ITEM 5. FEES AND COMPENSATION
Management Fees
In return for its advisory services, Sheridan receives a management fee (the
“Management Fee”) from Fund III-A and Fund III-B. The Management Fee is paid
quarterly in advance. Pre-paid Management Fees are generally not subject to refund.
However, as required by the Investment Advisers Act of 1940, if Sheridan is removed as
the Manager of a Fund prior to the end of the applicable period, management fees will
be charged on a pro rata basis through to the date of removal, and any fees paid in
advance but not earned will be refunded.
The amount of the Management Fee payable with respect to each Fund is calculated in
accordance with each Fund's Governing Documents. Initially, the Management Fee is
calculated by assessing a specified rate against the aggregate limited partner capital
commitments of the Fund. Upon the occurrence of certain events with respect to each
series of Funds, (i) the rate at which the Management Fee is assessed will step down
from its initial level and (ii) the Management Fee will be charged against the lesser of the
value (calculated in accordance with the Governing Documents) of the limited partners’
interest in the Fund or the aggregate limited partner capital commitments.
Management Fees are subject to reduction by 100% of the amount of certain additional
fees received by Sheridan in connection with the Funds’ investments, as described
below under “Other Fees.” Management Fees may be funded from cash flows received
in respect of a Fund’s operations or through capital contributions by limited partners.
Other Fees
None of Sheridan or its affiliates charges the Funds any fees other than the
Management Fee. Any transaction fees or other fees received by Sheridan or its
affiliates from third parties related to the Funds’ investments are applied entirely to
reduce the Management Fee (excluding any third-party fees received as operator of
properties under standard joint operating agreements, which would reduce Fund
Expenses (as defined below) on a dollar-for-dollar basis).
Fund Expenses
Each Fund bears all expenses associated with its investment program and operations
(“Fund Expenses”), including, without limitation, fees, costs and expenses related to
proposed and actual purchases and sales of properties, expenses incurred in the
operation of the Fund and development of its properties (including, without limitation,
expenses of custodians, counsel and auditors, and any insurance, indemnity or litigation
expenses), all costs of the Funds’ administration (including, but not limited to,
preparation of financial statements and reports to limited partners, interest, fees and
other amounts payable in connection with any leveraging, and costs of holding any
meetings of limited partners), and any taxes, fees or other governmental charges levied
against such Funds. In addition, the Funds are responsible for all fees and expenses
due to any legal, financial, accounting, consulting or other advisors, or any lenders,
investment banks and other financing sources in connection with transactions that are
not consummated.
One or more wholly-owned subsidiaries of the Firm (collectively, "SPC"), manage the
day-to-day operation and administration of the Funds' oil and gas properties and
employs engineers, geoscientists, accountants, attorneys, land professionals and other
office staff and field level personnel to carry out these activities. SPC does not charge
the Funds a fee for these services; however, all expenses associated with the operation
and administration of the Funds (including compensation expenses for such personnel)
are reimbursed by the Funds at cost as Fund Expenses unless included in Manager
Expenses, as described below. In the ordinary course of business, SPC receives all
revenues and pays all expenses associated with the properties owned by the Funds.
Sheridan accounts for all such revenues and expenses as among the various Funds,
and cash held by SPC is allocated to the Funds on the quarterly financial statements
delivered to limited partners.
Fund Expenses that are common to more than one Sheridan Fund are allocated among
the Funds as reasonably determined in good faith by Sheridan. Field-level operating
expenses are, as is customary in the oil and gas business, charged against the
applicable property and allocated to the Funds in proportion to their working interest
ownership therein, with any expenses recouped from third-party interest owners being
credited back against such costs in the same percentages as borne by the Funds. The
Firm allocates general and administrative expenses based on estimates of effort
expended, benefit received, assets under management, and other methods that are
reasonable under the circumstances, which methods may vary for the different
categories of Fund Expenses and are reviewed from time to time.
Manager Expenses
The Firm is responsible for paying, without reimbursement from the Funds, an allocated
portion of the compensation and employee benefit expenses, and rent and other
occupancy costs, of Sheridan’s senior management team and certain additional
management and/or investment professionals. The scope of these costs that are borne
by the Firm varies by Fund and is set forth in the Governing Documents.
Organizational Expenses
Each of the Funds paid expenses incurred in connection with its establishment, up to a
cap set forth in the applicable Governing Documents. In each case, any amounts in
excess thereof were borne by Sheridan and its affiliates.