Carl J.D. Bauman and Margaret A. Bauman - Page 11

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          royalty payments.  ERL’s total liability for the advance                    
          royalties, however, totaled $200 million in cash and notes.                 
               Each note, recourse and nonrecourse, became due 20 years               
          after execution; however, at the election of either JAD or ERL,             
          each note could be extended for an additional 10 years.  Although           
          each note bore annual interest at a rate of 6 percent, no partner           
          was personally liable for the payment of such interest.  The                
          maturity date of each recourse note would not change if the lease           
          were terminated prior to its primary term.  The offering                    
          materials explained that the coal reserves underlying the leased            
          property would serve as security for each note.                             
               The coal property was acquired by JAD in 1977 for                      
          $3,750,000.  Information pertaining to this acquisition was                 
          presented in the offering materials.  The offering materials                
          explained that the coal property contained three principal coal             
          seams; namely the Mason, Harlan, and Wallins Creek seams.  The              
          offering materials further explained that the objective of the              
          partnership was to develop these three seams and then to develop            
          other seams if such development were practicable.  The Coal                 
          Reserve Report, which accompanied the offering memorandum,                  
          however, did not lend solid support for this objective.  Although           
          it maintained that the Mason seam was “of good quality”, the Coal           
          Reserve Report noted that the Mason seam was not without serious            
          limitations.  The report further indicated that coal recovered              
          from the Harlan seam would be burdened by a high ash content and            

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