Document:

exv10w21

 

EXHIBIT 10.21

 

LIMITED PARTNERSHIP AGREEMENT

OF

HALLWOOD ENERGY 4, L.P.

A DELAWARE LIMITED PARTNERSHIP

 

Dated as of August 23, 2005

THE INTERESTS IN THIS PARTNERSHIP HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE “ACT”), OR REGISTERED OR QUALIFIED UNDER THE SECURITIES LAWS OF ANY STATE, AND THE
HOLDER THEREOF CANNOT MAKE ANY SALE, PLEDGE, HYPOTHECATION, ASSIGNMENT OR OTHER TRANSFER OF ANY
SUCH INTERESTS EXCEPT PURSUANT TO AN OFFERING OF SUCH INTERESTS DULY REGISTERED UNDER THE ACT AND
REGISTERED OR QUALIFIED UNDER ANY APPLICABLE STATE SECURITIES LAWS, OR UNDER SUCH OTHER
CIRCUMSTANCES WHICH IN THE OPINION OF COUNSEL FOR THE PARTNERSHIP DOES NOT REQUIRE REGISTRATION
UNDER THE ACT OR ANY APPLICABLE STATE SECURITIES LAWS. ALSO SAID INTERESTS ARE “RESTRICTED
SECURITIES” WITHIN THE MEANING OF RULE 144 PROMULGATED BY THE SECURITIES AND EXCHANGE COMMISSION
UNDER THE ACT AND MAY BE SUBJECT TO THE LIMITATIONS AND REPORTING REQUIREMENTS OF SAID RULE UPON
RESALE OR OTHER DISPOSITION THEREOF.

 

 

TABLE OF CONTENTS

	 	 	 	 	 	 	 
	 	 	 	 	Page	 
	ARTICLE I FORMATION OF PARTNERSHIP	 	 	1	 
	     Section 1.1.
	 	Formation	 	 	1	 
	Section 1.2.
	 	Name	 	 	1	 
	Section 1.3.
	 	Business	 	 	1	 
	Section 1.4.
	 	Places of Business; Registered Agent; Names and Addresses of Partners	 	 	1	 
	Section 1.5.
	 	Term	 	 	2	 
	Section 1.6.
	 	Filings	 	 	2	 
	Section 1.7.
	 	Title to Partnership Property	 	 	2	 
	Section 1.8.
	 	Power of Attorney	 	 	2	 
	Section 1.9.
	 	Merger	 	 	3	 
	 
	 	 	 	 	 	 
	ARTICLE II DEFINITIONS AND REFERENCES	 	 	3	 
	Section 2.1.
	 	Defined Terms	 	 	3	 
	Section 2.2.
	 	References and Titles	 	 	7	 
	 
	 	 	 	 	 	 
	ARTICLE III CAPITALIZATION	 	 	7	 
	Section 3.1.
	 	Percentage Interests	 	 	7	 
	Section 3.2.
	 	Capital Contributions	 	 	8	 
	Section 3.3.
	 	Additional Assessments	 	 	8	 
	Section 3.4.
	 	General Partner’s Capital Account	 	 	8	 
	Section 3.5.
	 	Additional Limited Partners	 	 	8	 
	Section 3.6.
	 	No Preemptive Rights	 	 	9	 
	 
	 	 	 	 	 	 
	ARTICLE IV ALLOCATIONS AND DISTRIBUTIONS	 	 	9	 
	Section 4.1.
	 	Allocation Among Limited Partners	 	 	9	 
	Section 4.2.
	 	Distributions of Available Cash	 	 	9	 
	Section 4.3.
	 	Distributions of Net Proceeds from Terminating Capital Transaction	 	 	9	 
	Section 4.4.
	 	Restrictions on Distributions	 	 	10	 
	 
	 	 	 	 	 	 
	ARTICLE V MANAGEMENT	 	 	10	 
	Section 5.1.
	 	Power and Authority of General Partner	 	 	10	 
	Section 5.2.
	 	Certain Restrictions on General Partner’s Power and Authority	 	 	13	 
	Section 5.3.
	 	Duties and Services of the General Partner	 	 	13	 
	Section 5.4.
	 	Liability of Partners and Indemnification	 	 	14	 
	Section 5.5.
	 	Other Matters Concerning General Partner	 	 	15	 
	Section 5.6.
	 	Duties of the Partners, Directors and Officers	 	 	16	 
	Section 5.7.
	 	Contracts with Affiliates; Other Businesses	 	 	16	 
	Section 5.8.
	 	Resolution of Conflicts of Interest	 	 	17	 
	Section 5.9.
	 	Reimbursement of Expenses	 	 	17	 
	Section 5.10.
	 	Tax Elections	 	 	18	 
	Section 5.11.
	 	Tax Returns	 	 	18	 
	Section 5.12.
	 	Tax Matters Partner	 	 	18	 
	Section 5.13.
	 	Withdrawal by the General Partner	 	 	18	 

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	 	 	 	 	Page	 
	ARTICLE VI RIGHTS OF LIMITED PARTNERS	 	 	18	 
	Section 6.1.
	 	Rights of Limited Partners	 	 	18	 
	Section 6.2.
	 	Limitations on Limited Partners	 	 	19	 
	Section 6.3.
	 	Liability of Limited Partners	 	 	20	 
	Section 6.4.
	 	Withdrawal and Return of Capital Contributions	 	 	20	 
	Section 6.5.
	 	Voting Rights of Class B Limited Partners	 	 	20	 
	 
	 	 	 	 	 	 
	ARTICLE VII BOOKS, REPORTS, MEETINGS AND CONFIDENTIALITY	 	 	20	 
	Section 7.1.
	 	Capital Accounts, Books and Records	 	 	20	 
	Section 7.2.
	 	Bank Accounts	 	 	20	 
	Section 7.3.
	 	Meetings of Partners	 	 	20	 
	Section 7.4.
	 	Confidentiality	 	 	22	 
	 
	 	 	 	 	 	 
	ARTICLE VIII DISSOLUTION, LIQUIDATION AND TERMINATION	 	 	22	 
	Section 8.1.
	 	Dissolution	 	 	22	 
	Section 8.2.
	 	Liquidation and Termination	 	 	23	 
	 
	 	 	 	 	 	 
	ARTICLE IX ASSIGNMENTS OF INTERESTS	 	 	24	 
	Section 9.1.
	 	Assignment by Partners	 	 	24	 
	Section 9.2.
	 	Partnership Right of First Refusal	 	 	25	 
	Section 9.3.
	 	Drag Along Rights	 	 	26	 
	Section 9.4.
	 	Admission of Partners	 	 	26	 
	Section 9.5.
	 	Removal of the General Partner	 	 	27	 
	Section 9.6.
	 	Right of General Partner Upon Removal	 	 	27	 
	 
	 	 	 	 	 	 
	ARTICLE X MISCELLANEOUS	 	 	28	 
	Section 10.1.
	 	Notices	 	 	28	 
	Section 10.2.
	 	Amendments	 	 	29	 
	Section 10.3.
	 	Partition	 	 	30	 
	Section 10.4.
	 	Entire Agreement	 	 	30	 
	Section 10.5.
	 	Severability	 	 	30	 
	Section 10.6.
	 	No Waiver	 	 	30	 
	Section 10.7.
	 	Applicable Law	 	 	30	 
	Section 10.8.
	 	Successors and Assigns	 	 	30	 
	Section 10.9.
	 	Counterparts	 	 	31	 
	Section 10.10.
	 	Execution in Writing	 	 	31	 
	Section 10.11.
	 	Expenses	 	 	31	 
	Section 10.12.
	 	Creditors Not Benefited	 	 	31	 
	Section 10.13.
	 	Further Action and Additional Documents	 	 	31	 
	 
	 	 	 	 	 	 
	EXHIBIT A – NAMES, ADDRESSES AND CAPITAL CONTRIBUTIONS OF THE PARTNERS	 	 	 	 
	 
	 	 	 	 	 	 
	EXHIBIT B – ALLOCATIONS AND TAX PROCEDURES	 	 	 	 

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LIMITED PARTNERSHIP AGREEMENT

OF

HALLWOOD ENERGY 4, L.P.

     THIS LIMITED PARTNERSHIP AGREEMENT (the “Agreement”) of Hallwood Energy 4, L.P. (the
“Partnership”), dated as of August 23, 2005, is made by and among HEC 4 Management, LLC, a Delaware
limited liability company, as the general partner (the “General Partner”), and The Hallwood Group
Incorporated, a Delaware corporation, as Limited Partner, together with any other Persons who
hereafter become Limited Partners in the Partnership as provided herein.

ARTICLE I

FORMATION OF PARTNERSHIP

     Section 1.1. Formation. Subject to the provisions of this Agreement, the parties hereby form
a limited partnership pursuant to the Act.

     Section 1.2. Name. The name of the Partnership shall be Hallwood Energy 4, L.P. Subject to
all applicable laws, the business of the Partnership shall be conducted in the name of the
Partnership unless under the law of some jurisdiction in which the Partnership does business, such
business must be conducted under another name, or unless the General Partner determines that it is
advisable to conduct Partnership business under another name. In such a case, the business of the
Partnership in such jurisdiction or in connection with such determination may be conducted under
such other name or names as the General Partner shall determine to be necessary. The General
Partner shall cause to be filed on behalf of the Partnership such partnership or assumed or
fictitious name certificates or similar instruments as may from time to time be required by law.

     Section 1.3. Business. The business of the Partnership shall be (a) to explore for, develop,
produce, store, treat, process, gather, transport, purchase or market oil, gas and related
hydrocarbons; (b) to acquire properties which may be used in oil and gas activities, including but
not limited to (i) leasehold interests, mineral interests and royalty interests, (ii) plants,
pipelines, wells, facilities, equipment and other assets relating to such activities or properties
and (iii) contracts, easements, servitudes, permits, licenses and other rights relating to the
foregoing; (c) to farmout, sell, abandon and otherwise dispose of Partnership assets; (d) to
effectuate commodity hedging transactions in order to minimize the risk associated with the
fluctuation of prices to be received by the Partnership from the sale of oil, gas and related
hydrocarbons and minerals from Partnership properties; (e) to participate in any of the foregoing
activities either directly or indirectly through another partnership, limited liability company,
joint venture, corporation or other agreement; and (f) to take all such other actions incidental or
ancillary to any of the foregoing as the General Partner may determine to be necessary or
desirable.

     Section 1.4. Places of Business; Registered Agent; Names and Addresses of Partners.

     (a) The address of the principal office and place of business of the Partnership shall
initially be 3710 Rawlins, Suite 1500, Dallas, Texas 75219. The General Partner, at any time

 

 

and from time to time, may change the location of the Partnership’s principal place of
business and may establish such additional place or places of business of the Partnership as the
General Partner shall determine to be necessary or desirable.

     (b) The registered office of the Partnership in the State of Delaware shall be 1209 Orange
Street, Wilmington, New Castle County, Delaware 19801, and the registered agent for service of
process on the Partnership at such address shall be The Corporation Trust Company. The General
Partner, at any time and from time to time, may change the Partnership’s registered office or
registered agent or both by complying with the applicable provisions of the Act, and may establish,
appoint and change additional registered offices and registered agents of the Partnership in such
other states as the General Partner shall determine to be necessary or advisable.

     (c) The General Partner is the sole general partner of the Partnership. The General Partner’s
address is set forth on Exhibit A.

     (d) The address of the initial Limited Partner is set forth on Exhibit A.

     Section 1.5. Term. The Partnership was formed and commenced upon filing of the certificate of
limited partnership of the Partnership with the Secretary of State of the State of Delaware on
August 23, 2005, and the Partnership shall continue until December 31, 2055 or until terminated in
accordance with Article VIII.

     Section 1.6. Filings. Upon the request of the General Partner, the Limited Partners shall
promptly execute and deliver all such certificates and other instruments conforming hereto as shall
be necessary for the General Partner to accomplish all filing, recording, publishing and other acts
appropriate to comply with all requirements for the formation and operation of a limited
partnership under the laws of the State of Delaware and for the qualification and operation of a
limited partnership (or a partnership in which the Limited Partners have limited liability) in all
other jurisdictions where the Partnership shall propose to conduct business. Prior to conducting
business in any jurisdiction, the General Partner shall use its reasonable good faith efforts to
cause the Partnership to comply with all requirements for the qualification of the Partnership to
conduct business as a limited partnership (or a partnership in which the Limited Partners have
limited liability) in such jurisdiction.

     Section 1.7. Title to Partnership Property. All property initially contributed to the
Partnership or hereafter acquired by the Partnership, whether real or personal, tangible or
intangible, shall be deemed to be owned by the Partnership as an entity, and no Partner,
individually, shall have any ownership of such property. The Partnership may hold its property in
its own name or in the name of a nominee which may be the General Partner or any of its Affiliates
or any trustee or agent designated by it.

     Section 1.8. Power of Attorney.

     (a) Authority to Execute Documents. Each Limited Partner hereby constitutes and
appoints the General Partner (and its successors and assigns) and its duly authorized partners,
officers, members, managers, agents and representatives, each with power of substitution, as its
agent and attorney in fact with full power and authority in its name, place and stead to make,

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execute, swear to and acknowledge, amend, file, record, deliver and publish (i) all
certificates and other documents (including without limitation this Agreement and the Certificate
of Limited Partnership) and all amendments and restatements thereof that the General Partner deems
appropriate or necessary to qualify, or continue the qualification of, the Partnership as a limited
partnership (or a partnership in which the Limited Partners have limited liability) in the State of
Delaware and in all jurisdictions in which the Partnership may conduct business or own property;
(ii) all documents that the General Partner deems appropriate or necessary to reflect any amendment
of this Agreement in accordance with its terms; (iii) all conveyances and other documents that the
General Partner deems appropriate or necessary to reflect the dissolution and liquidation of the
Partnership pursuant to the terms of this Agreement; (iv) all certificates and other documents
(including this Agreement and the Certificate of Limited Partnership) and all amendments and
restatements thereof relating to the admission or substitution of any Partner; (v) any fictitious
or assumed name certificate required or permitted to be filed by or on behalf of the Partnership;
and (vi) any other document which may hereafter be required by law to be filed for or on behalf of
the Partnership.

     (b) Authority to Approve Certain Acts. Each Limited Partner further appoints the
General Partner (and its successors and assigns) and its duly authorized partners, officers,
members, managers, agents and representatives, in its name, place and stead to consent to the
admission of any substituted or additional Limited Partner or the admission of any substituted or
additional General Partner pursuant to Article IX.

     (c) Survival of Power. This limited Power of Attorney shall not be revoked and shall
survive the assignment or transfer by a Limited Partner of all or part of its interest in the
Partnership and is coupled with an interest and therefore shall survive the termination,
revocation, dissolution, Bankruptcy, death, disability, incompetency or incapacity of any Limited
Partner to the extent that it may legally contract for such survival and shall be binding upon each
Limited Partner’s heirs, legatees, successors and assigns. Any Person dealing with the
Partnership may conclusively presume and rely upon the fact that any document executed by such
agent and attorney in fact is authorized, regular and binding without further inquiry.

     Section 1.9. Merger. The Partnership may merge with or into another limited partnership or
other entity, or enter into an agreement to do so.

ARTICLE II

DEFINITIONS AND REFERENCES

     Section 2.1. Defined Terms. When used in this Agreement, the following capitalized terms
shall have the respective meanings set forth below:

     “Act” means the Delaware Revised Uniform Limited Partnership Act, 6 Del. Code §17-101, et.
seq., as amended, supplemented or restated from time to time, and any successor to such statute.

     “Affiliate” means (a) any Person directly or indirectly controlling, controlled by or under
common control with another Person, and (b) any officer, director, member or partner of, or any

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Person related by blood or marriage to, another Person or any Person described in subsection
(a) of this paragraph.

     “Available Cash” means at any time of determination: (a) all cash and cash equivalents of the
Partnership on hand at such time, less (b) the sum of all reserves in such amounts as the General
Partner determines are required to (i) provide for the proper conduct of the business of the
Partnership (including capital expenditures) and (ii) comply with applicable law and any covenants
under any loan agreements, security agreements or other agreements to which the Partnership is a
party.

     “Bankruptcy” of a Person means the occurrence of any of the events described in Section 18-304
of the Act with respect to such Person.

     “Business Day” means each day of the week except Saturdays, Sundays, and days on which banking
institutions are authorized by law to close in the States of Delaware or Texas.

     “Capital Account” means the capital account maintained for each Partner pursuant to
requirements of Exhibit B.

     “Capital Contributions” means for any Partner at any particular time the aggregate of the
dollar amounts of any cash and the fair market value of any property contributed pursuant to
Article III to the capital of the Partnership.

     “Class A Limited Partner” means any Person validly holding a Class A Partnership Interest.

     “Class B Limited Partner” means any Person validly holding a Class B Partnership Interest.

     “Class A Partnership Interest” means all rights and interests of a Class A Limited Partner
under this Agreement, including (i) the right of a Class A Limited Partner, expressed as its
Percentage Interest, to receive distributions of revenues, allocations of income and loss and
distributions of liquidation proceeds in accordance with the terms of this Agreement, and (ii) all
management rights, voting rights or rights to consent held by such Limited Partner under this
Agreement.

     “Class B Partnership Interest” means all rights and interests of a Class B Limited Partner
under this Agreement, including (i) the right of a Class B Limited Partner, expressed as its
Percentage Interest, to receive distributions of revenues, allocations of income and loss and
distributions of liquidation proceeds in accordance with the terms of this Agreement, and (ii) all
management rights, voting rights or rights to consent, if any, held by such Limited Partner under
this Agreement.

     “Code” means the Internal Revenue Code of 1986, as amended and in effect from time to time, as
interpreted by the applicable regulations thereunder. Any reference herein to a specific section
or sections of the Code shall be deemed to include a reference to any corresponding provision of
future law.

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     “Confidential Information” means all proprietary information of the Partnership or its
Affiliates, including business opportunities of the Partnership or its Affiliates, intellectual
property, and any other information heretofore or hereafter acquired, developed or used by the
Partnership or its Affiliates relating to its business, including without limitation any
confidential information contained in any lease files, well files and records, production records,
electric logs, core data, pressure data, production records, geological and geophysical reports and
related data, memoranda, notes, records, drawings, manuals, correspondence, financial and
accounting information, customer lists, statistical data and compilations, patents, copyrights,
trademarks, trade names, inventions, formulae, methods, processes, agreements, contracts, manuals
or any other documents relating to the business of the Partnership or its Affiliates, developed by,
or originated by any third Person and brought to the attention of, the Partnership or its
Affiliates; provided that Confidential Information shall not include any information which: (i) is
or becomes publicly available other than through a breach of this Agreement; (ii) already is
lawfully known by the recipient at the time of disclosure; (iii) becomes lawfully known to the
recipient from a third Person not under a confidentiality obligation to another party hereto; (iv)
was independently developed by the recipient; or (v) is required to be disclosed by applicable law,
regulation or order of any governmental authority having jurisdiction.

     “Fiscal Year” means the twelve-month period ending December 31 of each year; provided that the
initial Fiscal Year shall be the period beginning on the effective date of this Agreement and
ending December 31, 2005, and the last Fiscal Year shall be the period beginning on January 1 of
the calendar year in which the final liquidation and termination of the Partnership is completed
and ending on the date such final liquidation and termination is completed (to the extent any
computation or other provision hereof provides for an action to be taken on a Fiscal Year basis, an
appropriate proration or other adjustment shall be made in respect of the initial and final Fiscal
Years to reflect that such periods are less than full calendar year periods).

     “General Partner” means HEC 4 Management, LLC, a Delaware limited liability company, and any
Person who becomes a substituted general partner of the Partnership pursuant to the terms hereof.

     “Limited Partner” means a Person who is designated on Exhibit A as a Class A Limited
Partner or a Class B Limited Partner, and any other Person who is admitted as a limited partner of
any class of the Partnership pursuant to this Agreement.

     “Maximum Tax Liability” means an amount determined for each Partner for a Fiscal Year equal to
the portion of the Partnership’s net income allocated to the Partner for such Fiscal Year (as
determined by the General Partner) multiplied by the highest marginal federal and state income tax
rates for individuals in effect for such Fiscal Year for that amount of the net income considered
ordinary income and multiplied by the highest capital gains rate for individuals in effect for such
Fiscal Year for that amount of the net income considered “net capital gains” (as such term is
defined in Code Section 1222(11)). State taxes shall be calculated using the highest rates
applicable for each Fiscal Year in any state in which any Partner is subject to state income
taxation on its allocable share of Partnership income; federal taxes shall be calculated giving
effect to allowable credits for state income taxes paid. In determining cumulative Maximum Tax
Liability for purposes of Section 4.2(a), net losses allocated to the Partner for a Fiscal
Year that are allowed

5

 

to be carried forward under applicable tax laws shall be deducted from net income in
succeeding years. For purposes of this definition, (a) income, gain, loss and deduction shall be
determined, recognized and classified as provided in Sections B.2.1 through B.2.4 of Exhibit
B (without regard to the allocations under Section B.2.7 of Exhibit B), and (b) net
income of the Partnership means the amount by which income and gains exceed its losses and
deductions (as determined under Code Section 702(a), including items required to be separately
stated thereunder) including Simulated Depletion (as defined in Exhibit B) from and
Simulated Gain or Loss on a sale of the Partnership’s oil and gas property as allocated under
Sections B.2.1 through B.2.4 of Exhibit B.

     “Net Proceeds” means the proceeds received by the Partnership in connection with a Terminating
Capital Transaction after payment of all reasonable costs and expenses incurred by the Partnership
in connection with such transaction, including brokers’ commissions, loan fees, loan payments,
repayments of indebtedness and other closing costs. Net Proceeds from a Terminating Capital
Transaction shall also be increased by all other funds then held by the Partnership at the time of
consummation of such transaction.

     “Partners” means the General Partner and the Limited Partners.

     “Partnership” means Hallwood Energy 4, L.P., a Delaware limited partnership.

     “Percentage Interest” means each Partner’s percentage interest reflected on the books of the
Partnership as determined pursuant to this Agreement.

     “Person” means an individual, an estate, a corporation, a partnership, a limited liability
company, an association, a joint stock company, a trust or any other entity.

     “Required Percentage” of the Class A Limited Partners, as to any agreement, election, vote or
other action of the Class A Limited Partners, means those Class A Limited Partners whose combined
Percentage Interests exceed 50% of the Percentage Interests of all Class A Limited Partners.

     “Terminating Capital Transaction” means any sale or other disposition of all or substantially
all of the then remaining assets of the Partnership which is entered into in connection with, or
which will result in, the liquidation of the Partnership.

     “Total Capital Contributions” means the total Capital Contributions to the Partnership by all
Partners.

     “Total Distributions” means the total of all cash and the Fair Value of all property that have
been distributed to the Partners, including the distributions to be made at the time of any
determination under Section 4.2, but excluding Tax Distributions.

     “Transfer” shall have the meaning set forth in Section 9.1.

     “Unreturned Capital” means a Class A Limited Partner’s aggregate Capital Contribution reduced
by the sum of distributions received by such Class A Limited Partner under Sections 4.2(a) and
4.3(a).

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     Section 2.2. References and Titles. All references in this Agreement to articles, sections,
subsections, other subdivisions and exhibits refer to corresponding articles, sections,
subsections, other subdivisions of this Agreement unless expressly provided otherwise. Titles
appearing at the beginning of any of such subdivisions are for convenience only and shall not
constitute part of such subdivisions and shall be disregarded in construing the language contained
in such subdivisions. The words “this Agreement”, “herein”, “hereof”, “hereby”, “hereunder” and
words of similar import refer to this Agreement as a whole and not to any particular subdivision
unless expressly so limited. Pronouns in masculine, feminine and neuter genders shall be construed
to include any other gender, and words in the singular form shall be construed to include the
plural and vice versa, unless the context otherwise requires.

ARTICLE III

CAPITALIZATION

     Section 3.1. Percentage Interests.

     (a) The Percentage Interest of the General Partner in the Partnership shall be 0.01% and shall
not be reduced by the admission of any additional Limited Partners to the Partnership. The
Percentage Interests of all Limited Partners shall be in the aggregate 99.99%.

     (b) If the Partnership itself acquires any Class A Partnership Interest in the Partnership
pursuant to a purchase right under Article IX or otherwise, the Class A Partnership
Interests of the other Class A Limited Partners shall be increased, in proportion to their
Percentage Interests, by the full amount of the Class A Partnership Interest acquired, so that the
General Partner and the Limited Partners will thereafter have the same aggregate interests in the
Partnership specified in Section 3.1(a).

     (c) The General Partner may, without any consent or approval of the Limited Partners, from
time to time admit Persons as Class B Limited Partners of the Partnership and may issue Class B
Partnership Interests in the Partnership, as the General Partner determines to be appropriate,
provided that the Percentage Interest of all Class B Partnership Interests shall not exceed twenty
percent (20%) of the Percentage Interests of all Limited Partners that may be awarded to members of
the management of the General Partner as an incentive for the formation and operation of the
Partnership, plus an additional two percent (2%) of the Percentage Interests of all Limited
Partners that may be awarded for other purposes. If the Partnership itself acquires any Class B
Partnership Interest in the Partnership pursuant to a purchase right under Article IX or
otherwise, (i) the Class A Partnership Interests of the Class A Limited Partners shall be
increased, in proportion to their Percentage Interests, by the full amount of the Class B
Partnership Interest acquired, (ii) the Class B Partnership Interests of the other Class B Limited
Partners shall remain unchanged; and (iii) the percentages attributed to the Class A Limited
Partners and the Class B Limited Partners in Sections 4.2(b) and 4.3(b) shall be adjusted
as appropriate to reflect new aggregate percentage interests in the Partnership owned by the Class
A Limited Partners and the Class B Limited Partners following such acquisition.

     (d) The Percentage Interest of each Partner on the date of this Agreement is as set forth in
Exhibit A.

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     Section 3.2. Capital Contributions. The cash contribution, if applicable, made by each
Partner for its Partnership Interest as of the date of this Agreement is set forth in Exhibit
A.

     Section 3.3. Additional Assessments. No additional assessments may be made on any Limited
Partner for any purpose.

     Section 3.4. General Partner’s Capital Account. Notwithstanding anything herein to the
contrary, the General Partner shall maintain a minimum Capital Account balance equal to 0.01% of
the total positive Capital Account balances of all Partners, and whenever a Limited Partner makes a
Capital Contribution to the Partnership, the General Partner shall immediately contribute to the
Partnership capital equal to 0.01% of such Limited Partner’s Capital Contribution or a lesser
amount (including zero) that causes the General Partner’s Capital Account balance to equal 0.01% of
the total positive Capital Account balances of all Partners.

     Section 3.5. Additional Limited Partners.

     (a) In order to raise additional debt or equity capital, to acquire assets, to redeem or
retire debt, to redeem interests in the Partnership, to adopt employee benefit plans for employees
of the Partnership, to comply with any applicable laws or regulations or for any other Partnership
purpose, the General Partner may, without any consent or approval of the Limited Partners, from
time to time admit additional Persons as Limited Partners of the Partnership and may issue such
classes of interests in the Partnership, or series of such classes, or rights, warrants or options
to acquire interests of any class or series, as the General Partner determines to be appropriate,
with such designations, rights, preferences, privileges and obligations as are specified by the
General Partner in its sole discretion, including without limitation preferential distribution or
voting rights or rights relating to conversion or redemption of interests. Upon the issuance of
any class or series of interests in the Partnership that are not identical to interests whose
rights, preferences and obligations are already specifically described in this Agreement, the
General Partner (pursuant to its power of attorney from the Limited Partners), without the consent
of any Limited Partner or assignee, may amend any provision of this Agreement and, if required by
applicable law, execute, swear to, acknowledge, deliver, file and record an amended Certificate of
Limited Partnership and whatever other documents may be required in connection therewith, as may be
necessary or desirable to reflect the issuance of such class or series of interests and the
relative rights, preferences and obligations of such class or series of interests. In addition,
the General Partner is authorized to cause the issuance of any other type of security from time to
time to Partners or other Persons on terms and conditions established in the sole discretion of the
General Partner. Such securities may specifically include, without limitation, unsecured and
secured debt obligations of the Partnership, debt obligations of the Partnership convertible into
any class or series of Partnership interests that may be issued by the Partnership, rights, options
or warrants to purchase any such class or series of interests or any combination of any of the
foregoing. The General Partner is authorized to do all things it deems necessary or advisable in
connection with any such future issuance, including compliance with any statute, rule, regulation
or guideline of any federal, state or other governmental agency.

     (b) Notwithstanding the provisions of Section 3.5(a) or any other provision of this
Agreement to the contrary, the issuance of additional Class A Limited Partnership Interests and
Class B Limited Partnership Interests by the General Partner from time to time shall only reduce

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the Percentage Interests of the then existing Class A Limited Partners and shall not reduce
the Percentage Interests of any of the Class B Limited Partners.

     Section 3.6. No Preemptive Rights. No Person shall have any preemptive, preferential or other
similar right with respect to (a) additional Capital Contributions; (b) issuance or sale by the
Partnership of any class or series of Partnership Interests, whether unissued or hereafter created;
(c) issuance of any obligations, evidences of indebtedness or other securities of the Partnership
convertible into or exchangeable for, or carrying or accompanied by any rights to receive, purchase
or subscribe to, any Partnership Interests; (d) issuance of any right of subscription to or right
to receive, or any warrant or option for the purchase of, any Partnership Interests; or (e)
issuance or sale of any other securities that may be issued or sold by the Partnership.

ARTICLE IV

ALLOCATIONS AND DISTRIBUTIONS

     Section 4.1. Allocation Among Limited Partners. All items of income, gain, loss, deduction
and credit shall be allocated among the Partners as provided in Exhibit B.

     Section 4.2. Distributions of Available Cash. Subject to the provisions of Section
4.4 below, at such times as the General Partner shall determine in its sole discretion, all
Available Cash of the Partnership (if any) shall be distributed among the Partners as follows and
in the following order of priority:

     (a) First: 100% to the Class A Limited Partners and the General Partner, pro rata in
accordance with the balances of their respective Unreturned Capital accounts until the balance of
each Class A Limited Partner’s Unreturned Capital account is reduced to zero; and

     (b) Second: The balance, if any, to the General Partner, the Class A Limited Partners and the
Class B Limited Partners, in proportion to their individual Percentage Interests.

     Section 4.3. Distributions of Net Proceeds from Terminating Capital Transaction. The Net
Proceeds of a Terminating Capital Transaction, after payment of all of the Partnership’s debts and
liabilities and the expenses of liquidation and/or the establishment of a reasonable reserve for
the Partnership’s debts and liabilities (contingent or otherwise), if deemed necessary by the
General Partner, and after taking into account all distributions to the Partners during such year
pursuant to Section 4.2, shall be distributed among the Partners as follows and in the
following order of priority:

     (a) First: 100% to the Class A Limited Partners and the General Partner, pro rata in
accordance with the balances of their respective Unreturned Capital accounts until the balance of
each Class A Limited Partner’s Unreturned Capital account is reduced to zero; and

     (b) Second: The balance, if any, to the General Partner, the Class A Limited Partners and to
Class B Limited in proportion to their individual Percentage Interests.

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     Section 4.4. Restrictions on Distributions.

     (a) No distribution of property in kind shall be permitted except in accordance with
Section 8.2.

     (b) All distributions are subject to applicable law and contractual restrictions, if any.

ARTICLE V

MANAGEMENT

     Section 5.1. Power and Authority of General Partner.

     (a) The General Partner, subject to the express terms and conditions of its Regulations, shall
conduct, direct and exercise full control over all activities of the Partnership. Except as
otherwise expressly provided in Section 5.2 and elsewhere in this Agreement, all management
powers over the business and affairs of the Partnership shall be exclusively vested in the General
Partner, and the Limited Partners shall have no right of control over the business and affairs of
the Partnership. In addition to the powers now or hereafter granted a general partner of a limited
partnership under the Act or which are granted to the General Partner under any other provision of
this Agreement, the General Partner shall have full power and authority to do all things deemed
necessary or desirable by it to conduct the business of the Partnership in the name of the
Partnership, including, without limitation (except as aforesaid), the right and power to:

     (1) acquire producing and non-producing oil and gas properties, leases, mineral
interests, royalty or overriding royalty interests, fee rights, licenses, concessions or
other rights covering oil, gas and related hydrocarbons (or contractual options or other
rights to acquire any such interest) or an undivided interest therein or portion thereof,
together with all appurtenances, easements, permits, licenses, servitudes and rights-of-way
situated upon or used or held for future use in connection with any such interest or the
exploration, development or operation thereof, and otherwise act for, in the name of and on
behalf of the Partnership with respect to such properties, all in accordance with the terms
of this Agreement;

     (2) purchase or otherwise acquire other real or personal property of every nature,
considered necessary or appropriate to carry on and conduct the business of the Partnership;

     (3) borrow monies for the purchase, development, exploration and maintenance of
Partnership assets and other aspects of the Partnership’s business and from time to time
draw, make, execute and issue promissory notes and other negotiable or non-negotiable
instruments and evidences of indebtedness; to secure the payment of the sums so borrowed and
mortgage, pledge or assign in trust all or any part of the property of the Partnership, and
assign any monies owing or to be owing to the Partnership;

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     (4) enter into any agreements of joint venture or partnership or for sharing of risks,
expenses or profits, with any Person, government or agency thereof engaged in any business
or transaction in which the Partnership is authorized to engage;

     (5) explore and prospect by geological, geophysical or other methods for the location
of anomalies or other indications favorable to the accumulation of oil and gas, including
specifically the power to contract with third Persons for such purposes;

     (6) maintain, develop, operate, manage and defend Partnership property; to drill, test,
plug and abandon or complete and equip, rework and recomplete any number of wells on
Partnership properties for the production of oil and gas; to contract with third Persons for
such purposes; to carry out a program or programs of enhanced recovery operations on
Partnership properties and to do any and all other things necessary or appropriate to carry
out the terms and provisions of this Agreement which would or might be done by a normal and
prudent operator in the development, operation and management of its own property;

     (7) enter into and execute operating agreements, drilling contracts, farmouts, dry and
bottom hole and acreage contribution letters, participation agreements, gas processing
agreements and any other agreements customarily employed in the oil and gas industry in
connection with the acquisition, sale, development, exploration or operation of oil and gas
properties, agreements as to rights-of-way and any and all other instruments or documents
considered by the General Partner to be necessary or appropriate to carry on and conduct the
business of the Partnership, for such consideration and on such terms as the General Partner
may determine to be in the best interests of the Partnership;

     (8) sell the production accruing to Partnership properties and to execute gas sales
contracts, casinghead gas contracts, transfer orders, division orders, or any other
instruments in connection with the sale of production from the Partnership’s interest in
such properties;

     (9) farm-out, sell, assign, convey or otherwise dispose of, for such consideration and
upon such terms and conditions as the General Partner may determine to be in the best
interests of the Partnership, all or any part of the Partnership property, any interest
therein, or any interest payable therefrom, and in connection therewith to execute and
deliver such deeds, assignments and conveyances containing such warranties as the General
Partner may determine to be appropriate;

     (10) purchase, lease, rent or otherwise acquire or obtain the use of facilities,
machinery, equipment, tools, materials and all other kinds and types of real or personal
property that may in any way be deemed necessary, convenient, or advisable in connection
with carrying on the business of the Partnership;

     (11) pay monies with respect to delay rentals, bonus payments, shut-in gas royalty
payments, property taxes, surface damages, rights-of-way, easements and any

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other amounts necessary or appropriate to the maintenance or operation of any
Partnership property;

     (12) make and to enter into such agreements and contracts with such Persons and to give
such receipts, releases and discharges with respect to any and all of the foregoing and any
matters incident thereto as the General Partner may deem advisable or appropriate;

     (13) procure and maintain in force such insurance as the General Partner shall deem
prudent to serve as protection against liability for loss and damage which may be occasioned
by the activities to be engaged in by the Partnership or the General Partner on behalf of
the Partnership;

     (14) quitclaim, surrender, release or abandon any Partnership property, with or without
consideration therefor;

     (15) enter into commodity hedging transactions of any type whatsoever;

     (16) exercise all rights, powers, privileges and other incidents of ownership or
possession with respect to assets owned by the Partnership;

     (17) acquire, exercise or fail to exercise any contractual options or other rights to
acquire any asset on behalf of the Partnership;

     (18) prepay in whole or in part, refinance, recast, increase, modify or extend any
liabilities affecting the Partnership property and in connection therewith execute any
extensions or renewals of encumbrances on any or all of the Partnership property;

     (19) contract on behalf of the Partnership for the employment and services of employees
and/or independent contractors, including but not limited to lawyers, financial advisors,
underwriters, consultants and accountants;

     (20) take, or refrain from taking, all actions, not expressly proscribed or limited by
this Agreement, as may be necessary or appropriate to accomplish the purposes of the
Partnership;

     (21) institute, prosecute, defend, mediate, arbitrate and settle lawsuits or other
judicial or administrative proceedings brought on or in behalf of, or against, the
Partnership or the Partners in connection with activities arising out of, connected with, or
incidental to this Agreement, and to engage counsel or others in connection therewith; and

     (22) take such other acts as may be incidental to the acts and things expressly
authorized by this Agreement.

     (b) In accomplishing all of the foregoing and in fulfilling its obligations pursuant to this
Agreement, the General Partner may, subject to Section 5.5, retain or use any Affiliates’
personnel, properties and equipment or the General Partner may hire or rent those of third

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Persons and may employ on a temporary or continuing basis outside accountants, attorneys,
consultants and others on such terms as the General Partner deems advisable. No Person dealing
with the Partnership shall be required to inquire into the authority of the General Partner to take
any action or make any decision.

     Section 5.2. Certain Restrictions on General Partner’s Power and Authority. Notwithstanding
anything else expressed or implied to the contrary in this Agreement, the General Partner shall not
have the power or authority to cause the Partnership to, and shall not do, perform or authorize any
of the following acts without having previously obtained the consent of the Required Percentage of
the Class A Limited Partners, which consent may be obtained at a meeting of the Class A Limited
Partners or by means of a written consent of the Required Percentage of the Class A Limited
Partners:

     (a) do any act in contravention of this Agreement;

     (b) possess Partnership property, or assign rights in specific Partnership property, for other
than a Partnership purpose;

     (c) knowingly perform any act that would subject any Limited Partner to liability as a general
partner in any jurisdiction;

     (d) make any payments of compensation or other consideration to the General Partner or any of
its Affiliates, except to the extent expressly permitted herein;

     (e) use the Partnership name, credit or property for other than Partnership purposes;

     (f) effect any merger, conversion, share exchange, interest exchange, consolidation,
recapitalization, reorganization or similar transaction;

     (g) effect the sale or other transfer in a single transaction or a series of related
transactions of all or substantially all of the assets of the Partnership;

     (h) enter into or engage in any material transaction, contract, agreement, arrangement or
operation that is unrelated to the Partnership’s business described in Section 1.3 or that
constitutes any material deviation from the Partnership’s business strategy described in
Section 1.3; or

     (i) except as expressly provided herein, to take any action with respect to the assets or
property of the Partnership which benefits the General Partner or an Affiliate thereof to the
detriment of the Limited Partners or the Partnership, including, among other things, utilization of
funds of the Partnership as compensating balances for the benefit of the General Partner.

     Section 5.3. Duties and Services of the General Partner. The General Partner shall comply in
all respects with the terms of this Agreement. In the conduct of the business and operations of
the Partnership, the General Partner shall (i) use the care of an ordinarily prudent business
Person to cause the Partnership (1) to comply with the terms and provisions of all agreements to
which the Partnership is a party or to which its properties are subject, (2) to comply with all
applicable laws, ordinances or governmental rules and regulations to which the

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Partnership is subject and (3) to obtain and maintain all licenses, permits, franchises and
other governmental authorizations necessary with respect to the ownership of Partnership properties
and the conduct of the Partnership’s business and operations and (ii) attend to other day-to-day
affairs of the Partnership in a manner which is in the best interests of the Partnership. The
General Partner shall be obligated to perform the duties, responsibilities and obligations of the
General Partner hereunder only to the extent that funds of the Partnership are available therefor.

     Section 5.4. Liability of Partners and Indemnification.

     (a) The General Partner, the Limited Partners and their Affiliates, and their partners,
officers, directors, employees and agents, shall not be liable, responsible or accountable in
damages or otherwise to the Partnership or the other Partners for any acts or omissions that do not
constitute gross negligence, willful misconduct or a breach of the express terms of this Agreement
or for transactions from which such person derived an improper personal benefit (which shall not
include any benefit permitted by Section 5.7(b) or any other provision of this Agreement),
and the Partnership shall indemnify and save harmless the General Partner, the Partners and their
Affiliates, and their partners, officers, directors, employees and agents (individually an
“Indemnitee”) from all liabilities for which indemnification is not prohibited by Delaware law, in
each case to the extent that any such liability in any way relates to or arises out of or is
alleged to relate to or arise out of any act or omission on the part of the Partnership, or the
Indemnitee acting on behalf of the Partnership, for which the Indemnitee is not to be held
accountable or otherwise liable under this Agreement. Any act or omission performed or omitted by
an Indemnitee on advice of legal counsel or an independent consultant who has been employed or
retained by the Partnership shall be presumed to have been performed or omitted in good faith
without gross negligence or willful misconduct. THE PARTIES RECOGNIZE THAT THIS PROVISION SHALL
RELIEVE ANY SUCH INDEMNITEE FROM ANY AND ALL LIABILITIES, OBLIGATIONS, DUTIES, CLAIMS, ACCOUNTS AND
CAUSES OF ACTION WHATSOEVER ARISING OR TO ARISE OUT OF ANY ORDINARY NEGLIGENCE BY ANY SUCH
INDEMNITEE, AND SUCH INDEMNITEE SHALL BE ENTITLED TO INDEMNIFICATION FROM ACTS OR OMISSIONS THAT
MAY CONSTITUTE ORDINARY NEGLIGENCE.

     (b) The Partnership shall, except as prohibited by Delaware law, pay or reimburse expenses
incurred by an Indemnitee in connection with (i) the Indemnitee’s appearance as a witness or other
participation in a proceeding involving or affecting the Partnership at a time when the Indemnitee
is not a named defendant or respondent in the proceeding, or (ii) the Indemnitee’s other indemnity
rights under this Agreement, in advance of the final disposition of any proceeding, within thirty
(30) days of the receipt by the Partnership from the Indemnitee of (x) a written request for such
reimbursement and (y) in the case of a request pursuant to clause (ii), a signed statement that the
Indemnitee is not accountable or otherwise liable under this Agreement for the losses alleged and
will promptly reimburse the Partnership for the advances if it ultimately is found not to be
entitled to the advances. If a claim is not paid in full by the Partnership within thirty (30)
days after a written claim has been received by the Partnership, the Indemnitee may at any time
thereafter bring suit against the Partnership to recover the unpaid amount of the claim and, if
successful in whole or in part, the Indemnitee shall be entitled to be paid also the expense of
prosecuting such claim. Neither the failure of the Partnership (including the General Partner,
independent legal counsel, or the Limited Partners) to have made a

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determination that indemnification of the Indemnitee is permissible in the circumstances
because the Indemnitee has met the applicable standard of conduct, if any, nor an actual
determination by the Partnership (including its General Partner, independent legal counsel, or its
Limited Partners) that the Indemnitee has not met the standard of conduct, shall be a defense to
the action or create a presumption that the Indemnitee has not met the standard of conduct.

     (c) The General Partner shall have the right to require that any contract entered into by the
Partnership provide that the General Partner shall have no personal liability for the obligations
of the Partnership thereunder.

     (d) The indemnification provided by this Section 5.4 shall be in addition to any other
rights to which each Indemnitee may be entitled under any agreement or vote of the Partners, as a
matter of law or otherwise, both as to action in the Indemnitee’s capacity as a Partner or an
officer, director, employee or agent of a Partner or as a Person serving at the request of the
Partnership as set forth above and to action in another capacity, and shall continue as to an
Indemnitee who has ceased to serve in such capacity and shall inure to the benefit of the heirs,
successors, assigns, administrators and personal representatives of the Indemnitees.

     (e) In no event may an Indemnitee subject the Limited Partners to personal liability by reason
of this indemnification provision.

     (f) An Indemnitee shall not be denied indemnification in whole or in part under this
Section 5.4 because the Indemnitee had an interest in the transaction with respect to which
the indemnification applies if the transaction was otherwise permitted by the terms of this
Agreement.

     Section 5.5. Other Matters Concerning General Partner.

     (a) The General Partner may rely and shall be protected in acting or refraining from acting
upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent,
order, bond, debenture or other paper or document believed by it to be genuine and to have been
signed or presented by the proper Person or Persons and any act taken or omitted in reliance upon
any such paper or documents shall be conclusively presumed to have been done or omitted in good
faith.

     (b) The General Partner may consult with legal counsel, accountants, appraisers, management
consultants, investment bankers and other consultants and advisers selected by it, and any act
taken or omitted in reliance upon the opinion or advice of any such Person as to matters that the
General Partner reasonably believes to be within such Persons’ professional or expert competence
(including, without limitation, any opinion of legal counsel to the effect that the Partnership
would “more likely than not” prevail with respect to any matter) shall be conclusively presumed to
have been done or omitted in good faith and in accordance with such opinion or advice.

     (c) The General Partner shall have the right, in respect of any of its powers or obligations
hereunder, to act through a duly appointed attorney or attorney-in-fact. Each such attorney or
attorney-in-fact shall, to the extent provided by the General Partner in the power of

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attorney, have full power and authority to do and perform each and every act and duty which is
permitted or required to be done by the General Partner hereunder.

     Section 5.6. Duties of the Partners, Directors and Officers.

     (a) Except as otherwise expressly provided in this Agreement, none of the Limited Partners,
the General Partner or any of their respective officers or Affiliates shall, to the fullest extent
permitted by Section 17.1101(d) of the Act, have any duties (whether fiduciary, quasi-fiduciary or
otherwise and whether existing by statute, in equity, at common law or otherwise) or obligations
whatsoever, by virtue of the relationships established pursuant to this Agreement, to take or
refrain from taking any action that may impact the Partnership, the General Partner, any Limited
Partner or any of their respective Affiliates.

     (b) The provisions of this Agreement, including this Article V, to the extent they
restrict the fiduciary and other duties and liabilities of a Person otherwise existing at law or in
equity, constitute an agreement to restrict and replace such fiduciary and other duties and
liabilities of such Person under Section 17-1101(d) of the Act, it being agreed and understood that
the provisions of this Agreement, including this Article V, shall not restrict or replace
any duties (whether fiduciary, quasi-fiduciary or otherwise and whether existing by statute, in
equity, at common law or otherwise) or obligations of the Limited Partners, the General Partner, or
their respective officers or Affiliates not arising by virtue of the relationships established
pursuant to this Agreement. To the extent that, at law or in equity, a Limited Partner, the
General Partner or any of their respective officers has duties (including fiduciary duties) and
liabilities relating thereto to the Partnership, to a Limited Partner, to the General Partner or to
any other Person that is a party to or is otherwise bound by this Agreement, such Limited Partner,
General Partner, or officer shall not be liable to the Partnership, to any Limited Partner, to the
General Partner or to any other Person that is a party to or is otherwise bound by this Agreement
for its reliance on the provisions of this Agreement.

     Section 5.7. Contracts with Affiliates; Other Businesses.

     (a) The Partnership may enter into contracts and agreements with any Partner and/or any of its
Affiliates for the rendering of services and the sale and lease of supplies and equipment on such
arm’s-length terms that (a) are no less favorable to the Partnership than those available from
unrelated third Persons and (b) are approved by the General Partner. No such contract or agreement
shall be void or voidable solely for such reason and no Person having an interest in any such
transaction shall have any liability to the Partnership or any Partner solely by virtue of such
relationship or conflict.

     (b) The General Partner and each Affiliate thereof (including without limitation any director,
officer, partner, member, manager, employee, agent or representative of the General Partner or any
Affiliate thereof) may have business interests and engage in business activities in addition to
those relating to the Partnership, including without limitation interests in and activities related
to the businesses described in Section 1.3 or otherwise competitive with the business of
the Partnership and neither the Partnership nor any other Partners shall have any rights in such
other business interests or activities or in any income or profits therefrom.

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     Section 5.8. Resolution of Conflicts of Interest.

     (a) Unless otherwise expressly provided herein, (i) whenever a potential conflict of interest
exists or arises between the General Partner or any of its Affiliates, on the one hand, and the
Partnership, or Limited Partner or assignee on the other hand, or (ii) whenever this Agreement or
any other agreement contemplated herein provides that the General Partner shall act in a manner
which is, or provide terms which are, fair and reasonable to the Partnership, or any Limited
Partner or assignee, the General Partner shall resolve such conflict of interest, take such action
or provide such terms, considering in each case (A) the relative interests of each party (including
its own interests) to such conflict, agreement, transaction or situation and the benefits and
burdens relating to such interests, (B) any customary or accepted industry practices and any
customary or historical dealings with a particular Person, (C) any applicable generally accepted
accounting practices or principles and (D) such additional factors as the General Partner
determines in its sole discretion to be relevant, reasonable or appropriate under the
circumstances. Any resolution, action or terms so made, taken or provided by the General Partner
in respect of such conflict of interest shall not constitute a breach of this Agreement, any other
agreement contemplated herein or any duty stated or implied by law or equity (including fiduciary
duties), so long as such action or decision is taken in a manner consistent with the provisions of
this Article V.

     (b) Whenever in this Agreement the General Partner is permitted or required to make a decision
(i) in its “sole discretion” or “discretion,” or under a similar grant of authority or latitude,
the General Partner shall be entitled to consider only such interests and factors as it desires and
shall have no duty or obligation to give any consideration to any interest of or factors affecting
the Partnership, the Limited Partners or the assignees, or (ii) in its “good faith” or under
another express standard, the General Partner shall act under such express standard and shall not
be subject to any other or different standards imposed by this Agreement or any other agreement
contemplated herein or therein. Each Limited Partner or assignee hereby agrees that any standard
or care or duty imposed in this Agreement or any other agreement contemplated herein or under the
Act or any other applicable law, rule or regulation shall be modified, waived or limited in each
case as required to permit the General Partner to act under this Agreement or any other agreement
contemplated herein and to make any decision pursuant to the authority prescribed in this
Section 5.8(b) so long as such action or decision does not constitute willful misconduct
and is reasonably believed by the General Partner to be consistent with the overall purposes of the
Partnership.

     Section 5.9. Reimbursement of Expenses. The Partnership shall pay or reimburse the General
Partner for all reasonable direct and indirect costs incurred by the General Partner in managing
and conducting the business and affairs of the Partnership, including, without limitation, (a) all
costs and expenses incurred in any business of the Partnership, (b) secretarial, telephone, office
rent and other office expenses, (c) salaries and other compensation expenses of employees, officers
and directors, (d) other administrative expenses, (e) travel expenses, (f) legal and accounting
costs and expenses and (g) expenses incurred in providing or obtaining such other professional,
technical, and administrative services and advice as the General Partner may deem necessary or
desirable. Subject to Section 5.7, the General Partner may utilize the services of any of
its Affiliates in the course of conducting the business and affairs of the Partnership, and the
Partnership may pay, and any such Affiliate shall be entitled to receive, a reasonable fee for

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any services performed at the request of the General Partner for the Partnership. The General
Partner shall determine in good faith which expenses are allocable to the Partnership in a manner
which is fair and reasonable to the General Partner and the Partnership.

     Section 5.10. Tax Elections. The Partnership shall make such tax elections as provided in
Section B.3.2 of Exhibit B.

     Section 5.11. Tax Returns. The General Partner shall prepare and file or cause to be prepared
and filed all federal, state and local income and other tax returns that the Partnership is
required to file. Within seventy-five (75) days after the end of each Fiscal Year, the General
Partner shall send or deliver or shall cause to be sent or delivered to each Person who was a
Limited Partner at any time during such year such tax information as shall be reasonably necessary
for the preparation by such Person of its federal income tax return and state and other tax
returns.

     Section 5.12. Tax Matters Partner. The Partners designate the General Partner to be the “tax
matters partner” of the Partnership pursuant to Section 6231(a)(7) of the Code. The Partners may
change the Partner who is designated the tax matters partner at any time. The Partner who is the
tax matters partner shall take such action as may be necessary to cause each other Partner to
become a “notice partner” within the meaning of Section 6223 of the Code. Such Partner shall
inform each other Partner of all significant matters that may come to its attention in its capacity
as tax matters partner by giving notice thereof on or before the fifth (5th) Business
Day after becoming aware thereof and, within that time, shall forward to each other Partner copies
of all significant written communications it may receive in that capacity. Any Partner who is
designated as tax matters partner may not take any action contemplated by Sections 6222 through
6232 of the Code without the consent of the other Partners, and may not in any case take any action
left to the determination of an individual Partner under Sections 6222 through 6232 of the Code.

     Section 5.13. Withdrawal by the General Partner. The General Partner shall not voluntarily
withdraw from the Partnership unless the Required Percentage of the Class A Limited Partners
consent to such withdrawal. In the event that the Required Percentage of the Class A Limited
Partners shall consent to the withdrawal of the General Partner, the General Partner shall not be
deemed to be liable with respect to any debts or liabilities that the Partnership incurs subsequent
to the date of withdrawal, provided that such withdrawal shall not diminish or in any way affect
the liability of the General Partner with respect to any debts or liabilities that the Partnership
incurred prior to such date.

ARTICLE VI

RIGHTS OF LIMITED PARTNERS

     Section 6.1. Rights of Limited Partners.

     (a) Each Limited Partner has the right, subject to such reasonable standards (including
standards governing what information and documents are to be furnished, at what time and location
and at whose expense) as may be established by the General Partner, to obtain

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from the General Partner from time to time upon reasonable demand (made in accordance §17-305
of the Act) for any purpose reasonably related to the Limited Partner’s interest as a Limited
Partner:

     (1) True and full information regarding the status of the business and financial
condition of the Partnership;

     (2) Promptly after becoming available, a copy of the Partnership’s federal, state and
local income tax returns for each Fiscal Year;

     (3) A current list of the name and last known business, residence or mailing address of
each Partner;

     (4) A copy of this Agreement and Certificate of Limited Partnership and all amendments
and restatements thereof, together with executed copies of any written powers of attorney
pursuant to which this Agreement and any certificate and all amendments and restatements
thereof have been executed;

     (5) True and full information regarding the amount of cash and a description and
statement of the agreed value of any other property or services contributed by each Partner
and which each Partner has agreed to contribute in the future, and the date on which each
became a Partner; and

     (6) Other information regarding the affairs of the Partnership as is just and
reasonable.

     (b) The General Partner shall have the right to keep confidential from Limited Partners for
such period of time as the General Partner deems reasonable, any information which the General
Partner reasonably believes to be in the nature of trade secrets or other information the
disclosure of which the General Partner in good faith believes is not in the best interest of the
Partnership or could damage the Partnership or its business or which the Partnership is required by
law or by agreement with a third Person to keep confidential.

     Section 6.2. Limitations on Limited Partners.

     (a) Except as provided in this Agreement, the Limited Partners shall not: (i) be permitted to
take part in the business or control of the business or affairs of the Partnership; (ii) have any
voice in the management or operation of any Partnership property; or (iii) have the authority or
power to act as agent for or on behalf of the Partnership or any other Partner, to do any act which
would be binding on the Partnership or any other Partner, or to incur any expenditures on behalf of
or with respect to the Partnership. No Partner shall hold out or represent to any third party that
the Limited Partners have any such power or right or that the Limited Partners are anything other
than “limited partners” in the Partnership.

     (b) The Limited Partners and their Affiliates may have business interests and engage in
business activities in addition to those related to the Partnership, including without limitation
interests in and activities related to the businesses described in Section 1.3 or otherwise
competitive with the business of the Partnership and neither the Partnership nor any other Partners

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shall have any rights in such other business interests or activities or in any income or
profits therefrom.

     Section 6.3. Liability of Limited Partners. The Limited Partners shall not be liable for the
debts, liabilities, contracts or other obligations of the Partnership except (a) for any unpaid
Capital Contributions agreed to be made by such Limited Partner, (b) to the extent of the Limited
Partners’ share of the assets (including undistributed revenues) of the Partnership, and (c) as
otherwise provided in the Act.

     Section 6.4. Withdrawal and Return of Capital Contributions. No Limited Partner shall be
entitled to (a) withdraw from the Partnership except upon the assignment by such Limited Partner of
all of its interest in the Partnership in accordance with Article IX, or (b) the return of
its Capital Contributions except to the extent, if any, provided in this Agreement and that
distributions made pursuant to the express terms of this Agreement may be considered as such by law
or upon dissolution and liquidation of the Partnership, and then only to the extent expressly
provided for in this Agreement and as permitted by law. No interest shall accrue on any Capital
Contributions.

     Section 6.5. Voting Rights of Class B Limited Partners. Except as required by this Agreement
and the Act, Class B Limited Partners shall have no voting rights.

ARTICLE VII

BOOKS, REPORTS, MEETINGS AND CONFIDENTIALITY

     Section 7.1. Capital Accounts, Books and Records.

     (a) The General Partner shall keep books of account for the Partnership in accordance with the
terms of this Agreement. Such books shall be maintained at the principal office of the
Partnership.

     (b) The Partnership shall maintain for each Partner a separate Capital Account in accordance
with Exhibit B.

     Section 7.2. Bank Accounts. The General Partner shall cause one or more accounts to be
maintained in a bank (or banks) which is a member of the Federal Deposit Insurance Corporation,
which accounts shall be used for the payment of the expenditures incurred by the Partnership in
connection with the business of the Partnership, and in which shall be deposited any and all
receipts of the Partnership. The General Partner shall determine the number of and the persons who
will be authorized as signatories on each such bank account. The General Partner may invest the
Partnership funds in such investments as the General Partner shall determine to be necessary or
appropriate.

     Section 7.3. Meetings of Partners.

     (a) Meetings of the Partners may be called at any time by the General Partner or by any
Partner or group of Class A Limited Partners that own more ten percent (10%) of the total

20

 

Percentage Interests held by all Class A Limited Partners.

     (b) The Partner or Partners (as the case may be) calling a meeting of the Partners shall give
written notice thereof to all of the Class A Limited Partners and, if called by a Limited Partner
or Limited Partners, such notice also shall be given to the General Partner. Such notice shall
state the time, date and purpose or purposes of the proposed meeting and, if applicable, the
General Partner no later than 10 days, and no earlier than 60 calendar days, prior to the meeting.
The Partners calling for a meeting of the Partners must sign the notice for the meeting.

     (c) Any notice required to be given to any Partner under this Agreement or the Act may be
waived in writing by that Partner (whether before, at, or after the meeting). A Partner’s
attendance at a meeting also shall constitute a waiver of any required notice of the meeting,
unless that Partner at the beginning of the meeting objects to holding the meeting or transacting
particular business at the meeting. Any action taken at a meeting at which proper notice was not
given to all of the Partners or which all of the Partners did not waive such notice requirement
shall be null and void and of no effect whatsoever.

     (d) All meetings of the Partners shall be held at the principal office of the Partnership
unless the General Partner (with respect to meetings called by the General Partner) or the Required
Percentage of the Class A Limited Partners (with respect to meetings called by one or more Class A
Limited Partners) designates another place for the meeting. Persons representing the Required
Percentage of Class A Limited Partners, in person or by proxy, shall be required to constitute a
quorum at a meeting of the Partners. A representative of the General Partner shall either preside,
or designate the person who is to preside, over the meeting or, in the absence of such designation,
the meeting shall be presided over by any person selected by a majority of the votes cast by the
Class A Limited Partners for such purpose at the meeting. The costs of calling and holding
meetings of the Partners shall be paid by the Partnership.

     (e) The General Partner shall have full power and authority concerning the manner of
conducting any meeting of the Partners, including, without limitation, the determination of Persons
entitled to vote, the existence of a quorum, the satisfaction of the requirements of this
Article VII, the conduct of voting, the validity and effectiveness of any proxies, and the
determination of any controversies, votes or challenges arising in connection with or during the
meeting or voting. The General Partner shall designate a Person to serve as chairman of any
meeting and shall further designate a Person to take minutes of any meeting.

     (f) At all meetings of the Partners and written consents executed in lieu thereof, a Partner
may vote in person or by proxy (executed in writing by such Partner and exercised by that Partner’s
duly authorized representative). Any such proxy shall be filed with the General Partner before or
at the time of the meeting. No proxy shall be valid after 11 months from the date of its
execution, unless otherwise validly provided in the proxy. Unless otherwise specifically provided
in this Agreement, voting on all matters by the Class A Limited Partners shall require the approval
of the Required Percentage of the Class A Limited Partners and not merely a majority of the votes
represented at the meeting. Action by the Partners may be taken by a voice vote or by a show of
hands unless, as to any matter, any Class A Limited Partner represented at such meeting shall
demand, before the vote on the matter, a ballot vote on the matter.

21

 

     (g) Any one or more Partners may participate in a meeting of the Partners by means of a
conference telephone or similar communication device that allows all persons participating in the
meeting to simultaneously hear each other during the meeting, and such participation in the meeting
shall be the equivalent of being present in person at such meeting.

     (h) Any action required or permitted to be taken at a meeting of the Partners may be taken
without a meeting if a proposed written consent, setting forth the action so taken or to be taken,
(i) is sent to all Partners, (ii) is signed by those Partners (or the duly authorized
representative or representatives thereof) owning the voting interest required hereunder to approve
or adopt such action, and (iii) such signed written consent(s) is delivered to the General Partner
to be included in the Partnership’s permanent records. The written consents may be executed in
counterparts. Action taken by written consent shall be effective when the Partners needed to
approve the action have signed the proposed written consent or counterpart thereof, unless the
written consent specifies that it is effective as of an earlier or later date. A written consent
has the same force and effect as if such matter was voted upon at a duly called meeting of the
Partners and may be described as such in any document or instrument.

     (i) The General Partner at its election may separately inform and consult with the Limited
Partners without the necessity of calling and/or holding a meeting of the Limited Partners.

     (j) Notwithstanding the foregoing provisions of this Section 7.3, the Limited Partners
shall not be permitted to take part in the business or control of the business of the Partnership.

     Section 7.4. Confidentiality. No Partner shall use, publish, disseminate or otherwise
disclose, directly or indirectly, any Confidential Information that should come into the possession
of such Partner for other than a proper Partnership purpose. No Partner shall disclose any such
Confidential Information except as expressly authorized by this Agreement or by the General
Partner, or as required by law or governmental or regulatory authority. Each Partner shall
instruct all Affiliates (including their representatives, agents and counsel) to comply with this
Section 7.4. If a Partner is required by law or court order to disclose information that
would otherwise be Confidential Information under this Agreement, such Partner shall immediately
notify the General Partner of such notice and provide the General Partner the opportunity to resist
such disclosure by appropriate proceedings.

ARTICLE VIII

DISSOLUTION, LIQUIDATION AND TERMINATION

     Section 8.1. Dissolution. The Partnership shall be dissolved upon the earliest to occur of
any of the following:

     (a) the expiration of its term as provided in Section 1.5 unless the term is extended
by approval of the General Partner and the Required Percentage of the Class A Limited Partners;

     (b) the sale or disposition of all or substantially all of the property then owned by the
Partnership;

22

 

     (c) the occurrence of an event of withdrawal from the Partnership by the General Partner as
provided for in this Agreement or the Act;

     (d) the consent in writing of the General Partner (subject to the express terms and conditions
of its limited liability company agreement) and the Required Percentage of the Class A Limited
Partners; or

     (e) the occurrence of any event which, under the Act, causes the dissolution of a limited
partnership.

     Notwithstanding anything contained to the contrary in this Section, if a dissolution of the
Partnership would otherwise occur due to the occurrence of an event of dissolution under
Section 8.1(c), the Partnership may be reconstituted if within ninety (90) days of such
event of dissolution the Required Percentage of the Class A Limited Partners agree in writing to
continue the business of the Partnership and agree to the appointment, effective as of the date of
such event of dissolution of one or more new General Partners (“New General Partner”). In the
event the Required Percentage of the Class A Limited Partners appoint a New General Partner of the
Partnership, the Partnership interest held by the former General Partner shall be converted into a
Class A Partnership Interest and the former General Partner shall be treated as a Class A Limited
Partner for all purposes of this Agreement. If a New General Partner is appointed by the Required
Percentage of the Class A Limited Partners and such New General Partner is not an existing Partner,
such New General Partner shall be admitted to the Partnership and the Percentage Interest of each
Class A Limited Partner, including the former General Partner, shall be reduced proportionately to
create the Percentage Interest of the New General Partner, and this Agreement shall be amended by
the Required Percentage of the Class A Limited Partners to reflect the new Percentage Interests of
the Class A Limited Partners and the admission of the New General Partner.

     Section 8.2. Liquidation and Termination. Upon dissolution of the Partnership, unless
reconstituted pursuant to the Act, the General Partner or, if the withdrawal of the General Partner
caused the dissolution of the Partnership, a Person selected by the Required Percentage of the
Class A Limited Partners, shall act as liquidator or shall appoint one or more liquidators who
shall have full authority to wind up the affairs of the Partnership and make final distributions as
provided herein. The liquidator shall continue to operate the Partnership properties with all of
the power and authority of the General Partner. The steps to be accomplished by the liquidator are
as follows:

     (a) As promptly as possible after dissolution and again after final liquidation, the
liquidator, if requested by any Partner, shall cause a proper accounting to be made by the
Partnership’s independent accountants of the Partnership’s assets, liabilities and operations
through the last day of the month in which the dissolution occurs or the final liquidation is
completed, as appropriate.

     (b) The liquidator shall pay all of the debts and liabilities of the Partnership (including
all expenses incurred in liquidation) or otherwise make adequate provision therefor (including
without limitation the establishment of a cash escrow fund for contingent liabilities in such
amount and for such term as the liquidator, with the consent of the Required Percentage of

23

 

the Class A Limited Partners, may reasonably determine). After making payment or provision for
all debts and liabilities of the Partnership, the liquidator shall sell all properties and assets
of the Partnership for cash as promptly as is consistent with obtaining the best price therefor;
provided, however, that upon the consent of the Required Percentage of the Class A Limited
Partners, the liquidator may distribute such properties in kind. All gain, loss, and amount
realized on such sales shall be allocated to the Partners as provided in Exhibit B, and the
Capital Accounts of the Partners shall be adjusted accordingly. In the event of a distribution of
properties in kind, the liquidator shall first adjust the Capital Accounts of the Partners as
provided in Exhibit B by the amount of any gains or losses that would have been recognized
by the Partners if such properties had been sold. The liquidator shall then distribute the proceeds
of such sales or such properties to the Partners, after giving effect to the distributions and all
allocations under Section 4.1 for the current and prior Fiscal Years, in accordance with
and in the order of priority listed in Section 4.3.

     (c) Except as expressly provided herein, the liquidator shall comply with any applicable
requirements of the Act and all other applicable laws pertaining to the winding up of the affairs
of the Partnership and the final distribution of its assets.

     (d) Notwithstanding any provision in this Agreement to the contrary, no Partner shall be
obligated to restore a deficit balance in its Capital Account at any time.

ARTICLE IX

ASSIGNMENTS OF INTERESTS

     Section 9.1. Assignment by Partners.

     (a) No Limited Partner’s interest in the Partnership, or any rights therein shall be
transferred by any Limited Partner except in accordance with the terms of this Article IX.
As used in this Article IX, the term “transfer” (whether used as a noun or a verb) shall
refer to any sale, transfer, or other disposition whether by sale, by gift, or otherwise, and
whether voluntary, involuntary, or by operation of law, to any Person, including but not limited to
an involuntary transfer in Bankruptcy, a transfer in connection with or as a result of a divorce of
a Limited Partner, any pledge, assignment, hypothecation or grant of a security interest, or any
transfer by devise or inheritance; provided, however, that this Article IX shall not
restrict the voluntary transfer by any Limited Partner to a member of the Limited Partner’s
immediate family or to an Affiliate of a Limited Partner (a “Permitted Transfer”). Any attempt by
a Limited Partner to transfer its interest without complying with the terms of this Article
IX shall be void ab initio.

     (b) The General Partner’s interest in the Partnership, or any rights therein shall not be
sold, assigned, mortgaged, pledged, subjected to a security interest or otherwise encumbered, in
whole or in part, without the prior written consent of the Required Percentage of the Class A
Limited Partners. Any attempt by the General Partner to assign its interest without the required
consent shall be void ab initio.

     (c) Except as provided in Section 9.4, any permitted transfer of Partnership Interests
and the admission of new Partners shall not constitute an amendment to this Agreement.

24

 

     Section 9.2. Partnership Right of First Refusal.

     (a) Written Notice. If any Limited Partner (a “Transferring Limited Partner”)
proposes to transfer any of its Partnership Interests, other than pursuant to a Permitted Transfer,
the Transferring Limited Partner shall give the Partnership written notice of the interest in the
Partnership to be transferred (the “Offered Interests”), the price, terms, closing date and
conditions of the proposed transfer (the “Transfer Notice”).

     (b) Partnership Option. On receipt of the Transfer Notice, the Partnership will have
the exclusive right and option, exercisable at any time during a period of thirty (30) days from
the date of the Transfer Notice, to purchase any of the Offered Interests upon the same terms and
conditions as contained in the Transfer Notice. If the consideration for the Offered Interests
from the third Person is for consideration other than money, the Partnership may substitute, for
the other consideration, an amount of money equivalent to the lesser of (i) the fair market value
of the other consideration, or (ii) the fair market value of the Offered Interests, in each case as
determined by the General Partner. The good faith determination of fair market value by the
General Partner shall be conclusive and binding, absent manifest error. If the Partnership decides
to exercise its option to purchase any of the Offered Interests, it will give written notice to
that effect to the Transferring Limited Partner. The right of the Partnership to exercise its
option to purchase is subject to the laws of the State of Delaware governing the rights of a
limited partnership to purchase its own limited partnership interests.

     (c) Failure to Give Written Notice. If the Transferring Limited Partner does not give
the Partnership written notice of the Partnership Interests to be transferred, then the Partnership
may exercise the right and option described in Section 9.2(b) at any time.

     (d) Sale to Third Person. If the Partnership does not elect to purchase all of the
Offered Interests, the Partnership will give written notice to that effect to the Transferring
Limited Partner, and the Transferring Limited Partner will have the right to transfer the Offered
Interests not elected to be purchased by the Partnership to the third Person, pursuant to the terms
of the offer, and the third Person will execute and become a party to this Agreement and will hold
the Partnership Interests subject to all the terms and conditions of this Agreement. If the third
Person fails to purchase the Offered Interests within thirty (30) days of the date of the notice
from the Partnership that all of the Offered Interests will not be purchased by the Partnership,
any subsequent offers for the Partnership Interests must be made pursuant to the terms of this
Agreement.

     (e) Consent of Trustee in Bankruptcy. If the transfer occurs as a result of
Bankruptcy, then at the Partnership’s election the purchase of the Offered Interests by the
Partnership shall not be consummated without the prior written consent of the trustee in
Bankruptcy, if any, or without other applicable approval of the Bankruptcy court.

     (f) Closing; Payment of Purchase Price. If the Partnership elects to purchase the
Offered Interests pursuant to this Section 9.2 , then:

     (i) Closing. The closing of the purchase will be held at the offices of the
Partnership on the thirtieth (30th) day following the Partnership’s election to acquire the

25

 

Offered Interests under the terms of this Agreement, or any other date and place as the
parties may agree. If the thirtieth (30th) day is not a Business Day, the closing will be
held on the next following Business Day.

     (ii) Payment. The Partnership shall pay the purchase price by a cashier’s
check drawn on a national bank or by wire transfer of immediately available funds. The full
amount of the purchase price must be paid at the closing, unless the terms of sale under
this Section 9.2 permit another method of payment, or unless the parties to the sale
agree otherwise. At the closing, the Transferring Limited Partner or other Person or
Persons holding the Partnership Interests to be transferred will duly execute and deliver
the certificates evidencing the Partnership Interests to the Partnership, in proper form for
transfer, free and clear of all liens, adverse claims and encumbrances, except as contained
in this Agreement.

     Section 9.3. Drag Along Rights. If at any time after the General Partner, with the consent of
the Class A Limited Partners in accordance with Section 5.2, shall approve (i) a proposal
from a Person for the transfer, directly or indirectly, to such Person of more than fifty percent
(50%) of the Percentage Interests of all Limited Partners, (ii) the merger or consolidation of the
Partnership with or into another Person or (iii) the sale by the Partnership of all or
substantially all of its assets to a Person, in each of the above cases for a specified price
payable in cash or otherwise and on specified terms and conditions (a “Sale Proposal”), then the
General Partner may deliver a notice (a “Required Sale Notice”) with respect to such Sale Proposal
to each Limited Partner stating that the Required Percentage of the Class A Limited Partners have
approved the Sale Proposal, and that the Partnership proposes to effect the Sale Proposal, and
providing the identity of the Persons involved in such Sale Proposal and the terms thereof. Each
Limited Partner, upon receipt of a Required Sale Notice, shall be obligated to sell its Partnership
Interests and participate in the transaction (a “Required Sale”) contemplated by the Sale Proposal
and otherwise to take all necessary action to cause the Partnership and the Limited Partners to
consummate such Required Sale. Any such Required Sale Notice may be rescinded by the General
Partner, with the written consent of the Required Percentage of the Class A Limited Partners, by
delivering written notice thereof to all of the Limited Partners prior to the consummation of the
sale.

Section 9.4. Admission of Partners.

     (a) Unless an assignee of an interest in the Partnership becomes a substituted Partner in
accordance with the provisions set forth herein, such assignee shall not be entitled to any of the
rights granted to a Partner hereunder, other than the right to receive allocations of income,
gains, losses, deductions, credits and similar items and distributions to which the assignor would
otherwise be entitled, to the extent such items are assigned.

     (b) An assignee of an interest in the Partnership shall become a substituted Partner entitled
to all of the rights of a Partner if, and only if, (i) the assignor gives the assignee such right,
(ii) the General Partner consents in writing to such substitution, the granting or denying of which
shall be in the General Partner’s sole discretion, (iii) the assignee executes and delivers such
documents as the General Partner may deem necessary or desirable to effect such substitution and to
confirm the agreement of the assignee to be bound by all of the terms and

26

 

provisions of this Agreement, and (iv) unless waived by the General Partner in its sole
discretion, the assignee reimburses the Partnership for any costs incurred by the Partnership in
connection with such assignment and substitution. Upon the satisfaction of such requirements, such
assignee shall be admitted as of such date as shall be provided for in any document evidencing such
assignment as a substituted Partner of the Partnership.

     (c) The Partnership and the General Partner shall be entitled to treat the record owner of any
Partnership interest as the absolute owner thereof in all respects and shall incur no liability for
distributions of cash or other property made in good faith to such owner until such time as a
written assignment of such interest that complies with the terms of this Agreement has been
received by the General Partner.

     Section 9.5. Removal of the General Partner. The Required Percentage of the Class A Limited
Partners may remove the General Partner and select a new General Partner to operate and carry on
the business and affairs of the Partnership. Any such successor General Partner will be named in,
and its appointment as such will be effective as of a date specified in, a notice to the General
Partner from the Limited Partners exercising the right to remove the General Partner and select the
successor General Partner. The removal of the General Partner shall be effective only if and when
the following conditions have been satisfied:

     (a) A successor General Partner shall have been selected and shall have agreed to accept the
responsibilities of a General Partner and shall have made arrangements to release the removed
General Partner from personal liability on all permitted Partnership indebtedness; and if the
Partnership creditors will not consent to such release, the new General Partner shall indemnify, in
a manner reasonably satisfactory to the removed General Partner, the removed General Partner for
such liability.

     (b) This Agreement and the Certificate of Limited Partnership of the Partnership shall have
been duly amended to name the new General Partner. To the extent required by the laws of any
jurisdiction to which the Partnership or this Agreement is subject, the Partners hereby unanimously
consent to the admission of such successor General Partner and hereby appoint such successor
General Partner as the agent and attorney in fact for each Partner (including without limitation
the retiring General Partner) for the purpose of signing, swearing to and filing an amendment to
the Certificate of Limited Partnership of the Partnership and all other necessary or appropriate
documents in connection with the substitution of such successor General Partner.

     (c) Either (i) a favorable ruling shall have been received by the Partnership from the
Internal Revenue Service to the effect that neither the grant nor the exercise of the powers
described in this Section 9.5 will materially adversely affect the tax status of the
Partnership or any of the Partners, or (ii) counsel for the Limited Partners shall have delivered
to the Limited Partners an opinion to the same effect.

     Section 9.6. Right of General Partner Upon Removal. In the event the General Partner is
removed in accordance with Section 9.5, the incoming General Partner shall have the right
to purchase from the removed General Partner the general partner interest in the Partnership at a
price equal to the appraised value thereof. Such appraised value shall be determined by a
qualified independent appraiser who is mutually agreed upon by both the removed General

27

 

Partner and the incoming General Partner within thirty (30) days after the selection of the
incoming General Partner. If the removed General Partner and the incoming General Partner cannot
mutually agree upon a single independent appraiser within such period, they shall each select their
own independent appraiser and those two appraisers shall select a third independent appraiser. The
cost of such appraisal shall be borne equally by the Partnership and by the removed General
Partner. The incoming General Partner’s option to acquire such interest must be exercised by notice
in writing to the removed General Partner not more than twenty (20) days after the selection of the
incoming General Partner and the purchase price for such interest shall be paid in cash not more
than thirty (30) days after receipt by the parties of the report of the appraiser setting forth the
appraised value. In the event the incoming General Partner does not elect to purchase the general
partner interest of the removed General Partner pursuant to the provisions of this Section
9.6, the remaining interest of the General Partner, if any, shall be converted to Class A
Partnership Interest and the removed General Partner shall continue as a Class A Limited Partner in
accordance with the Act.

ARTICLE X

MISCELLANEOUS

     Section 10.1. Notices. All notices, requests, claims, demands and other communications under
this Agreement shall be in writing and shall be deemed given upon receipt (or upon the next
succeeding Business Day if received after 5:00 p.m. local time on a Business Day or if received on
a day other than a Business Day) by the Partners at the following addresses (or at such other
address for a party as shall be specified by like notice):

     (a) if to the General Partner, to:

HEC 4 Management, LLC

3710 Rawlins, Suite 1500

Dallas, Texas 75219

Attention: President

with a copy to:

Jenkens & Gilchrist, a Professional Corporation

1445 Ross Avenue

Suite 3200

Dallas, Texas 75202

Attention: W. Alan Kailer, Esq.

28

 

     (b) if to the Partnership, to:

Hallwood Energy 4, L.P.

3710 Rawlins, Suite 1500

Dallas, Texas 75219

Attention: General Partner

with a copy to:

Jenkens & Gilchrist, a Professional Corporation

1445 Ross Avenue

Suite 3200

Dallas, Texas 75202

Attention: W. Alan Kailer, Esq.

     (c) If to a Limited Partner:

The last known business, residence or mailing address of such Limited
Partner reflected in the books and records of the Partnership.

Section 10.2. Amendments.

     (a) Amendments to be Adopted Solely by General Partner. The General Partner (pursuant
to the General Partner’s power of attorney from the Limited Partners), without the consent at the
time of any Limited Partner or assignee (each Limited Partner hereby consenting to any such
amendment), may amend any provision of this Agreement, and execute, swear to, acknowledge, deliver,
file and record whatever documents may be required in connection therewith, to reflect:

     (i) a change to conform the Agreement to provisions of the Act, provided that such
change does not impair the limited liability of the Limited Partners;

     (ii) the admission, substitution or withdrawal of Partners in accordance with this
Agreement;

     (iii) a change that is necessary to qualify the Partnership as a limited partnership or
a partnership in which the Limited Partners have limited liability under the laws of any
state or that is necessary or advisable in the opinion of the General Partner to ensure that
the Partnership will not be treated as an association taxable as a corporation for federal
income tax purposes;

     (iv) a change that is (1) of an inconsequential nature and does not adversely affect
the Limited Partners in any material respect, or (2) necessary or desirable to satisfy any
requirements, conditions or guidelines contained in any opinion, directive, order, ruling or
regulation of any federal or state agency or contained in any federal or state statute, or
(3) required or contemplated by this Agreement;

29

 

     (v) a change that is necessary or desirable in connection with the issuance of any
class or series of interests in the Partnership, or any rights, options or warrants to
acquire any interests in the Partnership; or

     (vi) any other amendment, change, decision or action that the General Partner is
authorized to make or take pursuant to this Agreement or the General Partner’s power of
attorney from the Limited Partners.

     (b) Other Amendments. Except as provided in Section 10.2(a), any amendment to
this Agreement must be approved by the General Partner and by a Required Percentage of Class A
Limited Partners; provided, however, that no amendment shall reduce a Partner’s Percentage
Interest, capital interest or voting interest in the Partnership without that Partner’s consent
unless the corresponding interests of all then existing Partners, are reduced proportionately;
provided further that no amendment shall create an obligation of a Partner to make a Capital
Contribution to the Partnership without that Partner’s consent; and provided further that this
Section 10.2(b) may not be amended without the consent of all affected Partners.

     Section 10.3. Partition. Each of the Partners hereby irrevocably waives for the term of the
Partnership any right that such Partner may have to maintain any action for partition with respect
to the Partnership property.

     Section 10.4. Entire Agreement. This Agreement, including the exhibits hereto which are
incorporated herein and made a part hereof for all purposes, and all other documents executed
contemporaneously with this Agreement constitute the full and complete agreement of the parties
hereto with respect to the subject matter hereof.

     Section 10.5. Severability. Every provision in this Agreement is intended to be severable. If
any term or provision hereof is illegal or invalid for any reason whatsoever, such illegality or
invalidity shall not affect the validity of the remainder of this Agreement.

     Section 10.6. No Waiver. The failure of any Partner to insist upon strict performance of a
covenant hereunder or of any obligation hereunder, irrespective of the length of time for which
such failure continues, shall not constitute a waiver of such Partner’s right to demand strict
compliance in the future. No consent or waiver, express or implied, to or of any other breach or
default in the performance of any obligation hereunder shall constitute a consent or waiver to or
of any other breach or default in the performance of the same or any other obligation hereunder.

     Section 10.7. Applicable Law. This Agreement and the rights and obligations of the parties
hereunder shall be governed by and interpreted, construed and enforced in accordance with the laws
of the State of Delaware, without regard to the principles of conflicts of law.

     Section 10.8. Successors and Assigns. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective heirs, legal representatives, successors and
assigns; provided, however, that no Partner may sell, assign, transfer or otherwise dispose of all
or any part of its rights or interest in the Partnership or under this Agreement except in
accordance with Article IX.

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     Section 10.9. Counterparts. This Agreement may be executed in one or more counterparts, each
of which shall be an original and all of which shall constitute one and the same document.

     Section 10.10. Execution in Writing. A facsimile, telegram, telex, email or similar
transmission by a Partner, or a photographic, photostatic, facsimile or similar reproduction of a
writing executed by a Partner, shall be treated as an execution in writing for purposes of this
Agreement.

     Section 10.11. Expenses. The Partnership shall bear all of the reasonable fees and expenses
of counsel incurred by the Partners in connection with the formation of the Partnership and the
General Partner. Except for the fees and expenses of counsel described in the preceding sentence,
each Partner will bear its own expenses incurred in connection with its investment in the
Partnership and the General Partner, including without limitation due diligence expenses.

     Section 10.12. Creditors Not Benefited. Nothing in this Agreement is intended to nor shall it
benefit any creditor of the Partnership. No creditor of the Partnership will be entitled to
require the General Partner to solicit or accept any loan or additional Capital Contribution for
the Partnership or to enforce any right which the Partnership or any Partner may have against a
Partner, whether arising under this Agreement or otherwise.

     Section 10.13. Further Action and Additional Documents. Each Partner agrees to perform all
further acts and execute, acknowledge, and deliver any documents that may be reasonably necessary,
appropriate, or desirable to carry out the provisions of this Agreement.

[Signature Page Follows]

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     IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first
above written.

	 	 	 	 	 	 	 
	 	 	GENERAL PARTNER:
	 
	 	 	 	 	 	 
	 	 	HEC 4 MANAGEMENT, LLC
	 
	 	 	 	 	 	 
	 

	 	By:

Name:
	 	/s/ William H. Marble
 

William H. Marble
	 	 
	 

	 	Title:
	 	Vice President	 	 
	 
	 	 	 	 	 	 
	 	 	INITIAL CLASS A LIMITED PARTNER:
	 
	 	 	 	 	 	 
	 	 	THE HALLWOOD GROUP INCORPORATED
	 
	 	 	 	 	 	 
	 

	 	By:

Name:
	 	/s/ Melvin J. Melle
 

Melvin J. Melle
	 	 
	 

	 	Title:
	 	Vice President and CFO	 	 

32

 

EXHIBIT A

NAMES AND ADDRESSES OF THE INITIAL PARTNERS

	 	 	 	 	 	 	 	 	 
	Name and	 	Initial Capital	 	Percentage
	Address of General Partner	 	Contribution	 	Interest
	HEC 4 Management, LLC
	 	 	 	 	 	 	 	 
	3710 Rawlins, Suite 1500

	 	 	$0.10	 	 	 	0.01%	 
	Dallas, Texas 75219
	 	 	 	 	 	 	 	 

	 	 	 	 	 	 	 	 	 
	Name and	 	Initial Capital	 	Percentage
	Address of the Initial Class A Limited Partner	 	Contribution	 	Interest
	The Hallwood Group Incorporated
	 	 	 	 	 	 	 	 
	3710 Rawlins, Suite 1500

	 	$	999.90	 	 	 	99.99	%
	Dallas, Texas 75219
	 	 	 	 	 	 	 	 

 

 

EXHIBIT B

ALLOCATIONS AND TAX PROCEDURES

ARTICLE B-I

DEFINITIONS

     B.1. Definitions. Capitalized words and phrases used in this Exhibit B have
the meaning ascribed to them in the Agreement except as otherwise provided below:

     B.1.1 “Adjusted Capital Account Deficit” means, with respect to any Partner, the
deficit balance, if any, in such Partner’s Capital Account as of the end of the relevant
Fiscal Year, after giving effect to the following adjustments:

     (a) Credit to such Capital Account any amounts which such Partner is obligated
to restore pursuant to any provision of this Agreement or is deemed to be obligated
to restore pursuant to the penultimate sentences of Treas. Reg. §§ 1.704-2(g)(1) and
1.704-2(i)(5); and

     (b) Debit to such Capital Account the items described in Treas. Reg. §§
1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), and 1.704-1(b)(2)(ii)(d)(6).

     The foregoing definition of Adjusted Capital Account Deficit is intended to comply with
the provisions of Treas. Reg. § 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently
therewith.

     B.1.2 “Capital Account” means, with respect to any Partner, the Capital Account
maintained for such Partner in accordance with the following provisions:

     (a) To each Partner’s Capital Account there shall be credited (A) such
Partner’s Capital Contributions, (B) such Partner’s distributive share of Profits
and any items in the nature of income or gain which are specially allocated pursuant
to Sections B.2.3 or B.2.4 hereof, and (C) the amount of any Partnership
liabilities assumed by such Partner or which are secured by any property distributed
to such Partner. The principal amount of a promissory note which is not readily
tradable on an established securities market and which is contributed to the
Partnership by the maker of the note (or a Partner related to the maker of the note
within the meaning of Treas. Reg. § 1.704-1(b)(2)(ii)(c)) shall not be included in
the Capital Account of any Partner until the Partnership makes a taxable disposition
of the note or until (and to the extent) principal payments are made on the note,
all in accordance with Treas. Reg. § 1.704-1(b)(2)(iv)(d)(2).

     (b) To each Partner’s Capital Account there shall be debited (A) the amount of
cash and the Gross Asset Value of any property distributed to such Partner pursuant
to any provision of this Agreement, (B) such Partner’s distributive share of Losses
and any items in the nature of expenses or losses

 

 

which are specially allocated pursuant to Sections B.2.3 or B.2.4
hereof, and (C) the amount of any liabilities of such Partner assumed by the
Partnership or which are secured by any property contributed by such Partner to the
Partnership.

     (c) In the event all or a portion of a Partner’s interest in the Partnership is
transferred in accordance with the terms of this Agreement, the transferee shall
succeed to the Capital Account of the transferor to the extent it relates to the
transferred interest; and

     (d) In determining the amount of any liability for purposes of subparagraphs
(a) and (b) above, there shall be taken into account Code Section 752(c) and any
other applicable provisions of the Code and Treasury Regulations.

     The foregoing provisions and the other provisions of this Agreement relating to the
maintenance of Capital Accounts are intended to comply with Treas. Reg. § 1.704-1(b), and
shall be interpreted and applied in a manner consistent therewith. In the event the General
Partner shall determine that it is prudent to modify the manner in which the Capital
Accounts, or any debits or credits thereto (including, without limitation, debits or credits
relating to liabilities which are secured by contributed or distributed property or which
are assumed by the Partnership or the Partners), are computed in order to comply with Treas.
Reg. § 1.704-1(b), the General Partner may make such modification, provided that it is not
likely to have a material effect on the amounts distributable to any Partner pursuant to
this Agreement upon the dissolution of the Partnership. The General Partner also shall (i)
make any adjustments that are necessary or appropriate to maintain equality between the
Capital Accounts of the Partners and the amount of Partnership capital reflected on the
Partnership’s balance sheet, as computed for book purposes, in accordance with Treas. Reg. §
1.704-1(b)(2)(iv)(g), and (ii) make any appropriate modifications in the event unanticipated
events might otherwise cause this Agreement not to comply with Treas. Reg. § 1.704-1(b),
provided that, to the extent that any such adjustment is inconsistent with other provisions
of this Agreement and would have a material adverse effect on any Partner, such adjustment
shall require the consent of such Partner.

     B.1.3 “Code” means the Internal Revenue Code of 1986, as amended and in effect from
time to time, as interpreted by the applicable regulations thereunder.

     B.1.4 “Partnership Minimum Gain” has the meaning set forth in Treas. Reg. §§
1.704-2(b)(2) and 1.704-2(d) for such term.

     B.1.5 “Depreciation” means, for each Fiscal Year, an amount equal to the depreciation,
amortization, or other cost recovery deduction allowable for federal income tax purposes
with respect to an asset for such Fiscal Year, except that if the Gross Asset Value of an
asset differs from its adjusted basis for federal income tax purposes at the beginning of
such Fiscal Year, Depreciation shall be an amount which bears the same ratio to such
beginning Gross Asset Value as the federal income tax depreciation, amortization, or other
cost recovery deduction for such Fiscal Year bears to such

B-2

 

beginning adjusted tax basis; provided, however, that if the federal income tax
depreciation, amortization, or other cost recovery deduction for such Fiscal Year is zero,
Depreciation shall be determined with reference to such beginning Gross Asset Value using
any reasonable method selected by the General Partner.

     B.1.6 “Gross Asset Value” means, with respect to any asset, the asset’s adjusted basis
for federal income tax purposes, except as follows:

     (a) The initial Gross Asset Value of any asset contributed by a Partner to the
Partnership shall be the gross fair market value of such asset, as determined by the
contributing Partner and the General Partner.

     (b) The Gross Asset Values of all Partnership assets shall be adjusted to equal
their respective gross fair market values (taking Code Section 7701(g) into
account), as determined by the General Partner, as of the following times: (A) the
acquisition of an additional interest in the Partnership by any new or existing
Partner in exchange for more than a de minimis capital contribution; (B) the
distribution by the Partnership to a Partner of more than a de minimis amount of
property as consideration for an interest in the Partnership; and (C) the
liquidation of the Partnership within the meaning of Treas. Reg. §
1.704-1(b)(2)(ii)(g); provided, however, that adjustments pursuant to clauses (A)
and (B) above shall be made only if the General Partner reasonably determines that
such adjustments are necessary or appropriate to reflect the relative economic
interests of the Partners in the Partnership.

     (c) The Gross Asset Value of any Partnership asset distributed to any Partner
shall be adjusted to equal the gross fair market value (taking into account Code
Section 7701(g) into account) of such asset on the date of distribution as
determined by the General Partner.

     (d) The Gross Asset Values of Partnership assets shall be increased (or
decreased) to reflect any adjustments to the adjusted basis of such assets pursuant
to Code Section 734(b) or Code Section 743(b), but only to the extent that such
adjustments are taken into account in determining Capital Accounts pursuant to
Treas. Reg. § 1.704-1(b)(2)(iv)(m), subparagraph (f) of the definition of “Profits”
and “Losses” and Section B.2.3(g) hereof; provided, however, that Gross
Asset Values shall not be adjusted pursuant to this subparagraph (d) to the extent
the General Partner determines that an adjustment pursuant to subparagraph (b)
hereof is necessary or appropriate in connection with a transaction that would
otherwise result in an adjustment pursuant to this subparagraph (d). If the Gross
Asset Value of an asset has been determined or adjusted pursuant to subparagraphs
(a), (b) or (d) hereof, such Gross Asset Value shall thereafter be adjusted by the
Depreciation and Simulated Depletion (as applicable) taken into account with respect
to such asset.

B-3

 

     B.1.7 “Partner Nonrecourse Debt” has the meaning set forth in Treas. Reg. §
1.704-2(b)(4) for such term.

     B.1.8 “Partner Nonrecourse Debt Minimum Gain” means an amount, with respect to each
Partner Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if such
Partner Nonrecourse Debt were treated as a Nonrecourse Liability, determined in accordance
with Treas. Reg. §1.704-2(i)(3).

     B.1.9 “Partner Nonrecourse Deductions” has the meaning set forth in Treas. Reg. §§
1.704-2(i)(1) and 1.704-2(i)(2) for such term.

     B.1.10 “Nonrecourse Deductions” has the meaning set forth in Treas. Reg. §§
1.704-2(b)(1) and 1.704-2(c). The amount of Nonrecourse Deductions for an Fiscal Year shall
generally equal the net increase, if any, in the amount of Partnership Minimum Gain for that
Fiscal Year, reduced (but not below zero) by the aggregate distributions during the year of
proceeds of Nonrecourse Liabilities that are allocable to an increase in Partnership Minimum
Gain, with such other modifications as provided in Treas. Reg. § 1.704-2(c).

     B.1.11 “Nonrecourse Liability” has the meaning set forth in Treas. Reg. §
1.704-2(b)(3).

     B.1.12 “Partially Adjusted Capital Account” shall mean with respect to any Partner and
any Fiscal Year, the Capital Account of such Partner at the beginning of such Fiscal Year,
adjusted as set forth in the definition of Capital Account for all contributions and
distributions during such year (including any actual or anticipated Tax Distributions for
such year) and all special allocations pursuant to Section B.2.3 and Section
B.2.4 with respect to such Fiscal Year, but before giving effect to any allocations of
Profits and Losses for such Fiscal Year pursuant to Section B.2.1 and Section
B.2.2, plus the Partner’s share of Minimum Gain determined under Treas. Reg. §
1.704-2(g) and plus the Partner’s share of “partner nonrecourse debt minimum gain,” as
defined and determined in Treas. Reg. §§ 1.704-(2)(i)(2) and 1.704-2(i)(4), all computed
immediately prior to the hypothetical sale described in the definition for Target Capital
Account.

     B.1.13 “Profits” and “Losses” means, for each Fiscal Year, an amount equal to the
Partnership’s taxable income or loss for such Fiscal Year, determined in accordance with
Code Section 703(a) (for this purpose, all items of income, gain, loss, or deduction
required to be stated separately pursuant to Code Section 703(a)(1) shall be included in
taxable income or loss), with the following adjustments (without duplication):

     (a) Any income of the Partnership that is exempt from federal income tax and
not otherwise taken into account in computing Profits or Losses pursuant to this
definition of “Profits” and “Losses” shall be added to such taxable income or loss.

B-4

 

     (b) Any expenditures of the Partnership described in Code Section 705(a)(2)(B)
or treated as Code Section 705(a)(2)(B) expenditures pursuant to Treas. Reg. §
1.704-1(b)(2)(iv)(i), and not otherwise taken into account in computing Profits or
Losses pursuant to this definition of “Profits” and “Losses” shall be subtracted
from such taxable income or loss.

     (c) In the event the Gross Asset Value of any Property is adjusted pursuant to
subparagraphs (b) or (c) of the definition of “Gross Asset Value,” hereof, the
amount of such adjustment shall be treated as an item of gain (if the adjustment
increases the Gross Asset Value of the asset) or an item of loss (if the adjustment
decreases the Gross Asset Value of the asset) from the disposition of such asset and
shall be taken into account for purposes of computing Profits or Losses.

     (d) Gain or loss resulting from any disposition of property with respect to
which gain or loss is recognized for federal income tax purposes shall be computed
by reference to the Gross Asset Value of the property disposed of, notwithstanding
that the adjusted tax basis of such property differs from its Gross Asset Value.

     (e) In lieu of the depreciation, amortization, and other cost recovery
deductions taken into account in computing such taxable income or loss, there shall
be taken into account Depreciation for such Fiscal Year, computed in accordance with
the definition of “Depreciation”.

     (f) To the extent an adjustment to the adjusted tax basis of any Partnership
asset pursuant to Code Section 734(b) or Code Section 743(b) is required pursuant to
Treas. Reg. § 1.704-1(b)(2)(iv)(m)(4) to be taken into account in determining
Capital Accounts as a result of a distribution other than in complete liquidation of
a Partner’s interest in the Partnership, the amount of such adjustment shall be
treated as an item of gain (if the adjustment increases the basis of the asset) or
loss (if the adjustment decreases such basis) from the disposition of such asset and
shall be taken into account for purposes of computing Profits or Losses.

     (g) Any items which are specially allocated pursuant to Sections B.2.3 or
B.2.4 hereof shall not be taken into account in computing Profits or Losses.
The amounts of the items of Partnership income, gain, loss, or deduction available
to be specially allocated pursuant to Sections B.2.3 or B.2.4 hereof shall
be determined by applying rules analogous to those set forth in subparagraphs (a)
through (f) above.

     B.1.14 “Regulatory Allocations” has the meaning set forth in Section B.2.4
hereof.

B-5

 

     B.1.15 “Simulated Depletion”, “Simulated Loss”, and “Simulated Gain” have the meaning
given to such terms in Treas. Reg. §1.704-1(b)(2)(iv)(k).

     B.1.16 “Target Capital Account” means, with respect to any Partner and for any Fiscal
Year, an amount (which may be either a positive or negative balance) equal to the
hypothetical distributions such Partner would receive as described in the next sentence.
The hypothetical distribution to a Partner is equal to the sum of (A) amount that would be
received by such Partner if all Partnership assets were sold for cash equal to their Gross
Asset Value and, all Partnership liabilities were satisfied to the extent required by their
terms (limited, with respect to Nonrecourse Liability or Partner Nonrecourse Debt, to the
Gross Asset Value of the assets securing each such liability) and the remaining assets were
distributed in full to the Partners pursuant to Section 8.2(b) of the Agreement, all
as of the last day of such year.

     B.1.17 “Tax Matters Partner” has the meaning set forth in Section B.3.3(a)
hereof.

     B.1.18 “Treasury Regulation” or “Treas. Reg.” means any temporary or final income tax
regulation issued by the United States Treasury Department.

ARTICLE B-II

ALLOCATIONS OF PROFITS AND LOSSES

     B.2.1 Profits. After giving effect to the special allocations set forth in
Sections B.2.3 and B.2.4 hereof, Profits for any Fiscal Year shall be allocated in the
following order and priority:

Profits for any Fiscal Year shall be allocated among the Partners so as to reduce,
proportionately, the differences between their respective Target Capital Accounts and
Partially Adjusted Capital Accounts for such Fiscal Year. No portion of the Profits for any
Fiscal Year shall be allocated to a Partner whose Partially Adjusted Capital Account is
greater than or equal to its Target Capital Account for such Fiscal Year.

     B.2.2 Losses. After giving effect to the special allocations set forth in
Sections B.2.3 and B.2.4 hereof, Losses for any Fiscal Year shall be allocated as set forth
in Section B.2.2(a) below, subject to the limitation in Section B.2.2(b) below:

     (a) Losses for any Fiscal Year shall be allocated among the Partners so as to reduce,
proportionately, the differences between their respective Partially Adjusted Capital
Accounts and Target Capital Accounts for such Fiscal Year. No portion of the Losses shall
be allocated to a Partner whose Target Capital Account is greater than or equal to its
Partially Adjusted Capital Account for such Fiscal Year.

     (b) The Losses allocated pursuant to Section B.2.2(a) hereof shall not exceed
the maximum amount of Losses that can be so allocated without causing any Limited Partner to
have an Adjusted Capital Account Deficit at the end of any Fiscal Year. In the

B-6

 

event some but not all of the Limited Partners would have Adjusted Capital Account Deficits
as a consequence of an allocation of Losses pursuant to Section B.2.2(a), the
limitation set forth in this Section B.2.2(b) shall be applied on a Limited Partner
by Limited Partner basis so as to allocate the maximum permissible Losses to each Limited
Partner under Treas. Reg. § 1.704-1(b)(2)(ii)(d), with any excess losses allocated to the
General Partner.

     B.2.3 Special Allocations. The following special allocations shall be made in the
following order and priority:

     (a) Minimum Gain Chargeback. Except as otherwise provided in Treas. Reg. §
1.704-2(f), notwithstanding any other provision of this Agreement, if there is a net
decrease in Partnership Minimum Gain during any Fiscal Year, each Partner shall be specially
allocated items of Partnership income and gain for such Fiscal Year (and, if necessary,
subsequent Fiscal Years) in an amount equal to such Partner’s share of the net decrease in
Partnership Minimum Gain, determined in accordance with Treas. Reg. § 1.704-2 (g).
Allocations pursuant to the previous sentence shall be made in proportion to the respective
amounts required to be allocated to each Partner pursuant thereto. The items to be so
allocated shall be determined in accordance with Treas. Reg. §§ 1.704-2(f)(6) and
1.704-2(j)(2). This Section B.2.3(a) is intended to comply with the minimum gain
chargeback requirement in Treas. Reg. § 1.704-2(f) and shall be interpreted consistently
therewith.

     (b) Partner Nonrecourse Debt Minimum Gain Chargeback. Except as otherwise
provided in Treas. Reg. § 1.704-2(i)(4), notwithstanding any other provision of this
Agreement, if there is a net decrease in Partner Nonrecourse Debt Minimum Gain attributable
to a Partner Nonrecourse Debt during any Fiscal Year, each Partner who has a share of the
Partner Nonrecourse Debt Minimum Gain attributable to such Partner Nonrecourse Debt,
determined in accordance with Treas. Reg. § 1.704-2(i)(5), shall be specially allocated
items of Partnership income and gain for such Fiscal Year (and, if necessary, subsequent
Fiscal Years) in an amount equal to such Partner’s share of the net decrease in Partner
Nonrecourse Debt Minimum Gain attributable to such Partner Nonrecourse Debt, determined in
accordance with Treas. Reg. §§ 1.704-2(i)(4). Allocations pursuant to the previous sentence
shall be made in proportion to the respective amounts required to be allocated to each
Partner pursuant thereto. The items to be so allocated shall be determined in accordance
with Treas. Reg. §§ 1.704-2(i)(4) and 1.704-2(j)(2). This Section B.2.3(b) is
intended to comply with the partner nonrecourse debt minimum gain chargeback requirement in
Treas. Reg. § 1.704-2(i)(4) and shall be interpreted consistently therewith.

     (c) Qualified Income Offset. In the event any Partner unexpectedly receives
any adjustments, allocations, or distributions described in Treas. Reg. §§
1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5) or 1.704-1(b)(2)(ii)(d)(6), items of
Partnership income and gain shall be specially allocated to each such Partner in an amount
and manner sufficient to eliminate, to the extent required by the Treasury Regulations, the
Adjusted Capital Account Deficit of such Partner as quickly as possible, provided that an

B-7

 

allocation pursuant to this Section B.2.3(c) shall be made only if and to the extent
that such Partner would have an Adjusted Capital Deficit after all other allocations
provided for in this Agreement have been tentatively made as if this Section
B.2.3(c) were not in this Agreement. This Section B.2.3(c) is intended to
comply with the qualified income offset requirement in Treas. Reg. § 1.704-1(b)(2)(ii)(d)
and shall be interpreted consistently therewith.

     (d) Gross Income Allocation. In the event any Partner has a deficit Capital
Account at the end of any Fiscal Year which is in excess of the sum of (i) the amount such
Partner is obligated to restore pursuant to any provision of this Agreement and (ii) the
amount such Partner is deemed to be obligated to restore pursuant to the penultimate
sentences of Treas. Reg. §§ 1.704-2(g)(1) and 1.704-2(i)(5), each such Partner shall be
specially allocated items of Partnership income and gain in the amount of such excess as
quickly as possible, provided that an allocation pursuant to this Section B.2.3(d)
shall be made only if and to the extent that such Partner would have a deficit Capital
Account in excess of such sum after all other allocations provided for in this Agreement
have been made as if Section B.2.3(c) hereof and this Section B.2.3(d) were
not in this Agreement.

     (e) Nonrecourse Deductions. Nonrecourse Deductions for any Fiscal Year shall
be specially allocated to the Partners in accordance with their Percentage Interests.

     (f) Partner Nonrecourse Deductions. Partner Nonrecourse Deductions for any
Fiscal Year shall be specially allocated to the Partner who bears the economic risk of loss
with respect to the Partner Nonrecourse Debt to which such Partner Nonrecourse Deductions
are attributable in accordance with Treas. Reg. § 1.704-2(i)(1); provided, however, that if
more than one Partner bears the economic risk of loss for such debt, the Partner Nonrecourse
Deductions attributable to such Partner Nonrecourse Debt shall be allocated to and among the
Partners in the same proportion that they bear the economic risk of loss for such Partner
Nonrecourse Debt. This Section B.2.3(f) is intended to comply with the provision of
Treas. Reg. § 1.704-2(i) and shall be interpreted consistently therewith.

     (g) Section 754 Adjustments. To the extent an adjustment to the adjusted tax
basis of any Partnership asset pursuant to Code Section 734(b) or Code Section 743(b) is
required, pursuant to Treas. Reg. §§ 1.704-1(b)(2)(iv)(m)(2) or 1.704-1(b)(2)(iv)(m)(4), to
be taken into account in determining Capital Accounts as the result of a distribution to a
Partner in complete liquidation of such Partner’s interest in the Partnership, the amount of
such adjustment to the Capital Accounts shall be treated as an item of gain (if the
adjustment increases the basis of the asset) or loss (if the adjustment decreases such
basis) and such gain or loss shall be specially allocated to the Partners in accordance with
their interests in the Partnership in the event Treas. Reg. § 1.704-1(b)(2)(iv)(m)(2)
applies, or to the Partner to whom such distribution was made in the event Treas. Reg. §
1.704-1(b)(2)(iv)(m)(4) applies.

     (h) Additional Allocations. The following special allocations shall be made:

B-8

 

	 	(A)	 	If the Partnership has Profits for any Fiscal
Year (determined before giving effect to this Section
B.2.3(h)), any Partner whose Partially Adjusted Capital Account is
greater than its Target Capital Account for such Fiscal Year shall be
specially allocated items of Partner deduction or loss (included in the
calculation of Profits) for such Fiscal Year equal to the difference
between its Target Capital Account and its Partially Adjusted Capital
Account. In the event the Partnership has insufficient items of
deduction and loss for such Fiscal Year to satisfy the previous
sentence with respect to all such Partners, the available items of
deduction and loss shall be divided among such Partners in proportion
to their differences.
	 
	 	(B)	 	If the Partnership has Loss for any Fiscal Year
(determined prior to giving effect to this Section B.2.3(h)),
any Partner whose Target Capital Account is greater than its Partially
Adjusted Capital Account for such Fiscal Year shall be specially
allocated items of Partnership income or gain (included in the
calculation of Loss) for such Fiscal Year equal to the difference
between its Partially Adjusted Capital Account and Target Capital
Account. In the event the Partnership has insufficient items of income
or gain for such Fiscal Year to satisfy the previous sentence with
respect to all such Partners, the available items of income or gain
shall be divided among such Partners in proportion to such differences.
	 
	 	(C)	 	The availability of items of income, gain, loss
or deduction to be specially allocated pursuant to this Section
B.2.3(h) shall be determined after giving full effect to all of the
preceding provisions of Section B.2.3.

	 	(i)	 	Simulated Depletion,
Simulated Loss and Simulated Gain. Simulated Depletion and
Simulated Loss shall be allocated under Treas. Reg.
§1.704-1(b)(2)(iv)(k) with any election required under such
section made by the General Partner. Any Simulated Gain shall
be included in the computation of Profits and Loss.

     B.2.4 Curative Allocations. The allocations set forth in Sections B.2.2(b) and
C.2.3(a) through (g) (the “Regulatory Allocations”) are intended to comply with certain
requirements of the Treasury Regulations. It is the intent of the Partners that, to the extent
possible, all Regulatory Allocations shall be offset either with other Regulatory Allocations or
with special allocations of other items of Partnership income, gain, loss or deduction pursuant to
this Section B.2.4. Therefore, notwithstanding any other provision of this Agreement
(other than the Regulatory Allocations), the General Partner shall make such offsetting allocations
of Partnership income, gain, loss, or deduction in whatever manner it determine appropriate so
that, after such offsetting allocations are made, each Partner’s Capital Account balance is, to the

B-9

 

extent possible, equal to the Capital Account balance such Partner would have had if the Regulatory
Allocations were not part of this Agreement.

     B.2.5 Intent of Allocations. The parties intend that the allocation provisions of
this Exhibit B shall produce final Capital Account balances of the Partners that will
permit liquidating distributions in accordance with Section 8.2(b) of the Agreement. To the
extent that the allocations required in this Exhibit B would fail to produce such final
Capital Account balances, (i) such allocation provisions shall be amended by the General Partner if
and to the extent necessary to produce such result and (ii) items of Partnership income, gain,
loss, or deduction for prior open taxable years shall be reallocated by the General Partner among
the Partners to the extent it is not possible to achieve such result with allocations of
Partnership income, gain, loss, or deduction for the current taxable year and future taxable years.

     B.2.6 Other Allocation Rules.

     (a) Profits, Losses or any other items allocable to any period shall be determined on a
daily, monthly or other basis, as determined by the General Partner using any permissible
method under Code Section 706 and the Treasury Regulations thereunder.

     (b) The Partners are aware of the income tax consequences of the allocations made in
this Agreement and hereby agree to be bound by the provisions of this Agreement in reporting
their shares of Partnership income and loss for income tax purposes.

     (c) Solely for purposes of determining a Partner’s proportionate share of the “excess
nonrecourse liabilities” of the Partnership within the meaning of Treas. Reg. §
1.752-3(a)(3), the Partners’ interests in Partnership profits shall be allocated in
accordance with their Percentage Interests.

     (d) To the extent permitted by Treas. Reg. § 1.704-2(h)(3), the General Partner shall
endeavor to treat distributions as having been made from the proceeds of a Nonrecourse
Liability or a Partner Nonrecourse Debt only to the extent that such distributions would
cause or increase an Adjusted Capital Account Deficit for any Partner.

     (e) For purpose of Section 613A(c)(7)(D) of the Code, the adjusted tax basis of an oil
and gas property shall be allocated to the Partners in their Percentage Interests, as of the
acquisition of the property or as otherwise reasonably determined by the General Partner
consistent with Section 613A(c)(7)(D) and Treas. Reg. § 1.704-1(b)(2)(iv)(k).

     B.2.7 Tax Allocations; Code Section 704(c).

     (a) In accordance with Code Section 704(c) and the Treasury Regulations thereunder,
income, gain, loss, and deduction with respect to any property contributed to the capital of
the Partnership shall, solely for tax purposes, be allocated among the

B-10

 

Partners so as to take account of any variation between the adjusted basis of such
property to the Partnership for federal income tax purposes and its initial Gross Asset
Value (computed in accordance with subparagraph (a) of the definition of “Gross Asset
Value”). The Partnership shall utilize the traditional method with curative allocations as
described in Treas. Reg. § 1.704-3(c) with respect to each item of contributed property.

     (b) In the event the Gross Asset Value of any Partnership asset is adjusted pursuant to
subparagraph (b) of the definition of “Gross Asset Value”, subsequent allocations of income,
gain, loss, and deduction with respect to such asset shall take account of any variation
between the adjusted basis of such asset for federal income tax purposes and its Gross Asset
Value in the same manner as under Code Section 704(c) and the Treasury Regulations
thereunder.

     (c) Subject to Section B.2.7(a), any elections or other decisions relating to
such allocations shall be made by the General Partner. Allocations pursuant to this
Section B.2.7 are solely for purposes of federal, state, and local taxes and shall
not affect, or in any way be taken into account in computing, any Partner’s Capital Account
or share of Profits, Losses, other items, or distributions pursuant to any provision of this
Agreement.

     (d) Except as otherwise provided in this Agreement, all items of Partnership income,
gain, loss, deduction, and any other allocations not otherwise provided for shall be divided
among the Partners in the same proportions as they share Profits or Losses, as the case may
be, for the Fiscal Year. For purposes of determining the nature (as ordinary or capital) of
any Partnership gain allocated among the Partners for Federal income tax purposes pursuant
to this Agreement, the portion of such gain required to be recognized as ordinary income
pursuant to Code Sections 1245 and/or 1250 shall be deemed to be allocated among the
Partners in accordance with Treas. Reg. § 1.1245-1(e)(2) and 1.1250-1(f).

     B.2.8 Reliance on Advice of Accountants and Attorneys. The General Partner will have
no liability to the Partners or the Partnership if the General Partner relies upon the written
opinion of tax counsel or accountants retained by the Partnership with respect to all matters
(including disputes) relating to computations and determinations required to be made under this
Exhibit B or other related provisions of this Agreement.

ARTICLE B-III

OTHER TAX MATTERS

     B.3.1 Tax Returns. The General Partner shall prepare and timely file all federal,
state, and local tax returns required to be filed by the Partnership in accordance with Section
5.9 of the Agreement.

     B.3.2 Tax Elections. The Partnership shall make the following elections for tax
purposes on the appropriate returns:

B-11

 

     (a) to the extent permitted by law, to adopt the calendar year as the Partnership’s
taxable year;

     (b) to the extent permitted by law, to adopt the accrual method of accounting and to
keep the Partnership’s books and records on the accrual method;

     (c) if a distribution of the Partnership’s property as described in Code Section 734
occurs or upon a transfer of an interest in the Partnership as described in Code Section 743
occurs, on request by notice from any Partner, to elect, pursuant to Code Section 754, to
adjust the basis of Partnership’s properties;

     (d) to elect to amortize the organizational expenses of the Partnership ratably over a
period of 60 months as permitted by Code Section 709(b); and

     (e) any other election the General Partner deems appropriate and in the best interests
of the Partners.

The Partnership intends to be classified as a partnership for federal income tax purposes under
Treas. Reg. § 301.7701-3. Neither the Partnership nor any Partner may make an election under
Treas. Reg. § 301.7701-3(c) to treat the Partnership as an association taxable as a corporation.
To the extent Treas. Reg. § 301.7701-3 does not govern the state and local tax classification of
the Partnership, the General Partner shall take such action as may be permitted or required under
any state and/or local law applicable to the Partnership to cause the Partnership to be taxable as,
and in a manner consistent with, a partnership (or the functional equivalent thereof under
applicable law) for the state and/or local income tax purposes. In addition, neither the
Partnership nor any Partner may make an election for the Partnership to be excluded from the
application of the provisions of subchapter K of chapter 1 of subtitle A of the Code or any similar
provisions of applicable state law and no provision of this Agreement shall be construed to
sanction or approve such an election.

     B.3.3 Amounts Withheld. All amounts required to be withheld pursuant to federal,
state, local, or foreign tax laws shall be treated as amounts actually distributed to the affected
Partners for all purposes under this Agreement. The General Partner is hereby authorized to
withhold from distributions, or with respect to allocations, to the Partners and to pay over any
federal, state, local, or foreign government any amounts required to be so withheld pursuant to
federal, state, or local law.

B-12

 

MEMORANDUM OF AMENDMENT

CHANGING THE NAME OF HALLWOOD ENERGY 4, L.P. TO

HALLWOOD ENERGY, L.P.

     Pursuant to Section 2.2 of the Agreement and Plan of Consolidation (the “LP Consolidation
Agreement”) dated December 8, 2005, among Hallwood Exploration, L.P. (“HEP”), Hallwood Energy II,
L.P. (“HE II”) and Hallwood Energy 4, L.P. (“HE 4”), effective immediately before midnight on
December 31, 2005, the effective date of the Merger (as defined in the LP Consolidation Agreement),
HEP and HE II merged with and into HE 4 (the “Surviving LP”) and the name of the Surviving LP
became “Hallwood Energy, L.P.”

	 	 	 	 	 	 	 
	 	 	HALLWOOD ENERGY, L.P.,
	 	 	By:	 	HALLWOOD ENERGY MANAGEMENT, LLC,

its general partner
	 
	 	 	 	 	 	 
	 

	 	 	 	By:
	 	          /s/ Tony Strehlow
	 

	 	 	 	 	 	 
	 

	 	 	 	Name:
	 	Tony Strehlow
	 

	 	 	 	Title:
	 	Chief Accountant

 

 

Amendment to Limited Partnership Agreement

     This Amendment, dated as of December 31, 2005, amends the Limited Partnership Agreement of
Hallwood Energy, L.P. (formerly Hallwood Energy 4, L.P.) dated as of August 23, 2005, by adding the
following language as a new subsection B.2.3(h)(D) in Exhibit B to the Agreement:

	 	(D)	 	If the Partnership sells or otherwise disposes of any Built-in Gain Assets of
the Partnership, any gain or loss on the sale of such Built-in Gain Asset recognized by
the Partnership shall be allocated among the Partners in the following manner:

	 	(i)	 	First, gain or loss required to be allocated under Code Section
704(c) (including any reverse Section 704(c) gain or loss) shall be allocated
in accordance with Code Section 704(c), applicable Treasury Regulations
promulgated thereunder and Section 2.7 of this Agreement to the
Partners (or former Partners) of the Contributing Partnership that was deemed
to have contributed the Built-in Gain Assets that were sold by the Partnership;
	 
	 	(ii)	 	Second, the excess, if any, of the total amount of the
Partnership’s recognized gain or loss on the sale or other disposition of the
Built-in Gain Assets over the gain or loss allocated to the Partners (or former
Partners) of one of the Contributing Partnership under Section
B.2.3(h)(D)(i) above, will be allocated to the Partners (or former
Partners) of the other two Contributing Partnerships in an amount not to exceed
the Special Allocation Amount;
	 
	 	(iii)	 	Third, the excess, if any, of the total amount of
Partnership’s recognized gain or loss on the sale or other disposition of the
Built-in Gain Assets over the gain or loss allocated to the Partners under
Sections B.2.3(h)(D)(i) and (ii) above shall be allocated to the
Partners in accordance with their Percentage Interests.
	 
	 	(iv)	 	It is the intent of the Partners and the Partnership that after
the sale or other disposition of all Built-in Gain Assets, the sum of the
allocations in Sections B.2.3(h)(D)(i) through (iii) above to each
Partner will be exactly the same as if the allocations under this Section
B.2.3(h)(D)  were not in this Agreement. The allocations of this
Section B.2.3(h)(D)  shall be interpreted consistent with this intent
and, if necessary, additional special allocations of income, gain, loss or
deduction will be made to accomplish this intent.
	 
	 	(v)	 	Distributions under Section 4.2 or Section 4.3
shall be made only after allocating the gain or loss under this Section
B.2.3(h)(D).
	 
	 	(vi)	 	For purposes of this Section B.2.3(h)(D), the following
definitions shall apply:

 

 

	 	(a)	 	“Built-in Gain Assets” shall mean assets of the
Partnership that were either owned by the Partnership as of December
31, 2005 or were contributed to the Partnership on December 31, 2005 as
a result of the Partnership Merger.
	 
	 	(b)	 	“Built-in Gain Percentage” for each
Contributing Partnership shall mean the following percentage:

	 	 	 	 	 
	Hallwood Energy 4, L.P.
	 	 	51.465850	%
	Hallwood Exploration , L.P.
	 	 	13.623313	%
	Hallwood Energy II, L.P.
	 	 	34.910837	%

	 	 	 	Each Contributing Partnership’s Built-in Gain Percentage represents
the percentage of the total built-in gain of all the Built-in Gain
Assets owned by a Contributing Partnership as of the effective date
of the Partnership Merger.
	 
	 	(c)	 	“The Contributing Partnerships” shall mean
Hallwood Energy 4, L.P., Hallwood Exploration, L.P. and Hallwood Energy
II, L.P. and each such partnership shall be a Contributing Partnership.
	 
	 	(d)	 	“Partnership Merger” shall mean the merger of
Hallwood Exploration, L.P. and Hallwood Energy II, L.P. with and into
Hallwood Energy 4, L.P. with Hallwood Energy 4, L.P. as surviving
limited partnership.
	 
	 	(e)	 	“Special Allocation Amount” shall mean an
amount equal to the quotient of:

	 	(I)	 	the amount allocated to the
Partners of one of the Contributing Partnerships under
Section B2.3(h)(D)(i); divided by
	 
	 	(II)	 	the sum of the Built-in Gain
Percentages of the two Contributing Partnerships not receiving
an allocation of gain or loss under Section
B2.3(h)(D)(i).

     The foregoing amendment was approved by the partners of the Partnership effective December 31,
2005.

 

 

     IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed, all as
of the day and year first written above.

	 	 	 	 	 
	 	 	GENERAL PARTNER:
	 
	 	 	 	 
	 	 	HEC 4 MANAGEMENT, LLC
	 
	 	 	 	 
	 

	 	By:
	 	/s/ William L. Guzzetti
	 

	 	 	 	 
	 

	 	 	 	William L. Guzzetti, President
	 
	 	 	 	 
	 	 	THE LIMITED PARTNERS (PURSUANT TO THE POWER OF ATTORNEY IN
SECTION 1.8 OF THE LIMITED PARTNERSHIP AGREEMENT):
	 
	 	 	 	 
	 	 	HEC 4 MANAGEMENT, LLC
	 
	 	 	 	 
	 

	 	By:
	 	/s/ William L. Guzzetti
	 

	 	 	 	 
	 

	 	 	 	William L. Guzzetti, Presidentexv10w22

 

EXHIBIT
10.22

SECOND AMENDMENT TO SECOND AMENDED AND RESTATED REVOLVING CREDIT LOAN AND SECURITY AGREEMENT

     This Second Amendment to Second Amended and Restated Revolving Credit Loan and Security
Agreement (“Amendment”) is entered into as of the 31st day of March, 2006, by and among
KEYBANK NATIONAL ASSOCIATION (“Bank”) and BROOKWOOD COMPANIES INCORPORATED, KENYON INDUSTRIES,
INC., BROOKWOOD LAMINATING, INC., ASHFORD BROMLEY, INC. and STRATEGIC TECHNICAL ALLIANCE, LLC
(collectively, “Borrower”).

RECITALS:

     WHEREAS, Bank and Borrower are parties to that certain Second Amended and Restated Revolving
Credit Loan and Security Agreement dated as of January 30, 2004, as amended by a First Amendment
thereto dated as of March 25, 2005 (“Loan Agreement”); and

     WHEREAS, Bank and Borrower desire to further amend the Loan Agreement in the manner
hereinafter set forth;

     NOW, THEREFORE, in consideration of the mutual agreements hereinafter set forth, and for other
good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree that the Loan Agreement is amended as follows:

     1. Definitions. Unless otherwise defined herein, capitalized terms used herein shall
have the meanings ascribed to them in the Loan Agreement.

     2. Equipment Revolving Credit Facility Maturity Date. The Equipment Revolving Credit
Facility Maturity Date shall be extended until January 30, 2010, and the definition of the same in
Section 1.1 shall be amended accordingly.

     3. Working Capital Revolving Credit Maturity Date. The Working Capital Revolving
Credit Maturity Date shall be extended until January 30, 2010, and the definition of the same in
Section 1.1 shall be amended accordingly.

 

 

     4. Interest Rate Pricing Formula. The Interest Rate Pricing Grid in Sections 2.6.1
and 2.6.2 shall be deleted in its entirety and replaced with the following:

	 	 	 	 	 	 	 
	 	 	 	 	Applicable	 	Applicable
	 	 	 	 	Margin for	 	Margin for
	Tier	 	TD/TNW	 	LIBOR Loans	 	Prime Loans
	I
	 	<=1.50

and >=1.00
	 	1.75%
	 	0%
	 	 	 	 	 	 	 
	II
	 	<1.00x and

>=0.50
	 	1.50%
	 	0%
	 	 	 	 	 	 	 
	III
	 	<0.50
	 	1.25%
	 	0%

     5. Dissolution of XtraMile, Inc. and Land and Ocean III, Inc. Borrower represents,
warrants and covenants to and wth Bank that XtraMile, Inc. and Land and Ocean III, Inc. have been
administratively dissolved and no longer have any legal existence. The Loan Agreement is amended
accordingly to delete all references to these entities as the context permits.

     6. Effective Date. This Amendment shall be become effective as of the date hereof.

     7. Representations and Warranties; No Default. Borrower hereby ratifies and confirms
to the Bank that all representations and warranties set forth in the Loan Agreement are true,
complete and correct in all material respects as of the date hereof as if set forth herein in full
(except as to representations and warranties made as of a certain date which shall be true,
complete and correct only as of such date) and apply with equal force and effect to this Amendment.
Borrower hereby certifies that, after giving effect hereto, no Default or Event of Default exists
under the Loan Agreement.

     8. Miscellaneous.

          (a) Borrower agrees to pay on demand all of the Bank’s reasonable expenses in preparing,
executing and delivering this Amendment, and all related instruments and documents, including,
without limitation, the reasonable fees and out-of-pocket expenses of the Bank’s special counsel,
PretiFlaherty, LLP. Borrower agrees to indemnify and hold harmless the Bank (and its directors,
officers, employees and agents) against any damages, loss, liability, and reasonable costs or
expenses incurred with respect to any claim made against Bank by a third party arising out of the
financing contemplated hereby or the use or proposed use of the proceeds thereof (except to the
extent resulting from the gross negligence or willful misconduct of the Bank).

          (b) Borrower acknowledges and agrees that: (i) as of the date hereof, it has no claim or cause
of action against the Bank (or its directors, officers, employees, agents, representatives,
affiliates or attorneys); (ii) as of the date hereof, it has no offset right, right of recoupment,
counterclaim or defense of any kind against any of the Obligations or any other obligation or
indebtedness of Borrower to the Bank; and (iii) Bank has heretofore properly performed and
satisfied in a timely manner all of its obligations to Borrower.

2

 

          (c) For and in consideration of the agreements contained in the Loan Agreement, as amended
hereby, and other good and valuable consideration, Borrower unconditionally and irrevocably
releases, waives and forever discharges the Bank, together with its successors, assigns,
subsidiaries, affiliates, directors, officers, employees, agents and attorneys (collectively, the
“Released Parties”), from: (i) any and all liabilities, obligations, duties, promises or
indebtedness of any kind of the Released Parties to Borrower as a result of any matter occurring on
or prior to the date hereof, provided that the Bank shall continue to be bound by its express
obligations under the Loan Agreement, as amended hereby, in accordance with the terms hereof and
thereof, and (ii) all claims, offsets, rights of recoupment, causes of action, suits or defenses of
any kind whatsoever (if any) occurring on or prior to the date hereof, which Borrower might
otherwise have against the Released Parties or any of them, in either case (i) or (ii) on account
of any condition, act, omission, event, contract, liability, obligations, indebtedness, claim,
cause of action, defense, circumstance, or matter of any kind occurring on or prior to the date
hereof.

          (d) Except as expressly amended by this Amendment, all of the remaining terms and conditions
of the Loan Agreement shall continue in full force and effect and are hereby ratified and confirmed
by Borrower, and Borrower ratifies and confirms its prior grant and conveyance and grants and
conveys, to the extent not previously granted and conveyed, to the Bank a security interest in the
Collateral to the extent defined and described in the Loan Documents.

          (e) In the event of a conflict between the terms and conditions of this Amendment and the
terms and conditions of the Loan Agreement, the terms and conditions of this Amendment shall
prevail, and the Loan Agreement shall be interpreted and construed so as to give maximum effect to
the purpose and intent of this Amendment.

          (f) This Amendment shall be governed by and construed and enforced in accordance with the laws
of the State of Maine.

     9. Fee. In consideration of Bank’s agreement to execute this Amendment and
forbearance in making demand for payment in full of the Obligations, Borrower agrees to pay a fee
of $25,000 which is due and payable upon the execution of this Amendment.

[Signature pages follow.]

3

 

     IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as a sealed
instrument by their duly authorized officers as of the date first set forth above.

	 	 	 	 	 
	 	BANK:
KEYBANK NATIONAL ASSOCIATION

 	 
	 	By:  	
 	 
	 	 	Name:  	Paul G. Black, Jr. 	 
	 	 	Title:  	Senior Vice President 	 

4

 

     IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as a sealed
instrument by their duly authorized officers as of the date first set forth above.

	 	 	 	 	 
	 	BORROWER:
BROOKWOOD COMPANIES INCORPORATED

 	 
	 	By:  	
 	 
	 	 	Name:  	Ronald E. Kaplan 	 
	 	 	Title:  	Chief Financial Officer 	 
	 
	 	KENYON INDUSTRIES, INC.

 	 
	 	By:  	
 	 
	 	 	Name:  	Joseph Trumpetto 	 
	 	 	Title:  	Treasurer 	 
	 
	 	BROOKWOOD LAMINATING, INC.

 	 
	 	By:  	
 	 
	 	 	Name:  	Joseph Trumpetto 	 
	 	 	Title:  	Treasurer 	 
	 
	 	ASHFORD BROMLEY, INC.

 	 
	 	By:  	
 	 
	 	 	Name:  	Ronald E. Kaplan 	 
	 	 	Title:  	Chief Financial Officer 	 
	 
	 	STRATEGIC TECHNICAL ALLIANCE, LLC
By:  Brookwood Companies Incorporated, Its Sole Member 	 
	 
	 	By:  	
 	 
	 	 	Name:  	Ronald E. Kaplan 	 
	 	 	Title:  	Chief Financial Officer 	 

5

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