural gas on an economic basis, Atlas does not believe that the Partnership will be a "potentially abusive tax shelter." Accordingly, Atlas does not intend to cause the Partnership to register with the IRS as a tax shelter. If it is subsequently determined that the Partnership was required to be registered with the IRS as a tax shelter, Atlas would be subject to certain penalties, including a penalty of 1% of the aggregate amount invested in the Units of the Partnership for failing to register and $100 for each failure to furnish a Participant a tax shelter registration number, and each Participant would be liable for a $250 penalty for failure to include the tax shelter registration number on his tax return, unless such failure was due to reasonable cause. A Participant also would be liable for a penalty of $100 for failing to furnish the tax shelter registration number to any transferee of his interest in the Partnership. However, based on the representations of the Managing General Partner, Special Counsel has expressed the opinion that the Partnership, more likely than not, is not required to register with the IRS as a tax shelter. Issuance of a registration number does not indicate that an investment or the claimed tax benefits have been reviewed, examined, or approved by the IRS. Investor Lists Section 6112 of the Code requires that any person who organizes a tax shelter required to be registered with the IRS or who sells any interest in such a shelter must maintain a list identifying each person who was sold an interest in the shelter and setting forth other required information. For the reasons described above, Atlas does not believe the Partnership is subject to the requirements of .6112 If this determination is wrong, .6708 of the Code provides for a penalty of $50 for each person with respect to whom there is a failure to meet any requirements of .6112, unless the failure is due to reasonable cause. Tax Returns and Audits In General. The tax treatment of all partnership items is generally determined at the partnership, rather than the partner, level; and the partners are generally required to treat partnership items on their individual returns in a manner which is consistent with the treatment of such partnership items on the partnership return. I.R.C. ..6221 and 6222. Regulations define "partnership items" for this purpose as including distributive share items that must be allocated among the partners, such as partnership liabilities, data pertaining to the computation of the depletion allowance, and guaranteed payments. Treas. Reg. .301.6231(a)(3)-1. Generally, the IRS must conduct an administrative determination as to partnership items at the partnership level before conducting deficiency proceedings against a partner, and the partners must file a request for an administrative determination before filing suit for any credit or refund. The period for assessing tax against a Partner attributable to a partnership item may be extended as to all partners by agreement between the IRS and Atlas, which will serve as the Partnership's representative ("Tax Matters Partner") in all administrative and judicial proceedings conducted at the partnership level. The Tax Matters Partner generally may enter into a settlement on behalf of, and binding upon, partners owning less than a 1% profits interest in partnerships having more than 100 partners. By executing the Partnership Agreement, each Participant agrees that he will not form or exercise any right as a member of a notice group and will not file a statement notifying the IRS that the Tax Matters Partner does not have binding settlement authority. In the event of an audit of the return of the Partnership, the Tax Matters Partner, pursuant to advice of counsel, will take all actions necessary, in its discretion, to preserve the rights of the Participants. All expenses of such proceedings undertaken by the Tax Matters Partner, which might be substantial, will be paid for by the Partnership. The Tax Matters Partner is not obligated to contest adjustments made by the IRS. Tax Returns. The preparation and filing of each Participant's federal, state and local income tax returns are the responsibility of the Participant. The Partnership will provide each Participant with the tax information applicable to his investment in the Partnership necessary to prepare such returns; however, the treatment of the tax attributes of the Partnership may vary among Participants. The Managing General Partner, its Affiliates and Special Counsel assume no responsibility for the tax consequences of this transaction to a Participant, nor for the disallowance of any proposed deductions. EACH PARTICIPANT IS URGED TO SEEK QUALIFIED, PROFESSIONAL ASSISTANCE IN THE PREPARATION OF HIS FEDERAL, STATE AND LOCAL TAX RETURNS. Penalties and Interest In General. Interest (based on the applicable Federal short-term rate plus 3 percentage points) is charged on underpayments of tax and various civil and criminal penalties are included in the Code. Penalty for Negligence or Disregard of Rules or Regulations. If any portion of an underpayment of tax is attributable to negligence or disregard of rules or regulations, 20% of such portion is added to the tax. Negligence is strongly indicated if a partner fails to treat partnership items on his tax return in a manner that is consistent with the treatment of such items on the partnership's return or to notify the IRS of the inconsistency. The term "disregard" includes any careless, reckless or intentional disregard of rules or regulations. There is no penalty, however, if the position is adequately disclosed, or the position is taken with reasonable cause and in good faith, or the position has a realistic possibility of being sustained on its merits. Treas. Reg. .1.6662-3. Valuation Misstatement Penalty. There is an addition to tax of 20% of the amount of any underpayment of tax of $5,000 or more ($10,000 in the case of corporations other than S corporations or personal holding companies) which is attributable to a substantial valuation misstatement. There is a substantial valuation misstatement if the value or adjusted basis of any property claimed on a return is 200% or more of the correct amount; or if the price for any property or services (or for the use of property) claimed on a return is 200% or more (or 50% or less) of the correct price. If there is a gross valuation misstatement (400% or more of the correct value or adjusted basis or the undervaluation is 25% or less of the correct amount) the penalty is 40%. I.R.C. .6662(e) and (h). Substantial Understatement Penalty. There is also an addition to tax of 20% of any underpayment if the difference between the tax required to be shown on the return over the tax actually shown on the return, exceeds the greater of 10% of the tax required to be shown on the return, or $5,000 ($10,000 in the case of corporations other than S corporations or personal holding companies). I.R.C. .6662(d). The amount of any understatement generally will be reduced to the extent it is attributable to the tax treatment of an item supported by substantial authority, or adequately disclosed on the taxpayer's return. However, in the case of "tax shelters," the understatement may be reduced only if the tax treatment of an item attributable to a tax shelter was supported by substantial authority and the taxpayer reasonably believed that the tax treatment claimed was more likely than not the proper treatment. Disclosure of partnership items should be made on the Partnership's return; however, a taxpayer partner also may make adequate disclosure on his individual return with respect to pass-through items. Section 6662(d)(2)(C) provides that a "tax shelter" is any entity which has as its principal purpose the avoidance or evasion of federal income tax. Assuming the Partnership is conducted as set forth in the Prospectus, in the opinion of Special Counsel it is more likely than not that the Partnership will not be characterized as a tax shelter for purposes of the substantial understatement of income tax penalty. IRS Anti-Abuse Rule. Under Treas. Reg. .1.701-2, if a principal purpose of a partnership is to reduce substantially the partners' federal income tax liability in a manner that is inconsistent with the intent of the partnership rules of the Code, based on all the facts and circumstances, the IRS is authorized to remedy the abuse. For illustration purposes, the following factors may indicate that a partnership is being used in a prohibited manner: (i) the partners' aggregate federal income tax liability is substantially less than had the partners owned the partnership's assets and conducted its activities directly; (ii) the partners' aggregate federal income tax liability is substantially less than if purportedly separate transactions are treated as steps in a single transaction; (iii) one or more partners are needed to achieve the claimed tax results and have a nominal interest in the partnership or are substantially protected against risk; (iv) substantially all of the partners are related to each other; (v) income or gain are allocated to partners who are not expected to have any federal income tax liability; (vi) the benefits and burdens of ownership of property nominally contributed to the partnership are related in substantial part by the contributing party; and (vii) the benefits and burdens of ownership of partnership property are in substantial part shifted to the distributee partners before or after the property is actually distributed to the distributee partners. Based on the Managing General Partner's representation that the Partnership will be conducted as described in the Prospectus, in the opinion of Special Counsel it is more likely than not that the Partnership will not be subject to the anti-abuse rule set forth in Treas. Reg. .1.701-2. State and Local Taxes The Partnership will operate in states and localities which impose a tax on its assets or its income, or on each Participant. Deductions which are available to Participants for federal income tax purposes may not be available for state or local income tax purposes. A Participant's distributive share of the net income or net loss of the Partnership generally will be required to be included in determining his reportable income for state or local tax purposes in the jurisdiction in which he is a resident. To the extent that a non-resident Participant pays tax to a state by virtue of Partnership operations within that state, he may be entitled to a deduction or credit against tax owed to his state of residence with respect to the same income. To the extent that the Partnership operates in certain jurisdictions, state or local estate or inheritance taxes may be payable upon the death of a Participant in addition to taxes imposed by his own domicile. Under Pennsylvania law, the Partnership is required to withhold state income tax at the rate of 2.8% of Partnership income allocable to Participants who are not residents of Pennsylvania. This requirement does not obviate Pennsylvania tax return filing requirements for Participants who are not residents of Pennsylvania. In the event of overwithholding, a Pennsylvania income tax return must be filed by Participants who are not residents of Pennsylvania in order to obtain a refund. Prospective Participants should consult with their own tax advisors concerning the possible effect of various state and local taxes on their personal tax situations. Severance, Franchise, and Ad Valorem (Real Estate) Taxes The Partnership may incur various ad valorem or severance taxes imposed by state or local taxing authorities in the event any Partnership Wells are situated in areas of the Appalachian Basin other than Mercer County, Pennsylvania. Currently, there is no similar tax liability in Mercer County, Pennsylvania. Tax Consequences to Qualified Plans and IRAs It is anticipated that the Partnership's net income will be attributable entirely to ownership of Working Interests in the Leases and will constitute unrelated business taxable income upon which a tax may be imposed if received by certain tax-exempt organizations. Prospective Participants that are otherwise exempt from federal income tax pursuant to .501(a) of the Code generally will be required to take into account their share (whether distributed or not) of the gross income of the Partnership and their share of Partnership deductions and credits directly connected with such gross income in computing their unrelated business taxable income. Trusts otherwise exempt from tax will be subject to a tax on their unrelated business taxable income computed in generally the same manner as tax is computed with regard to trusts that are not tax-exempt as provided in .1(e) of the Code. I.R.C. .511(b). Other organizations otherwise exempt from tax will be subject to a tax on their unrelated business taxable income computed in generally the same manner as tax is computed with regard to corporations that are not tax-exempt as provided in .11 of the Code. I.R.C. .51l(a). Quarterly payments of estimated tax on unrelated business taxable income are required. I.R.C. .6154(h). However, an additional specific deduction of $1,000 will generally be allowed. I.R.C. .512(b)(12). There may be alternative minimum tax liability for tax preference items. I.R.C. .511(d). Any interest or royalty income of the Partnership generally will not constitute unrelated business taxable income unless a Participant's interest in the Partnership, or the Partnership's interest in a Prospect, is financed by "acquisition indebtedness" and certain additional tests are met, which is not anticipated. I.R.C. ..512(b)(1) and (2), 514. PROSPECTIVE PARTICIPANTS THAT ARE EXEMPT FROM FEDERAL INCOME TAX SHOULD CAREFULLY CONSIDER WHETHER AN INVESTMENT IN THE PARTNERSHIP IS APPROPRIATE AND SHOULD CONSULT WITH THEIR OWN TAX ADVISORS PRIOR TO THE INVESTMENT. (See "Terms of the Offering - Subscriptions by IRAs, Keogh Plans and Other Qualified Plans" in the Prospectus.) Social Security Benefits and Self-Employment Tax A Limited Partner's share of income or loss from the Partnership is excluded from the definition of "net earnings from self-employment." No increased benefits under the Social Security Act will be earned by Limited Partners and if any Limited Partners are currently receiving Social Security benefits, their shares of Partnership taxable income will not be taken into account in determining any reduction in benefits because of "excess earnings." An Investor General Partner's share of income or loss from the Partnership will constitute "net earnings from self-employment" for these purposes. I.R.C. .1402(a). For 1996 the ceiling for social security tax of 12.4% is $62,700 and there is no ceiling for medicare tax of 2.9%. Self-employed individuals can deduct one-half of their self-employment tax. Foreign Partners The Partnership will be required to withhold and pay to the IRS tax at the highest rate under the Code applicable to Partnership income allocable to foreign partners, even if no cash distributions are made to such partners. A purchaser of a foreign Partner's Units may be required to withhold a portion of the purchase price and the Managing General Partner may be required to withhold with respect to taxable distributions of real property to a foreign Partner. The withholding requirements described above do not obviate United States tax return filing requirements for foreign Partners. In the event of overwithholding, a foreign Partner must file a United States tax return to obtain a refund. Estate and Gift Taxation There is no federal tax on lifetime or testamentary transfers of property between spouses. The gift tax annual exclusion is $10,000 per donee. The maximum estate and gift tax rate is 55% (subject to a 5% surtax on amounts in excess of $10,000,000); and estates of $600,000 or less generally are not subject to federal estate tax. In the event of the death of a Participant, the fair market value of his interest as of the date of death (or as of the alternate valuation date) will be included in his estate for federal estate tax purposes. The decedent's heirs will, for federal income tax purposes, take as their basis for the interest the value as so determined for federal estate tax purposes. Changes in Law The Partnership and the Participants could be adversely affected by any further changes in tax laws that may result through future Congressional action, Tax Court or other judicial decisions, or interpretations by the IRS. It is impossible to predict what, if any, changes in the tax law may become law in the future or even if adopted, would apply to the Partnership. IT IS NOT POSSIBLE FOR US TO PREDICT THE EFFECT OF THE TAX LAWS ON INDIVIDUAL PARTICIPANTS. EACH PARTICIPANT IS URGED TO SEEK, AND SHOULD DEPEND UPON, THE ADVICE OF HIS OWN TAX ADVISORS WITH RESPECT TO HIS INVESTMENT IN THE PARTNERSHIP WITH SPECIFIC REFERENCE TO HIS OWN TAX SITUATION AND POTENTIAL CHANGES IN THE APPLICABLE LAW. We consent to the use of this opinion letter as an exhibit to the Registration Statement, and all amendments thereto, and to all references to this firm in the Prospectus. Very truly yours, /s/ Kunzman & Bollinger, Inc. KUNZMAN & BOLLINGER, INC. EX-99.3 10 - ----------------------------------------------------------------------- ESCROW AGREEMENT - ----------------------------------------------------------------------- ATLAS-ENERGY FOR THE NINETIES-PUBLIC #5 LTD. ESCROW AGREEMENT THIS AGREEMENT, made to be effective as of the ______ day of ___________________, 1996, by and between Atlas Resources, Inc., a Pennsylvania corporation (hereinafter referred to as "Atlas"), National City Bank of Pennsylvania, Pittsburgh, Pennsylvania, as escrow agent (hereinafter referred to as the "Escrow Agent"), and the Soliciting Dealers (hereinafter defined). WITNESSETH: WHEREAS, Atlas intends to offer publicly for sale to qualified investors (the "Investors") up to 800 limited partnership interests in a Pennsylvania limited partnership (the "Units"); and WHEREAS, each Investor will be required to pay his subscription in full upon subscribing ($10,000 per Unit, however, the Managing General Partner, in its discretion, may accept one-half Unit [$5,000] subscriptions), with larger subscriptions permitted in $1,000 increments, by check, draft or money order except that the broker-dealers and Atlas and its officers and directors may purchase Units net of the commissions and wholesaling fees set forth below (the "Subscription Proceeds"); and WHEREAS, Atlas intends to sell the Units on a "best efforts" all or none basis for 100 Units and on a best efforts basis for the remaining Units; and WHEREAS, Atlas will enter into a Soliciting Dealer Agreement with registered broker-dealers which are members in good standing of the National Association of Securities Dealers, Inc. (the "NASD") at a 7.5% sales commission, plus reimbursement of their bona fide accountable due diligence expenses of .5%, to participate in the offering of the Units (hereinafter referred to as the "Soliciting Dealers") and will utilize the services of wholesalers at a wholesaling fee of 2.5%; and WHEREAS, under the terms of the Soliciting Dealer Agreements the Subscription Proceeds are required to be held in escrow subject to the receipt and acceptance by Atlas of the minimum Subscription Proceeds of 100 Units, excluding any optional subscription by the Managing General Partner; and WHEREAS, no subscriptions to the Partnership will be accepted after receipt of the maximum Subscription Proceeds of $7,000,000 (which may be increased to $8,000,000 in Atlas' discretion) or December 31, 1996, whichever event occurs first (the "Offering Termination Date"); and WHEREAS, to facilitate compliance with the terms of the Soliciting Dealer Agreements, Atlas desires to have the Subscription Proceeds deposited with the Escrow Agent and the Escrow Agent desires to hold the Subscription Proceeds pursuant to the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the mutual covenants and conditions herein contained, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Appointment of Escrow Agent. Atlas hereby appoints Escrow Agent as the escrow agent to receive and to hold the Subscription Proceeds deposited with Escrow Agent by the Soliciting Dealers pursuant hereto and Escrow Agent hereby agrees to serve in such capacity during the term and based upon the provisions hereof. 2. Deposit of Subscription Proceeds. Pending receipt of the minimum Subscription Proceeds of 100 Units, Atlas agrees that all monies received from subscribers for the payment of the Units will be forwarded by the Soliciting Dealers to the Escrow Agent by noon of the second business day after Atlas received the subscription documents for purposes of a suitability determination, which documents were forwarded to Atlas by noon of the next business day following receipt of the monies by the Soliciting Dealer, for deposit in the Escrow Account. Payment for each subscription for Units shall be in the form of a check made payable to "National City Bank, Escrow Agent, Atlas Public #5 Ltd." The Escrow Agent shall deliver a receipt to Atlas for each deposit of Subscription Proceeds made pursuant hereto. 3. Investment of Subscription Proceeds. The Subscription Proceeds shall be deposited in an interest bearing account maintained by the Escrow Agent entitled "Armada Government Fund." Subscription Proceeds may be temporarily invested by the Escrow Agent only in income producing short-term, highly liquid investments secured by the United States government where there is appropriate safety of principal, such as U.S. Treasury Bills. The interest earned shall be added to the Subscription Proceeds and disbursed in accordance with the provisions of paragraph 4 or 5, as the case may be. 4. Distribution of Subscription Proceeds. If the Escrow Agent (a) receives written notice from an authorized officer of Atlas that at least the minimum aggregate subscriptions of 100 Units have been received and accepted by Atlas, and (b) determines that Subscription Proceeds for at least 100 Units as determined by Atlas have cleared the banking system and are good, the Escrow Agent shall promptly release and distribute to Atlas such escrowed Subscription Proceeds which have cleared the banking system and are good plus any interest paid and investment income earned on such Subscription Proceeds while held by the Escrow Agent in an escrow account. Any remaining Subscription Proceeds, plus any interest paid and investment income earned on such Subscription Proceeds while held by the Escrow Agent in an escrow account shall be promptly released and distributed to Atlas by the Escrow Agent as such Subscription Proceeds clear the banking system and become good. 5. Distributions to Subscribers. (a) In the event that the Partnership will not be funded as contemplated because less than the minimum aggregate subscriptions of 100 Units have been received and accepted by Atlas by twelve p.m. (noon), local time, on December 31, 1996, or for any other reason, Atlas shall so notify the Escrow Agent, whereupon the Escrow Agent promptly shall distribute to each Investor a refund check made payable to such Investor in an amount equal to the Subscription Proceeds of such Investor, plus any interest paid or investment income earned thereon while held by the Escrow Agent in an escrow account as calculated by Atlas. (b) In the event that a subscription for Units submitted by an Investor is rejected by Atlas for any reason after the Subscription Proceeds relating to such subscription have been deposited with the Escrow Agent, then Atlas promptly shall notify the Escrow Agent of such rejection, and the Escrow Agent shall promptly distribute to such Investor a refund check made payable to such Investor in an amount equal to the Subscription Proceeds of such Investor, plus any interest paid or investment income earned thereon while held by the Escrow Agent in an escrow account as calculated by Atlas. 6. Compensation and Expenses of Escrow Agent. Atlas shall be solely responsible for and shall pay the compensation of the Escrow Agent for its services hereunder, as provided in Appendix 1 to this Agreement and made a part hereof, and the charges, expenses (including any reasonable attorneys' fees), and other out-of-pocket expenses incurred by the Escrow Agent in connection with the administration of the provisions of this Agreement. The Escrow Agent shall have no lien on the Subscription Proceeds deposited in an escrow account unless and until the Partnership is funded with cleared Subscription Proceeds of at least 100 Units and the Escrow Agent receives the notice described in Paragraph 4 of this Agreement, at which time the Escrow Agent shall have, and is hereby granted, a prior lien upon any property, cash, or assets held hereunder, with respect to its unpaid compensation and nonreimbursed expenses, superior to the interests of any other persons or entities. 7. Duties of Escrow Agent. The Escrow Agent shall not be obligated to accept any notice, make any delivery, or take any other action under this Escrow Agreement unless the notice or request or demand for delivery or other action is in writing and given or made by the party given the right or charged with the obligation under this Escrow Agreement to give the notice or to make the request or demand. In no event shall the Escrow Agent be obligated to accept any notice, request, or demand from anyone other than Atlas. 8. Liability of Escrow Agent. The Escrow Agent shall not be liable for any damages, or have any obligations other than the duties prescribed herein in carrying out or executing the purposes and intent of this Escrow Agreement; provided, however, that nothing herein contained shall relieve the Escrow Agent from liability arising out of its own willful misconduct or gross negligence. Escrow Agent's duties and obligations under this Agreement shall be entirely administrative and not discretionary. Escrow Agent shall not be liable to any party hereto or to any third party as a result of any action or omission taken or made by Escrow Agent in good faith. The parties to this Agreement will indemnify Escrow Agent, hold Escrow Agent harmless, and reimburse Escrow Agent from, against and for, any and all liabilities, costs, fees and expenses (including reasonable attorney's fees) Escrow Agent may suffer or incur by reason of its execution and performance of this Agreement. In the event any legal questions arise concerning Escrow Agent's duties and obligations hereunder, Escrow Agent may consult with its counsel and rely without liability upon written opinions given to it by such counsel. The Escrow Agent shall be protected in acting upon any written notice, request, waiver, consent, authorization, or other paper or document which the Escrow Agent, in good faith, believes to be genuine and what it purports to be. In the event that there shall be any disagreement between any of the parties to this Agreement, or between them or either of any of them and any other person, resulting in adverse claims or demands being made in connection with this Agreement, or in the event that Escrow Agent, in good faith, shall be in doubt as to what action it should take hereunder, Escrow Agent may, at its option, refuse to comply with any claims or demands on it or refuse to take any other action hereunder, so long as such disagreement continues or such doubt exists; and in any such event, Escrow Agent shall not be or become liable in any way or to any person for its failure or refusal to act and Escrow Agent shall be entitled to continue to so refrain from acting until the dispute is resolved by the parties involved. National City Bank of Pennsylvania is acting solely as Escrow Agent and is not a party to, nor has it reviewed or approved any agreement or matter of background related to this Agreement, other than this Agreement itself, and has assumed, without investigation, the authority of the individuals executing this Agreement to be so authorized on behalf of the party or parties involved. 9. Resignation or Removal of Escrow Agent. The Escrow Agent may resign as such following the giving of thirty days' prior written notice to Atlas. Similarly, the Escrow Agent may be removed and replaced following the giving of thirty days' prior written notice to the Escrow Agent by Atlas. In either event, the duties of the Escrow Agent shall terminate thirty days after the date of such notice (or as of such earlier date as may be mutually agreeable); and the Escrow Agent shall then deliver the balance of the Subscription Proceeds (and any interest paid or investment income earned thereon while held by the Escrow Agent in an escrow account) in its possession to a successor escrow agent as shall be appointed by Atlas as evidenced by a written notice filed with the Escrow Agent. If Atlas shall have failed to appoint a successor prior to the expiration of thirty days following the date of the notice of resignation or removal, the then acting Escrow Agent may petition any court of competent jurisdiction for the appointment of a successor escrow agent or other appropriate relief; and any such resulting appointment shall be binding upon all of the parties hereto. Upon acknowledgement by any successor escrow agent of the receipt of the then remaining balance of the Subscription Proceeds (and any interest paid or investment income earned thereon while held by the Escrow Agent in an escrow account), the then acting Escrow Agent shall be fully released and relieved of all duties, responsibilities, and obligations under this Agreement. 10. Termination. This Agreement shall terminate and the Escrow Agent shall have no further obligation with respect hereto upon the occurrence of the distribution of all Subscription Proceeds (and any interest paid or investment income earned thereon while held by the Escrow Agent in an escrow account) as contemplated hereby or upon the written consent of all the parties hereto. 11. Notice. Any notices or instructions, or both, to be given hereunder shall be validly given if set forth in writing and mailed by certified mail, return receipt requested, as follows: If to the Escrow Agent: National City Bank of Pennsylvania Attention: Mr. Robert Mialki, Vice President Corporate Trust Department 300 Fourth Avenue Pittsburgh, Pennsylvania 15278-2331 Phone: (412) 644-8401 Facsimile: (412) 644-7971 If to Atlas: Atlas Resources, Inc. 311 Rouser Road P.O. Box 611 Moon Township, Pennsylvania 15108 Attention: J. R. O'Mara Phone: (412) 262-2830 Facsimile: (412) 262-2820 Any party may designate any other address to which notices and instructions shall be sent by notice duly given in accordance herewith. 12. Miscellaneous. (a) This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania. (b) This Agreement is binding upon and shall inure to the benefit of the undersigned and their respective heirs, successors and assigns. (c) This Agreement may be executed in multiple copies, each executed copy to serve as an original. IN WITNESS WHEREOF, the parties hereto have executed this Agreement to be effective as of the day and year first above written. NATIONAL CITY BANK OF PENNSYLVANIA ATTEST: As Escrow Agent By: Mr. Robert Mialki By: /s/ Mr. Robert Mialki (Authorized Officer) (Authorized Officer) ATLAS RESOURCES, INC. ATTEST: A Pennsylvania corporation By: /s/J.R. O'Mara, J.R. O'Mara, President APPENDIX I TO ESCROW AGREEMENT Compensation for Services of Escrow Agent Escrow Agent annual fee per year or any part thereof $3,000.00 APPENDIX II TO ESCROW AGREEMENT Soliciting Dealer Execution Page The undersigned Soliciting Dealer hereby executes this Soliciting Dealer Execution Page for the purpose of becoming a party to the Escrow Agreement for Atlas-Energy for the Nineties-Public #5 Ltd. entered into by and among Atlas Resources, Inc., National City Bank of Pennsylvania, Pittsburgh, Pennsylvania ("Escrow Agent") and the remaining Soliciting Dealers, and agrees to all of the terms and conditions of said Escrow Agreement. SOLICITING DEALER a ---------corporation By:--------------------- (Print Name, Title and Address) - ------------------------------, 1996 ATTEST: - ------------------------------- (SEAL) Secretary EX-23.1 11 - ----------------------------------------------------------------------- CONSENT OF MCLAUGHLIN & COURSON - ----------------------------------------------------------------------- CONSENT OF INDEPENDENT AUDITOR ATLAS-ENERGY FOR THE NINETIES-PUBLIC #5 LTD. The firm, as Independent Certified Public Accountants, hereby consents to the use of the audit report dated August 6, 1996, on the balance sheet of Atlas-Energy for the Nineties-Public #5 Ltd.,as of July 26, 1996, the audit report dated October 24, 1995, on the consolidated statements of financial position for the years ending July 31, 1995 and 1994, of AEG Holdings, Inc. and subsidiaries and the related consolidated statements of income and cash flows for the years then ended; and the audit report dated October 24, 1995, on the audited balance sheets as of July 31, 1995 and 1994 of Atlas Resources, Inc. in the Registration Statement, and any supplements thereto, including post-effective amendments, for Atlas-Energy for the Nineties-Public #5 Ltd. In addition, the firm hereby consents to all references to it as having prepared such reports and to the reference to the firm under the caption "Experts". McLaughlin & Courson Certified Public Accountants /s/ McLaughlin & Courson September 20, 1996 Pittsburgh, Pennsylvania EX-23.2 12 - ----------------------------------------------------------------------- CONSENT OF UNITED ENERGY DEVELOPMENT CONSULTANTS, INC. - ----------------------------------------------------------------------- Exhibit 24(b) CONSENT OF UNITED ENERGY DEVELOPMENT CONSULTANTS, INC. INDEPENDENT PETROLEUM ENGINEERING & GEOLOGICAL CONSULTING FIRM UEDC, as an independent petroleum engineering and geological consulting firm, hereby consents to the use of it's Geologic Evaluation, dated July 31, 1996, in the Pre-Effective Amendments, for Atlas-Energy for the Nineties- Public #5, Ltd., and to all references to UEDC as having prepared such report and as an expert concerning such report. UEDC, Inc. /s/ Isaias Ortiz Isaias Ortiz September 20, 1996 President Ambridge, PA EX-24 13 - ---------------------------------------------------------------------- POWER OF ATTORNEY - ---------------------------------------------------------------------- Exhibit 25 ATLAS-ENERGY FOR THE NINETIES-PUBLIC #5 LTD. POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned officers and/or directors of Atlas Resources, Inc., a Pennsylvania corporation which is about to file with the Securities and Exchange Commission, under the provisions of the Securities Act of 1933, as amended, a Registration Statement on Form SB-2 relating to certain securities of Atlas-Energy for the Nineties-Public #5 Ltd., constitutes and appoints James R. O'Mara and Bruce M. Wolf, his/her true and lawful attorney-in- fact, with full power of substitution and resubstitution and with full power to act without another, for him/her and in his/her name, place and stead, in any and all capacities, to sign such Registration Statement, and any and all amendments, including post-effective amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission and all states and other jurisdictions wherein such Registration Statement and amendments thereto may be filed for securities compliance measures, granting unto said attorneys-in-fact and agents, and each of them full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he/she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or his/her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Dated: July 29, 1996 /s/ Charles T. Koval Charles T. Koval, Co-Chairman of the Board and a Director Dated: July 31, 1996 /s/ Joseph R. Sadowski Joseph R. Sadowski, Co-Chairman of the Board and a Director Dated: July 29, 1996 /s/ James R. O'Mara James R. O'Mara, President, Chief Executive Officer and a Director Dated: July 31, 1996 /s/ Bruce M. Wolf Bruce M. Wolf, General Counsel, Secretary and a Director Dated: July 29, 1996 /s/ Donald P. Wagner Donald P. Wagner, Vice President of Operations Dated: July 29, 1996 /s/ James J. Kritzo James J. Kritzo, Vice President of the Land Department Dated: July 31, 1996 /s/ Tony C. Banks Tony C. Banks, Vice President of Finance and Chief Financial Officer Dated: July 29, 1996 /s/ Frank P. Carolas Frank P. Carolas, Vice President of Geology Dated: July 29, 1996 /s/ Barbara J. Krasnicki Barbara J. Krasnicki, Vice President of Administration EX-99 14 . THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED FINANCIAL STATEMENT OF ATLAS-ENERGY FOR THE NINETIES-PUBLIC #5 LTD. A PENNSYLVANIA PARTNERSHIP AS OF JULY 26, 1996 ITEM NUMBER ITEM DESCRIPTION AMOUNT 5-02(1) Cash and cash items $ 0 5-02(2) Marketable securities 0 5-02(3)(a)(1) Notes and accounts receivable-trade 100 5-02(4) Allowances for doubtful accounts 0 5-02(6) Inventory 0 5-02(9) Total current assets 0 5-02(13) Property, plant and equipment 0 5-02(14) Accumulated depreciation 0 5-02(18) Total assets 0 5-02(21) Total current liabilities 0 5-02(22) Bonds, mortgages and similar debt 0 5-02(28) Preferred stock-mandatory redemption 0 5-02(29) Preferred stock-no mandatory redemption 0 5-02(30) Common stock 0 5-02(31) Other stockholders' equity 100 5-02(32) Total liabilities and stockholders' equity 0 5-03(b)1(a) Net sales of tangible products 0 5-03(b)1 Total revenues 0 5-03(b) 2(a) Cost of tangible goods sold 0 5-02(b) 2 Total costs & expenses applicable to sales & revenues 0 5-03(b) 3 Other costs and expenses 0 5-03(b) 5 Provision for doubtful accounts and notes 0 5-03(b)(8) Interest and amortization of debt discount 0 5-03(b)(10) Income before taxes and other items 0 5-03(b)(11) Income tax expense 0 5-03(b)(14) Income/loss continuing operations 0 5-03(b)(15) Discontinued operations 0 5-03(b)(17) Extraordinary items 0 5-03(b)(18) Cumulative effect-changes in accounting principles 0 5-03(b)(19) Net income or loss 0 5-03(b)(20) Earnings per share-primary 0 5-03(b)(20) Earnings per share-fully diluted 0 - ------------------------------------------------------------------------ -----END PRIVACY-ENHANCED MESSAGE-----