Registration No. 333-85994
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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POST-EFFECTIVE AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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MEWBOURNE ENERGY PARTNERS 02-A, L.P.
MEWBOURNE ENERGY PARTNERS 03-A, L.P.
(Exact name of registrants)
<Table>
DELAWARE 1311 71-0871949
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
</Table>
3901 S. BROADWAY
TYLER, TEXAS 75701
(903) 561-2900
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
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CURTIS W. MEWBOURNE COPIES TO:
MEWBOURNE DEVELOPMENT CORPORATION A. WINSTON OXLEY
3901 S. BROADWAY VINSON & ELKINS L.L.P.
TYLER, TEXAS 75701 3700 TRAMMELL CROW CENTER
(903) 561-2900 2001 ROSS AVENUE
DALLAS, TEXAS 75201
(214) 220-7700
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
CALCULATION OF REGISTRATION FEE
<Table>
<Caption>
=========================================== ================================== =====================================
TITLE OF SECURITIES PROPOSED MAXIMUM AMOUNT OF
TO BE REGISTERED AGGREGATE OFFERING PRICE REGISTRATION FEE
- ------------------------------------------- ---------------------------------- -------------------------------------
Limited Partner Interests............... (2) (3)
General Partner Interests............... (2) (3)
TOTAL............................. $36,000,000(1)(2) $0(4)
=========================================== ================================== =====================================
</Table>
(1) This registration statement covers all limited partner interests that may
be acquired by limited partners and all general partner interests that may
be acquired by general partners, including additional limited partner
interests into which general partner interests are convertible if the
maximum aggregate subscriptions contemplated by this offering are obtained.
No subscriber will be admitted as an investor partner in a partnership
unless, at the end of the subscription period for interests in that
partnership, subscription funds have been received and accepted by
Mewbourne Development Corporation in an amount of $1,000,000 or more and
Mewbourne Development Corporation determines, in its sole discretion, to
proceed with the funding of that partnership.
(2) The proposed maximum offering price is comprised of any combination of
limited partner interests and general partner interests.
(3) Pursuant to Rule 457(o), the registration fee is calculated on the basis of
the maximum aggregate offering price of all securities listed.
(4) Calculated pursuant to Rule 457(o) at the statutory rate of $92 per
$1,000,000 of securities registered and, pursuant to Rule 457(p), minus the
filing fee of $3,750 previously paid on May 9, 2001, in respect of
$15,000,000 aggregate amount of unsold securities included in the
prospectus herein from the Registration Statement on Form S-1 (No.
333-57156) previously filed by Mewbourne Energy Partners 01-A, L.P. and
Mewbourne Energy Partners 02-A, L.P.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED APRIL 23, 2003
P R O S P E C T U S
MEWBOURNE ENERGY PARTNERS
02-03 DRILLING PROGRAMS
(PER PARTNERSHIP MINIMUM OFFERING AMOUNT)
$1,000,000 (1,000 GENERAL AND/OR LIMITED PARTNER
INTERESTS AT $1,000 PER INTEREST)
Minimum Purchase: 10 Interests ($10,000)
We are offering to qualified investors during 2002 and 2003 limited
partner interests and general partner interests in a series of two Delaware
limited partnerships formed or to be formed by us. We will sell these interests
to investors for $1,000 each. The minimum number of interests that we will offer
for any one partnership is 1,000 and the minimum subscription in any one
partnership is ten interests ($10,000). The maximum number of interests that we
will offer for any one partnership is 18,000. Therefore, the minimum offering
amount for any one partnership will be $1,000,000 and the maximum offering
amount for any one partnership will be $18,000,000. If we accept your
subscription for a partnership, you may elect to be admitted as a general
partner or limited partner in the partnership you have invested in. Each
partnership will participate with us and our affiliate, Mewbourne Oil Company,
in a drilling program. The primary objective of each drilling program will be to
establish oil and gas reserves by drilling wells in the Permian and Anadarko
Basins.
SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR A DISCUSSION OF FACTORS THAT
YOU SHOULD CONSIDER BEFORE YOU INVEST IN EITHER PARTNERSHIP BEING SOLD WITH THIS
PROSPECTUS. These "risk factors" include but are not limited to:
o Drilling to establish productive oil and natural gas
properties is highly risky and includes the possibility of a
total loss of one's investment.
o If you purchase a general partner interest you may be subject
to personal unlimited liability for that partnership's
obligations.
o An investment in a partnership is illiquid. You may not be
able to sell any interests you purchase because there will be
no market for them.
<Table>
<Caption>
Per Partnership
Per Interest Total Minimum Total Maximum
------------ --------------- -------------
Public Price............................. $ 1,000 $ 1,000,000 $ 18,000,000
Underwriting Discounts................... 85 85,000 1,530,000
Proceeds Available to a Partnership...... 1,000 1,000,000 18,000,000
</Table>
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
Soliciting dealers will be soliciting subscriptions on a
"minimum/maximum best efforts" basis. The soliciting dealers must sell the
minimum number of interests offered ($1,000,000) if any interests are sold and
are required to use only their best efforts to sell the maximum number of
securities offered ($18,000,000).
The dealer manager for this offering is:
Mewbourne Securities, Inc.
The date of this prospectus is __________, 2003
<Table>
<Caption>
PAGE
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SUMMARY OF OFFERING ............................................................ 1
The Partnerships ............................................................... 1
Investment Objectives .......................................................... 1
Proposed Activities ............................................................ 2
Application of Proceeds ........................................................ 2
Compensation and Reimbursement to Managing
Partner and its Affiliates .................................................. 2
These securities are speculative and involve a high
degree of risk .............................................................. 2
Investment as a Limited Partner or General Partner ............................. 3
Liability of General Partners ............................................... 3
Liability of Limited Partners ............................................... 4
How to Subscribe ............................................................ 4
RISK FACTORS ................................................................... 5
Particular Risks Relating to the Interests ..................................... 5
Liability of Limited Partners ............................................... 5
Liability of Investor General Partners ...................................... 5
Liability of Joint Working Interest Owners .................................. 5
Possibility of Reduction or Unavailability of
Insurance Coverage of a Partnership ...................................... 5
Sole Reliance on Us for Management of a
Partnership .............................................................. 6
Sole Reliance on Our Financial Status ....................................... 6
Prospects Not Yet Identified or Selected; No
Opportunity to Evaluate Prospects ........................................ 6
Limited Ability to Spread Risk .............................................. 6
Additional Partnership Financing May Become
Necessary Due to Unforseen Circumstances ................................. 6
Uncertainty of Partnership Cash Distributions ............................... 7
Conflicts of Interest of Managing Partner ................................... 7
Inside Board of Directors and Other Family
Relationships of Managing Partner and
Program Director ......................................................... 8
Limitations on the Fiduciary Obligations of the
Managing Partner and the Managing Partner's
Responsibility to Determine the Application
of the Limitations ....................................................... 8
Partnership's Joint Activities With Others .................................. 8
Lack of Liquidity for Investors ............................................. 8
Indemnification of Managing Partner and its
Affiliates ............................................................... 9
Investor's Lack of Substantial Voting Rights ................................ 9
Investor's Lack of Appraisal Rights ......................................... 9
Limitations on Right of Presentment ......................................... 9
Limited Ability to Remove Managing Partner and
Difficulty in Finding a Successor Managing
Partner .................................................................. 10
Withdrawal of Partners ...................................................... 10
Dissolution of a Partnership and Termination of
the Drilling Program ..................................................... 10
Ability of the Managing Partner to Cause
Dissolution of a Partnership and the Related
Drilling Program ......................................................... 10
Unauthorized Acts of General Partners Could Be
Binding Against the Partnership .......................................... 11
General Risks Relating to Oil and Natural Gas
Operations .................................................................. 11
Loss of Investment Due to Speculative Nature of
Oil and Gas Activities ................................................... 11
The Partnerships and the General Partners Could
be Liable for Environmental Hazards ...................................... 11
Return on Investment is Dependent on Future
Prices, Supply and Demand for Oil and Gas.11
Government Regulation of a Partnership's
Activities ............................................................... 12
Tax Risks ...................................................................... 12
General ..................................................................... 12
Partnership Classification for Tax Purposes; No
IRS Ruling Sought ........................................................ 12
Allocations ................................................................. 12
Passive Activity Limitations ................................................ 13
Tax Shelter Registration .................................................... 13
Current Tax Deductions ...................................................... 13
Conversion of General Partner Interests ..................................... 14
Tax Liabilities in Excess of Cash Distributions ............................. 14
Risks of Borrowings ......................................................... 14
Percentage Depletion ........................................................ 14
Farmouts and Backin Interests ............................................... 14
Recapture ................................................................... 14
Audits ...................................................................... 15
Changes in Federal Income Tax Laws .......................................... 15
Significance of Tax Aspects ................................................. 15
Forward Looking Statements ..................................................... 15
APPLICATION OF PROCEEDS ........................................................ 16
PARTICIPATION IN COSTS AND REVENUES ............................................ 18
Costs and Revenues ............................................................. 18
Distributions .................................................................. 18
Capital Accounts ............................................................... 19
Allocations of Federal Income Tax Items ........................................ 19
Proportionate Interests of Partners ............................................ 19
COMPENSATION AND REIMBURSEMENT ................................................. 20
Partnership and Program Interest ............................................... 20
Lease and Equipment Purchases from Mewbourne ................................... 20
Administrative Costs ........................................................... 21
ESTIMATED DRILLING PROGRAM EXPENSES ............................................ 22
Contracts with Mewbourne and Its Affiliates .................................... 22
Compensation as Operator ....................................................... 22
DEFINITIONS .................................................................... 23
TERMS OF THE OFFERING .......................................................... 27
General ........................................................................ 27
Subscription Refunds ........................................................... 27
</Table>
(i)
<Table>
<Caption>
PAGE
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Subscription Period ............................................................ 27
Suitability Standards .......................................................... 28
General ..................................................................... 28
Minimum Suitability Standards ............................................... 29
Additional Suitability Standards ............................................ 29
Additional Requirements ..................................................... 30
Subscription Procedure ......................................................... 31
Conversion of General Partner Interests ........................................ 32
Right of Presentment ........................................................... 32
ADDITIONAL FINANCING ........................................................... 34
General ..................................................................... 34
Limitation on Borrowings .................................................... 34
PLAN OF DISTRIBUTION ........................................................... 35
INVESTMENT OBJECTIVES .......................................................... 36
PROPOSED ACTIVITIES ............................................................ 36
Development Policy ............................................................. 37
Area of Geographic Concentration ............................................... 37
Prospect Evaluation ............................................................ 38
Cost Estimates ................................................................. 38
Acquisition of Leases .......................................................... 38
Transactions with Affiliates ................................................... 38
Sale of Leases to a Partnership ............................................. 38
Purchase of Leases from a Partnership ....................................... 40
Participation by Mr. Mewbourne .............................................. 40
Farmouts ....................................................................... 41
Operations ..................................................................... 42
Title to Partnership Properties ................................................ 43
Insurance ...................................................................... 43
The Managing Partner's Policy Regarding Roll-Up
Transactions ................................................................ 45
MANAGEMENT ..................................................................... 46
OWNERSHIP STRUCTURE OF MEWBOURNE
COMPANIES ...................................................................... 47
Officers, Directors and Key Employees of the
Managing Partner and the Drilling Program
Manager ..................................................................... 48
Key Employees .................................................................. 50
Compensation ................................................................... 51
Executive Officer .............................................................. 51
Cash Compensation to Executive Officer ...................................... 51
Executive Officer Compensation Under Plans .................................. 51
Non-Cash Compensation of Executive Officer .................................. 52
Certain Transactions ........................................................... 52
Participation in Drilling Program Activities ................................ 52
CONFLICTS OF INTEREST .......................................................... 52
Fiduciary Responsibility of the Managing Partner ............................... 52
Limitations on the Fiduciary Obligations of the
Managing Partner and the Managing Partner's
Responsibility to Determine the Application
of the Limitations ....................................................... 53
Farmouts ....................................................................... 54
Purchase of Leases from a Partnership .......................................... 55
Sale of Leases to a Partnership ................................................ 56
Adjacent Acreage ............................................................... 56
Other Activities ............................................................... 56
Contracts with Mewbourne and Affiliates ........................................ 57
Mewbourne Oil Company as Operator .............................................. 57
PRIOR ACTIVITIES ............................................................... 58
Prior Partnerships ............................................................. 58
Past Compensation .............................................................. 60
Previous Drilling Activities ................................................... 62
Payout and Net Cash Tables ..................................................... 63
Tax Deductions and Tax Credits ................................................. 67
Reserves and Future Net Revenues of Prior Programs ............................. 69
TAX ASPECTS .................................................................... 70
Opinion of Counsel ............................................................. 70
Partnership Taxation ........................................................... 72
General ..................................................................... 72
Partnership Classification .................................................. 72
Taxation of Partners ........................................................ 74
Allocations ................................................................. 74
Elections and Returns ....................................................... 76
Determinations of Partnership Items at Partnership
Level .................................................................... 76
Administrative Costs ........................................................ 77
Conversion of General Partner Interests ..................................... 77
Special Features of Oil and Gas Taxation ....................................... 77
Lease Acquisition Costs ..................................................... 77
Geophysical Costs ........................................................... 77
Operating and Administrative Costs .......................................... 78
Intangible Drilling Costs ................................................... 78
Depreciation ................................................................ 78
Depletion ................................................................... 79
Passive Activity Loss Limitations ........................................... 79
Limitations on Interest Deductions .......................................... 81
For Profit Limitation ....................................................... 82
Basis and At Risk Limitations ............................................... 82
Sale of Property ............................................................ 83
Termination of a Partnership ................................................ 83
Sale of Interests ........................................................... 84
Farmouts and Backin Interests ............................................... 84
General Tax Provisions ......................................................... 85
Other Tax Consequences ......................................................... 85
Alternative Minimum Tax ..................................................... 85
Tax Shelter Registration .................................................... 86
Changes in Federal Income Tax Laws .......................................... 86
Compliance Provisions ....................................................... 86
Consistency Requirements .................................................... 86
Nominees .................................................................... 87
Social Security Benefits; Self-Employment Tax ............................... 87
State Law Tax Aspects ....................................................... 87
Anticipated Federal Income Tax Deductions ...................................... 87
Individual Tax Advice Should be Sought ......................................... 87
COMPETITION, MARKETS AND REGULATION ............................................ 88
Competition .................................................................... 88
Markets For Sale Of Production ................................................. 88
Regulation Of Production ....................................................... 89
Natural Gas Prices ............................................................. 89
Oil and Liquid Hydrocarbon Price Controls ...................................... 89
Possible Legislation ........................................................... 89
Regulation of the Environment .................................................. 89
</Table>
(ii)
<Table>
<Caption>
PAGE
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LIABILITY OF GENERAL AND LIMITED
PARTNERS ........................................................................ 90
General Partners ................................................................ 90
Limited Partners ................................................................ 90
SUMMARY OF PARTNERSHIP AGREEMENT
AND DRILLING PROGRAM AGREEMENT .................................................. 91
Term ............................................................................ 92
Rights and Powers of Partners ................................................... 92
General and Limited Partners ................................................. 92
Limited Partners ............................................................. 93
General Partners ............................................................. 93
Rights and Powers of the Managing Partner ....................................... 94
Indemnification of the Managing Partner and its
Affiliates ................................................................... 94
Right of Presentment ............................................................ 95
Assignability of Interests ...................................................... 95
Removal or Withdrawal ........................................................... 96
Dissolution, Liquidation and Termination ........................................ 96
Reconstitution of a Partnership ................................................. 98
Amendments ...................................................................... 98
Reports to Partners ............................................................. 99
Access to List of General and Limited Partners .................................. 99
Power of Attorney ............................................................... 100
LEGAL OPINIONS .................................................................. 100
EXPERTS ......................................................................... 100
WHERE YOU CAN FIND MORE INFORMATION.............................................. 101
INDEX TO FINANCIAL STATEMENTS ................................................... 102
</Table>
EXHIBIT A: Form of Agreement of Partnership
EXHIBIT B: Form of Drilling Program Agreement
EXHIBIT C: Form of Special Subscription
Instructions
EXHIBIT D: Form of Subscription Agreement
(iii)
PENNSYLVANIA AND IOWA INVESTORS: Because the minimum closing amount is less than
$2.0 million, you are cautioned to carefully evaluate the program's ability to
fully accomplish its stated objectives and to inquire as to the current dollar
volume of program subscriptions.
SUMMARY OF OFFERING
This summary highlights some information from this prospectus. It may
not contain all of the information that is important to you. To understand this
offering fully, you should read the entire prospectus carefully. For definitions
of key terms used in this prospectus, see "Definitions." FOR A DISCUSSION OF
MATTERS THAT SHOULD BE CONSIDERED IN EVALUATING AN INVESTMENT IN THE INTERESTS,
SEE "RISK FACTORS."
THE PARTNERSHIPS
We are offering to qualified investors limited partner interests and
general partner interests in a series of two Delaware limited partnerships
formed or to be formed by us. We will sell these interests to investors for
$1,000 each. The minimum number of interests that we will offer for any one
partnership is 1,000 interests that may be comprised of any combination of
limited and general partnership interests. The minimum subscription in any one
partnership is ten interests ($10,000). The maximum number of interests that we
will offer for any one partnership is 18,000. Therefore, the minimum offering
amount for any one partnership will be $1,000,000 and the maximum offering
amount for any one partnership will be $18,000,000. A partnership will not
commence operations or have any material assets or liabilities prior to the
termination of the subscription period for interests in such partnership.
The offering of interests in Mewbourne Energy Partners 02-A, L.P.
commenced on June 26, 2002 and terminated on October 10, 2002. A total of 1,430
($1,430,000) limited partner interests and 14,642 ($14,642,000) general partner
interests in Mewbourne Energy Partners 02-A, L.P. were sold to a total of 51
persons and 597 persons, respectively.
The subscription period for interests in Mewbourne Energy Partners
03-A, L.P. will commence on the date of this prospectus and terminate on
December 31, 2003, unless Mewbourne Development Corporation, the managing
partner, in its sole discretion, accelerates or delays the offering termination
date, provided that its ability to delay the offering termination date is
subject to its obligation to return the purchase price for any interests not
invested in a partnership within any period required by state securities law.
A partnership will not be funded with less than $1,000,000 in capital
contributions from investors. If we have not received subscription funds of at
least $1,000,000 by the end of a partnership's subscription period, we will
promptly return all funds we have received for that partnership to subscribers.
Each partnership will terminate 50 years from the date of its formation.
INVESTMENT OBJECTIVES
Each partnership will participate in a drilling program consisting of
the acquisition, drilling and development of oil and gas prospects under a
drilling program agreement with us and our affiliate, Mewbourne Oil Company. The
primary investment objective of each partnership is to conduct oil and gas
drilling and development activities on prospects in an attempt to establish
long-life oil and gas reserves. In addition, the drilling program's structure is
intended to result in tax benefits, consisting principally of deductions for
intangible drilling costs, depletion, and depreciation. To the extent that the
operations of a partnership and the drilling program result in a net loss for a
taxable period, general partners will be able to claim their respective shares
of the deductions giving rise to such loss in the current year, but limited
partners will not be able to claim their shares of the deductions comprising
such loss in the current year except to the extent they have net passive income
from other sources. See "Tax Aspects." The drilling program agreement provides
that Mewbourne Oil Company, in its capacity as manager of the drilling program,
will have the exclusive power and authority to act on behalf of a partnership
with respect to the management, control and administration of the business and
affairs of the drilling program and the oil and gas properties subject to the
drilling program agreement. See "Management."
Each drilling program is intended to be a partnership for income tax
purposes only. See "Tax Aspects -- Partnership Taxation -- Partnership
Classification." For all other purposes, each drilling program is intended to be
an agreement among us, the related partnership and Mewbourne Oil Company in its
capacity as manager of the drilling program. The participants in a drilling
program will be co-owners of undivided interests in the oil and gas properties
subject to that drilling program agreement. Each drilling program agreement sets
out the rights, duties, and obligations of the drilling program manager and the
other participants in the related drilling program.
1
PROPOSED ACTIVITIES
The primary objective of each partnership is to establish long-life oil
and gas reserves through the development of oil and gas prospects located in the
shelf and the shelf-slope regions of the Permian Basin, located in West Texas
and Southeastern New Mexico, and the Anadarko Basin, located in Western Oklahoma
and the Texas Panhandle, by participating in a drilling program formed and
managed by Mewbourne Oil Company or its successor. Although subject to change
based on subsequent events and conditions, we anticipate that each partnership
will conduct oil and gas drilling and development activities on prospects in the
Permian and Anadarko Basins through a drilling program. However, these prospects
in the Permian and Anadarko Basins have not yet been identified. In order to
reduce the potential risks to the participants, we anticipate that each
partnership's activities through the related drilling program will primarily
focus upon activities relating to lower risk development wells rather than
higher risk exploratory wells. However, at our discretion, a partnership may
expend up to 20% of its capital contributions in connection with activities
relating to exploratory wells. See "Proposed Activities." We may also determine
that it is in the best interest of a partnership to conduct activities in other
geographic areas.
APPLICATION OF PROCEEDS
Interests in each partnership may be sold in an aggregate amount from
$1,000,000 to $18,000,000. There is no deduction from the proceeds realized from
the sale of interests to investors for organization and offering expenses, sales
commissions, and due diligence fees and, therefore, all of such sales proceeds
will be available to each partnership for the partnership's operations. The
managing partner under the terms of each drilling program agreement will pay all
organization and offering expenses, sales commissions, and due diligence fees.
See "Application of Proceeds" and "Participation in Costs and Revenues."
We estimate that of the total contributions made to each partnership's
drilling program approximately 8.5% will be expended for organization and
offering expenses, sales commissions and due diligence fees, approximately 15%
to 20% will be made in the form of lease acquisition costs of prospects,
approximately 12% to 16% will be expended for tangible costs, approximately 55%
to 60% will be expended for intangible drilling costs and the remainder will be
expended for other direct costs. These percentages are estimates only, and we
cannot assure that these percentages will be actually realized or that
variations in the percentages will not be significant to a partnership or its
drilling program.
COMPENSATION AND REIMBURSEMENT TO MANAGING PARTNER AND ITS AFFILIATES
The managing partner and its affiliates will receive benefits, both
directly and indirectly, from its position as managing partner of the
partnerships and Mewbourne Oil Company's position as drilling program manager of
the drilling program. These benefits include:
o reimbursement for administrative costs,
o compensation for its role as operator,
o compensation for the managing partner's drilling program
participation,
o compensation for lending funds to a partnership, and
o payments received for supplying equipment, supplies and other
services.
The amounts to be received by the managing partner and its affiliates are, for
the most part, indeterminate at this time. See "Compensation and Reimbursement."
THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK.
Significant risks include, but are not limited to:
o Drilling to establish productive oil and nature gas properties
is highly risky and includes the possibility of a total loss
of one's investment.
2
o Investors who purchase general partner interests may be
subject to unlimited liability for the partnership's
obligations.
o Investment is illiquid - investors may not be able to sell
their interests because there will be no market for the
interests.
o Total reliance is on the managing partner for management and
control of the partnership.
o No oil and gas leases for drilling have yet been selected and
therefore no investor will have an opportunity to evaluate any
of the oil and gas leases before investing in the partnership.
o The number of oil and gas wells and prospects in which the
partnership will participate is dependent upon the amount of
capital raised. To the extent that funds available to the
partnership are limited, its ability to diversify its risk
over a larger number of oil and gas wells an prospects will be
limited.
o Distributions may only be made from partnership funds realized
from operations. Accordingly, there is no assurance that any
distributions from the partnership will be made to its
investors.
o The partnership is subject to various conflicts of interest
which are inherent in its relationship with us and our
affiliates, and therefore, when these conflicts of interest
occur, they may not in every instance be resolved to the
maximum benefit of the partnership. There can be no assurance
that transactions between the partnership and affiliated
parties will be on terms as favorable as could have been
obtained with unaffiliated third parties.
o The partnership agreement contains certain provisions which
modify what would otherwise be the applicable Delaware law
relating to the fiduciary standards of the managing partner to
the general and limited partners. The fiduciary standards in
the partnership agreement could be less advantageous to the
general and limited partners and more advantageous to the
managing partner than the corresponding fiduciary standards
otherwise applicable under Delaware law.
o Revenues from the partnership are directly related to oil and
natural gas prices which cannot be predicted and can be
volatile.
See "Risk Factors."
INVESTMENT AS A LIMITED PARTNER OR GENERAL PARTNER
You have the option to invest in a partnership as a limited partner or
general partner. If you invest, the allocations of costs and revenues relating
to a partnership's drilling activities to you will be the same regardless of
whether you elect to become a limited partner or a general partner of a
partnership. However, if you elect to become a general partner you may
experience economic and tax consequences different from those you would
experience if you were to elect to become a limited partner due to differences
in the legal obligations and tax treatment of general partners and limited
partners. The tax treatment of income and deductions attributable to ownership
of interests by a limited partner will be more restrictive for many investors
than the treatment afforded income and deductions attributable to ownership of
interests by a general partner. We generally will receive the same tax benefits
and assume the same obligations as the general partners.
Liability of General Partners. By law, each general partner is liable
for all of the obligations of a partnership. Furthermore, each partnership will
own working interests in oil and gas leases subject to some portion of the costs
of development, operation or maintenance. We, and likely others, will also own
similar working interests in these leases. Therefore, a general partner could be
liable for the obligations of all such joint working interest owners. The
subsequent conversion of a general partner interest into a limited partner
interest will have no effect on the converted general partner's liability as to
events that occurred prior to the conversion. However, the managing partner will
indemnify each general partner from any liability in excess of his share of a
partnership's undistributed assets. See "Risk Factors -- Particular Risks
Relating to the Interests -- Liability of Investor General Partners."
3
Liability of Limited Partners. Assuming that a limited partner does not
take part in the control of the business of a partnership, his liability under
Delaware law will be limited, generally to the amount of capital he has
contributed to the partnership. Under the laws of the states where we anticipate
the partnerships will conduct substantially all of their business, the liability
of limited partners will be governed by Delaware law. See "Liability of Investor
Partner--Limited Partners" and "Risk Factors -- Particular Risks Relating to the
Interests -- Liability of Limited Partners."
Under the terms of the partnership agreement, the managing partner may
not request or require additional capital contributions from general or limited
partners and, under the terms of the partnership agreement, general and limited
partners are not permitted to voluntarily make any additional capital
contributions to a partnership.
How to Subscribe. For instructions on how to subscribe for interests in
a partnership see "Terms of the Offering -- Subscription Procedure."
THE FOREGOING IS A VERY BRIEF SUMMARY OF MATTERS RELATING TO THE
OFFERING OF INTERESTS. THIS SUMMARY MUST BE CONSIDERED TOGETHER WITH INDEPENDENT
ADVICE AND A CAREFUL READING AND EXAMINATION OF THIS ENTIRE PROSPECTUS AND THE
ATTACHED EXHIBITS.
4
RISK FACTORS
You should recognize that oil and gas drilling and exploration is a
high risk venture. Therefore, we recommend that you invest in a partnership only
if you are prepared to assume the substantial risks discussed below and
elsewhere in this prospectus. The nature of these risks requires persons who
purchase interests to be in a position:
o to hold such investment for a substantial number of years, and
o to absorb the possible loss of such investment.
PARTICULAR RISKS RELATING TO THE INTERESTS
Liability of Limited Partners. Each partnership will be governed by the
Delaware Revised Uniform Limited Partnership Act. Under Delaware law, as a
general rule, a limited partner's liability for the obligations of a partnership
is limited to such limited partner's capital contribution and such limited
partner's share of the partnership's assets. A limited partner of the
partnership will not otherwise be liable for the obligations of the partnership
unless, in addition to the exercise of his or her rights and powers as a limited
partner, such limited partner participates in the control of the business of a
partnership. In such case the limited partner is liable only to persons who
transact business with the partnership with actual knowledge of the limited
partner's participation in control. Accordingly, if a limited partner were to
take an action which was subsequently determined to constitute participating in
the control of the business of a partnership, such limited partner could become
liable for the partnership debts and obligations. See "Liability of Investor
Partners -- Limited Partners."
Liability of Investor General Partners. Under Delaware law, each
general partner in a partnership will be liable for all of the liabilities and
recourse obligations of the partnership. Furthermore, each partnership will own
working interests in oil and gas leases subject to some portion of the costs of
development, operation or maintenance. We, and likely others, will also own
similar working interests in these oil and gas leases. Therefore, a general
partner could be liable for the obligations of all such joint working interest
owners. The managing partner will indemnify each general partner from any
liability in excess of his share of a partnership's undistributed assets.
However, a general partner still could be subject to such liability if we should
become bankrupt or for any other reason we are unable to meet our financial
commitment to indemnify the general partners. This liability could obligate a
general partner to make additional payments to the partnership. The possible
amount of such a liability cannot be predicted. The subsequent conversion of a
general partner interest into a limited partner interest will have no effect on
the converted general partner's liability as to events that occurred prior to
the conversion. See "Liability of Investor Partners -- General Partners."
Liability of Joint Working Interest Owners. Under the drilling program
agreement, each drilling program participant, including the managing partner and
each partnership, will hold its working interest in oil and gas leases in its
own name and will be a joint working interest owner with the other drilling
program participants and also with third parties. It has not been clearly
established under the laws of some of the jurisdictions where a portion of each
drilling program's properties will be located whether a single joint working
interest owner is liable with respect to all obligations relating to the entire
jointly owned working interest. The operating agreements relating to drilling
program oil and gas leases will specify that the liabilities of joint working
interest owners will be limited to their individual joint working interest,
though we cannot assure that such a provision would be enforceable against a
third party. As a result it is possible that a general partner could be
determined liable for all obligations relating to the entire jointly owned
working interest.
Possibility of Reduction or Unavailability of Insurance Coverage of a
Partnership. It is possible that some or all of the insurance coverage which a
partnership has available may become unavailable or prohibitively expensive. If
the program manager and its affiliates cease to retain the coverage described
for any reason for a period of more than 20 days during the subscription period
for a partnership, the offering of interests in that partnership shall cease,
and subscribers for interests in any partnership in which investors have not
been admitted shall receive a refund of their subscription funds. The managing
partner will also promptly notify those investors of any material reduction in
the insurance coverage of the drilling programs and the partnerships. The
managing
5
partner shall give investors this notice as soon as possible after it learns of
such change and if possible at least 30 days in advance of the change in
insurance coverage. In addition, if a drilling program or a partnership, after
the admission of investors, has its insurance coverage materially reduced for
any reason, that partnership will halt all drilling activity until such time as
comparable replacement coverage is obtained. If a partnership has its insurance
coverage materially reduced after you invest, you could be subject to a greater
risk of loss of your investment since less insurance would be available to
protect your investment from casualty losses. See "Proposed Activities --
Insurance."
Sole Reliance on Us for Management of a Partnership. Under the
partnership agreement, Mewbourne Development Corporation is designated as the
managing partner of each partnership and is given the exclusive authority to
manage and operate each partnership's business. As the managing partner, we will
have complete and total authority and broad discretion to determine the manner
in which all of the offering proceeds will be expended. Also, we are required to
devote only such time as is reasonably needed to the operations of the
partnerships. Accordingly, if you invest in a partnership you must rely solely
on us to make all decisions on behalf of each partnership. Investors will have
no role in the management of the business of either partnership. Therefore, each
partnership's success will depend, in part, upon the management we provide, our
ability, and the ability of Mewbourne Oil Company as manager of each drilling
program to:
o select and acquire oil and gas leases on which oil and gas
wells capable of producing oil and natural gas in commercial
quantities may be drilled,
o successfully drill and develop oil and gas well on the
properties selected, and
o market oil and natural gas produced from such oil and gas
wells.
Sole Reliance on Our Financial Status. No financial information will be
provided to the investors concerning any investor who has elected to invest in a
partnership as a general partner. In no event should investors rely on the
financial wherewithal of investor general partners, including in the event we
should become bankrupt or are otherwise unable to meet our financial
commitments.
Prospects Not Yet Identified or Selected; No Opportunity to Evaluate
Prospects. Although we maintain an inventory of leasehold acreage covering
numerous prospects, we have not, as of the date of this prospectus, selected or
agreed to transfer from such owned inventory any particular oil and gas leases
to a partnership or related drilling program. The drilling program manager will
select all oil and gas leases that the partnerships and the related drilling
programs will acquire or drill. You will not have an opportunity to review those
oil and gas leases before investing in a partnership. You will also not have an
opportunity to participate in the selection of oil and gas leases after an
investment is made. We may during the course of this offering select, and cause
this prospectus to be amended or supplemented to describe, prospects designated
for acquisition by participants in a drilling program. If you subscribe for
interests prior to any such amendment or supplement you will not be permitted to
withdraw your subscription as a result of the selection of any such designated
prospect and you may not be notified of the selection of any such designated
prospect prior to funding of the partnership or partnerships in which you have
invested. See "Proposed Activities -- Acquisition of Leases."
Limited Ability to Spread Risk. A partnership could be formed with as
little as $1,000,000 in capital contributions from investors. To the extent that
the funds available to a partnership are limited, its ability to spread risks
over a large number of oil and gas wells and prospects will be reduced. The
number of oil and gas wells which can be drilled based on the minimum investment
amount cannot be determined because prospects have not been selected. However,
even if a drilling program is formed with substantially more than the minimum
required capital, investors must rely on us to diversify drilling activities of
the related partnership.
Additional Partnership Financing May Become Necessary Due to Unforseen
Circumstances. We anticipate that the net proceeds from the sale of interests in
a particular partnership will be sufficient to finance that partnership's share
of the related drilling program's costs of:
o drilling and completing oil and gas wells, and
6
o providing necessary production equipment and facilities to
service such oil and gas wells and plugging and abandoning
non-productive oil and gas wells.
However, due to unforeseen circumstances, it could become necessary to finance
the costs of additional partnership operations through partnership borrowings,
utilization of partnership revenues obtained from production or other methods of
financing. These additional operations may include the acquisition of additional
oil and gas leases and the drilling, completing and equipping of additional
wells to further develop drilling program prospects. Each partnership agreement
provides that outstanding partnership borrowings may not at any time exceed 20%
of the aggregate capital contributions of the general and limited partners.
Furthermore, a partnership may borrow funds only if the lender agrees that it
will have no recourse against individual general partners. If the
above-described method of financing should prove insufficient to maintain the
desired level of development operations for the drilling program, such
operations could be continued through farmout arrangements with third parties,
including the managing partner and/or its affiliates. These farmouts could
result in the drilling program giving up a substantial interest in any oil and
gas revenues so developed.
Uncertainty of Partnership Cash Distributions. No distributions will be
made from a partnership to the general or limited partners of that partnership
until that partnership has funds which the managing partner determines are not
needed for the operation of the partnership and the drilling program.
Accordingly, we cannot assure that any distributions from a partnership will be
made to its general and limited partners. Distributions will depend primarily on
a partnership's net cash receipts from oil and gas operations. Moreover,
distributions could be delayed to repay the principal and interest on
partnership borrowings, if any, or to fund partnership costs. Partnership income
will be taxable to the general and limited partners in the year earned, even if
cash is not distributed.
Conflicts of Interest of Managing Partner. Investors will not be
involved in the day-to-day operations of the partnerships. Accordingly, if you
invest in a partnership, you must rely on our judgment in such matters. Inherent
with the exercise of our judgment, we will be faced with conflicts of interest,
including:
o We will participate in the drilling programs in our individual
capacity. As a result, actions taken by a partnership may be
more beneficial to us than the partnership.
o We or our affiliates may participate in oil and gas activities
on behalf of other programs that we sponsor, will sponsor or
are for our account. We owe a duty of good faith to each of
the partnerships which we manage, and it is possible that
actions taken with regard to other partnerships may not be
advantageous to a partnership.
o We and/or our affiliates may provide services to a
partnership. We and/or our affiliates will be compensated for
these services at rates competitive with the rates charged by
unaffiliated persons for similar services.
o If we or our affiliates' own interests in a partnership, this
ownership may dilute the voting power of the other general and
limited partners in that partnership.
o The oil and gas leases that may be contributed to a
partnership may be adjacent to acreage or oil and gas leases
which we or our affiliates hold or will hold. While the
drilling program will not drill any well for the purpose of
proving or disproving the existence of oil or gas on any
adjacent acreage, such drilling activities may incidentally
develop information valuable to us or our affiliates in
evaluating our nearby acreage at no cost to us. Accordingly, a
conflict of interest will exist between our interests and the
interest of a partnership in selecting the location and type
of operations which the drilling program will conduct on
drilling program oil and gas leases.
We will attempt, in good faith, to resolve all conflicts of interest in a fair
and equitable manner with respect to all persons affected by those conflicts of
interest. However, we cannot assure that transactions between a partnership and
its affiliates will be on terms as favorable as could have been negotiated with
unaffiliated third parties. You should be aware that we have not formally
adopted any procedures or criteria to avoid or to resolve any conflicts of
interest that may arise between us and a partnership. You are urged to review
the discussion under "Conflicts of Interest" for a more complete description of
possible conflicts of interests.
7
Inside Board of Directors and Other Family Relationships of Managing
Partner and Program Director. The Board of Directors of both the managing
partner and the program manager are comprised entirely of employees and family
members of Mr. Mewbourne. Therefore, the activities of the managing partner and
the program manager are not subject to the review and scrutiny of an independent
Board of Directors.
Limitations on the Fiduciary Obligations of the Managing Partner and
the Managing Partner's Responsibility to Determine the Application of the
Limitations. The partnership agreement contains provisions which modify what
would otherwise be the applicable Delaware law relating to the fiduciary
standards of the managing partner to the general and limited partners. The
fiduciary standards in the partnership agreement could be less advantageous to
the general and limited partners and more advantageous to the managing partner
than the corresponding fiduciary standards otherwise applicable under Delaware
law, specifically:
o we and our affiliates may be indemnified and held harmless by
a partnership,
o we are required to devote only so much of its time as is
necessary to manage the affairs of a partnership,
o we and our affiliates may conduct business with a partnership
in a capacity other than as a manager of the partnership,
o we and/or our affiliates may pursue business opportunities
that are consistent with a partnership's investment objectives
for our own account if we determine that such opportunity
cannot be pursued by the partnership either because of
insufficient funds or because it is not appropriate for the
partnership under the existing circumstances, and
o we may manage multiple programs simultaneously.
In addition, the partnership agreement limits the liability of us or
our affiliates to a partnership or to general and limited partners for acts or
omissions if we determine in good faith, as of the time of the conduct or
omission, that the course of conduct or omission was in the best interest of
that partnership and that such conduct or omission did not constitute negligence
or misconduct.
Your purchase of an interest in a partnership may be deemed as consent
to the limitations upon the fiduciary standards set forth in the partnership
agreement. As a result of these provisions in the partnership agreement, the
general and limited partners may find it more difficult to hold us responsible
for not acting in the best interests of a partnership and its general and
limited partners than if the fiduciary standards of the otherwise applicable
Delaware law governed the situation.
Partnership's Joint Activities With Others. We anticipate that the
participants in the drilling programs, including the related partnerships, will
not own the full working interest in most prospects to be explored and developed
under the drilling program agreement. It is likely that a third party or parties
will own a partial working interest in a prospect to be developed under the
drilling program agreement. These third parties could be either our affiliates
or unrelated to us and could also include Mr. Mewbourne. While Mewbourne Oil
Company, on behalf of each drilling program, would participate in decisions
affecting the development of such prospects, decisions with respect to
development activities might be controlled or affected by the other owners of
working interests in such prospects. Furthermore, a partnership could be held
liable for the joint activity obligations of such other working interest owners,
and this liability could in turn result in individual liability for the general
partners in that partnership. See " -- Particular Risks Relating to the
Interests -- Liability of Joint Working Interest Owners."
Lack of Liquidity for Investors. We anticipate that there will not be
any market for resale of the interests. Although the partnership agreement
permits the assignment of interests by general and limited partners, transfers
of interests are subject to restrictions. As one example, an assignee of an
interest may not become a substituted general or limited partner without our
consent. Accordingly, if you purchase an interest you should be prepared to bear
the investment risks attendant upon your investment for an indefinite period of
time. See "Summary of Partnership Agreement and Drilling Program Agreement --
Assignability of Interests" for a description of transfer restrictions.
General and limited partners will not have the right to withdraw any
capital from a partnership or to receive the return of all or any portion of
their capital contributions, except out of distributions of operating revenues,
upon a sale or other disposition of that partnership's property or the
dissolution and liquidation of that partnership.
8
Although general and limited partners may under certain circumstances require
us, or an affiliate that we have designated, to purchase their interest in whole
but not in part, this obligation is limited and does not assure the liquidity of
an investor's investment. See " Terms of the Offering -- Right of Presentment."
Indemnification of Managing Partner and its Affiliates. The partnership
agreement provides for indemnification of us, our affiliates and the officers
and directors of such persons against claims arising from conduct on behalf of a
partnership or the related drilling program. In addition, the drilling program
agreement provides for indemnification of Mewbourne Oil Company, its affiliates,
and the officers and directors of such persons against claims arising from
conduct on behalf of the related drilling program. In the event of any such
indemnification for losses, liabilities or expenses arising from or out of an
alleged violation of federal or state securities laws, a court must approve the
indemnification. In all other instances of indemnification, we will decide
whether or not indemnification is appropriate under the partnership agreement or
drilling program agreement. Therefore, if you invest, in such situations you
must rely upon our integrity to cause a partnership to indemnify us and our
affiliates only when such indemnification is justified under the partnership
agreement or drilling program agreement. You should also bear in mind that in
any situation involving indemnification, a partnership's funds could be applied
to the indemnification of us and our affiliates rather than to make
distributions to the general and limited partners. See "Summary of Partnership
Agreement and Drilling Program Agreement -- Indemnification of the Managing
Partner and its Affiliates.
Investor's Lack of Substantial Voting Rights. In order to preserve the
limited liability of the limited partners of the partnerships, the limited
partners may not take part in the day to day operations of a partnership.
Although those investors who elect to invest as general partners will not
initially be limited partners of a partnership, we are presuming that the vast
majority, if not all, of the general partner interests will be converted into
limited partner interests upon completion of the partnership's drilling
activities. In order to preserve the limited liability of the limited partners,
limited partners are not permitted to take actions which generally may be taken
by stockholders of public corporations, such as annual votes to approve
important matters. Because limited partners are not permitted to take part in
the day to day operations of a partnership, limited partnerships, such as the
partnerships, do not generally hold annual meetings such as those at which
stockholders may express their views and confront management directly. As a
result of the control of the day to day operations of a partnership is vested
exclusively in us, and you must rely on us to fulfill our fiduciary duties to
you and the other partners and to maximize the partnership's economic
performance.
Investor's Lack of Appraisal Rights. Unlike most modern corporation
laws and the solid body of judicial case law which provides most corporate
stockholders with appraisal rights to have their shares of stock redeemed by the
corporation in certain instances, limited partnership acts generally provide no
such rights. Although the partnership agreement does provide general and limited
partners with limited appraisal rights in the case of mergers and similar
events, an investor may not have appraisal rights in as many situations as would
some corporate stockholders. There is no extensive judicial case law
interpreting and upholding the appraisal rights of limited partners. See
"Proposed Activities -- The Managing Partner's Policy Regarding Roll-Up
Transactions" for a description of the limited appraisal rights provided to
general and limited partners.
Limitations on Right of Presentment. General and limited partners may
under certain circumstances request that we, or an affiliate that we have
designated, purchase their interests in whole but not in part. Partners in a
partnership formed in 2002 may make this request in each of the years 2006
through 2011 and partners in a partnership formed in 2003 may make this request
in each of the years 2007 through 2012. However, our obligation to purchase
interests is limited and does not assure the liquidity of an investor's
investment. Our obligation to purchase interests in a partnership in any single
calendar year is limited to no more than 5% of the total number of interests of
that partnership outstanding at the beginning of such calendar year; provided,
however, the total amount of funds that we directly and by means of a purchaser
designee are required to expend in any calendar year to purchase partnership
interests from investors in all of the oil and gas drilling partnerships as to
which we or an affiliate serve as sponsor shall not exceed $500,000.
Additionally, if subsequent to December 31 of the year immediately preceding the
year in which the right of presentment is being exercised, the price for either
oil or gas received by partnership from its program wells decreases by 20% or
more as compared to the price being received as of that date, then we may in our
sole and absolute discretion refuse to purchase any interests in the
partnership. See "Terms of the Offering - Right of Presentment."
Limited Ability to Remove Managing Partner and Difficulty in Finding a
Successor Managing Partner. We may be removed from our position as the managing
partner and/or Mewbourne Oil Company may be removed from its position as the
drilling program manager only by the affirmative vote of investors holding at
least 50% of the then outstanding general and limited interests of such
partnership. The general and limited partners in certain circumstances must, in
order to continue the partnership, elect a successor to the removed managing
partner if the removal of the managing partner causes a dissolution of that
partnership. In the event the drilling program manager is removed, the related
partnership must elect a successor to the removed drilling program manager.
There is a risk that the general and limited partners could not find a new
managing partner or drilling program manager if we or Mewbourne Oil Company were
to be removed from such positions.
Withdrawal of Partners. Under the partnership agreement, each general
partner will agree that he will not voluntarily withdraw from a partnership. We
agree that we will not voluntarily withdraw from a partnership prior to the
later to occur of:
o completion of the partnership's primary drilling activities
under the related drilling program, and
9
o the fifth anniversary of the date that general and limited
partners were admitted to the partnership.
In order to exercise its right of withdrawal, the managing partner must
give the general and limited partners at least 120 days' advance written notice.
A general partner who withdraws in violation of this agreement will be obligated
to reimburse the partnership and the other partners for any expenses associated
with such withdrawal. We expect that such expenses may be substantial and could
exceed the amount of the withdrawing general partner's original investment in
the partnership. Furthermore, a withdrawing general partner will no longer be
entitled to receive any distributions nor shall such general partner have any
rights as a partner under the partnership agreement.
Dissolution of a Partnership and Termination of the Drilling Program. A
partnership will be dissolved and terminated upon the occurrence of any of the
events listed under "Summary of Partnership Agreement and Drilling Program
Agreement -- Dissolution, Liquidation and Termination." These events include:
o the expiration of that partnership's term, or
o the vote or consent in writing at any time by a majority in
interest of the general and limited partners.
However, a partnership could also be dissolved and both it and the related
drilling program terminated as a result of events which do not include the
passage of time or the consent of the general and limited partners. These events
include our bankruptcy, insolvency, dissolution, or withdrawal from the
partnership. The general and limited partners have the right to reconstitute a
partnership under such circumstances and, in so doing, avoid termination of that
partnership. However, there is no certainty that the general and limited
partners could find a new managing partner to replace us in such circumstances.
We currently have no intention of withdrawing as the managing partner of a
partnership.
Ability of the Managing Partner to Cause Dissolution of a Partnership
and the Related Drilling Program. The partnership agreement and applicable law
provide our withdrawal from a partnership, directly or as a result of
bankruptcy, dissolution or similar event, will cause dissolution of that
partnership. We have undertaken not to withdraw as the managing partner of a
partnership prior to the later to occur of
o completion of that partnership's primary drilling activities
under the related drilling program, and
o the fifth anniversary of the date that general and limited
partners were admitted to that partnership.
However, we have the power under applicable law to withdraw from a partnership
in violation of the partnership agreement. We currently do not intend to
withdraw from a partnership. The partners of each partnership are given the
right under the partnership agreement to reconstitute a partnership upon our
withdrawal, but there is an additional risk in such event that the partners of a
partnership could not find a successor managing partner.
Unauthorized Acts of General Partners Could Be Binding Against the
Partnership. Under Delaware law, the act of a general partner of a partnership
apparently carrying on the business of the partnership binds the partnership,
unless the general partner in fact has no authority to act for the partnership
and the person with whom the partner is dealing has knowledge in good faith of
the fact that such general partner has no such authority. While there is a risk
that a general partner might bind a partnership by his acts, we believe that the
managing partner will have such exclusive control over the conduct of the
business of the partnerships that it is unlikely that a third party, in the
absence of bad faith, would deal with a general partner in connection with a
partnership's business. The participation by a general partner in the management
and control of a partnership's business is expressly prohibited by the
partnership agreement, and a violation of such prohibition would give rise to a
cause of action by the partnership against such general partner. Nevertheless,
there is always the possibility that a general partner could attempt to take
unauthorized actions on behalf of a partnership, and if a court were to hold
that such actions were binding against the partnership such unauthorized actions
could be contrary to the best interests of that partnership and could adversely
impact such partnership.
10
GENERAL RISKS RELATING TO OIL AND NATURAL GAS OPERATIONS
Loss of Investment Due to Speculative Nature of Oil and Gas Activities.
Development of oil and gas properties is not an exact science and involves a
high degree of risk which could result in a loss of a partner's investment or
personal liability on the part of a general partner. Under the drilling program
agreement, the activities of each partnership will focus upon the acquisition of
oil and gas leases, the drilling of development wells, the development of
prospects, and the production and operation of the resulting properties. In
addition to development wells, at our discretion, up to 20% of a partnership's
capital contributions may be expended in connection with activities relating to
exploratory wells. All drilling activities involve a high degree of risk with
exploratory wells presenting a higher degree of risk than development wells. We
cannot assure that the objective formation(s) will be encountered or that any or
sufficient oil or gas production will be obtained through drilling program
activities, or if production is obtained, that such production will be sold at
sufficient prices to enable an investor to recoup his investment in a
partnership. During the drilling and completion of wells, a drilling program
could encounter hazards such as unusual or unexpected formations, pressures or
other conditions, blow-outs, fires, failure of equipment, downhole collapses,
and other hazards, whether similar or dissimilar to those enumerated. Although a
partnership will maintain the insurance coverage described under "Proposed
Activities -- Insurance," the drilling program may suffer losses due to hazards
against which it cannot insure or against which it may elect not to insure. Such
liabilities could result in personal liability for a general partner.
The Partnerships and the General Partners Could be Liable for
Environmental Hazards. There are numerous natural hazards involved in the
drilling of wells, including unexpected or unusual formations, pressures,
blowouts, and accidental leakage involving possible damage to property and third
parties. Such hazards may cause substantial liabilities to third parties or
governmental entities. Although we anticipate that customary insurance will be
obtained, a partnership may be subject to liability for pollution and other
damages due to hazards which cannot be insured against or will not be insured
against due to prohibitive premium costs or for other reasons. Liabilities to
third parties or governmental entities for pollution could reduce funds
available for distributions and for drilling operations, result in the loss of
partnership property, or result in the personal liability of the general
partners if the liability exceeded insurance proceeds, a partnership's assets,
and the managing partner's ability to indemnify such general partners.
Return on Investment is Dependent on Future Prices, Supply and Demand
for Oil and Gas. The revenues generated from the activities of each partnership
and the return on the investments made by the partner's will be highly dependent
upon the future prices and demand for oil and gas which can be volatile. The
high and low average monthly posted price for crude oil received by the drilling
program manager during 2002 was approximately $26.18 per barrel and $16.47 per
barrel, respectively. The high and low monthly average price received by the
drilling program manager for gas produced and sold during 2002 was approximately
$3.95 per mmbtu and $1.86 per mmbtu, respectively. Factors which may affect
prices and demand include the world-wide supply of oil and gas, the price of
foreign imports, the levels of consumer demand, price and availability of
alternative fuels and changes in existing and proposed federal regulation and
taxation. Also, gas prices remain somewhat seasonal in nature and, for this
reason, it is particularly difficult to estimate accurately future prices of
gas, and any assumptions concerning future prices may prove to be incorrect.
The United States average daily production of oil declined from 9.0
million barrels in 1985 to approximately 5.8 million barrels in 2002. The
reduced production level is in part the result of decreased drilling activity in
the United States which has only recently increased. Drilling activity is
measured by the United States rig count which averaged 830 during 2002 compared
to 1,156 for 2001. Another factor contributing to the reduction of United States
oil production is the plugging and abandoning of wells which are uneconomical
due to the significant decrease in the price of oil.
The United States import levels for oil have increased significantly
since 1985. In 1985, imports of foreign oil represented 27% of the United
States' demand. During the year 2002, imports averaged approximately 59% of the
United States' consumption.
Government Regulation of a Partnership's Activities. The oil and gas
business is subject to extensive governmental regulation under which, among
other things, rates of production from oil and gas wells may be regulated.
Governmental regulation also may affect the market for a partnership's
production. Governmental
11
regulations relating to environmental matters could also affect a partnership's
operations. We cannot predict the nature and extent of various regulations, the
nature of other political developments and their overall effect upon a
partnership and the related drilling program.
TAX RISKS
General. We have not requested, and we will not request, a ruling from
the IRS regarding the tax consequences of investing in interests. Based on our
representations and various assumptions and qualifications, our counsel has
rendered an opinion that the material federal income tax benefits of an
investment in interests, in the aggregate, more likely than not will be realized
in substantial part by a partner who is an individual United States citizen and
who acquires his interests for profit, provided that an investor who acquires
limited partner interests either is not subject to the passive activity loss
limitations of Section 469 of the Internal Revenue Code or has sufficient
passive income against which he can deduct his share of any partnership
deductions and losses. See "Tax Aspects -- Opinion of Counsel."
Partnership Classification for Tax Purposes; No IRS Ruling Sought. In
order for income and deductions to be passed through to the general and limited
partners, a partnership and the related drilling program must be classified as
partnerships for federal income tax purposes. If a partnership or the related
drilling program were taxed as a corporation for federal income tax purposes,
the tax consequences resulting from the ownership of interests would be
adversely affected and any anticipated federal income tax benefits would be
reduced or eliminated. Based on our representations and various assumptions and
qualifications, our counsel is of the opinion that, at the time of formation,
each partnership and each related drilling program will be treated as a
partnership for federal income tax purposes and that neither partnership will be
treated as a corporation under the "publicly traded partnership" rules of
Section 7704 of the Internal Revenue Code. We cannot assure, however, that
future legislative, judicial or administrative action will not affect the
classification of a partnership or a drilling program for federal income tax
purposes. See "Tax Aspects -- Partnership Taxation -- Partnership
Classification."
Allocations. The partnership agreement and the drilling program
agreement contain provisions that allocate federal income tax consequences of a
drilling program's activities among us and the general and limited partners. If
such allocation provisions were not recognized for federal income tax purposes:
o a portion of the federal income tax deductions allocated to
and claimed by the general and limited partners, including
deductions for intangible drilling costs, could be reallocated
to us. This reallocation could occur notwithstanding the fact
that such general and limited partners had been charged with
the expenditures giving rise to such deductions, and
o a portion of the taxable income allocated to us could be taxed
to the general and limited partners. This allocation could
occur notwithstanding the fact that the revenues giving rise
to such taxable income had been credited to us.
Based on our representations and various assumptions and qualifications, our
counsel is of the opinion that, except as noted below, the allocation of income,
gains, losses, and deductions between us and the general and limited partners
under the partnership agreement and between us and a partnership under the
drilling program agreement will be recognized for federal income tax purposes.
Our counsel's opinion is not binding on the IRS, however, and we cannot assure
that the IRS will not challenge such allocations.
Passive Activity Limitations. A limited partner's interest in a
partnership will be treated as a "passive activity," and any tax losses derived
by a limited partner from a partnership will be allowable only to the extent of
such limited partner's "passive income." Disallowed passive losses in any year
can be carried forward indefinitely and used to offset future passive income or
can be deducted in full when the limited partner disposes of his entire interest
in the partnership to an unrelated person in a fully taxable transaction.
A taxpayer's interest in an oil or gas well drilled or operated under a
working interest does not constitute a passive activity so long as the taxpayer
owns the working interest directly or through an entity that does not limit the
taxpayer's liability with respect to such drilling or operation. Based on our
representations and various assumptions
12
and qualifications, our counsel is of the opinion that the passive activity loss
limitations of Section 469 of the Internal Revenue Code should not apply to
general partners in a partnership, prior to any conversion of a general partner
interest to a limited partner interest, to the extent that a partnership drills
or operates wells under working interests. Consequently, each general partner
should be entitled to deduct currently his share of intangible drilling and
development costs and other deductible expenses allocable to the drilling or
operation of wells under working interests without regard to the passive
activity loss limitations. However, a general partner's ability to take
deductions will be subject to basis and "at risk" limitations. The exception for
working interests would not be applicable to any operations of a partnership
other than the drilling and operation of wells under working interests.
Therefore, if a partnership acquires an interest or participates in other
activities, such activities will be treated as passive activities to the general
partners and any losses derived by them with respect to such activities will be
passive losses allowable only to the extent of their passive income. In
addition, the exception for working interests will not apply from and after a
conversion of a general partner interest to a limited partner interest. See "Tax
Aspects -- Special Features of Oil and Gas Taxation -- Passive Activity Loss
Limitations."
The treatment of a partnership as a "publicly traded partnership" for
purposes of applying the passive activity loss limitations would even more
severely restrict or eliminate a limited partner's ability to use any
partnership losses to offset income from other sources. Based on our
representations and various assumptions and qualifications, our counsel is of
the opinion that neither partnership will be treated as a publicly traded
partnership for purposes of the application of the passive activity loss
limitations of Section 469 of the Internal Revenue Code. Our counsel's opinion
is not binding on the IRS, however, and we cannot assure that the IRS will not
assert that a partnership is a publicly traded partnership for purposes of
applying the passive activity loss limitations.
Tax Shelter Registration. Although an investment in a partnership may
generate tax benefits, a partnership should not be considered a "tax shelter" as
that term is commonly understood. Nevertheless, because of the expansive
definition of the term "tax shelter" under applicable Treasury Regulations, we
will apply to the IRS for a "tax shelter" registration number with respect to
each partnership. We will furnish the registration number to each partner. Each
partner must include the registration number on his individual tax return and
must furnish the number and certain other information to any transferee of his
interests. We will also maintain and make available to the IRS on request a list
of the general and limited partners in each partnership. There may be a greater
likelihood that partners in a partnership will be audited by the Internal
Revenue Service because the partnership has been registered as a "tax shelter."
Current Tax Deductions. We will use reasonable efforts to expend or
contract for the expenditure of the capital contributions of each partnership in
the year such contributions are received. However, some of the expenses may be
incurred prior to the actual drilling of the oil and gas wells. We cannot assure
that any intangible drilling costs incurred in a year prior to the year of the
actual drilling of the oil and gas wells will be deductible in the year
incurred. In particular, a partnership might not expend or contract for the
expenditure of a substantial portion of its capital contribution in the year in
which general and limited partners are admitted to a partnership, in which event
no substantial partnership tax deductions would be available in that year. We
have sponsored a series of fourteen public limited partnerships similar to the
partnerships being offered by this prospectus since December 1992 and, based on
the historic results of these previous limited partnerships, we anticipate that
no more than 65% of the total intangible drilling costs incurred by a
partnership will be incurred and deductible by investors in that partnership in
the year they are admitted as general or limited partners to such partnership.
See "Tax Aspects -- Anticipated Federal Income Tax Deductions."
Conversion of General Partner Interests. We anticipate that the general
partner interests in a partnership will be converted to limited partner
interests following the completion of the partnership's drilling activities. We
anticipate a partnership will complete drilling activities within approximately
8 to 15 months after the funding of the partnership. The tax consequences of
such a conversion will depend upon the law in existence at the time of
conversion and upon the results of that partnership's operations prior to that
time. Such consequences may be adverse if the conversion is deemed a
"constructive termination" of the partnership for federal income tax purposes or
may be adverse under the passive loss rules as a result of a partner's
particular circumstances. If we determine that the conversion of the general
partner interests in a partnership to limited partner interests will have an
adverse effect on the general partners or the partnership, due to adverse tax
consequences or other reasons, we may elect not to convert those interests.
Accordingly, we cannot assure that any general partner interests will be
converted to limited partner interests or when any such conversion will occur.
13
Tax Liabilities in Excess of Cash Distributions. A partner must report
and pay income tax on his share of partnership income, regardless of whether
such income is retained and used for debt service, working capital, or other
reasons, any of which uses may not give rise to deductions for federal income
tax purposes. The receipt of cash distributions by the general and limited
partners may be delayed due to various factors, such as the use of revenues to
finance permitted activities. To the extent that the general and limited
partners are credited with net income from a partnership, an income tax
liability will be incurred even though the general and limited partners may not
yet have received any cash distributions from the partnership. The timing and
amount of cash distributions will be determined by us in our complete
discretion. If you invest in a partnership, you will be required to report your
share of any partnership income on your federal, state and local tax returns and
you will be responsible for the payment of taxes attributable to such income. In
any year, your resulting tax liability may exceed the amount of cash distributed
to you by a partnership.
Risks of Borrowings. We are authorized to cause a partnership to obtain
additional loans from banks or other financial sources, or from us or our
affiliates, provided that the total amount of such loans may not in the
aggregate exceed 20% of the capital contributions to the partnership. A
partner's share of revenue applied to the repayment of loans, will be included
in his taxable income. Although such income may be offset in part by deductions
for depletion, cost recovery, depreciation, and intangible drilling costs, such
loans could cause a partner to become subject to an income tax liability in
excess of the amount of cash distributions he receives from the partnership.
Percentage Depletion. Percentage depletion deductions are tax
deductions calculated based upon a percentage of gross income from the property,
but are limited to 100% of the total taxable income of the partner from the
property for each taxable year, and are only available to limited partners
qualifying as independent producers. Because depletion deductions must be
computed separately by each partner and not at the partnership level, the
availability of percentage depletion will depend in part upon a partner's
individual circumstances. Therefore, each individual investor may not be
eligible to claim percentage depletion deductions. See "Tax Aspects -- Special
Features of Oil and Gas Taxation -- Depletion."
Farmouts and Backin Interests. If a partnership acquires working
interests in oil and gas leases under the terms of a farmout agreement, a
portion of the value of such working interests may have to be reported as
taxable income. In addition, the ability of a partnership to deduct all
intangible drilling costs paid by it with respect to oil and gas leases burdened
by a backin working interest may be limited. A backin working interest is a
right held by another party to become a working interest owner in the oil and
gas lease on payout of the initial well on the oil and gas lease. See "Tax
Aspects -- Special Features of Oil and Gas Taxation -- Farmouts and Backin
Interests."
Recapture. Certain deductions for intangible drilling costs, depletion,
and depreciation must be recaptured as ordinary income on disposition of
property by a partnership or on disposition of interests by a partner. If a
partnership disposes of property or a partner transfers an interest, the
partnership, and the partners may recognize ordinary income (instead of capital
gain) to the extent such deductions for intangible drilling costs, depletion and
depreciation must be recaptured. See "Tax Aspects--Special Features of Oil and
Gas Taxation -- Intangible Drilling and Development Costs," " -- Depletion" and
" -- Depreciation."
Audits. The IRS may audit the tax returns of the partnership you invest
in or its related drilling program, in which case an audit of your individual
tax returns also may result. If such audits occur, tax adjustments may be made,
including adjustments to items on your returns unrelated to the partnership.
Furthermore, any settlement or judicial determination of the partnership's or
the drilling program's income may be binding on you. This is the case even
though you may not have participated directly in the settlement proceedings or
litigation. See "Tax Aspects -- Partnership Taxation -- Elections and Returns."
Changes in Federal Income Tax Laws. Significant and fundamental changes
in the nation's federal income tax laws have been made in recent years and
additional changes are likely. Any such change may affect the partnerships and
the general and limited partners. Moreover, judicial decisions, regulations or
administrative pronouncements could unfavorably affect the tax consequences of
an investment in a partnership. See "Tax Aspects -- Other Tax Consequences --
Changes in Federal Income Tax Laws."
14
Significance of Tax Aspects. These interests are being offered to
parties who may avail themselves of the benefits presently allowed oil and gas
activities under federal income tax laws. We cannot assure that:
o money invested in a partnership will be recovered,
o any capital contributions to a partnership will be expended
and result in any tax deductions in the year such
contributions are received by a partnership,
o federal income tax laws or the present interpretation of those
laws will not be changed, or
o that any position taken by a partnership or a drilling program
on its federal income tax returns will not be challenged by
the IRS.
In addition, federal income tax provisions may:
o limit deductions,
o trigger or increase a partner's liability for the alternative
minimum tax on tax preference items,
o increase tax liability on the disposition of interests, or
o otherwise increase the federal income tax liability of a
partner.
Notwithstanding enactment of additional legislation or interpretations of
legislation which might require different treatment from the discussion under
"Tax Aspects," a partnership is authorized to expend the proceeds from the sale
of interests and to conduct its business and operations as described in this
prospectus. Each item of partnership income, gain, loss, or deduction will be
shared or borne financially in the manner specified in this prospectus. It is
suggested that you obtain professional guidance from your tax advisor in
evaluating the tax risks involved in investing in a partnership.
FORWARD LOOKING STATEMENTS
Forward-looking statements are inherently uncertain. Some statements
under the captions "Summary of Offering," "Risk Factors," "Application of
Proceeds," and elsewhere in this prospectus are forward-looking statements.
These forward-looking statements include, but are not limited to, statements
about our industry, plans, objectives, expectations, intentions and assumptions
and other statements contained in the prospectus that are not historical facts.
When used in this prospectus, the words "expect," "anticipate," "intend,"
"plan," "believe," "seek," "estimate" and similar expressions are generally
intended to identify forward-looking statements. Because these forward-looking
statements involve risks and uncertainties, including those described in this
"Risk Factors" section, actual results may differ materially from those
expressed or implied by these forward-looking statements. We do not intend to
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. Market data and forecasts used in this
prospectus have been obtained from independent industry sources. Although we
believe these sources are reliable, we do not guarantee the accuracy and
completeness of historical data obtained from these sources and we have not
independently verified these data. Forecasts and other forward-looking
information obtained from these sources are subject to the same qualifications
and the additional uncertainties accompanying any estimates of future market
size.
APPLICATION OF PROCEEDS
Interests in each partnership may be sold in an aggregate amount from
$1,000,000 to $18,000,000. There is no deduction from the proceeds realized from
the sale of interests to investors for organization and offering expenses, sales
commissions, and due diligence fees and, therefore, all of such sales proceeds
will be available to each partnership for the partnership's operations. The
managing partner under the terms of each drilling program agreement will pay all
organization and offering expenses, sales commissions, and due diligence fees.
See "Application of Proceeds" and "Participation in Costs and Revenues."
15
A partnership may receive capital contributions by the investor
partners ranging from a minimum of $1,000,000 to a maximum of $18,000,000.
Regardless of the amount of capital contributions received, each partnership
will have sufficient capital to engage in the proposed activities as set forth
under "Proposed Activities." However, to the extent that a partnership receives
the minimum capital contributions from the investor partners, the ability of
that partnership to participate in a large number of program wells and prospects
will be reduced, and therefore, the partnership may have a concentration of
risk. See "Risk Factors -- Particular Risks Relating to the Interests --
Concentration of Investment Risks." It is not anticipated that the liquidity of
a partnership will depend upon the amount of capital contributions received from
the investor partners, because as set forth below, all of the capital
contributions are to be expended and none of such funds will be retained for
liquidity purposes. A partnership's liquidity is dependent upon the amount of
revenues, if any, which are realized as a result of the partnership activities.
See "Proposed Activities -- Partnership Distributions."
We do not anticipate that we will make any capital contributions
directly to a partnership, but rather we will make our capital contributions
directly to the drilling program in which the partnership is a participant. We
will contribute to each drilling program the oil and gas leases upon which the
drilling program will conduct its operations. Our contribution of oil and gas
leases to each drilling program will be credited to the drilling program at the
lease acquisition costs of the oil and gas leases contributed or at fair market
value if the lease acquisition costs is materially more than fair market value.
The aggregate amount of contributions we will make to the related
drilling program as a participant, in respect of organization and offering
expenses, sale commissions, due diligence fees and oil and gas leases, must
equal at least 42% of the capital contributions initially made by investor
partners to the related partnership. In the event that our aggregate
contributions to the related drilling program in respect of organizational and
offering expenses, sale commissions, due diligence fees and oil and gas leases
is less than an amount equal to 42% of the capital contributions initially made
by investor partners to the related partnership, then we shall contribute to the
drilling program such additional funds in respect of tangible costs as may be
necessary to cause our aggregate contributions to the related drilling program
to be not less than 42% of the capital contributions initially made by investor
partners to the related partnership. Any amounts paid by us in respect of
organizational and offering expenses, sales commissions and due diligence fees
in excess of 15% of the capital contributions initially made by the investor
partners to the related partnership will not be considered in determining the
amount of our contribution.
The following table shows the calculation of the maximum and minimum
amounts which will be contributed to each drilling program to be conducted by
each partnership.
<Table>
<Caption>
MAXIMUM MINIMUM
CAPITAL CAPITAL
------------ ------------
Capital contributions of investor partners ...................... $ 18,000,000 $ 1,000,000
Managing partner's capital contribution to the partnership ...... 0
Initial partnership capital and total partnership
funds available for drilling program operations ............. 18,000,000 $ 1,000,000
Plus:
Contributions of the managing partner as a participant
in the drilling program ..................................... 7,560,000 420,000
TOTAL AMOUNTS TO BE CONTRIBUTED
TO EACH DRILLING PROGRAM .................................... $ 25,560,000 $ 1,420,000
</Table>
The following table is a summary of the estimated expenditures to be
made with respect to the total contributions made to a partnership's drilling
program. The table assumes a partnership receiving the minimum total capital
contribution from investor partners of $1,000,000 and a corresponding
contribution of the managing partner as a participant in the drilling program of
$420,000. The percentages set forth in the table below are estimates only,
16
and we cannot assure that these percentage will be actually realized or that
variations in the percentages will not be significant to partnership or its
drilling program.
<Table>
<Caption>
RANGE OF TOTAL DOLLAR
RANGE OF PERCENTAGES OF AMOUNT OF
CAPITAL CONTRIBUTIONS CAPITAL CONTRIBUTIONS
EXPENDED EXPENDED
--------------------------- -------------------------
Organizational and Offering Expenses 2.5 $35,000
Sales Commissions and Due Diligence Fees 5.9% $85,000
Lease Acquisition Costs of Prospects 15%-20% $213,000-$284,000
Tangible Costs 12%-16% $170,400-$227,200
Intangible Drilling Costs 55%-60% $781,000-$852,000
Other Costs 0%-10% $0-$142,000
</Table>
The amount of organization and offering expenses described above will represent
approximately 3.5% of the capital contributions initially made by investor
partners to each partnership in exchange for their respective interests. The
amount of sales commissions and due diligence fee will equal 8% and .5%,
respectively, of the capital contributions initially made by investor partners
to each partnership in exchange for their respective interests.
17
PARTICIPATION IN COSTS AND REVENUES
COSTS AND REVENUES
The combination of the allocation provisions contained in each
partnership agreement and the related drilling program agreement results in
aggregate allocations of revenues and costs, and income and gain relating to
revenues and costs, to the investor partners in a partnership and to the
managing partner on a consolidated basis are, in general, as set forth in the
table below.
<Table>
<Caption>
INVESTOR MANAGING
PARTNERS PARTNER
------------ ------------
Participation in Revenues:
Interest earned on capital contributions of investor partners ....................... 100% --
Proceeds from disposition of depreciable property and depletable oil
and gas property ................................................................. 60% 40%
Revenues from operations ............................................................ 60% 40%
Participation in Costs:
Organization and Offering Expenses, Sales Commissions and Due Diligence Fees
0% 100%
Operating Costs ..................................................................... 60% 40%
Administrative Costs ................................................................ 60% 40%
Reporting and Legal Expenses ........................................................ 60% 40%
Lease Acquisition Costs funded by contributions ..................................... 0% 100%
Intangible Drilling Costs funded by contributions ................................... 100% 0%
Tangible Costs funded by contributions .............................................. 100% 0%
All other Direct Costs, including intangible drilling costs and
tangible costs that may be funded by revenues from operations .................... 60% 40%
</Table>
All tangible costs shall be allocated entirely to the related
partnership; provided however, that to the extent, if any, that the total
contributions made by us for organization and offering expenses, sales
commissions and due diligence fees and lease acquisition costs are less than an
amount equal to 42% of the aggregate capital contributions initially made by
investor partners to that partnership, then we will be allocated an amount of
tangible costs equal to that deficit amount.
Proceeds from the sale of an oil and gas property, or depreciable
property, to the extent of a drilling program's simulated basis, or adjusted tax
basis, in the property will be allocated in accordance with the manner in which
costs attributable to such property's purchase were allocated up to an amount
equal to the drilling program's simulated basis, or adjusted tax basis, in such
property at the time of sale. Any remaining sale proceeds will be allocated to
the partners in a manner which will cause the total proceeds from such sale and
all prior sales to be allocated, to the extent possible, as if all such proceeds
had been allocated in the percentages indicated.
DISTRIBUTIONS
That portion of a partnership's revenues, if any, which in the sole
judgment of the managing partner are not required to meet the obligations of
that partnership including, but not limited to, the obligations of a partnership
to reimburse the managing partner and its affiliates for administrative costs
will be distributed to the investor partners not less often than quarterly.
Accordingly, there is no assurance that any distributions will be made to the
investor partners. See "Compensation and Reimbursement." Such reimbursements and
payments by a partnership reduce the amounts otherwise available for
distribution to the investor partners and create a risk that an investor
partner's share of the partnership's taxable income may be greater than the
amounts distributed to him. See "Tax Aspects -- Partnership Taxation --
General." Interest earned on aggregate capital contributions of the investor
partners will be allocated solely to the investor partners and will be
distributed to them periodically at such time or times as the managing partner
shall determine.
18
CAPITAL ACCOUNTS
A capital account will be maintained by each partnership for each
partner and by each drilling program for each participant therein in the manner
described in "Tax Aspects -- Partnership Taxation -- Allocations."
ALLOCATIONS OF FEDERAL INCOME TAX ITEMS
All recapture of federal income tax deductions and credits resulting
from the sale or other disposition of partnership assets will be allocated among
the investor partners in the same proportions as the deductions or credits
giving rise to such recapture were allocated. Items of income, gain, loss,
deduction and credit are allocated for federal income tax purposes under the
drilling program agreement in accordance with the allocation of costs, revenues,
and expenses described above.
The partnership agreement provides that if during any fiscal year of a
partnership, the allocation of any loss or deduction, net of any income or gain,
to a partner would cause his capital account balance, as adjusted in accordance
with applicable Treasury Regulations, to be less than zero as of the end of such
fiscal year, or would increase a deficit balance, only the amount of such loss
or deduction that reduces the balance to zero shall be allocated to such deficit
partner. The remaining loss or deduction shall be allocated to the partners
having positive capital account balances.
After any such allocation, partnership income or gain that otherwise
would be allocated to the deficit partner which is in excess of the cash
distributions to the deficit partner for such fiscal year shall be allocated
instead to the partners having positive capital account balances until the
amount so allocated equals the amount of loss or deduction previously allocated
to the partners having positive capital account balances rather than to the
deficit partner under this provision.
In addition, if at the end of any fiscal year of a partnership the
capital account balance, as adjusted in accordance with applicable Treasury
Regulations by taking into account distributions and deductions reasonably
expected in subsequent years, of any partner is less than zero, partnership
income or gain otherwise allocable for such fiscal year to the partners having
positive capital account balances shall be allocated to such negative partner in
an amount necessary to cause such capital account balance to equal zero.
After any such allocation, the partnership gain resulting from the sale
or other disposition of partnership property that would otherwise be allocated
to the negative partner for any fiscal year shall be allocated instead to the
partners having positive capital account balances until the amount of such gain
or amount realized so allocated equals the amount of income or gain previously
allocated to such negative partner. See "Tax Aspects -- Partnership Taxation --
Allocations."
PROPORTIONATE INTERESTS OF PARTNERS
Distributions of cash and allocations of tax items among partners in a
partnership will be made in accordance with the proportion that the sharing
ratio of each partner in the partnership bears to the aggregate sharing ratios
of all partners in the partnership. A partner's sharing ratio is equal to the
amount determined by dividing that partner's capital contribution to a
partnership by the aggregate capital contributions of all partners to that
partnership.
In the event of a transfer or surrender of interests by an investor
partner, items of income, gain, loss, deduction, and credit will be allocated
between the transferring investor partner and the transferee based on the number
of days during the taxable year in which such transfer was made on which each
person owned such interests. For purposes of such allocations and for purposes
of the next following distribution of cash, except for cash attributable to a
sale of a depletable property, transfers of interests will be recognized, in
accordance with the partnership agreement, effective as of a date determined by
the managing partner, which is expected to be the first day of the month
following the recordation of the transfer in the books and records of the
related partnership.
19
COMPENSATION AND REIMBURSEMENT
The managing partner and its affiliates will receive benefits, both
directly and indirectly, from its position as managing partner of the
partnerships and Mewbourne Oil Company's position as drilling program manager of
the drilling programs, which benefits may be considered to be compensation to
the managing partner and its affiliates. Such benefits consist of the following:
<Table>
<Caption>
Form of Compensation/
Reimbursement Amount
--------------------- ------
Reimbursement - Administrative Costs Indeterminate - reimbursement based upon allocation made in
accordance with generally accepted accounting principles.
For an estimate of the reimbursable administrative costs
estimated to be allocable to a partnership during the first
twelve months of its operation, see the discussion under
"Estimated Drilling Program Expenses."
Compensation - operator Compensation initially based upon participation share of
$780 per producing well per month charge and $7,420 per
drilling well per month charge.
Compensation - partnership interest and drilling Indeterminate - based upon between the managing
program participation partner's share of drilling program revenues and the
managing partner's share of drilling program costs.
Compensation - lending of funds to a partnership Indeterminate - compensation based upon the lesser of
lender's incurred interest cost or the rates chargeable by
banks on comparable loans.
Compensation - payment for equipment, supplies and Indeterminate - based upon competitive prices.
other services
</Table>
PARTNERSHIP AND PROGRAM INTEREST
Under the terms of each drilling program agreement, the managing
partner as a participant in the drilling program will be required to make
contributions to the drilling program at a percentage which is lower than the
percentages of revenues to be received by the managing partner. Specifically,
the aggregate amount of contributions to be made by the managing partner to the
drilling program must equal at least 42% of the capital contributions initially
made by investor partners to the related partnership or 29.57% of the aggregate
contributions made by all participants to the drilling program, and all revenues
from drilling program operations, other than from disposition of depletable or
depreciable property, generally shall be allocated 60% to the investor partners
and 40% to the managing partner.
LEASE AND EQUIPMENT PURCHASES FROM MEWBOURNE
The managing partner as a participant under the terms of each drilling
program agreement will contribute to each drilling program the oil and gas
leases upon which the drilling program will conduct its operations. The managing
partner's contribution of oil and gas leases to the drilling program will be
credited to the drilling program at the lease acquisition costs or at fair
market value if the lease acquisition costs is materially more than fair market
value. In addition, a partnership may buy or lease supplies and equipment from
the managing partner or its affiliates for compensation, prices or rentals that
are no less favorable to a partnership than are generally available from
unrelated third parties in the area engaged in the business of selling or
leasing comparable supplies or equipment. See "Proposed Activities --
Transactions with Affiliates."
20
ADMINISTRATIVE COSTS
The managing partner of each partnership, and the drilling program
manager of each related drilling program, will be entitled to reimbursement of
administrative costs and reporting and legal expenses incurred by them in
connection with managing and conducting the affairs relating to a partnership's
interest in the related drilling program or of the partnership, as applicable.
The amount of administrative costs that are reimbursed by a partnership shall be
allocated to the partnership and the related drilling program on a basis
conforming with generally accepted accounting principles and must be supported
in writing as to the application of such costs and as to the amount charged.
Regardless of the actual amount of administrative costs incurred by the managing
partner or drilling program manager in connection with the affairs of a
partnership, during any particular calendar year the total amount of
administrative costs allocable to that partnership shall not exceed the greater
of:
o 3.5% of the partnership's gross revenues from the sale of oil
and natural gas production during such year, calculated
without any deduction for Operating Costs or other costs and
expenses, or
o the sum of $50,000 plus .25% of the capital contributions of
general and limited partners to such partnership.
The above limitation on administrative costs shall not be applicable to
administrative costs otherwise allocable to a partnership which are
extraordinary and non-recurring or to the fixed overhead fee chargeable by an
operator of oil and gas wells including the fixed overhead fee chargeable under
an operating agreement by Mewbourne Oil Company with respect to the oil and gas
wells operated by Mewbourne Oil Company.
Administrative Costs incurred by the managing partner and the drilling
program manager in respectively managing and conducting the business and affairs
of a partnership and the related drilling program will be allocated 60% to the
investor partners and 40% to the managing partner. The managing partner
anticipates that the amount of administrative costs allocated to a partnership
in 2003 will be approximately $30,000. These expenses are only estimates and
they may vary due to the amount of capital raised, the date a partnership is
funded, the costs actually incurred in the operation of a partnership and the
related drilling program, and inflationary trends. Such amount includes
administrative costs that the managing partner or its affiliates have incurred
or which it is estimated they will incur on behalf of a partnership, including
those relating to a partnership's interest in the related drilling program, in
the calendar year in which investor partners are first admitted to the
partnership, but before investor partners are admitted to the partnership.
Reporting and legal expenses will be allocated 60% to the investor
partners in the partnership and 40% to the managing partner. Reporting and legal
expenses are estimated to be $25,000 for a partnership for the first year
following the year in which investor partners are first admitted to the
partnership.
21
ESTIMATED DRILLING PROGRAM EXPENSES
The managing partner estimates that direct costs that are in the nature
of reporting and legal expenses and administrative costs allocable to a
partnership and the related drilling program for the first twelve months of
operation will be approximately $75,000. This estimate is not dependent upon the
amount of capital contributions to a partnership and respectively represents
..416% and 7.5% of the total capital contributions by investor partners in the
case of the maximum capital contribution of $18,000,000 and the minimum capital
contribution of $1,000,000. The managing partner estimates that the components
of such allocable amounts will be as follows:
<Table>
Administrative Costs:
Legal................................................................ $ 1,000
Accounting........................................................... 12,000
Geological........................................................... 3,000
Secretarial.......................................................... 12,000
Travel............................................................... 2,000
Office Rent.......................................................... 5,000
Telephone............................................................ 3,000
Data Processing...................................................... 5,000
Other................................................................ 6,000
Other Direct Costs:
External Legal....................................................... $ 5,000
Audit Fees........................................................... 16,000
Independent Engineering Reports...................................... 5,000
TOTAL.......................................................... $ 75,000
</Table>
The expenses shown above are estimates only and these estimates have been made
by the managing partner based upon its historical experience with the
partnerships that it has previously sponsored. These estimates may vary due to
the amount of capital raised, the date a partnership is funded, the number of
prospects or leases acquired and the number of wells drilled by the partnership,
the timing and amount of the costs actually incurred in the operation of that
partnership and the related drilling program, and inflationary trends. In
addition, depending upon the timing of the funding and operation of a
partnership the engineering costs may not be incurred in the first twelve
months. See "Prior Activities"--"Prior Partnerships"--"Past Compensation" for a
discussion of the amount of administrative costs reimbursed by prior
partnerships sponsored by the managing partner or its affiliate.
CONTRACTS WITH MEWBOURNE AND ITS AFFILIATES
Neither the managing partner nor its affiliates owns any drilling rigs
or service companies, and except for the providing of gas compressors from an
affiliate of the managing partner, the managing partner currently does not
anticipate that it or its affiliates will enter into contracts with a
partnership for the rendering of services or the sale or lease of supplies and
equipment other than the operating agreement discussed below. Nevertheless, the
managing partner and its affiliates are permitted under the terms of the
partnership agreement to enter into contracts with a partnership for such
purposes and for the lending of money to the partnership under the limitations
established in the partnership agreement. The partnership agreement, however,
provides limitations on the circumstances under which such services may be
rendered and such sales may occur and the prices and rates that can be charged
therefor and for loans of money by the managing partner or its affiliates as
discussed in "Conflicts of Interest -- Contracts with Mewbourne and affiliates."
COMPENSATION AS OPERATOR
Except for limited instances described in the drilling program
agreement, the drilling program manager has agreed to act as operator with
respect to drilling and production operations to be conducted on program wells.
The drilling program manager will be entitled to be reimbursed for such services
in an amount equal to all charges, including overhead charges, which constitute
direct and indirect charges under an operating agreement or other applicable
operating agreement, including, for each program well, an initial fixed rate
overhead charge for each
22
producing well of $780 per month and a fixed rate overhead charge for each
drilling well of $7,420 per month. However, any charges by the drilling program
manager or its affiliates to a partnership under an operating agreement or other
applicable agreement for the use of the drilling program manager's or the
affiliate's personnel, properties, and equipment, as well as the pricing of
materials purchased by a partnership from the drilling program manager or the
affiliates or by the drilling program manager or the affiliates from a
partnership, will be subject to limitations imposed in the partnership
agreement. "Proposed Activities -- Operations" and "Conflicts of Interest." In
no event shall the consideration received for operator services duplicate any
other consideration or reimbursements received under the drilling program
agreement.
DEFINITIONS
The following are definitions of certain terms used in this prospectus.
In order to fully understand the terms of this offering, you should read these
definitions carefully.
"affiliated program" means a drilling, producing property, income,
royalty, or other program, whether in the form of a partnership, joint venture,
or otherwise, including the partnerships, for or of which the managing partner
or an affiliate of the managing partner serves as manager or managing partner or
acts in a similar capacity.
"development well" means a well drilled within the proved area of an
oil or gas reservoir to the depth of a stratigraphic zone or horizon known to be
productive. Development wells include, without limitation,
o a well drilled as an additional well to the same reservoir as
another producing well on an oil and gas lease,
o a well drilled to the same reservoir which previously
contained a producing well, drilled on an offset oil and gas
lease to the same reservoir, or
o a well drilled on acreage reasonably certain, based on
accepted geological, geophysical, and engineering studies and
data, to be geologically contiguous with the same reservoir.
"direct costs" means all actual and necessary costs directly incurred
for the benefit of a drilling program and generally attributable to the goods
and services provided to the drilling program by parties other than the managing
partner or its affiliates. Direct costs shall not include any cost otherwise
classified as organization and offering expenses, administrative costs,
operating costs, or lease acquisition costs. Direct costs also include the costs
of services provided by the managing partner or its affiliates under the terms
of written contracts. The term direct costs includes reporting and legal
expenses and expenditures and costs that would otherwise be classified as
intangible drilling costs or tangible costs if they were not funded by revenues
from operations.
"eligible citizen" means any person who is eligible to be qualified to
hold an interest in oil and gas leases on federal lands, including offshore
areas, under federal laws and regulations in effect from time to time. As of the
date of this prospectus, in order to be an eligible citizen a person must
(a) be a citizen of the United States,
(b) not be a minor, unless a legal guardian or trustee holds the
interest on the minor's behalf,
(c) be in compliance with federal acreage limitations, and
(d) not be participating in any agreement, scheme, plan, or
arrangement related to simultaneous oil and gas leasing that
would otherwise be prohibited.
23
Under current federal oil and gas leasing rules,
(i) an association, including a partnership or a trust, is
considered an eligible citizen if both such association and
all of its members or partners, and all parties who own, hold,
or control any of its instruments of ownership or control,
satisfy requirements (a) through (d) above, and
(ii) a corporation is considered an eligible citizen if it is
organized or existing under the laws of the United States, a
state, the District of Columbia, or a United States territory
and if it and all parties who own, hold, or control any of its
instruments of ownership or control satisfy requirements (a)
through (d) above. For purposes of this clause (ii), aliens
from countries that the federal government regards as not
denying similar privileges to citizens or corporations of the
United States may own, hold, or control stock in an eligible
citizen.
In addition, an eligible citizen may not hold, own, or control, directly or
indirectly, interests in federal oil and natural gas leases, options for such
leases or interests in such leases, on lands subject to the United States
Mineral Lease Act of 1920, as amended, in excess of the following limits:
o 246,080 acres, of which no more than 200,000 may be under
option, in any one state other than Alaska, and
o 300,000 acres, of which no more than 200,000 may be under
option, in each of the northern and southern leasing districts
of Alaska.
"exploratory well" means
o a well drilled to find commercially productive hydrocarbons in
an unproven area, or
o a well drilled to find a new commercially productive zone or
horizon in a field previously found to be productive of
hydrocarbons at another zone or horizon, or to significantly
extend a known prospect.
"intangible drilling costs" means expenditures associated with the
drilling and completion of oil and gas wells that under present law are
generally accepted as fully deductible currently for federal income tax
purposes. intangible drilling costs include all expenditures made with respect
to any well prior to, and in preparation of, establishment of production in
commercial quantities. The term intangible drilling costs shall not include
lease acquisition costs. The term intangible drilling costs shall not include
expenditures that are funded by revenues from operations.
"lease acquisition costs" means, when used to describe the costs of any
oil and gas lease, the sum of
(a) all monetary consideration paid or given for the oil and gas
lease to a non-affiliate of the managing partner, including
but not limited to lease bonuses and advance rentals paid to a
non-affiliate of the managing partner,
(b) all costs of lease acquisition and title examination including
but not limited to curing or defending title, title insurance
or examination costs, brokerage commissions, the fees and
wages of landsmen and lease brokers and their expenses, filing
fees, recording costs, transfer taxes, and like charges paid
in connection with the acquisition of the oil and gas lease,
(c) all delay rentals and other similar payments and ad valorem
taxes paid by the seller with respect to the oil and gas
lease,
(d) such portion as may be allocated to the oil and gas lease in
accordance with generally accepted accounting principles and
industry standards of all reasonable, necessary, and actual
costs and expenses of the managing partner or its affiliates
for geological, geophysical, seismic, land, engineering,
drafting, accounting, legal, and other like services together
with related
24
administrative and general overhead costs involved in lease
acquisition and prospect evaluation including such costs and
expenses which could otherwise be classified in this
prospectus as administrative costs,
(e) such portion as may be allocated to the oil and gas lease in
accordance with generally accepted accounting principles and
industry standards of all costs and expenses incurred in the
acquisition of farmouts, subleases, pooling orders, or other
oil and gas interests,
(f) interest and points actually incurred on funds borrowed to pay
any of the costs and expenses described in clauses (a) through
(e) above calculated from the date of their incurrence until
the date of their reimbursement by a drilling program at the
time the oil and gas lease is acquired by the drilling
program, and
(g) with respect to oil and gas leases held on the date of this
prospectus by or acquired after such date by the managing
partner or an affiliate of the managing partner, an interest
in which is transferred to the participants pursuant to the
drilling program agreement, the costs of such transfer;
provided that the expenses described in clauses (c), (d), (e),
and (f) shall have been incurred by the managing partner or
its affiliates not more than 36 months prior to the
acquisition by a drilling program of the oil and gas lease;
and provided further, that such time limitation shall not be
applicable to an oil and gas lease having a primary term of
five or more years.
Lease Acquisition Costs of an oil and gas lease shall not include any costs or
expenses which represent costs or expenses incurred in connection with the past
drilling of wells which are not producers of sufficient quantities of oil or
natural gas to make commercially reasonable their continued operation.
"operating agreement" means a model form operating agreement based upon
the American Association of Petroleum Landsmen Form 610-1989. This operating
agreement includes the accounting procedure for joint operations issued by the
Council of Petroleum Accountants Societies of North America which is attached as
an exhibit to such agreement. An operating agreement will contain modifications
that are customary and usual for the geographic area in which the partnership
intends to conduct operations.
"operating costs" means all expenditures made and costs incurred in
producing and marketing oil and gas from completed wells. Operating costs
include labor, fuel, repairs, hauling, materials, supplies, utility charges,
other costs incidental to or resulting from such costs, ad valorem and severance
taxes, insurance, casualty loss expense, and compensation to well operators or
others for services rendered in conducting such operations.
"organization and offering expenses" means all costs and expenses
incurred by the managing partner and its affiliates in connection with the
organization of a partnership and a drilling program, the registration of the
interests for offer and sale under applicable federal and state securities laws,
and the offer and sale of the interests. Organization and offering expenses
include, without limitation, fees paid to persons performing due diligence
examinations or otherwise acting in relation to a partnership or the managing
partner with respect to the offering and sale of the interests and all expenses
reasonable for the managing partner and its affiliates incurred in assisting
with the distribution of the interests or such due diligence. Organizational and
offering expenses shall not include any costs and expenses that might be
categorized as any of the foregoing but that are included as sales commissions
or due diligence fees.
"proved reserves" means those quantities of crude oil, natural gas, and
natural gas liquids which, upon analysis of geological and engineering data,
appear with reasonable certainty to be recoverable in future years from known
oil and gas reservoirs under existing economic and operating conditions. Proved
Reserves are limited to those quantities of oil and gas which can be expected,
with little doubt, to be recoverable commercially at current prices and costs,
under existing regulatory practices and with existing conventional equipment and
operating methods. Depending upon their status or development, Proved Reserves
will be subdivided into the following classifications and have the following
definitions:
25
o "proved developed reserves" means proved reserves which can be
expected to be recovered through existing wells with existing
equipment and operating methods. Additional oil and gas
expected to be obtained through the application of improved
recovery techniques are included as proved developed reserves
only after testing by a pilot project or after the operation
of an installed program has confirmed through production that
increased recovery will be achieved.
o "proved undeveloped reserves" means all reserves which are
expected to be recovered from additional wells on undrilled
acreage or from existing wells where a relatively major
expenditure is required for recompletion. Such reserves on
undrilled acreage are limited to those drilling units
offsetting productive units which are reasonably certain of
production when drilled. Proved reserves for other undrilled
units are claimed only where it can be demonstrated with
reasonable certainty, based on accepted geological,
geophysical, and engineering studies and data, that there is
continuity of reservoir from an existing productive formation.
No estimates for Proved undeveloped reserves are attributable
to any improved recovery technique contemplated for any
acreage, unless the techniques to be employed have been proved
effective by actual tests in the same areas and reservoir.
"reporting and legal expenses" means all third party accounting fees,
costs, and expenses associated with obtaining audits of books and records, third
party engineering fees, costs, and expenses associated with annual reserve
reports, and third party attorney's fees and other legal fees, costs, and
expenses associated with matters that are attributable to a drilling program's
or a partnership's business.
"sharing ratio" means for any partner in a partnership the proportion
obtained by dividing
o the amount of such partner's capital contribution to the
partnership by
o the sum of all capital contributions paid by all partners to
that partnership.
In the event of a voluntary or involuntary assignment by a partner of interests
in a partnership, other than an assignment solely of an interest in
distributions of partnership revenues, the sharing ratio of such partner shall
be proportionately reduced, based upon the number of interests assigned compared
to the total number of interests owned by such partner. The assignee of such
interests shall succeed to a proportionate share of the sharing ratio of his
assignor that is attributable to the interests transferred to such assignee.
"sponsor" means any person directly or indirectly instrumental in
organizing, wholly or in part, a partnership or any person who will manage or is
entitled to manage or participate in the management or control of a partnership.
Sponsor includes the managing partner and any other person who actually controls
or selects any person who controls 25% or more of the exploratory,
developmental, or producing activities of a partnership or any segment of the
partnership, even if that person has not entered into a contract at the time of
the formation of the partnership. Sponsor does not include wholly independent
third parties such as attorneys, accountants, and underwriters whose only
compensation is for professional services rendered in connection with the
offering of the interests. The term sponsor shall also be deemed to include its
affiliates.
"tangible costs" means those costs associated with drilling and
completion of oil and gas wells which are generally accepted as capital
expenditures under the Internal Revenue Code of 1986, as amended. Tangible costs
include all costs of equipment, parts and items of hardware used in drilling and
completing a well. Tangible costs also include those items necessary to deliver
acceptable oil and gas production to purchasers to the extent such items are
installed downstream from the wellhead of any well and which are required to be
capitalized under applicable provisions of the Internal Revenue Code and the
regulations promulgated under the Internal Revenue Code. The term tangible costs
shall not include costs that are funded by revenues from operations.
26
TERMS OF THE OFFERING
GENERAL
Mewbourne Development Corporation, as managing partner, is offering to
qualified investors during 2002 and 2003 limited partner interests and general
partner interests in a series of two partnerships. The minimum offering amount
for a partnership is 1,000 interests ($1,000,000) with the maximum offering
amount being 18,000 interests ($18,000,000). Each partnership will be a distinct
entity, and a purchaser of interests in any one partnership will not obtain an
interest in the other partnership. No partnership will commence operations prior
to the termination of the subscription period for interests. Each partnership
will participate, together with us and our affiliate Mewbourne Oil Company, in a
drilling program. Under the drilling program agreement, the activities of each
partnership will focus upon the acquisition of oil and gas leases covering
prospects, the drilling of development wells and the production and operation of
the resulting properties.
The minimum subscription in a partnership is ten interests ($10,000).
The entire purchase price for each interest must be paid in cash at the time of
subscription.
The execution of a subscription agreement in the form attached as
Exhibit D to this prospectus by a subscriber constitutes a binding offer to buy
subscription is accepted or rejected by the managing partner. Once an investor
subscribes for interests, he will not have any revocation rights other than
rights under applicable securities laws. The managing partner may refuse to
accept any subscription without liability to the subscriber. The managing
partner may reject a subscription if, for example, the prospective investor does
not satisfy the suitability standards or if the subscription is received after
the offering period has terminated. The execution of a subscription agreement
and its acceptance by the managing partner also constitute the execution of the
partnership agreement and an agreement to be bound by the terms of the
partnership agreement as an investor partner, including the granting of a
special power of attorney to the managing partner appointing it as the investor
partner's lawful representative to make, execute, sign, swear to, and file
various documents and instruments. See "Summary of Partnership Agreement and
Drilling Program Agreement -- Power of Attorney."
SUBSCRIPTION REFUNDS
If, within 12 months after the admission of the general and limited
partners to a partnership, the partnership has not expended or committed for
expenditure an amount equal to the total capital contributions of the
partnership's investor general and limited partners, the managing partner shall
distribute, as a return of capital, to the general and limited partners on a pro
rata basis the amount of such unexpended and uncommitted partnership funds,
after deducting an amount that the managing partner reasonably determines will
be equal to the operating capital to be required by that partnership that will
not be provided by anticipated revenues from partnership operations. For a
description of the tax consequences resulting from the distribution of such
uncommitted amounts, see "Tax Aspects -- Special Features of Oil & Gas Taxation
- -- Basis and At Risk Rules."
SUBSCRIPTION PERIOD
The subscription period for interests in Mewbourne Energy Partners
03-A, L.P. will commence on the date of this prospectus and terminate on
December 31, 2003, unless the managing partner, in its sole discretion,
accelerates or delays the offering termination date, provided that its ability
to delay the offering termination date is subject to its obligation to return
the purchase price for any interests not invested in a partnership within any
period required by state securities law.
A partnership shall not be funded with less than $1,000,000 in capital
contributions from investor general and limited partners. If, at the end of the
subscription period for interests in a partnership, subscription funds of less
than $1,000,000 have been received by us, such funds, together with any interest
thereon, will be promptly returned to subscribers.
27
SUITABILITY STANDARDS
General.
Investment in a partnership involves a high degree of financial risk
and is suitable only for persons of substantial means who have no need for
liquidity in their investment and who can afford to lose all or substantially
all of their investment. In particular, investment as a general partner is
recommended only to those persons who are in a position to benefit from the
treatment given such investment under current federal income tax laws. The
following suitability requirements represent the minimum suitability
requirements for investors in a partnership, and the satisfaction of such
requirements by a prospective investor does not necessarily mean that an
investment in a partnership is a suitable investment for that investor.
Based upon the information provided by each subscriber concerning
his/her investment objectives, other investments, financial situation and needs,
and any other pertinent information, each person offering and selling interests
is required to make every reasonable effort to assure that the purchase of
interests and an investment in a partnership are an appropriate investment for
an investor in light of the suitability standards set forth in this prospectus
and that an investment in interests is consistent with such investor's
investment objectives and financial situation. Relevant information for this
purpose will include at least the age, investment objectives, investment
experience, income, net worth, financial situation, and other investments of
each subscriber, as well as any other pertinent factors. In addition, such
persons will make every reasonable effort to assure that:
o such subscriber meets the minimum income and net worth
standard required under the applicable suitability standards,
o the subscriber can reasonably benefit from an investment in a
partnership based on the subscriber's overall investment
objectives and portfolio structure,
o the subscriber is able to bear the economic risk of the
investment based on the subscriber's overall financial
situation,
o an investment in a partnership is otherwise suitable for such
subscriber, and
o they have a reasonable basis to believe that the subscriber,
along or with one or more representatives, advisors, or agents
has the knowledge and experience in financial and business
matters to be capable of evaluating the merits and risks of
the offering including:
o the fundamental risks of the investment,
o the risk that a subscriber may lose his entire
investment,
o the lack of liquidity,
o the restrictions on transferability of interests,
o the background and qualifications of the managing
partner and program manager,
o the tax consequences of the investment, and
o the unlimited liability associated with purchasing
general partner interests.
Such information will be maintained by the managing partner and the applicable
soliciting dealer for at least six years.
28
Minimum Suitability Standards
Each subscriber for interests must represent in writing that he/she
has:
o a minimum annual gross income of $60,000 and a minimum net
worth of $60,000 exclusive of home, home furnishings and
automobiles, or
o a minimum net worth of $225,000 (exclusive of home, home
furnishings and automobiles).
Investors who are residents of the states set forth below may be
subject to higher and/or alternative suitability standards, which are described
below. Additional representations and warranties required of general and limited
partners are set forth in the special subscription instructions and the
subscription agreement attached as Exhibits C and D to this prospectus.
Additional Suitability Standards.
FOR ARIZONA, IDAHO, IOWA, KANSAS, MAINE, MASSACHUSETTS, MICHIGAN,
MISSISSIPPI, MISSOURI, NEW MEXICO, NORTH CAROLINA, OHIO, OKLAHOMA, OREGON,
PENNSYLVANIA, RHODE ISLAND, SOUTH CAROLINA, SOUTH DAKOTA, TENNESSEE, TEXAS,
UTAH, VERMONT, VIRGINIA, WASHINGTON AND WEST VIRGINIA RESIDENTS. A resident of
the States of ARIZONA, IDAHO, IOWA, KANSAS, MAINE, MASSACHUSETTS, MICHIGAN,
MISSISSIPPI, MISSOURI, NEW MEXICO, NORTH CAROLINA, OHIO, OKLAHOMA, OREGON,
PENNSYLVANIA, RHODE ISLAND, SOUTH CAROLINA, SOUTH DAKOTA, TENNESSEE, TEXAS,
UTAH, VERMONT, VIRGINIA, WASHINGTON, AND WEST VIRGINIA, and who are subscribers
for general partner interests must represent in writing that he/she has:
o minimum net worth of $225,000 without regard to the investment
in the partnership, exclusive of home, home furnishings and
automobiles, and as to the residents of IDAHO, IOWA, MAINE,
MASSACHUSETTS, NEW MEXICO, NORTH CAROLINA, OHIO, OKLAHOMA,
PENNSYLVANIA, RHODE ISLAND, SOUTH CAROLINA, TENNESSEE, TEXAS,
UTAH, VERMONT, VIRGINIA, WASHINGTON AND WEST VIRGINIA a
minimum annual gross income of $100,000 for the current year
and for the two previous years, and as to residents of
ARIZONA, KANSAS, MICHIGAN, MISSISSIPPI, MISSOURI, OREGON AND
SOUTH DAKOTA a taxable income of $60,000 or more for the
previous year and the expectation of an annual taxable income
of $60,000 or more for the current year and for the next
succeeding year, or
o a minimum net worth in excess of $1,000,000, inclusive of
home, home furnishings, and automobiles, or
o a minimum net worth of $500,000, exclusive of home, home
furnishings and automobiles, or
o a minimum annual gross income of $200,000 in the current year
and the two previous years.
The subscriber must also represent in writing that the investment in a
partnership does not represent more than ten percent of the subscriber's net
worth, less the value of the subscriber's other investments in limited
partnership interests.
For CALIFORNIA Residents. A resident of the State of CALIFORNIA who
subscribes for limited partner interests must represent in writing that he/she
has:
o a net worth of at least $250,000 or more, exclusive of home,
home furnishings, and automobiles and had during the last tax
year or estimates that he/she will have during the current tax
year, a gross annual income of $65,000 or more, or
o a net worth of $500,000 or more, exclusive of home, home
furnishings, and automobiles.
A resident of the State of CALIFORNIA who subscribes for general
partner interests must represent in writing that he/she has:
29
o a net worth of at least $250,000 or more, exclusive of home,
home furnishings, and automobiles and had during the last tax
year, or estimates that he/she will have during the current
tax year, a gross annual income of $120,000 or more, or
o a net worth of $500,000 or more, exclusive of home, home
furnishings, and automobiles, or
o a net worth of $1,000,000 or more, inclusive of home, home
furnishings, and automobiles, or
o had during the last tax year, or estimates that he/she will
have during the current tax year, a gross annual income of
$200,000 or more.
For MICHIGAN and OHIO Residents. A resident of MICHIGAN or OHIO must
represent that the investment in a partnership does not exceed ten percent of
the subscriber's individual or joint net worth, exclusive of home, home
furnishings, and automobiles.
For NEW HAMPSHIRE RESIDENTS. A resident of the State of NEW HAMPSHIRE
who subscribes for interests must, at a minimum, represent in writing that
he/she has:
o an individual net worth of at least $250,000, exclusive of
home, home furnishings, and automobiles, or
o an individual net worth of at least $125,000, exclusive of
home, home furnishings, and automobiles, and $50,000 of
taxable income.
For TENNESSEE Residents. A resident of the State of TENNESSEE who
subscribes for interests must, at a minimum, represent in writing that he/she
has:
o an individual net worth of at least $250,000, exclusive of
home, home furnishings, and automobiles, and had during the
last tax year and estimates that he/she will have during the
current tax year, a gross income of at least $65,000, or
o a net worth of at least $500,000, exclusive of home, home
furnishings, and automobiles.
Additional Requirements.
For CALIFORNIA Residents. Assignability or transfer of an interest is
limited so that no assignee or assignor, transferee or transferor may hold less
than $5,000 in interests. See the special subscription instructions attached as
Exhibit C to this prospectus for restrictions that limit the transferability of
interests.
For NORTH CAROLINA Residents. The minimum subscription in a partnership
is ten interests ($10,000). Although the managing partner may accept joint
ownership of interests, the minimum initial cash investment by each person
having such joint ownership may not be less than $10,000.
It is anticipated that each partnership will acquire interests in
federal oil and gas leases, thus subscriptions for interests will not be
accepted from a person who is not an eligible citizen. In general, an eligible
citizen is any person who is a citizen of the United States or is otherwise
eligible to be qualified to hold an interest in oil and gas leases on federal
lands, including offshore areas, under federal laws and regulations in effect
from time to time. Each prospective investor must represent in writing that he
or she is an eligible citizen.
For Fiduciary Accounts. In the case of subscriptions by fiduciary
accounts, the applicable suitability standards must be met by the beneficiary,
the fiduciary account or by the donor or grantor who directly or indirectly
supplies the funds to purchase the interests if the donor or grantor is the
fiduciary.
For Transferees of Interests. Transferees of interests seeking to
become substitute general and limited partners must also meet the suitability
requirements discussed above, provided that the requirements with respect to net
worth and taxable income may be waived at the managing partner's discretion
under limited circumstances, including transfers of interests by an investor
partner to a dependent or to a trust for the benefit of a dependent or transfers
by will, gift, or by the laws of descent and distribution.
30
Tax Exempt Entities. SUBSCRIPTIONS FROM PERSONS OTHERWISE GENERALLY
EXEMPT FROM FEDERAL INCOME TAX SUCH AS IRA'S, KEOUGH PLANS, QUALIFIED EMPLOYEE
BENEFIT PLANS AND CHARITABLE ORGANIZATIONS WILL NOT BE ACCEPTED AND ARE NOT
ELIGIBLE SUBSCRIBERS.
SUBSCRIPTION PROCEDURE
An eligible subscriber may subscribe for interests in a partnership
prior to the end of the subscription period for the partnership by properly
completing, executing, and delivering the following documents to his soliciting
dealer:
o A subscription agreement in the form attached as Exhibit D to
this prospectus; and
o A check payable to the order of "Regions Bank-Tyler, Escrow
Agent for Mewbourne 02-03 Drilling Program" in an amount equal
to the purchase price for the number of interests to be
purchased by that investor.
The managing partner will not accept any subscription agreement that
has been executed by someone other than the investor, except a subscription
agreement on the part of a fiduciary account that has been executed by an
individual having the legal power of attorney to so act. Unless a subscription
is rejected by the managing partner at any time prior to the admission of
general and limited partners to a partnership or the managing partner elects not
to admit general and limited partners to a partnership, fully paid subscriptions
in proper form will be deemed accepted, subject to reduction in accordance with
the subscription agreement. By its terms, the subscription agreement constitutes
a binding agreement of the subscriber. Subject to the right of the managing
partner to reject subscriptions, each subscriber will become an investor partner
in a partnership at the time he is admitted to the partnership. General and
limited partners will be admitted to a partnership contemporaneously with the
release of the funds from the escrow account, and thereafter general and limited
partners will be admitted to a partnership not later than the last day of the
calendar month in which their subscriptions were accepted by the managing
partner. Subscriptions will be accepted or rejected by the managing partner
within 30 days of their receipt or such other shorter time period as may be
required by applicable laws of the state in which the subscriber resides. If a
subscription is rejected, the subscription funds tendered in connection
therewith will be immediately returned to the appropriate subscriber without
interest or deduction for expenses. If general and limited partners are not
admitted to a partnership on or before the expiration of the subscription period
for interests in that partnership, all subscription funds relating to that
partnership will be immediately returned in full, together with any interest
thereon, to the appropriate subscribers.
Subscription funds will be deposited in an escrow account at Regions
Bank-Tyler or another federally insured institution designated by the managing
partner; provided that upon receipt and clearance of aggregate subscription
funds of $1,000,000 or more from subscribers that the managing partner deems
suitable to be general and limited partners in a partnership, the managing
partner may, upon written request, cause those subscription funds to be
withdrawn from the escrow account and to be deposited in an account established
for that partnership and all subscribers whose subscriptions have been accepted
shall be admitted as an investor partner in that partnership within 15 days
after such deposit. Thereafter, subscription funds will be deposited in a
partnership account with each subscriber whose subscription has been accepted
being admitted as an investor partner in that partnership no later than the last
day of the calendar month in which such subscription was accepted. Until
subscribers are admitted as general or limited partners in a partnership, no
expenses may be paid from the partnership account. Each subscriber whose
subscription has been accepted and who has been admitted as an investor partner
will be provided confirmation of such acceptance and admission. Funds deposited
in the escrow account or partnership account will be invested in time deposits,
short-term bank certificates of deposit, short-term governmental obligations,
U.S. treasury bills, bank money market accounts and similar investments until
those funds are expended for partnership operations.
A subscriber whose funds are deposited in the escrow or partnership
account no fewer than five business days prior to the termination of the
subscription period for interests in the partnership will receive, within 60
days following the admission of such subscriber as an investor partner in the
partnership, interest earned on those funds from the date those funds cleared
the institution where that account is maintained and are invested to the date on
31
which such subscriber was admitted to the partnership as an investor partner in
the partnership. Although subscription funds generally clear an institution
within three to five business days following their deposit, no assurance can be
given that those proceeds will be clear within that period of time. All
subscription funds, together with any interest earned thereon, will be promptly
returned to each subscriber that is not admitted as an investor partner to a
partnership.
After the subscription period for a partnership has expired, no
additional interests in the partnership will be offered or sold. Notice of the
admission of general and limited partners to a partnership and the percentage of
ownership of each investor partner in that partnership will be furnished to each
investor partner following their admission to the partnership.
Pending their use in partnership activities, the managing partner
intends to invest the balance of the capital contributions in time deposits,
short-term governmental obligations, U.S. treasury bills, money market accounts,
commercial paper and similar investments. Any interest earned on capital
contributions from investor general and limited partners will be allocated
solely to the investor general and limited partners, and will be distributed to
the general and limited partners periodically. See "Participation in Costs and
Revenues." Funds of a partnership will not for any purpose be commingled with
funds of any partnership, the managing partner or an affiliate of the managing
partner or any other entity.
NO SUBSCRIPTION AGREEMENT WILL BE ACCEPTED UNTIL AT LEAST FIVE BUSINESS
DAYS HAVE ELAPSED FROM THE DATE THAT THE SUBSCRIBER RECEIVED A COPY OF THIS
PROSPECTUS.
CONVERSION OF GENERAL PARTNER INTERESTS
We anticipate that the general partner interest in a partnership held
by a general partner will be converted to a limited partner interest in that
partnership following the completion of that partnership's drilling activities;
which we anticipate will occur within approximately eight to 15 months after the
funding of that partnership. Generally, the discussion in this prospectus
relating to limited partners and limited partner interests, other than the
discussion of the federal income tax consequences of an initial investment as a
limited partner, will apply to converted partners after the time of such
conversion. However, converted partners will continue to have the rights and
obligations of general partners with respect to activities occurring prior to
conversion, including liability for the partnership's obligations. See
"Liability of General and Limited Partners -- General Partners." Furthermore,
the tax treatment of converted partners will in some respects be determined by
their previous status as general partners. See "Tax Aspects -- Partnership
Taxation -- Conversion of General Partner Interests" and "Tax Aspects -- Special
Features of Oil and Gas Taxation -- Passive Activity Loss Limitations." If the
managing partner determines that the conversion of the general partner interests
in a partnership to limited partner interests will have an adverse effect on the
general partners or the partnership, due to adverse tax consequences or other
reasons, the managing partner may delay the conversion or may elect not to
convert the general partner interests; provided that if the managing partner
determines that such conversion would not be in the best interests of the
general partners or the partnership, the insurance coverage limits as set forth
under "Proposed Activities -- Insurance" will not be reduced unless such
coverage becomes unobtainable or is only available at premiums which are
prohibitively more expensive than the premiums now being paid for such policies.
RIGHT OF PRESENTMENT
Each investor partner in a partnership may request in writing that the
managing partner purchase for cash all, but not less than all, of that investor
partner's interests on the terms and subject to the limitations set forth below.
The managing partner may cause its affiliate to fulfill its obligation to
purchase an investor partner's interests. Partners in a partnership formed in
2002 may make this request in each of the years 2006 through 2011 and partners
in a partnership formed in 2003 may make this request in each of the years 2007
through 2012. The managing partner, acting in its sole discretion, shall have
the right, but not the obligation, to extend either or both of the time periods
in which an investor partner may make this request. Any such extension must be
made for a period of at least one year and in yearly increments. Should the
managing partner elect to make an extension, then the managing partner shall
give notice to the investor partners of the extension on or before January 31 of
the last year in which the right of presentment then may be exercised. If the
interests are subsequently listed on a national securities exchange or are
traded through the National Association of Securities Dealer's Automated
Quotation System or in
32
the over-the-counter market, this right of presentment may be terminated at any
time at the option of the managing partner. Any such listing could have an
adverse effect on the tax consequences of an investment in interests. See "Tax
Aspects - Partnership Taxation." If the obligation of the managing partner or
its purchaser designee to purchase interests from general and limited partners
is determined to violate any existing or future laws, such obligation will be
eliminated or modified appropriately.
The obligation of the managing partner to purchase interests in a
partnership in any single calendar year is limited to no more than 5% of the
total number of interests of that partnership outstanding at the beginning of
such calendar year; provided, however, the total amount of funds that the
managing partner directly and by means of a purchaser designee is required to
expend in any single calendar year to purchase partnership interests from
investors in all of the oil and gas drilling partnerships as to which the
managing partner or an affiliate of the managing partner serves as sponsor shall
not exceed $500,000. Additionally, if subsequent to December 31 of the year
immediately preceding the year in which the right of presentment is being
exercised, the price for either oil or gas received by a partnership from its
program wells decreases by 20% or more as compared to the price being received
as of that date, then the managing partner may in its sole and absolute
discretion refuse to purchase any interests in that partnership.
During the first calendar quarter of each of the years during which the
right of presentment exists, each investor partner in a partnership may request
in writing that the managing partner purchase all, but not less than all, of his
interests. Prior to May 31 of each such year, the managing partner will notify
each requesting investor partner of the amount that the managing partner or its
purchaser designee will pay to purchase each interest and those general and
limited partners shall have 20 days from the receipt of that notice in which to
elect whether to present their interests for purchase. If a greater number of
interests are presented than the managing partner is required to purchase, the
interests to be purchased will be selected by lot or by such other method as the
managing partner deems reasonable. Interests that are not purchased will not
have any priority with respect to purchase in subsequent years.
The purchase price paid to an investor partner upon repurchase of his
interests in a partnership will be the pro rata share represented by his
interests of the sum of:
o 65% of the unescalated value of future net revenues
attributable to proved developed producing reserves of that
partnership, and
o 50% of the unescalated value of future net revenues
attributable to proved developed non-producing reserves of
that partnership, as such are determined by an independent
expert selected by the managing partner and after such value
has been discounted as described below, less the share of that
partnership's debts, expenses, and obligations of all kinds
incurred and then allocable to those interests.
As used above, the term "unescalated value" means a value held constant
over time and not increased by any interest rate or any other factor. The
purchase price will be determined as of December 31 of the year immediately
preceding the year in which the right of presentment is being exercised. Any
cash distributions to an investor partner after December 31 and before the date
of purchase attributable to the interests being repurchased will be deducted
from the purchase price for his interests. The effective date of any such sale
for purposes of determining such deduction will be deemed to be the day on which
payment of the purchase price is tendered by the managing partner or its
purchaser designee.
In order to compute the price to be paid upon the purchase of
interests, a partnership will cause an independent expert to estimate annually
the future net revenues attributable to the partners' interests in that
partnership's proved reserves based upon then current costs and pricing for oil
and gas as of the December 31 of the year immediately preceding the year in
which the right of presentment is being exercised. Such future net revenues
attributable to proved reserves:
o will first be adjusted by the independent expert to reflect
the risks of production and development of such reserves and
any other economic contingencies that normally would be
considered by a purchaser of proved reserves, and
33
o will then be discounted to present value at a rate equal to
10%.
A selling investor partner will be entitled to no further partnership
distributions with respect to the interests he has sold after the date on which
payment of the purchase price is tendered by the managing partner or its
purchaser designee.
Although the managing partner anticipates that its financial resources,
including its borrowing capabilities, will be sufficient to meet its purchase
obligations under the right of presentment, no assurance can be given that
contingencies will not arise which will require funding beyond the financial
resources committed to it. Therefore, there can be no assurance that either the
managing partner or its affiliates will have sufficient funds available to meet
the obligation to purchase interests from investors exercising the right of
presentment. If the managing general partner assigns or transfers its interest
in a partnership, the assignee of such interest will be required to assume the
withdrawing managing partner's obligations with respect to the right of
presentment.
An investor who sells his interests by exercising the right of
presentment may receive more or less total consideration than would be received
if the election to sell had not been made and, depending upon the success of the
partnership's activities and the timing of the sale, may realize a gain or loss
on such sale. Appraisals of future net recoverable reserves of oil and gas and
estimates of future net revenues to be received from such reserves are based on
variable and uncertain factors and assumptions, including the price at which
production can be sold, and amounts of actual production and net revenues will
vary from the estimates. Estimates made during the first few years of production
from a property will be based on relatively little production history and
generally are less reliable than estimates based on a longer production history.
Accordingly, reserve estimates and estimates of future net revenues from
production are likely to vary from year to year. For these and other reasons,
the price paid for purchased interests may be less than the fair market value or
initial price of such interests.
The sale of interests through the right of presentment will be a
taxable event to the selling investor partner. See "Tax Aspects - Special
Features of Oil and Gas Taxation - Sale of Interests."
ADDITIONAL FINANCING
General. The actual costs of the proposed drilling activities of a
drilling program may exceed the estimated costs of such activities and it is
possible that additional funds in addition to the initial contributions from the
participants in that drilling program may be required to complete such drilling
activities, to further develop the drilling program's oil and gas leases and to
pay for other drilling program operations. The partnership agreement does not
provide for any additional assessments, either mandatory or voluntary of any
general and limited partners. Thus, it is anticipated that a partnership's share
of such additional expenditures will be financed by partnership borrowings,
partnership revenues or the proceeds of sale of partnership properties. There
can be no assurance that such additional funds can be obtained, and if they
cannot be obtained a partnership might have to forego further drilling
activities or development of the related drilling program's oil and gas leases.
Also, the terms of oil and gas leases may bind the participants in the drilling
program to a specified drilling schedule and the inability of a partnership to
fund on a timely basis its portion of the cost of such additional specified
drilling could result in the forfeiture of a partnership's interest in such oil
and gas leases. Further, the inability to finance additional activities could
result in the sale of undeveloped acreage or farmouts to independent parties or
to affiliates of the managing partner including affiliated programs, under which
circumstances a partnership may not realize the full value of its properties.
Limitation on Borrowings. The partnership agreement authorizes the
managing partner to borrow money on behalf of a partnership and to mortgage or
pledge a partnership's property, including production from such property, as
security and to engage in any other method of financing customary in the oil and
gas industry. The sum of outstanding borrowings by a partnership may not at any
time exceed 20% of the aggregate capital contributions to the partnership. The
partnership agreement permits borrowing to finance partnership operations,
including without limitation drilling and completion activities. A partnership
may borrow funds only if the lender agrees that it will have no recourse against
the individual general and limited partners. Borrowings may be secured by a
partnership's assets or income and may be made with or without recourse to the
managing partner. The managing partner contemplates, however, that any borrowing
by a partnership will be incurred without recourse to the managing
34
partner and will be secured by the partnership's property. The managing partner
does not presently intend to guarantee nonrecourse loans by third parties to a
partnership. A partnership's ability to borrow will depend in large part upon
the success of its drilling activities. There is no assurance that the managing
partner will be able to secure nonrecourse financing in an amount sufficient to
conduct drilling operations if such financing is sought, that any such financing
can be secured without the guarantee of the managing partner or an affiliate of
the managing partner or that financing can be obtained at satisfactory interest
rates or terms. A partnership's borrowings will be repaid from the partnership
revenues allocable to the partners, reducing the amounts available for
distribution to them and creating the risk that an investor partner's share of a
partnership's taxable income may be greater than the amounts distributed to him.
See "Tax Aspects -- Partnership Taxation -- General."
The partnership agreement further authorizes the managing partner and
its affiliates to make loans to a partnership for purposes permitted by the
partnership agreement. Interest charged by the managing partner or the affiliate
of the managing partner on advances made by the managing partner or such
affiliate to a partnership will be at a rate not in excess of the lesser of the
effective rate then being paid by the managing partner or the affiliate for
similar type borrowings or the highest lawful rate, and in no event at a rate in
excess of the amount which would be charged to the partnership by independent
third parties for the same purpose. The managing partner or an affiliate of the
managing partner may not receive points or other financing charges or fees on
advances made by it to a partnership. In addition, a partnership may not make
loans to the managing partner or any affiliate of the managing partner. The
managing partner may pledge its interest in a partnership but may not pledge
partnership assets for its own benefit. The managing partner however, may pledge
its directly owned interest in drilling program properties at any time and may
sell its working interests in drilling program properties pursuant to the
drilling program agreement after the cessation of substantially all drilling
activities of such drilling program.
PLAN OF DISTRIBUTION
Subscription for interests will be solicited by soliciting dealers that
are members of the National Association of Securities Dealers, Inc. on a
"minimum/maximum best efforts" basis. The soliciting dealers must sell the
minimum number of interests offered ($1,000,000) if any interests are sold and
are required to use only their best efforts to sell the maximum number of
securities offered ($18,000,000). Mewbourne Securities, Inc., an affiliate of
the managing partner, is a broker-dealer which may act as a soliciting dealer
for the partnerships. While there is no limitation on the number of interests
that may be sold by Mewbourne Securities, it is anticipated that the number of
interests, if any, sold by Mewbourne Securities will not be material. Neither
Mewbourne Securities, Inc. nor any soliciting dealer shall execute any
transaction in a discretionary account without the prior specific written
approval of the transaction by the customer.
Each soliciting dealer will receive sales commissions and due diligence
fees in an aggregate amount of up to 8.5% of the sales price of interests sold
by that soliciting dealer. No sales commissions or due diligence fees will be
paid on sales of interests to:
o officers, directors, or employees of the managing partner or
its affiliates,
o officers, directors, employees, or registered representatives
of a soliciting dealer, or
o an affiliate of the managing partner.
The total commission and fees paid to a particular soliciting dealer
may be comprised of a sales commission in an amount up to 8% of the sales price
of interests in a partnership sold by the soliciting dealer, and a due diligence
fee in an amount of up to .5% of the sales price of interests sold by the
soliciting dealer; provided that the aggregate commission and fees paid to a
soliciting dealer shall not exceed 8.5% of the sales price of interests in a
partnership sold by the soliciting dealer. The maximum wholesaling expenses to
be paid will not exceed 2% of the estimated aggregate gross proceeds of the
offering. The maximum compensation to be paid to the soliciting dealers and
related parties in connection with the distribution of the offering, including,
but not limited to, wholesaling expenses, retailing expenses, sales commissions
and the up to .5% in due diligence fees will not exceed 10.5% of the aggregate
gross proceeds of the offering.
35
The managing partner, under the terms of each drilling program, will
pay all organization and offering expenses, sales commissions and due diligence
fees. A portion of these fees and expenses are in the nature of wholesaling fees
and expenses. The managing partner estimates that these wholesaling fees and
expenses will be approximately $315,000 or 1.75% of the offering proceeds in the
case of the maximum offering of $18,000,000. All of these wholesaling fees and
expenses will be paid by the managing partner pursuant to the terms of the
drilling program.
The managing partner has engaged its affiliate, Mewbourne Securities,
Inc. to serve as the dealer manager for purposes of forming a soliciting dealer
group comprised of members of the National Association of Securities Dealers,
Inc. Mewbourne Securities, Inc., in its role as dealer manager and each
soliciting dealer participating in the offering of the interests may be deemed
to be an underwriter within the meaning of the Securities Act of 1933. The
managing partner and the partnerships have agreed to indemnify the soliciting
dealers, including Mewbourne Securities, Inc., against various civil
liabilities, including liabilities arising under the Securities Act of 1933.
In offering the interests, in addition to this prospectus, the managing
partner has prepared and intends to provide soliciting dealers and investors
with a brochure entitled "Mewbourne Energy Partners" concerning the offering of
the interests. Prior to the distribution, such sales materials must be filed
with and reviewed by the Securities and Exchange Commission, various state
securities administrators and by state regulatory authorities. When utilized,
such sales material must be accompanied or preceded by a prospectus. No other
sales material has been authorized by the managing partner for use in connection
with this offering. The managing partner will not offer a sales incentive
program in connection with the distribution of interests in either partnership.
INVESTMENT OBJECTIVES
Each partnership will participate in a drilling program, to be managed
by Mewbourne Oil Company in its capacity as drilling program manager, consisting
of the acquisition and development of oil and gas prospects. The primary
investment objective of each partnership is to conduct oil and gas drilling and
development activities on prospects in an attempt to establish long-life oil and
gas reserves. In addition, a drilling program's structure is intended to result
in tax benefits, consisting principally of deductions for intangible drilling
costs, depletion, and depreciation. To the extent that the operations of a
partnership and the related drilling program result in a net loss for a taxable
period, general partners will be able to claim their respective shares of the
deductions giving rise to such loss in the current year, but limited partners
will not be able to claim their shares of the deductions comprising such loss in
the current year except to the extent they have net passive income from other
sources. See "Proposed Activities" and "Tax Aspects."
PROPOSED ACTIVITIES
Under the drilling program agreement, the activities of the
partnerships will focus upon the acquisition of oil and gas leases covering
prospects, the drilling of development wells, and the production and operation
of the resulting properties. In addition to development wells, at the discretion
of the managing partner, up to 20% of a partnership's capital contributions may
be expended in connection with activities relating to exploratory wells. All
drilling activities involve a high degree of risk with exploratory wells
presenting a higher degree of risk than development wells. Mewbourne Development
Corporation will act as the managing partner of each partnership. See "Summary
of Partnership Agreement and Drilling Program Agreement -- Rights and Powers of
the Managing Partner." Mewbourne Oil Company will act, in its individual
capacity, as the drilling program manager of each drilling program and as
operator under each operating agreement.
The managing partner intends to cause the partnerships to engage in
drilling for oil and gas on a number of different prospects, none of which is
yet determined. For a number of reasons, it is impossible at this time to
predict with certainty the drilling activities that will be conducted by either
partnership. Among these reasons are that neither partnership has yet to acquire
working interests or other rights to any particular oil and gas leases and it
will do so only after the prospective offering of interests is completed.
Further, the amount of capital that will be raised by a partnership as a result
of this offering has not yet been determined. The result of the initial drilling
activities conducted by a partnership also may have a significant effect on the
number and location of subsequent wells. Decisions as to the management,
business, and affairs of a partnership will be made by the managing partner
based upon its judgment at the time as to the best interests of the partnership.
36
DEVELOPMENT POLICY
Decisions as to the number and location of the prospects in which a
partnership will invest and as to the amounts spent on drilling will be made
solely by the managing partner for the partnership and by the drilling program
manager on behalf of the related drilling program. The managing partner intends
to cause each partnership to acquire an interest in as many prospects as
practicable in order to best diversify the risks associated with drilling for
oil and gas, however, the number and type of wells to be drilled by a
partnership will vary according to the amount of funds raised, the costs of each
well and the size of the fractional working interests selected in each well.
The managing partner will designate in writing the area comprising a
prospect in which a partnership is to acquire an interest under the related
drilling program agreement at or prior to the date on which a well is spudded
(i.e., boring is commenced) on such prospect. The prospect area may be enlarged
or contracted from time to time by the managing partner on the basis of
subsequently acquired geological and engineering data to define or redefine the
productive limits of the original area of the prospect. Notwithstanding the
foregoing, with respect to any large, continuous known stratigraphic trend which
could be defined as a continuous reservoir, the managing partner, acting in good
faith, shall be permitted to limit or reduce the area of a prospect to the
minimum area permitted by state law or local practices whichever is applicable,
to protect against drainage from adjacent wells.
AREA OF GEOGRAPHIC CONCENTRATION
The managing partner anticipates that all of a partnership's funds
available for drilling activities will be expended in the Permian Basin, located
in West Texas and Southeastern New Mexico, and also the Anadarko Basin, located
in Western Oklahoma and the Texas Panhandle. However, if the managing partner
determines that it is in the best interest of a partnership to conduct
additional drilling activities in other onshore geographic areas of the United
States, the related drilling program and the partnership may expend available
funds in such areas. At the present time, the partnerships are not committed to
any specific drilling sites. No geological, engineering or other information
about any geographic area, other than that contained in this prospectus, will be
furnished to any prospective investor and, for that reason, no person should
invest in a partnership on the basis of any expectation regarding the results of
drilling on any particular drilling location.
The Permian Basin encompasses a large area of approximately 75,000
square miles located in West Texas and Southeastern New Mexico. Since 1921, over
26 billion barrels of oil and 76 trillion cubic feet of natural gas have been
produced from the Permian Basin.
Two interior basins, the Midland Basin in West Texas and the Delaware
Basin in West Texas and Southeastern New Mexico, subdivide the Permian Basin.
Although drilling depths range from very shallow to more than 20,000 feet, the
managing partner and its affiliates target multiple Pennsylvanian and Permian
age sandstone and carbonate reservoirs along the shelf and shelf-slope areas
within the interior subbasins, which lay at depths ranging from 3,000 to 13,000
feet.
Over the past 38 years, Mewbourne Oil Company and its affiliates have
conducted operations throughout the Permian Basin. Mewbourne Oil Company
currently operates approximately 225 wells in the Permian Basin and Mewbourne
Oil Company and its affiliates have drilled approximately 250 commercially
productive oil and gas wells in the Permian Basin. These historical results are
not indicative of the results that may be achieved by the partnerships and such
results should not be used by potential investors in making an investment
decision. In addition, a commercially productive well may not necessarily have
sufficient production to recover both operating expenses and drilling and
development costs. Most current operations are centered on the shelf and along
shelf slope areas of the Delaware Basin located in Eddy, Chaves, and Lea County,
New Mexico. It is anticipated that each partnership will, through the related
drilling program, conduct a portion of its oil and gas drilling and development
activities in this area of the Permian Basin. Predominantly, wells drilled by
Mewbourne Oil Company in this region of the Permian Basin are classified as gas
wells but produce both oil and gas. However, Mewbourne Oil Company and its
affiliates have drilled a number of wells in this area which have been
classified as oil wells.
The Anadarko Basin of Western Oklahoma, the Texas Panhandle and
Southwestern Kansas encompasses an area of approximately 60,000 square miles.
First production was established in 1917, and since that time over 6 billion
barrels of oil and 80 trillion cubic feet of natural gas have been produced from
this geological basin.
37
Production in the Anadarko Basin ranges from several hundred feet to
over 26,000 feet in depth. Over the past 25 years, Mewbourne Oil Company and its
affiliates have drilled approximately 448 commercially productive wells that
have targeted Pennsylvanian, Mississippian, Devonian, and Silurian age sandstone
and carbonate reservoirs along the shelf area of Western Oklahoma and the Texas
Panhandle at depths of between 6,000 and 13,000 feet. Mewbourne Oil Company
currently operates approximately 270 wells in the Anadarko Basin. It is
anticipated that each partnership will, through the related drilling program,
conduct a portion of its drilling and development activities along the shelf
area of Western Oklahoma, the Texas Panhandle and Southwest Kansas. A majority
of the wells drilled by Mewbourne Oil Company over the past 26 years in this
region of the Anadarko Basin have been classified as gas wells but produce both
oil and gas. However, Mewbourne Oil Company and its affiliates have drilled a
number of wells in this area which have been classified as oil wells.
PROSPECT EVALUATION
Mewbourne Oil Company currently employs 16 engineers, 10 geologists and
9 landmen which are available to assist in prospect origination for each
drilling program. It is anticipated that Mewbourne Oil Company, as drilling
program manager, will conduct substantially all prospect origination for each
drilling program, although a program may conduct operations on prospects
originated by third parties. Prospect origination is the process of formulating
a geological or geophysical concept and negotiating for the acquisition of a
sufficient interest in oil and gas leases covering the area to warrant drilling
and testing. Before selecting a prospect for a drilling program, the drilling
program manager will review all available engineering and geological data, which
may include, but is not limited to, logs, completion reports and plugging
reports for wells located in the vicinity of the proposed prospect.
COST ESTIMATES
Prior to conducting drilling activities on behalf of a partnership, the
managing partner will estimate the costs to be incurred by a partnership in
drilling the wells planned for the partnership. Such estimates will be based
upon the managing partner's historic experience and contracts to be entered into
by the managing partner or its affiliates and non-affiliated drilling
contractors fixing the footage drilling rates, and in limited circumstances
stimulation costs to be incurred by the partnership.
ACQUISITION OF LEASES
The decision for a partnership to acquire an interest in a prospect,
the size and nature of the interest acquired and the terms of each such
acquisition will be based upon evaluations of the properties conducted by the
managing partner after consultation with the drilling program manager or
independent geologists or engineers. To assist in conducting and interpreting
such evaluations, the managing partner or its affiliates employ a staff of
technical personnel. See "Management."
TRANSACTIONS WITH AFFILIATES
Sale of Leases to a Partnership. All oil and gas leases to be acquired
by a partnership or related drilling program will be selected by the managing
partner from a variety of prospects, substantially all of which will be
originated by the drilling program manager. Since none of the prospects upon
which a partnership may conduct drilling activities has been determined, it is
unknown whether or not any of the oil and gas leases to be acquired by a
partnership are currently held by the managing partner as a part of its
leasehold inventory. The partnership agreement provides that neither the
managing partner, nor any affiliate thereof, including an affiliated program, is
permitted to sell, transfer or convey any oil and gas lease to a partnership,
directly or indirectly, except in a transaction which is fair and reasonable to
the partnership and in accordance with the following restrictions:
(a) The managing partner and its affiliates may only sell an
oil and gas lease to a partnership or related drilling program at a
price equal to its lease acquisition costs unless the managing partner
has reasonable grounds to believe that the lease acquisition costs is
materially more than the fair market value of the oil and gas lease. If
the managing partner determines that the lease acquisition costs is
materially more than its fair market value, then, the oil and gas lease
may not be sold to a partnership or the related drilling program at a
price that is in excess of its fair market value. An affiliated program
may sell an oil
38
and gas lease to a partnership or the related drilling program at its
fair market value even if the fair market value is materially more than
its lease acquisition costs if:
o The affiliated program has held the oil and gas lease
for more than two years, and
o The economic interest of the managing partner and its
affiliate in the affiliated program is
substantially similar to, or less than, their
economic interest in the drilling program.
(b) If the managing partner or its affiliate sells any oil and
gas lease within a prospect to a partnership, it must, at the same
time, sell to the partnership and the partnership must buy an equally
proportionate interest in all other oil and gas leases that it owns in
the same prospect.
(c) If at any time within a period of five years from a
partnership's funding, the managing partner or its affiliate proposes
to acquire an interest from a non-affiliated person in a prospect in
which the partnership possesses an interest or in a prospect in which
the partnership's interest has been terminated without compensation
within one year preceding such proposed acquisition, the following
conditions will apply:
o if the managing partner or any affiliate of the
managing partner does not currently own property in
the prospect separately from the partnership, then
neither the managing partner nor any affiliate of
the managing partner will be permitted to purchase
an interest in the prospect, and
o if the managing partner or any affiliate of the
managing partner currently owns a proportionate
interest in the prospect separately from the
partnership, then the interest to be acquired will
be divided between that partnership and the
managing partner or an affiliate of the managing
partner in the same proportion as is the other
property in the prospect; provided, however, if
cash or financing is not available to the
partnership to enable it to consummate a purchase
of the additional interest to which it is entitled,
then neither the managing partner, nor any
affiliate thereof may purchase any additional
interest in the prospect during such five year
period.
(d) If the area constituting a partnership's prospect is
subsequently enlarged to encompass any area in which the managing
partner or any affiliate of the managing partner owns a separate oil
and gas lease, such separate oil and gas lease or a portion of such
lease must be sold, transferred, or conveyed to the partnership, if the
activities of the partnership were material in establishing the
existence of proved undeveloped reserves that are attributable to such
oil and gas lease.
(e) A sale, transfer, or conveyance of less than all of the
ownership of the managing partner or any affiliate of the managing
partner in any oil and gas lease is prohibited unless the interest
retained by the managing partner or such affiliate is a proportionate
working interest, the respective obligations of the managing partner or
such affiliate and the partnership are substantially the same after the
sale of the interest by the managing partner or such affiliate, and its
interest in revenues does not exceed the amount proportionate to its
retained working interest. Neither the managing partner, nor any
affiliate of the managing partner may retain any overriding royalty
interest or other burden on an interest conveyed to a partnership.
(f) For the purposes of the preceding four paragraphs, the
term "affiliate" does not include an affiliated program in which the
interest of the managing partner or an affiliate of the managing
partner is substantially similar to or less than its interest in the
partnership.
(g) If a partnership acquires an oil and gas lease through a
farmout or joint venture from an affiliated program, the managing
partner's, and any of its affiliate's aggregate compensation associated
with the property and any direct or indirect ownership interest in the
property may not exceed the lower of the compensation and ownership
interest the managing partner and such affiliates could receive if the
property were separately owned or retained by either the partnership or
such other affiliated program.
39
A determination of fair market value must be supported by an appraisal
from an independent expert. Such opinion and any associated supporting
information must be maintained in the drilling program's records for at least
six years. In determining whether the lease acquisition costs is materially more
than the fair market value of a particular oil and gas lease you must rely upon
the managing partner's good faith in making the determination of materiality.
Purchase of Leases from a Partnership. Neither the managing partner nor
any affiliate of the managing partner, including affiliated programs, may
purchase or acquire any oil and gas lease from a partnership, directly or
indirectly, except in transactions that are fair and reasonable to the
partnership and then subject to the following conditions:
o A sale, transfer, or conveyance, including a farmout, of an
oil and gas lease not having any proved developed reserves
attributable to it from a partnership to the managing partner
or its affiliate, other than an affiliated program, must be
made at the higher of the lease acquisition costs or fair
market value.
o A sale, transfer, or conveyance of an oil and gas lease having
proved developed reserves attributable to it from a
partnership to the managing partner or its affiliate, other
than an affiliated program in which the interest of the
managing partner or its affiliate is substantially similar to
or less than its interest in the partnership, is not permitted
except in connection with the liquidation of the partnership
and then only at fair market value.
o Except in connection with farmouts or joint ventures made in
compliance with the restrictions described in paragraph (b)
above under the heading "Sales of Leases to a Partnership," a
transfer of an undeveloped oil and gas lease from a
partnership to an affiliated program must be made at fair
market value if the oil and gas lease has been held for more
than two years; otherwise, if the managing partner deems it to
be in the best interest of the partnership, the transfer may
be made at the lease acquisition costs.
o Except in connection with farmouts or joint ventures made in
compliance with the restrictions described in paragraph (b)
above under the heading "Sales of Leases to a Partnership," a
transfer of any oil and gas lease from a partnership to an
affiliated program, whose investment objective is to directly
acquire, hold, operate and/or dispose of producing oil and gas
properties, must be made at fair market value if the oil and
gas lease has been held for more than six months or there have
been significant expenditures made in connection with the oil
and gas lease; otherwise, if the managing partner deems it to
be in the best interest of the partnership, the transfer may
be made at the lease acquisition costs as adjusted for
intervening operations.
A determination of fair market value must be supported by an appraisal
from an independent expert. Such opinion and any associated supporting
information must be maintained in the drilling program's records for at least
six years.
Participation by Mr. Mewbourne. Mr. Mewbourne has historically invested
directly or indirectly in the drilling and development activities of Mewbourne
Oil Company and its affiliates during the past 38 years. In addition he has been
an investor in the joint ventures and drilling agreements through which other
investors participated in various Mewbourne Oil Company managed programs. Mr.
Mewbourne's annual participation varied considerably both in level of investment
and form, but in general approximated 25% to 50% of the annual expenditures.
Mr. Mewbourne and/or affiliates intend to invest alongside each
partnership in the activities of the related drilling program, however, there is
no assurance that the amount of Mr. Mewbourne's participation will be in
accordance with his historical custom. The amount of such investment will be
subject to many variables, including the availability of working interests in
the oil and gas leases, the amount of capital available to the partnerships from
subscriptions, the timing of the drilling activities, and other such matters.
40
FARMOUTS
A partnership will acquire only those oil and gas leases that are
reasonably required for the stated purpose of the partnership, and no oil and
gas leases will be acquired for the purpose of subsequent sale or farmout,
unless the acquisition of such oil and gas leases by the partnership is made
after a well has been drilled to a depth sufficient to indicate that such an
acquisition is believed to be in the best interests of the partnership.
The necessity to enter into farmouts is most likely to occur when a
partnership has insufficient funds to bear development costs accompanying an oil
and gas lease or where the development costs or attendant risks are substantial.
The managing partner may arrange for the development or disposition of a
partnership's oil and gas leases by farmout arrangements with third parties or
affiliates, including an Affiliated Program, if the managing partner, in
exercising the standard of a prudent operator, determines that:
o a partnership lacks sufficient funds to drill on the oil and
gas leases and cannot obtain suitable alternative financing
for such drilling,
o the oil and gas leases have been downgraded by events
occurring subsequent to their acquisition by that partnership
so that the drilling of the oil and gas leases would no longer
be desirable to the partnership,
o drilling on the oil and gas leases would result in an
excessive concentration of a partnership's funds in one
location creating, in the opinion of the managing partner,
undue risk to the partnership, or
o the best interests of a partnership would be served by the
farmout.
A partnership will not farmout an oil and gas lease for the primary
purpose of avoiding payment of the costs related to drilling such oil and gas
lease or prospect to be borne by the managing partner or its affiliates.
A partnership may also farmin oil and gas leases from third parties or
its affiliates, including affiliated programs, in partial or in full
consideration for its agreement to drill one or more wells thereon.
Any farmouts between a partnership and the managing partner or an
affiliate of the managing partner will be on terms substantially consistent
with, in the opinion of the managing partner, those available from
non-affiliated third parties in the same geographic area for similar
arrangements. No farmout shall be entered into between a partnership and the
managing partner or an affiliate of the managing partner unless the managing
partner, exercising the standard of a prudent operator, shall determine that the
farmout is in the best interests of that partnership and the general and limited
partners. A partnership's authority to enter into farmouts with the managing
partner or an affiliate of the managing partner is subject to the same
restrictions as its authority to purchase property from or sell property to the
managing partner or an affiliate. See "-- Transactions with Affiliates" above.
For a discussion of the prudent operator standard of conduct, see "Conflicts of
Interest -- Fiduciary Responsibility of the Managing Partner."
Any decision with respect to farmouts and farmins and the terms of any
such farmout or farmin to or from a drilling program will involve conflicts of
interest, as the managing partner may benefit from cost savings and reduction of
risk, and in the event of a farmout or farmin to or from an Affiliated Program,
the managing partner will represent both programs involved in the transaction.
See "Conflicts of Interest."
For a discussion of federal income tax risks and considerations
associated with farmouts, see "Tax Aspects -- Special Features of Oil and Gas
Taxation -- Farmouts and Backin Interests."
OPERATIONS
All administration of each drilling program, including the origination
of prospects and the supervision of drilling and completion activities with
respect to those operations for which it is acting as operator, will be
conducted by Mewbourne Oil Company in its capacity as the drilling program
manager. All management functions
41
of a partnership will be conducted by Mewbourne Development Corporation in its
capacity as managing partner. The drilling program manager will perform all
operating services relating to program wells, and will be entitled to be
reimbursed for such services in an amount equal to all charges, including
certain overhead charges, which constitute direct and indirect charges under the
operating agreement or other applicable operating agreements incurred by the
drilling program manager in connection with drilling or operating a program
well, including an initial fixed rate, per-month, overhead charge of $780 for
each producing well and $7,420 for each drilling well. The amount of the fixed
rate overhead charges have been determined based upon:
o the anticipation that each partnership's activities will be
conducted in the Permian Basin, located in West Texas and
Southeastern New Mexico and also the Anadarko Basin, located
in Western Oklahoma, the Texas Panhandle and Southwest Kansas;
o the managing partner's estimate of the current fixed rate
overhead charges charged by other non-affiliated operators in
the anticipated area of operations; and
o guidelines set by the Council of Petroleum Accountants
Societies of North America.
The drilling program manager and affiliates of the drilling program
manager currently employ approximately 118 persons on a full time basis, many of
whom will be engaged in some aspect of a drilling program's activities. In
addition to its own employees, the drilling program manager may utilize the
services of consultants for well drilling and completion activities, production
accounting and other activities. The managing partner currently employs three
persons, all of whom are members of the drilling program manager's executive
management group.
Under the drilling program agreement, the drilling program manager has
agreed to act as operator with respect to drilling and production operations
conducted on each program well, except in those instances in which:
o the oil and gas lease on which such program well is to be
drilled is already subject to an existing operating agreement
under which a third party has been designated as operator,
o the requisite number of third parties being joint working
interest owners in such well elect another entity as operator,
or
o the drilling program manager determines in good faith that it
is not in the best interests of the participants in the
drilling program and of the drilling program manager for it to
act as operator.
In any case in which the drilling program manager or its affiliate acts
as operator for a drilling program's properties or provides other services or
materials to a drilling program, it will do so only under a written agreement
and only on terms and conditions comparable to those entered into by
non-affiliated parties in the same area. Any such agreement will precisely
describe the services to be rendered and all compensation to be paid and will
require a partnership and its partners to pay only that portion of the fees
allocable to their working interest. Fees received by the drilling program
manager or its affiliate under any such operating agreement may constitute
additional compensation. See "Compensation and Reimbursement."
With respect to each program well for which the drilling program
manager is to serve as operator, all operations relating to the program well,
including without limitation, all costs and expenditures of drilling, testing,
completing, equipping, and operating the program well shall be conducted under
an operating agreement between the drilling program manager as operator, and the
participants in the drilling program as non-operator, with the operating
agreement to be substantially in the form and substance as the operating
agreement attached to this prospectus as Attachment B to the drilling program
agreement. In the event, at the time of acquisition of an oil and gas lease by
the drilling program, such oil and gas lease is subject to another operating
agreement or if the drilling program manager enters into an operating agreement
with third parties being joint working owners in such program well,
nevertheless, the operating agreement between the drilling program manager and
the participants in the drilling program shall govern operations as between
them. However, the drilling program manager and the managing partner shall have
the right to amend the operating agreement between the drilling program manager
and the
42
participants in the drilling program covering specified oil and gas leases in
order to conform to such other operating agreement, except that the operating
agreement may not be amended in any manner that the managing partner determines
will adversely affect a partnership or the general and limited partners in any
material respect. The drilling program manager shall have the right to charge
the joint account under the operating agreement between the drilling program
manager and the participants in the drilling program a share attributable to the
participants' working interest of any costs or expenses incurred by the drilling
program manager under such other operating agreement which are not otherwise
provided for in the drilling program agreement or in the operating agreement
between the drilling program manager and the participants in the drilling
program.
TITLE TO PARTNERSHIP PROPERTIES
Program wells will be drilled on oil and gas leases having limited
warranties of title, or none at all. As is customary in the oil and gas
industry, the only investigation of title made at the time of acquisition of
undeveloped properties is a preliminary review of local real estate records.
Prior to drilling a program well on a prospect, the drilling program manager
shall cause to be done or be satisfied that there has been done such title
examination and other title curative work as the drilling program manager in its
sole discretion, shall determine to be necessary or appropriate in accordance
with general industry standards. In addition, a drilling title opinion is
generally secured before commencement of drilling operations. Title to a
partnership's properties will be held temporarily in the name of the drilling
program manager in the capacity of nominee, with record title being transferred
to a partnership following commencement of production from a program well.
INSURANCE
The managing partner expects to conduct the business of each
partnership and to cause the drilling program manager to conduct the business of
each drilling program in a manner intended to limit, to the extent practicable,
the exposure of the general partners to liability in excess of their capital
contributions to that partnership. See "Liability of General and Limited
Partners -- General Partners" for a discussion of the potential liability of
general partners. It is anticipated that drilling activities of the partnerships
will be conducted in the medium depths between 3,000 to 13,000 feet of the
Northwest Shelf, and the shelf of the Delaware and Midland Basins, and Central
Basin Platform geological sub-regions of the Permian Basin and the shelf and the
shelf slope area of the Anadarko Basin where the probability of encountering
severely over-pressured formations and other hazards associated with drilling
activities is less likely. The drilling program manager and its affiliates will
maintain extensive insurance coverage to protect, to the extent practicable,
each partnership from losses that could arise in connection with program
activities, including legal and contractual liability to third parties.
The drilling program manager and its affiliates expect to retain the
insurance coverage described below, unless such coverage becomes unobtainable or
is only available at premiums which are prohibitively more expensive than the
premiums now being paid for such policies. However, the drilling program manager
and its affiliates will not be required to retain operator's extra expense and
care, custody and control insurance coverage for a partnership after the related
drilling program has completed its drilling activities.
A brief discussion of the insurance policies that the drilling program
manager and its affiliates have obtained on behalf of themselves and the
partnerships is set forth below. Each of those policies is subject to customary
terms, conditions, exclusions, and limitations that may preclude a partnership
from recovering damages, expenses, and liabilities suffered by that partnership,
including typically, damages and liabilities arising from or caused by:
o the violation of any federal, state, or local statute,
ordinance, or regulation,
o fines, penalties, and punitive and exemplary damages,
o war and terrorist acts,
o normal operation including wear and tear,
43
o faulty design, and
o the fraud, disloyalty, theft, malicious acts or other similar
conduct of employees.
Other exclusions that are customary in the insurance and oil and gas industries
may also apply, including exclusions relating to pollution and environmental
damages. The drilling program manager believes that from time to time the terms,
conditions, exclusions, and limitations described in this section of the
prospectus may prevent a partnership from recovering the full amount of any
damages, expenses, and liabilities suffered by the partnership which arise in
the event of an accident. In some cases a partnership may not recover any
portion of such damages, expenses, and liabilities.
If the drilling program manager and its affiliates cease to retain the
coverage described below for any reason for a period of more than 20 days during
the subscription period for a partnership, the offering of interests in that
partnership shall cease, and subscribers for interests who have not been
admitted as general and limited partners in the partnership shall receive a
refund of their subscription funds. The managing partner will notify general and
limited partners of any material reduction in the insurance coverage of a
drilling program and partnership. If possible, this notice shall be given thirty
days in advance of the change in insurance coverage. In addition, if a drilling
program or a partnership has its insurance coverage materially reduced for any
reason, the partnership will, as soon as possible, halt all drilling activity
until such time as comparable replacement coverage is obtained.
The drilling program manager and its affiliates maintain comprehensive
general liability, employers liability, and commercial automobile insurance
policies that generally protect the insured against the routine hazards
encountered by the drilling program manager, its affiliates and its employees
and agents in the conduct of the business of the drilling program manager and
its affiliates. The coverage amount under each of these policies is limited to
$1,000,000 per occurrence. In addition, the drilling program manager and its
affiliates maintain a comprehensive energy package and an excess liability
policy that together provide an additional coverage amount of $50,000,000 per
occurrence. The comprehensive energy package and excess liability policy are in
effect and are renewed annually, but may be canceled by the insurance
underwriters upon a minimum of 60 days written notice. Each of these policies
names each of the partnerships as a co-insured and co-beneficiary thereunder.
The physical damage section of the comprehensive energy package, which
has a coverage limit of $5,000,000 per occurrence, generally protects the
insured against all risks of direct physical loss or damage to all personal
property, except drilling rigs and related equipment, vehicles, oil and gas, and
various other personal property, for which the insured has liability or is
legally liable, subject to a maximum deductible of $5,000 per occurrence or
$25,000 in the case of earthquake.
The operators extra expense/seepage and pollution section of the
comprehensive energy package, which has a coverage limit of $3,000,000 for land
wells less than 10,000 feet in depth and a limit of $10,000,000 for wells
greater than 10,000 feet in depth, generally protects the insured from:
o the costs to regain control of a well that goes out of
control, costs to redrill or restore a well which has been
lost or otherwise damaged as a result of an out of control
well,
o third party claims for property damage relating to seepage,
pollution, or contamination arising from a well out of control
and the cost of cleaning up such substances,
o loss, damage, or expense arising from the uncontrollable flow
of oil, gas, or water from one subterranean stratum to another
through the bore of a well, and
o evacuation expense if ordered by a governmental agency.
The excess umbrella liability policies, which have coverage limits of
$50,000,000, generally protect the insured against all liabilities imposed upon
an insured by law or assumed under contract or agreement by the insured for
damages on account of personal injuries, property damage, or advertising
liability such as libel, slander, defamation and invasion of privacy caused by
or arising out of an occurrence happening anywhere in the world.
44
Injury and damage arising from seepage, pollution, or contamination is covered
only if caused by a sudden, unintended, and unexpected happening. Injury and
damage arising from pollution is not covered for sites used in handling,
processing, treatment, storage, or disposal of waste substances or the
transportation of waste substances.
THE MANAGING PARTNER'S POLICY REGARDING ROLL-UP TRANSACTIONS
Although the managing partner has no intention of causing either
partnership to engage in a roll-up transaction, it is possible at some
indeterminate time in the future that a partnership will become so involved. A
roll-up means a transaction involving the acquisition, merger, conversion, or
consolidation, either directly or indirectly, of a partnership and the issuance
of securities by the "roll-up entity." The term "roll-up" does not include a
transaction involving the conversion to corporate, trust, or association form of
only a partnership if, as the consequence of the transaction, there will be no
significant adverse change in any of the following:
o voting rights,
o the term of existence of the entity (formerly the
partnership),
o compensation to the managing partner and its affiliates, or
o the entity's investment objectives.
For the purposes of the foregoing, a "roll-up entity" means a
partnership, trust, corporation, or other entity that would be created or
survive after the successful completion of a proposed roll-up transaction. In
the case of transactions excluded from the definition of a roll-up, the
additional protections for general and limited partners described below would
not be available to the general and limited partners. For the purposes of
determining whether or not a transaction constituted a roll-up, the managing
partner would make the determination as to whether or not there would be no
"significant adverse change" in voting rights, the term of existence,
compensation, or investment objectives. The managing partner realizes that to
some extent the determination of whether or not such a change would be
"significant" or "adverse" may vary from investor partner to investor partner.
Accordingly, the managing partner intends to interpret the terms "significant"
and "adverse" broadly if it is ever called upon to do so and will use its best
efforts to interpret those terms as to their applicability to any reasonable
investor partner, and not only as to what it perceives to be the circumstances
of a majority of the general and limited partners.
The partnership agreement provides various policies in the event that a
roll-up should occur in the future. These policies include:
o An appraisal of all partnership assets will be obtained from a
competent Independent Expert, and a summary of the appraisal
will be included in a report to the general and limited
partners in connection with a proposed roll-up.
o Any investor partner who votes "no" on the roll-up proposal
would be offered a choice of:
-- accepting the securities of the roll-up entity
offered in the proposed roll-up, or
-- either (a) remaining a limited partner or general
partner in the partnership and preserving his or her
interest in that partnership on the same terms and
conditions as existed previously, or (b) receiving
cash in an amount equal to his or her pro-rata share
of the appraised value of the net assets of that
partnership.
o A partnership will not participate in a proposed roll-up:
-- which would result in the diminishment of the general
and limited partners' voting rights in the
partnership agreement under the roll-up entity's
organizational documents,
45
-- which includes provisions which would operate to
materially impede or frustrate the accumulation of
shares by any purchaser of the securities of the
roll-up entity, except to the minimum extent
necessary to preserve the tax status of the roll-up
entity,
-- which would limit the ability of an investor partner
to exercise the voting rights of its securities in
the roll-up entity on the basis of the number of
roll-up entity interests held by such investor
partner,
-- in which the participants' rights of access to the
records of the roll-up entity would be less than
those provided in the partnership agreement, or
-- in which any of the costs of the transaction would be
borne by a partnership if the proposed roll-up were
not approved by the general and limited partners.
o Any roll-up transaction involving a partnership requires the
approval of a at least 66% of the total interests held by the
general and limited partners.
Depending upon the structure of any possible roll-up which may present
itself, it is possible that remaining a limited partner or an general partner in
the related partnership on the same terms and conditions as existed prior to the
roll-up may not be possible. In such a situation, the managing partner would be
required to either not consummate the proposed Roll-Up if any investor partner
votes "no" or offer the general and limited partners the option of receiving
cash in an amount equal to his or her pro-rata share of the appraised value of
the net assets of the partnership.
General and limited partners should understand that the selection of a
cash payment in an amount equal to an their pro-rata share of the appraised
value of the net assets of a partnership may not fully compensate the investor
partner for his investment.
MANAGEMENT
Mewbourne Development Corporation was originally incorporated in 1982
as Caliche Pipeline Company in the state of Texas. The company was formed to
facilitate the gathering, transporting and marketing of natural gas. In 1990,
Caliche Pipeline Company was merged into a newly incorporated Caliche Pipeline
Company, a Delaware corporation. In 1992, Caliche Pipeline Company sold all its
remaining interest in gas gathering and marketing activities to an affiliated
company, and changed its name to Mewbourne Development Corporation. Mewbourne
Development Corporation will serve as the managing partner of each partnership
and in such capacity will have the sole power and authority to act on behalf of
the partnerships with respect to the management, control, and administration of
the properties, business, and affairs of each partnership. The managing partner
was organized for the purpose, among other things, of engaging in any and all
phases of the oil and gas business, including sponsoring and forming limited or
general partnerships for the purpose of acquiring and owning working interests
in oil and gas properties and offering limited or general partner interests
therein to investors.
Mewbourne Oil Company, a Delaware corporation, was incorporated in 1967
and is a wholly owned indirect subsidiary of Mewbourne Holdings, Inc. The
drilling program manager provides management and technical services and serves
as operator for ventures of Mewbourne Holdings, Inc., the managing partner and
Mr. Mewbourne. In this connection, the drilling program manager develops oil and
gas prospects, acquires leasehold interests, and serves as the operator in the
drilling, completion, and production of oil and gas wells. Mewbourne Oil Company
will also conduct the administration of the business, and affairs of each
drilling program. Mewbourne Oil Company maintains offices in Tyler, Perryton,
Midland and Amarillo, Texas; Hobbs, New Mexico; and Oklahoma City and Woodward,
Oklahoma. The general offices are located at 3901 South Broadway, Tyler, Texas
75701. Mewbourne Oil Company employs approximately 118 persons including 16
engineers, 10 geologists, 9 landmen, 9 accountants, and 18 other degreed
administrative professionals.
46
Mewbourne Holdings, Inc., a Texas corporation, was founded by Mr.
Mewbourne in 1965 and is a privately owned corporation which serves as the
parent company for both the managing partner and the drilling program manager
and their affiliates.
OWNERSHIP STRUCTURE OF MEWBOURNE COMPANIES
Corporate Structure
(CHART)
Both the managing partner and the drilling program manager are directly
or indirectly wholly owned subsidiaries of Mewbourne Holdings, Inc. The
following table provides information as to the beneficial ownership of Mewbourne
Holdings, Inc., as of December 31, 2002 by each person who, to their knowledge,
beneficially owned 5% or more of their respective outstanding capital stock.
47
<Table>
<Caption>
Number and
Class of percent of Percent of
Owner Security Share Voting Rights
----- ------------------ ---------------- -----------------
Curtis W. Mewbourne Preferred stock 24,000 shares 92%
$.10 par value 100%
Ruth Anne Mewbourne and Julie Mewbourne Common stock 700 shares 2.6666%
Trustees of the Dorothy Elizabeth Mewbourne Trust $.10 par value 33.33%
No. 1
Dorothy Elizabeth Mewbourne and Julie Mewbourne,
Trustees of the Ruth Anne Mewbourne Trust No. 1 Common stock 700 shares 2.6666%
$.10 par value 33.33%
Dorothy Elizabeth Mewbourne and Ruth Anne
Mewbourne, Trustees of the Julie Mewbourne Trust Common stock 700 shares 2.6666%
No. 1 $.10 par value 33.33%
</Table>
OFFICERS, DIRECTORS AND KEY EMPLOYEES OF THE MANAGING PARTNER AND THE
DRILLING PROGRAM MANAGER
Set forth below are the names, ages and positions of the officers,
directors and key employees of the managing partner and the drilling program
manager. Directors are elected to serve until the next annual meeting of
shareholders or until their successors are elected and qualified, and officers
serve at the discretion of the Board of Directors.
Officers and Directors of the Managing Partner
<Table>
<Caption>
Name Position
---- --------
Curtis W. Mewbourne........................... President and Director
J. Roe Buckley................................ Executive Vice President, Chief Financial Officer and Director
Kenneth S. Waits.............................. Executive Vice President and Chief Operating Officer
Alan Clark.................................... Treasurer and Controller
Michael F. Shepard ........................... Secretary and General Counsel
Dorothy M. Cuenod............................. Assistant Secretary and Director
Ruth M. Buckley............................... Assistant Secretary and Director
Julie M. Greene............................... Assistant Secretary and Director
</Table>
Officers and Directors of the Drilling Program Manager
<Table>
<Caption>
Name Position
---- --------
Curtis W. Mewbourne........................... President and Director
Joseph F. Odom................................ Vice President of Administration and Personnel
J. Roe Buckley................................ Executive Vice President, Chief Financial Officer and Director
Dorothy M. Cuenod............................. Assistant Secretary and Director
Monty L. Whetstone............................ Vice President-Production
Kenneth S. Waits.............................. Executive Vice President and Chief Operating Officer
Ruth M. Buckley............................... Assistant Secretary and Director
Julie M. Greene............................... Assistant Secretary and Director
Alan Clark.................................... Treasurer and Controller
</Table>
48
Curtis W. Mewbourne, age 67, formed Mewbourne Holdings, Inc. in 1965
and serves as Chairman of the Board and President of Mewbourne Holdings, Inc.,
Mewbourne Oil Company and Mewbourne Development Corporation. He has operated as
an independent oil and gas producer for the past 36 years. Mr. Mewbourne
received a Bachelor of Science Degree in Petroleum Engineering from the
University of Oklahoma in 1957. Mr. Mewbourne is the father of Dorothy M.
Cuenod, Ruth M. Buckley, and Julie M. Greene and the father-in-law of J. Roe
Buckley.
Joseph F. Odom, age 64, joined Mewbourne Oil Company as Manager,
Administration and Personnel of Mewbourne Oil Company in November, 1981, and was
elected Vice President of Administration and Personnel in March, 1993. Prior to
joining Mewbourne Oil Company, Mr. Odom was employed in personnel management
positions with Delta Drilling Company from 1980 to 1981, with Great Lakes
Chemicals from 1978 to 1980 and with Air Products and Chemicals from 1963 to
1978. Mr. Odom received a Bachelor of Science in Management from the University
of West Florida.
Roe Buckley, age 40, joined Mewbourne Holdings, Inc. in July, 1990 and
serves as Executive Vice President, Chief Financial Officer and Director of both
Mewbourne Development Corporation and Mewbourne Oil Company. Mr. Buckley was
employed by Mbank Dallas from 1985-1990 where he served as a commercial loan
officer. He received a Bachelor of Arts in Economics from Sewanee in 1984. Mr.
Buckley is the son-in-law of Curtis W. Mewbourne and is married to Ruth M.
Buckley. He is also the brother-in-law of Dorothy M. Cuenod and Julie M. Greene.
Michael F. Shepard, age 56, joined Mewbourne Oil Company in 1986 and
serves as Secretary and General Counsel of Mewbourne Development Corporation. He
has practiced law exclusively in the oil and gas industry since 1979 and
formerly was counsel with Parker Drilling Company and its Perry Gas subsidiary
for seven years. Mr. Shepard holds the Juris Doctor degree from the University
of Tulsa where he received the National Energy Law and Policy Institute award as
the outstanding graduate in the Energy Law curriculum. He received the B.A.
degree, magna cum laude, from the University of Massachusetts in 1976. Mr.
Shepard is a member of the bar in Texas and Oklahoma.
Dorothy Mewbourne Cuenod, age 43, received a B.A. Degree in Art History
from the University of Texas and a Masters of Business Administration Degree
from Southern Methodist University. Since 1984 she has served as a Director and
Assistant Secretary of both Mewbourne Development Corporation and Mewbourne Oil
Company. Ms. Cuenod is the daughter of Curtis W. Mewbourne and is the sister of
Ruth M. Buckley and Julie M. Greene. She is also the sister-in-law of J. Roe
Buckley.
Ruth Mewbourne Buckley, age 41, received a Bachelor of Science Degrees
in both Engineering and Geology from Vanderbilt University. Since 1987 she has
served as a Director and Assistant Secretary of both Mewbourne Development
Corporation and Mewbourne Oil Company. Ms. Buckley is the daughter of Curtis W.
Mewbourne and is the sister of Dorothy M. Cuenod and Julie M. Greene. She is
also the wife of J. Roe Buckley.
Julie Mewbourne Greene, age 39, received a B.A. in Business
Administration from the University of Oklahoma. Since 1988 she has served as a
Director and Assistant Secretary of both Mewbourne Development Corporation and
Mewbourne Oil Company. Prior to that time she was employed by Rauscher, Pierce,
Refsnes, Inc. Ms. Greene is the daughter of Curtis W. Mewbourne and is the
sister of Dorothy M. Cuenod and Ruth M. Buckley. She is also the sister-in-law
of J. Roe Buckley.
B. Alan Clark - Mr. Clark, age 50, Treasurer, Controller and drilling
program Administrator, joined Mewbourne Oil Company May, 1979. Prior to joining
Mewbourne Oil Company, Mr. Clark was employed by Texas Oil and Gas Corporation
as Assistant Supervisor of Joint interest Accounting from 1976 to 1979. Mr.
Clark has served in several accounting/financial positions with Mewbourne Oil
Company prior to his current position. Mr. Clark received a Bachelor of Business
Administration in Accounting from the University of Texas at Arlington.
Kenneth S. Waits - Mr. Waits, age 42, Executive Vice President and
Chief Operating Officer, has been with Mewbourne Oil Company since February,
1984. He joined the company following his graduation from the University of
Oklahoma where he received a Bachelor of Science in Petroleum Engineering in
December, 1983. He
49
currently manages all of Mewbourne Oil Company's exploration efforts. He has
also served as Exploration Manager for Western Oklahoma. Previously, he held
positions in Operations and in Reservoir/Evaluations.
KEY EMPLOYEES
J. Allen Brinson - Mr. Brinson, age 52, Administrative Land Manager and
Assistant Secretary, has been with Mewbourne Oil Company since January, 1979.
Previously, he was employed for two years by Gulf Oil Corporation in its Land
Department. Mr. Brinson received a Bachelor of Business Administration from
Angelo State University in 1973 and a Master of Business Administration from the
University of Texas-Permian Basin in 1977.
W. Ronald Howell - Mr. Howell, age 50, District Manager-Woodward,
Oklahoma District, joined Mewbourne Oil Company in July, 1979. Previously, he
was employed by AMOCO Production Company in production assignments. Mr. Howell
received a Bachelor of Science in Engineering from Texas Tech University in
1975.
A. Wayne Jones - Mr. Jones, age 47, Manager-Oil and Gas Marketing,
joined Mewbourne Oil Company in April, 1984. He was previously employed by
Crystal Oil Company as Manager of Natural Gas Sales Administration. Mr. Jones
received a Bachelor of Business Administration in 1978 and a Master of Business
Administration in Marketing in 1980 from Louisiana Tech University.
Bryan M. Montgomery - Mr. Montgomery, age 43, Manager-Economics and
Evaluation, joined Mewbourne Oil Company upon his graduation from the University
of Oklahoma in August, 1984, where he received a Bachelor of Science in
Petroleum Engineering. Mr. Montgomery has previously served in operations and
reservoir engineering positions.
Roy L. Hunter - Mr. Hunter, age 55, has been with Mewbourne Oil Company
since January 1998 and is District Manager Exploration office-Amarillo, Texas.
He graduated from the University of Texas at Austin with a B.A. in 1972. For the
five years prior to joining Mewbourne Oil Company, Mr. Hunter was a Division
Land Manager with Maxus Energy Corporation. Mr. Hunter manages the exploration
efforts in Anadarko Basin in Texas.
Norris M. Young - Mr. Young, age 51, District Manager-Hobbs, New
Mexico, joined Mewbourne Oil Company in January, 2000. After graduating from
Lamar University in 1975, Mr. Young worked for five years for Schlumberger. For
the last 19 years he has worked in drilling completions for Harvey E. Yates
Company and as a consultant.
Tony D. Phillips - Mr. Phillips, age 45, District Exploration Manager
for Oklahoma City, joined Mewbourne Oil Company in August, 1980 upon his
graduation from the University of Oklahoma where he received a Bachelor of
Science in Petroleum Land Management. Previously, Mr. Phillips has served as
Landman and District Landman. Mr. Phillips manages exploration efforts in the
Anadarko Basin in Western Oklahoma.
Brent R. Thurman - Mr. Thurman, age 43, District Manager-Perryton,
Texas District, joined Mewbourne Oil Company in January 1983. Prior to his
present assignment, he served in various supervisory positions in production and
completions at both Hobbs, New Mexico and Perryton, Texas. Mr. Thurman received
a Bachelor of Science in Petroleum Engineering from Texas Tech University in
1982.
Monty L. Whetstone - Mr. Whetstone, age 41, Vice President of
Production, joined Mewbourne Oil Company in June, 1985 after graduating from
Texas Tech University with a Bachelor of Science in Petroleum Engineering. Mr.
Whetstone served as a District Superintendent - Woodard, Oklahoma, Unit Engineer
and as the Drilling/Production Engineering Supervisor prior to assuming his
present position.
Bruce Insalaco - Mr. Insalaco, age 48, Manager of Exploration, joined
Mewbourne Oil Company in 1998. He graduated from Michigan State University in
1977 with a B.S. in Geology. He has worked as a geologist in the oil and gas
industry for 21 years, including 16 years in the Permian Basin. Prior to joining
Mewbourne, he was employed with EOG Resources.
50
Larry D. Cunningham - Mr. Cunningham, age 47, District Exploration
Manager, Midland, Texas, joined Mewbourne Oil Company in May 2001 after working
as Project Landman for EOG Resources, Inc. and as District Landman for Mitchell
Energy Corporation. He graduated from the University of North Texas in 1978 with
a BBA in Finance.
COMPENSATION
None of the officers or directors of the managing partner or the
drilling program manager will receive remuneration directly from the
partnerships or the drilling programs, but will continue to be compensated by
their present employers. Each partnership and each drilling program will
reimburse the managing partner, the drilling program manager, and their
affiliates for costs of overhead falling within the definition of administrative
costs, including without limitation, salaries of the officers and employees of
the managing partner or drilling program manager; provided that no portion of
the salaries of the directors or of the executive officer of the managing
partner or drilling program manager may be reimbursed as administrative costs.
EXECUTIVE OFFICER
Mr. Mewbourne directly controls and directs all key policy decisions of
the management group of the managing partner and the drilling program manager
and is the only executive officer of both the managing partner and the drilling
program manager.
Cash Compensation to Executive Officer. The cash compensation paid by
the managing partner and the drilling program manager for services rendered
during the year ended December 31, 2002 to Mr. Mewbourne was $124,800. As of the
date of this prospectus, members of the respective boards of directors of the
managing partner and the drilling program manager do not receive any special
compensation for serving as director.
Executive Officer Compensation Under Plans. Mewbourne Oil Company
maintains the Employees' Pension Plan and Trust as a qualified defined benefits
plan for all full time employees with five years of service. The Employees'
Pension Plan and Trust provides for maximum retirement benefits of 50% of an
employee's average monthly base pay, calculated on the highest five consecutive
years, for persons with 30 or more years of service. Employees with less than 30
years of service will have their retirement benefits proportionally reduced.
The following table sets forth the Employees' Pension Plan and Trust
benefits at various years of service and salary levels.
<Table>
<Caption>
====================================================================================================================
PENSION TABLE
Years of Service (1)
- --------------------------------------------------------------------------------------------------------------------
SALARY 10 15 20 25 30
- -------------------- ------------------ ------------------- ------------------ ------------------ ------------------
120,000 20,000 30,000 40,000 50,000 60,000
100,000 16,666 25,000 33,333 41,666 50,000
75,000 12,500 18,750 25,000 31,250 37,500
50,000 8,333 12,500 16,666 20,833 25,000
==================== ================== =================== ================== ================== ==================
</Table>
- -------------
(1) Assumes a Lifetime Only Benefit (benefits cease upon employees death).
Under the Employees' Pension Plan and Trust, Mr. Mewbourne would have a lifetime
benefit of $5,200 per month based on his current base salary of $124,800.
Mewbourne Holdings, Inc. maintains an incentive compensation plan for
key personnel, which is funded by overriding royalty interests burdening
prospects developed by the drilling program manager. Payments to employees are
discretionary and are made net of expenses. Gross payments from the plan to
employees were
51
approximately $909,000 for the fiscal year ended June 30, 2002. The interests in
the oil and gas leases to be acquired by the drilling program will not be
burdened by plan royalties and the partnerships will not bear any costs or
expenses attributable to the plan.
Non-Cash Compensation of Executive Officer. Mr. Mewbourne, as the sole
executive officer of the managing partner and the drilling program manager, was
provided club memberships for use in performing his assigned duties and from
time to time used such memberships for personal purposes. To the extent any club
membership was used for non-reimbursed, non-job related purposes, a
proportionate part of the cost of providing such use would have constituted
remuneration to the user. The managing partner and the drilling program manager
are unable without unreasonable effort to determine the extent of such
non-reimbursed, non-job related use, but believe that during the year ended
December 31, 2002 the amounts of such benefits received by such officer did not
exceed 10% of such officer's cash compensation for the year.
CERTAIN TRANSACTIONS
Participation in Drilling Program Activities. Mr. Mewbourne and/or his
affiliates, other than affiliated programs, have historically invested directly
in the exploration and development activities of Mewbourne Oil Company during
the past 38 years. In addition, he and/or his affiliates, other than affiliated
programs, has/have been an investor in the joint ventures and drilling
agreements through which, other investors participated in various Mewbourne Oil
Company managed programs. Mr. Mewbourne's and his affiliate's, other than
affiliated programs, annual participation varied considerably both in level of
investment and form, but in general approximated 25% to 50% of the annual
expenditures.
Mr. Mewbourne intends to invest directly and/or indirectly alongside
each partnership in the activities of each drilling program; however, we cannot
assure that the amount of Mr. Mewbourne's participation will be in accordance
with his historical custom. The amount of such investment will be subject to
many variables, including the availability of working interests in the oil and
gas leases, the amount of capital available to each partnership from
subscriptions, the timing of the drilling activities, and other such matters.
CONFLICTS OF INTEREST
o The managing partner currently manages and in the future will
sponsor and manage other partnerships similar to the
partnerships in which interests are being offered.
o The managing partner will decide which prospects each
partnership will acquire.
o The drilling program manager will act as the operator for
program wells, under the operating agreement, the terms of
which have not been negotiated by non-affiliated persons.
o The managing partner and its affiliates will contribute oil
and gas leases and sell other property to the drilling program
and related partnerships.
o The managing partner is a general partner of numerous other
partnerships and owes duties of good faith and fair dealing to
such other partnerships.
o The managing partner and its affiliates engage in significant
drilling, operating, and producing activities for other
partnerships.
o Affiliates of the managing partner are eligible to purchase
interests, and subject to limitations, interests purchased by
an affiliate will have voting rights under the partnership
agreement.
FIDUCIARY RESPONSIBILITY OF THE MANAGING PARTNER
The contemplated activities of each partnership will involve decisions
by the managing partner, on behalf of each partnership, and the drilling program
manager, on behalf of the related drilling program, and transactions
52
between the partnership, the related drilling program, the managing partner, or
affiliates thereof. Because of the common control of each partnership, each
drilling program, the managing partner, the drilling program manager, and other
affiliates thereof, any such decisions or transactions will lack the benefits of
arm's-length bargaining and will necessarily involve conflicts of interest. The
managing partner is accountable to each partnership as a fiduciary and is
required to act in good faith in the best interests of each partnership at all
times. The managing partner will attempt, in good faith, to resolve all
conflicts of interest in a fair and equitable manner with respect to all persons
affected by those conflicts of interest. Nevertheless, the actions of the
managing partner may not be the most advantageous to a partnership and could
fall short of the full exercise of such fiduciary duty. No provision has been
made for an independent review of conflicts of interest.
The partnerships are organized under Delaware law, and under Delaware
law the general partner of a partnership owes a fiduciary duty to the
partnership and to its partners. Under Delaware law, the managing partner will
owe the general and limited partners a duty of good faith, fairness, and
loyalty. In this regard, the managing partner is required to supervise and
direct the activities of each partnership prudently and with that degree of
care, including acting on an informed basis, which an ordinarily prudent person
in a like position would use under similar circumstances. Moreover, the managing
partner must act at all times in the best interests of each partnership and the
general and limited partners. The managing partner and its affiliates may never
profit by causing the partnership to engage in drilling in contravention of
these duties. Since the law in this area is rapidly developing and changing,
investors who have questions concerning the responsibilities of the managing
partner should consult their own counsel.
Limitations on the Fiduciary Obligations of the Managing Partner and
the Managing Partner's Responsibility to Determine the Application of the
Limitations. The partnership agreement contains provisions which modify what
would otherwise be the applicable Delaware law relating to the fiduciary
standards of the managing partner to the general and limited partners. The
fiduciary standards in the partnership agreement could be less advantageous to
the general and limited partners and more advantageous to the managing partner
than the corresponding fiduciary standards otherwise applicable under Delaware
law, specifically:
o a partnership may indemnify and hold harmless the managing
partner and its affiliates,
o the managing partner is required to devote only so much of its
time as is necessary to manage the affairs of the partnership,
o the managing partner and its affiliates may conduct business
with a partnership in a capacity other than as a sponsor,
o the managing partner and any of its affiliates may pursue
business opportunities that are consistent with a
partnership's investment objectives for their own account, and
o the managing partner may manage multiple programs
simultaneously.
As summarized above the partnership agreement contains provisions which
are intended to limit the liability of the managing partner or any affiliate of
the managing partner for any act or omission within the scope of authority
conferred upon them under the partnership agreement or drilling program
agreement if the managing partner has determined in good faith, as of the time
of the conduct or omission, that such conduct or omission was in the best
interest of a partnership and that it did not constitute negligence or
misconduct. The managing partner would be subject to a conflict of interest in
making any such determination. The limitation upon the fiduciary standards in
the partnership agreement could be less advantageous to the general and limited
partners and more advantageous to the managing partner than the corresponding
fiduciary standards otherwise applicable under Delaware law. The purchase of
interests may be deemed as consent to the fiduciary standards set forth in the
partnership agreement. As a result of these provisions in the partnership
agreement, the general and limited partners may find it more difficult to hold
the managing partner responsible for acting in the best interests of a
partnership and its general and limited partners than if the fiduciary standards
of the otherwise applicable Delaware law governed the situation.
The partnership agreement and drilling program agreement provide for
indemnification of the managing partner, the drilling program manager and
affiliates of the drilling program manager and their respective officers and
directors against claims arising from conduct or omission on behalf of a
partnership or a drilling program. Such indemnification will be available if the
managing partner determines in good faith, as of the time of the conduct or
53
omission, that the conduct or omission was in the best interest of the related
partnership and that it did not constitute negligence or misconduct. The
managing partner would be subject to a conflict of interest in making any such
determination as to whether the managing partner or its affiliates should be
indemnified, and the general and limited partners must rely upon the integrity
of the managing partner in making such determination.
Where the question has arisen, courts have held that an investor
partner may institute a legal action called a class action on behalf of himself
and all other similarly situated investor partners to recover damages for a
breach by a general partner of his fiduciary duty. An investor partner may also
institute a legal action called a derivative suit on behalf of the partnership
to recover damages from third parties. In addition, investor partners may have
the right, subject to procedural and jurisdictional requirements, to bring
partnership class actions in federal courts to enforce their rights under the
federal securities laws. Further, investor partners who have suffered losses in
connection with the purchase or sale of their interests in a partnership may be
able to recover such losses from a general partner where the losses result from
a violation by the general partner of the antifraud provisions of the federal
securities laws. The burden of proving such a breach, and all or a portion of
the expense of such lawsuit, would have to be borne by the investor partner
bringing such action. In the event of a lawsuit for a breach of its fiduciary
duty to a partnership and/or the general and limited partners, the managing
partner, depending upon the particular circumstances involved, might be able to
avail itself under Delaware law of various defenses to the lawsuit.
In the performance of its duties as operator under an operating
agreement, the program manager is required to act in accordance with a prudent
operator standard. In general, under the prudent operator standard, a person is
required to act in the same manner as an ordinary prudent operator would act
under the same or similar circumstances. The prudent operator standard is
significantly less restrictive than the fiduciary duty imposed upon the managing
partner. Conduct under the prudent operator standard may not necessarily be the
most advantageous to a partnership and under such standard it would be more
difficult to hold the program manager responsible for acts or omissions in its
capacity as operator than if the fiduciary duty standard were otherwise
applicable.
FARMOUTS
Any farmout or similar agreement pertaining to a partnership's oil and
gas leases must comply with the rules, restrictions, and guidelines described in
this prospectus and the limitations set forth in the partnership agreement, and
will be subject to the following conditions:
o the managing partner must determine that the farmout or
similar agreement is in the best interests of the partnership,
o the terms of the farmout or similar agreement must be
consistent with, and in any case no less favorable to the
partnership than, those utilized in the same geographic area
for similar arrangements, and
o if the assignee under the farmout is the managing partner or
its affiliate then, the farmout is subject to the same
restrictions as applicable to a purchase of undeveloped
property from the partnership. See "Proposed Activities --
Transactions with Affiliates -- Purchase of Leases from the
Partnership."
The decision of the managing partner with respect to making a farmout
and the terms of a farmout to an affiliate may involve conflicts of interest, as
the managing partner or the affiliate may benefit from cost savings and
reduction of risk, and in the event of a farmout to an affiliate, the managing
partner will represent both the partnership and the affiliate.
None of a partnership's oil and gas leases will be farmed out unless
the managing partner, determines that:
o the partnership lacks sufficient funds to drill on the oil and
gas lease and cannot obtain suitable alternative financing for
such drilling,
54
o the value of the oil and gas lease has been reduced by events
occurring or information disclosed to such managing partner
after assignment of the oil and gas lease to the partnership
so that drilling would no longer be desirable for the
partnership,
o drilling on the oil and gas lease would result in an excessive
concentration of the partnership's funds creating, in the
managing partner's opinion, undue risk to the partnership, or
o the best interests of the partnership would be served by the
farmout.
A partnership will acquire only those oil and gas leases that are
reasonably required for the stated purpose of the partnership, and no oil and
gas leases will be acquired for the purpose of subsequent sale or farmout,
unless the acquisition of the oil and gas leases by that partnership is made
after a well has been drilled to a depth sufficient to indicate that the
acquisition is believed to be in the best interest of the partnership. The
managing partner is not permitted to farmout a property for the primary purpose
of avoiding payment of the costs relating to drilling on the property that would
otherwise be allocable to the managing partner. See "Proposed Activities --
Farmouts," and "Conflicts of Interest -- Sale of Leases to a Partnership" and
"Purchase of Leases from a Partnership."
PURCHASE OF LEASES FROM A PARTNERSHIP
Neither the managing partner nor its affiliate, including an affiliated
program, may purchase or acquire any oil and gas lease from a partnership,
directly or indirectly, except in transactions that are fair and reasonable to
the partnership and then subject to the following conditions:
o a sale, transfer or conveyance, including a farmout, of an oil
and gas lease not having any proved developed reserves
attributable to it from a partnership to the managing partner,
or its affiliate, other than an affiliated program, must be
made at the higher of the lease acquisition costs or fair
market value,
o a sale, transfer or conveyance of an oil and gas lease (having
proved developed reserves attributable to it from the
partnership to the managing partner or its affiliate, other
than an affiliated program in which the interest of the
managing partner or its affiliate is substantially similar to
or less than its interest in the partnership, is not permitted
except in connection with the liquidation of the partnership
and then only at fair market value,
o except in connection with farmouts or joint ventures made in
compliance with the partnership agreement. which is summarized
in the final paragraph of the subsection entitled "Sale of
Lease to the partnership" below, a transfer of an undeveloped
oil and gas lease from the partnership to an affiliated
program must be made at fair market value if the oil and gas
lease has been held for more than two years; otherwise, if the
managing partner deems it to be in the best interest of the
partnership, the transfer may be made at the lease acquisition
costs, and
o except in connection with farmouts made in compliance with the
restrictions described in the partnership agreement, a
transfer of any oil and gas lease from the partnership to an
affiliated program, whose investment obligation is to directly
acquire, hold, operate and/or dispose of producing oil and gas
properties, must be made at fair market value if the oil and
gas lease has been held for more than six months or there have
been significant expenditures made in connection with the oil
and gas lease; otherwise, if the managing partner deems it to
be in the best interest of the partnership, the transfer may
be made at the lease acquisition costs as adjusted for
intervening operations.
A determination of fair market value must be supported by an appraisal from an
independent expert. Such opinion and any associated supporting information must
be maintained in a drilling program's records for at least six years.
55
SALE OF LEASES TO A PARTNERSHIP
The managing partner has discretion in selecting the oil and gas leases
to be contributed to a partnership by the managing partner and the location and
type of operations that a partnership will conduct on the contributed oil and
gas leases. A portion of such oil and gas leases may be part of the managing
partner's existing inventory. In determining which oil and gas leases should be
contributed to a partnership, if the managing partner or its affiliates has oil
and gas leases in its own inventory at the time, the managing partner would be
subject to a conflict of interest in selecting properties for the partnership
out of its or an affiliate's inventory or from third party sellers.
ADJACENT ACREAGE
A drilling program may not drill any well for the purpose of proving or
disproving the existence of oil or gas on any adjacent acreage held by the
managing partner or an affiliate of the managing partner. Nevertheless, such
drilling activities may incidentally develop information valuable to the
managing partner or affiliates of the managing partner in evaluating their
nearby acreage at no cost to them. Mewbourne Oil Company or its affiliates also
may retain an ownership interest in an oil and gas lease contributed by the
managing partner to a drilling program and the use of drilling program funds to
drill a well on such oil and gas lease will reduce the cost and risk to the
managing partner or its affiliates of drilling on such oil and gas lease.
Accordingly, a conflict of interest will exist between the interest of the
partnership and the interest of the managing partner in selecting the location
and type of operations which the related drilling program will conduct on
drilling program leases where the managing partner or affiliates of the managing
partner own oil and gas leases in the vicinity of the drilling program leases or
retain an ownership interest in the drilling program leases. In addition, the
liability of the managing partner and its affiliates to the partnerships is
limited as set forth under "-- Fiduciary Responsibility of the Managing Partner"
and such limitations significantly increase the potential conflicts that may
arise with regard to the acquisition and operation of adjacent acreage.
OTHER ACTIVITIES
As summarized in "Risk Factors -- Particular Risks Relating to the
Interests -- Limitations on the Fiduciary Obligations of the Managing Partner
and the Managing Partner's Responsibility to Determine the Application of the
Limitations," the partnership agreement modifies the fiduciary duties owed by
the managing partner or its affiliates to a partnership and the general and
limited partners by specifically modifying the duties otherwise owed under
Delaware law. The partnership agreement specifically permits the managing
partner and its affiliates to engage in and possess interests in other business
ventures of any and every type and description, independently or with others,
including without limitation the acquisition, ownership, exploration,
development, operation, and management of oil and gas properties for themselves
and other persons, and the organization and management of other partnerships and
joint ventures similar to the partnerships; provided, however, except as
otherwise set forth in the partnership agreement and as described in "Proposed
Activities -- Transactions with Affiliates," the managing partner and its
affiliates may pursue business opportunities that are consistent with the
partnerships' investment objectives for their own account only after they have
determined that such opportunity either cannot be pursued by a partnership
because of insufficient funds or because it is not appropriate for a partnership
under the existing circumstances. The managing partner and its affiliates
currently act as the managing general partner of several other oil and gas
drilling partnerships. See "Prior Activities." The business of these
partnerships may be considered competitive with the business of the partnerships
in areas such as markets for production, use of equipment, and access to the
time and financial resources of management, as well as in other areas. In
addition, the managing partner or its affiliates may sponsor additional drilling
partnerships and other oil and gas partnerships in the future. Therefore, the
managing partner will be acting on behalf of each partnership as managing
partner, on behalf of existing partnerships, and on behalf of other partnerships
and joint ventures which the managing partner or its affiliates may sponsor in
the future. As a result of these activities of the managing partner and its
affiliates, circumstances may arise where the interest of the managing partner
or of its affiliates in such independent ventures will conflict with those of
the general and limited partners with respect to the acquisition of prospects,
the utilization of available drilling services and similar matters. A conflict
of interest may arise, for example, when a partnership, the managing partner and
other prior or future oil and gas partnerships in which the managing partner or
its affiliate has an interest will have an opportunity to acquire the same oil
and gas leases. In these situations, it may be expedient for the managing
partner to favor one partnership or venture over another. It is possible that
the managing partner or its affiliates will be in the process of
56
acquiring oil and gas leases for inclusion in other drilling partnerships at the
same time that they are acquiring oil and gas leases for inclusion in a drilling
program.
CONTRACTS WITH MEWBOURNE AND AFFILIATES
The managing partner and its affiliates do not own any drilling rigs or
service companies, and except for the providing of gas compressors from an
affiliate of the managing partner and for the operating agreement, the managing
partner currently does not anticipate that it will enter into contracts and
agreements with either partnership for the rendering of services or the sale and
lease of supplies and equipment. However, the partnership agreement specifically
permits a partnership and the managing partner to enter into agreements for such
purposes and for the lending of money to a partnership. Neither the managing
partner nor any affiliate of the managing partner will enter into any agreement
with a partnership to provide services, supplies and equipment unless:
(a) the managing partner or such affiliate is engaged
independently of the partnership as an ordinary and ongoing
business in the business of rendering such services or selling
or leasing such equipment and supplies to a substantial extent
to other persons in the oil and gas industry in addition to
partnerships or drilling programs in which the managing
partner or such affiliate has an interest,
(b) the compensation, price, or rental is competitive, determined
as of the time that the contract is entered into, with the
compensation, price, or rental of other persons in the area
engaged in the business of rendering comparable services or
selling or leasing comparable equipment and supplies which
could reasonably be made available to the partnership, and
(c) if the managing partner or such affiliate is not engaged in a
business within the meaning of clause (a) above, then such
compensation, price, or rental is the lesser of the cost of
such services, equipment, or supplies to the managing partner
or such affiliate or the competitive rate which could be
obtained in the area. Any loan of money to a partnership by
the managing partner or its affiliate may not bear interest in
excess of the lesser of the rate the managing partner or such
affiliate is required to pay on similar borrowings or the
highest lawful rate, or in any event at a rate in excess of
the amount which would be charged to the partnership by
independent third parties for the same purpose. See
"Additional Financing."
All contracts between a partnership and the managing partner or its
affiliate may be terminated upon the vote or written consent of more than 50% of
the interest of the general and limited partners without penalty on 60 days'
advance written notice. Notwithstanding any provision to the contrary, the
managing partner and its affiliates may not profit by drilling in contravention
of their fiduciary obligations to the general and limited partners. In addition,
no rebates may be received by the managing partner or any affiliate nor may the
managing partner or any affiliate participate in any reciprocal business
arrangements.
No funds shall be advanced by a partnership to the managing partner or
any affiliate of the managing partner except where necessary to secure tax
benefits of prepaid drilling costs, and these advance payments shall not include
nonrefundable payments for completion costs prior to the time that a decision is
made regarding whether the relevant well warrants a completion attempt.
MEWBOURNE OIL COMPANY AS OPERATOR
Under the terms of each drilling program agreement, the drilling
program manager has agreed to serve as operator of program wells. Each drilling
program agreement specifically provides that any operating agreement pertaining
to the drilling program manager's acting as an operator of program wells will be
subject to the limitations set forth in the related partnership agreement with
respect to contracts for the rendering of services and the sale and lease of
supplies and equipment, which limitations are described in the preceding
paragraph. In the event that non-affiliated parties do not participate, or have
a small interest, in a drilling program's prospects there will be no independent
oversight with respect to the competitiveness of the operating agreements
entered into with the drilling
57
program manager. See "Proposed Activities -- Operations" and "Compensation and
Reimbursement -- Compensation as Operator."
PRIOR ACTIVITIES
PRIOR PARTNERSHIPS
The managing partner has historically originated and managed drilling
and development activities through which a limited number of qualified
participants, including other oil and gas companies, acquired individual working
interests in leases by means of joint ventures and drilling agreements. The
structure of such transactions, including the manner in which costs and revenues
are shared varied considerably and in each case are substantially different from
those of an investor partner investing in a partnership.
During the period 1977-1980, affiliates of the general partner
sponsored a series of five private limited partnerships. The general partner has
also sponsored fourteen public partnerships, Mewbourne Development Partners
93-A, L.P., Mewbourne Development Partners 93-B, L.P., Mewbourne Development
Partners 94-A, L.P., Mewbourne Development Partners 94-B, L.P., Mewbourne
Development partners 94-C, L.P., Mewbourne Energy Partners 95-A, L.P., Mewbourne
Energy Partners 95-B, L.P., Mewbourne Energy Partners 96-A, L.P., Mewbourne
Energy Partners 97-A, L.P., Mewbourne Energy Partners 98-A, L.P., Mewbourne
Energy Partners 99-A, L.P., Mewbourne Energy Partners 00-A, L.P., Mewbourne
Energy Partners 01-A, L.P., Mewbourne Energy Partners 02-A, L.P. and two private
partnerships, Mewbourne Development Partners 1992 GP and Mewbourne Energy
Partners 1994 Private L.P. Except for the above described partnerships, neither
the general partner nor any of its affiliates have sponsored any private or
public partnerships within the past ten years. The financial disclosure provided
below is presented on a tax basis of accounting.
FOR PURPOSES OF MAKING AN INVESTMENT DECISION, THE STRUCTURE AND ACTIVITIES OF
THE FIVE PRIVATE LIMITED PARTNERSHIPS SPONSORED DURING THE YEARS 1977 THROUGH
1980 ARE NOT COMPARABLE TO THE PARTNERSHIPS. IN PARTICULAR, THE FIVE PRIVATE
LIMITED PARTNERSHIPS WERE STRUCTURED TO INCLUDE ONE OR MORE OF THE FOLLOWING
ATTRIBUTES:
o ADDITIONAL ASSESSMENTS WERE REQUIRED FROM THE INVESTORS AS
CONTRASTED TO THE CURRENT OFFERING WHICH DOES NOT ALLOW FOR
ANY ADDITIONAL ASSESSMENTS,
o SIGNIFICANT INDEBTEDNESS WAS INCURRED AS CONTRASTED TO THE
CURRENT OFFERING WHICH CONTEMPLATES ONLY LIMITED BORROWINGS
AND IN LIMITED CIRCUMSTANCES,
o EXCESS INCOME WAS REINVESTED IN ADDITIONAL DRILLING ACTIVITIES
AS CONTRASTED TO THE PROPOSED OFFERING WHICH DOES NOT
CONTEMPLATE SIGNIFICANT REINVESTMENT OF EXCESS INCOME,
o ACTIVITIES WERE ENGAGED IN THAT ARE NOT COMPARABLE TO THE
ACTIVITIES PROPOSED TO BE ENGAGED IN BY THE CURRENT OFFERING,
INCLUDING DRILLING EXPLORATORY WELLS, AS CONTRASTED TO THE
CURRENT OFFERING WHICH CONTEMPLATES THE DRILLING OF PRIMARILY
DEVELOPMENT WELLS, AND/OR
o THE SHARING OF PARTNERSHIP'S REVENUES AND COSTS BETWEEN THE
MANAGING PARTNER AND THE INVESTORS WAS MADE IN A SIGNIFICANTLY
DIFFERENT METHOD AS CONTRASTED TO THE CURRENT OFFERING.
DUE TO THESE SIGNIFICANT DIFFERENCES, THE DISCLOSURE REGARDING THE PRIOR
ACTIVITIES OF THE FIVE PRIVATE LIMITED PARTNERSHIPS MAY NOT BE RELEVANT TO A
PROSPECTIVE SUBSCRIBER MAKING AN INVESTMENT DECISION WITH RESPECT TO A
PARTNERSHIP AND ARE NOT INDICATIVE OF THE RESULTS THAT MAY BE ACHIEVED BY EITHER
PARTNERSHIP.
58
The following table is to indicate the total amount of administrative
costs incurred, as of December 31, 2002, by partnerships sponsored by the
managing partner or its affiliates, and the percentage of subscriptions raised
in each partnership as compared to other costs incurred by each partnership.
<Table>
<Caption>
Other Costs(1) Administrative Costs
----------------------------- ------------------------------
Percentage of Percentage of
Partnership(3) Amount Subscriptions Amount Subscriptions
- ----------------------------------------------------- ------------ ------------- ------------ --------------
Mewbourne Oil, Ltd. 1977 (4) .................... $ 3,386,123 100.8% $ 783,976 23.3%
Mewbourne Oil, Ltd. 1978 ........................ 12,263,806 277.1% 2,653,548 60.0%
Mewbourne Oil, Ltd. 1978B (5) ................... 7,901,956 196.0% 1,322,538 32.8%
Mewbourne Oil, Ltd. 1979 (4)..................... 7,005,778 162.9% 1,267,283 29.5%
Mewbourne Oil, Ltd. 1980 (4)..................... 2,783,153 135.7% 398,584 19.4%
Mewbourne Development Partners 92 GP (6)......... 1,217,898 104.0% 41,702 3.6%
Mewbourne Development Partners 93-A LP........... 1,355,292 97.2% 48,606 3.5%
Mewbourne Development Partners 93-B LP........... 1,386,415 105.8% 57,668 4.4%
Mewbourne Development Partners 94-A LP........... 1,327,397 110.2% 58,556 4.9%
Mewbourne Development Partners 94-B LP........... 1,110,425 108.9% 64,217 6.3%
Mewbourne Development Partners 94-C LP........... 1,113,992 107.2% 63,196 6.1%
Mewbourne Energy Partners 1994 Private LP........ 1,570,129 105.7% 0 0.0%(2)
Mewbourne Energy Partners 95-A, L.P.............. 1,702,789 104.1% 117,239 7.2%
Mewbourne Energy Partners 95-B, L.P.............. 2,054,465 101.1% 44,130 2.2%
Mewbourne Energy Partners 96-A, L.P.............. 4,079,223 104.3% 153,624 3.9%
Mewbourne Energy Partners 97-A, L.P.............. 3,635,504 114.6% 161,005 5.1%
Mewbourne Energy Partners 98-A, L.P.............. 3,736,253 100.0% 158,629 4.3%
Mewbourne Energy Partners 99-A, L.P.............. 5,753,909 100.5% 195,589 3.4%
Mewbourne Energy Partners 00-A, L.P.............. 10,732,735 107.3% 202,834 2.0%
Mewbourne Energy Partners 01-A, L.P.............. 15,013,909 100.1% 88,432 0.6%
Mewbourne Energy Partners 02-A, L.P.............. 12,025,818 74.8% 0 0.0%(2)
</Table>
- --------------
(1) Includes lease acquisition costs, and all direct costs.
(2) Represents less than .01%.
(3) Unless otherwise noted, all partnerships are currently operating.
(4) This partnership was terminated November 30, 1994.
(5) This partnership was terminated September 1, 1996.
(6) This partnership was terminated December 31, 2001.
59
PAST COMPENSATION
In connection with a series of five private limited partnerships
sponsored by an affiliate of the managing partner during 1977-1980 and two
private limited partnerships and a series of eleven public limited partnerships
sponsored by the managing partner since December 1992, such partnerships have
made the following payments to the managing partner and its affiliates.
PAYMENTS MADE TO THE MANAGING PARTNER AND AFFILIATES
December 31, 2002
<Table>
<Caption>
Nonrecurring
Management
and Administrative
Organization Lease Cost
Partnership Fee Acquisition (1) Equipment Operating Fees Reimbursement
============================================= ============= ================ ============== =============== ===============
Mewbourne Oil, Ltd. 1977(2).................. $ 35,000 $300,689 $ 795,925 $1,226,840 $ 53,129
Mewbourne Oil, Ltd. 1978A(4)................. 55,000 639,232 2,918,535 4,739,700 2,907,444
Mewbourne Oil, Ltd. 1978B(3)................. 48,180 338,801 2,131,126 2,600,875 1,512,960
Mewbourne Oil, Ltd. 1979(2).................. 52,230 490,024 1,357,496 2,169,170 1,194,485
Mewbourne Oil, Ltd. 1980(2).................. 26,628 301,720 472,053 307,664 491,564
Mewbourne Development Partners 92 GP(5)...... 63,162 267,023 215,009 169,234 41,702
Mewbourne Development Partners 93-A,
L.P.(4)...................................... 62,190 108,043 277,576 381,856 48,606
Mewbourne Development Partners 93-B,
L.P.(4)...................................... 58,455 171,438 263,993 312,617 57,668
Mewbourne Development Partners 94-A,
L.P.(4)...................................... 53,730 228,090 220,078 218,284 58,556
Mewbourne Development Partners 94-B,
L.P.(4)...................................... 45,451 86,390 205,384 232,286 64,217
Mewbourne Development Partners 94-C,
L.P.(4)...................................... 46,351 95,860 201,348 227,790 63,196
Mewbourne Energy Partners 1994 Private
L.P.(4)...................................... 0 225,614 183,418 275,835 0
Mewbourne Energy Partners 95-A, L.P.(4)...... 105,235 375,776 275,603 325,563 117,239
Mewbourne Energy Partners 95-B, L.P.(4)...... 20,110 520,466 220,611 278,802 44,130
Mewbourne Energy Partners 96-A, L.P.(4)...... 251,680 952,945 728,328 721,675 153,624
Mewbourne Energy Partners 97-A, L.P.(4)...... 169,650 772,204 603,190 557,271 161,005
Mewbourne Energy Partners 98-A, L.P.(4)...... 159,020 879,183 575,325 589,325 158,629
Mewbourne Energy Partners 99-A, L.P.(4)...... 0 31,876 1,280,473 870,172 195,589
Mewbourne Energy Partners 00-A, L.P.(4)...... 0 4,211 2,071,537 1,070,450 202,834
Mewbourne Energy Partners 01-A, L.P.(4)...... 0 0 3,248,077 1,170,524 88,432
Mewbourne Energy Partners 02-A, L.P.(4)...... 0 0 1,309,243 222,098 0
</Table>
- --------------
(1) Interests in oil and gas properties were acquired at cost from
Mewbourne Oil Company.
(2) This partnership was terminated on November 30, 1994.
(3) This partnership was terminated on September 1, 1996.
(4) This partnership is currently operating.
(5) This partnership was terminated on December 31, 2001.
60
The following table is presented to indicate certain sale distribution
characteristics concerning partnerships sponsored by the managing partner or its
affiliates.
PRIOR PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS
EXPERIENCE IN RAISING FUNDS
<Table>
<Caption>
Number of
Date of Initial
First Participants Maximum Contributions
Partnership Funding Revenue Number of in Price Per Offering From
Date Distribution Unite Sold Partnership Unit Size Investors(4)
========================================= ========= ============= ============ =============== ========== ============ ============
Mewbourne Oil, Ltd. 1977(1) 8/25/77 6/27/78(2)(3) 193.0 34 $ 10,000 $ 3,000,000 $2,891,000
Mewbourne Oil, Ltd. 1978A(8) 5/4/78 2/24/84(2)(3) 288.0 41 10,000 4,000,000 3,456,000
Mewbourne Oil, Ltd. 1978B (7) 12/6/78 12/31/80(2)(3) 286.5 39 10,000 4,000,000 3,581,250
Mewbourne Oil, Ltd. 1979(1) 7/10/79 12/8/80(2)(3) 312.5 44 10,000 4,000,000 3,906,250
Mewbourne Oil, Ltd. 1980(5)(1) 5/22/80 --(2)(3) 147.0 23 10,000 4,000,000 1,837,500
Mewbourne Development Partners 92 GP(10) 12/31/92 5/18/93(3) 1,16.0 10 10,000 5,000,000 1,160,000
Mewbourne Development Partners 93-A,
L.P.(8) 10/11/93 2/21/94 1,382.0 48 1,000(6) 10,000,000 1,382,000
Mewbourne Development Partners 93-B,
L.P.(8) 12/31/93 4/25/94 1,299.0 59 1,000(6) 10,000,000 1,299,000
Mewbourne Development Partners 94-A,
L.P.(8) 6/30/94 10/24/94 1,194.0 67 1,000(6) 10,000,000 1,194,000
Mewbourne Development Partners 94-B,
L.P.(8) 11/4/94 3/21/95 1,100.0 45 1,000(6) 10,000,000 1,010,000
Mewbourne Development Partners 94-C,
L.P.(8) 12/30/94 4/28/95 1,030.0 21 1,000(6) 10,000,000 1,030,000
Mewbourne Energy Partners 1994 Private
L.P.(8) 12/30/94 4/28/95 73.5 49 20,000 10,000,000 1,470,000
Mewbourne Energy Partners 95-A, L.P.(8) 10/11/95 2/19/96 1,619.0 78 1,000(6) 10,000,000 1,619,000
Mewbourne Energy Partners 95-B, L.P.(8) 12/29/95 5/20/96 2,011.0 111 1,000(6) 10,000,000 2,011,000
Mewbourne Energy Partners 96-A, L.P.(8) 11/7/96 3/20/97 3,872.0 159 1,000(6) 10,000,000 3,872,000
Mewbourne Energy Partners 97-A, L.P.(8) 11/9/97 3/20/98 3,141.0 147 1,000(6) 10,000,000 3,141,000
Mewbourne Energy Partners 98-A, L.P.(8) 11/20/98 3/25/99 3,698.0 159 1,000(6) 10,000,000 3,698,000
Mewbourne Energy Partners 99-A, L.P.(8) 11/22/99 3/27/00 5,727.0 238 1,000(9) 10,000,000 5,727,000
Mewbourne Energy Partners 00-A, L.P.(8) 10/31/00 3/26/01 10,000.0 352 1,000(9) 10,000,000 10,000,000
Mewbourne Energy Partners 01-A, L.P.(8) 08/28/01 1/25/02 15,000.0 569 1,000(9) 15,000,000 15,000,000
Mewbourne Energy Partners 02-A, L.P.(8) 10/10/02 N/A 16,572.0 648 1,000(9) 18,000,000 16,072,000
</Table>
- --------------
(1) This partnership was terminated on November 30, 1994.
(2) Cash Distributions reflect the policy to retain initial revenues to
reinvest in additional wells. Retention of revenues delayed the
commencement of distributions to the participants.
(3) The 1977 partnership retained $553,549 of distributable operating cash
flow to reinvest in additional drilling. The 1978A, 1978B, 1979 and
1980 partnerships retained $1,836,329, $3,580,177, $2,326,134 and
$223,343 of distributable operating cash flow to reinvest in additional
drilling, respectively, and $5,391,821, $30,072, $125,133 and $732,939
of distributable operating cash flow was used to repay borrowings of
the partnership, respectively. The 92 GP, 93-A, 93-B, 94-A, 94-B, 94-C
MEP 94-Private 95-B, 97-A, 98-A, 99-A, 00-A and 01-A partnerships
retained $64,165, $24,614, $76,838, $82,864, $124,975, $111,208,
$25,852, $5,732, $303,818, $27,029, $37,876, $77,825, and $152,100
respectively of distributable operating cash flow to complete drilling
operations.
(4) Includes initial subscriptions plus additional assessments, if any,
under the provisions of each offering. Also includes contributions by
the managing partner and its affiliates in each of public programs
previously sponsored by the managing partner. Such contributions were
in the amounts of $480,000, $400,000, $366,000, $437,500 and $660,000
in each of Mewbourne Development partners 93-A, L.P., Mewbourne
Development partners 93-B, L.P., Mewbourne Development partners 94-A,
L.P., Mewbourne Development partners 94-B, L.P., Mewbourne Development
partners 94-C, L.P., respectively.
(5) The activities of this partnership consisted solely of exploratory
drilling.
(6) Each partnership required a minimum investment of five units or $5,000.
(7) This partnership was terminated September 1, 1996.
(8) This partnership is currently operating.
(9) Each partnership required a minimum investment of 10 units or $10,000.
(10) This partnership was terminated December 31, 2001.
61
PREVIOUS DRILLING ACTIVITIES
The following table reflects the previous drilling activity of
partnerships sponsored by the managing partner or its affiliates.
PRIOR PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS
DRILLING RESULTS
Inception Through December 31, 2002
<Table>
<Caption>
Gross (1) Net (2)
--------------------------- ------------------------------------------
Percent
Partnership Completed Dry Completed Dry Completed
================================================== ============ ============ ============ ============ ============
Mewbourne Oil Ltd., 1977-A(3) .................... 15 4 8.00 2.33 77%
Mewbourne Oil Ltd., 1978A(7) ..................... 35 11 20.68 6.58 76%
Mewbourne Oil Ltd., 1978B (6) .................... 31 8 15.66 4.10 79%
Mewbourne Oil Ltd., 1979(3) ...................... 27 12 13.60 5.62 71%
Mewbourne Oil Ltd., 1980(3)(4) ................... 34 11 3.31 0.96 78%
------------ ------------ ------------ ------------ ------------
Total ....................................... 142 46 61.25 19.59 76%
============ ============ ============ ============ ============
Mewbourne Development Partners 92 GP(8) .......... 6 4 0.73 0.56 56%
Mewbourne Development Partners 93-A, L.P.(7) ..... 9 0 2.57 0 100%
Mewbourne Development Partners 93-B, L.P.(7) ..... 14 0 2.09 0 100%
Mewbourne Development Partners 94-A, L.P.(7) ..... 8 1 1.21 0.14 90%
Mewbourne Development Partners 94-B, L.P.(7) ..... 5 0 1.28 0 100%
Mewbourne Development Partners 94-C, L.P.(7) ..... 4 0 1.3 0 100%
Mewbourne Energy Partners 1994 Private L.P.(7) ... 5 1 3.03 0.33 90%
Mewbourne Energy Partners 95-A, L.P.(7) .......... 7 0 2.91 0 100%
Mewbourne Energy Partners 95-B, L.P.(7) .......... 6 3 2.03 0.74 73%
Mewbourne Energy Partners 96-A, L.P.(7) .......... 14 3 4.75 0.73 87%
Mewbourne Energy Partners 97-A, L.P.(7) .......... 15 4 2.91 0.7 81%
Mewbourne Energy Partners 98-A, L.P.(7) .......... 19 3 3.86 0.6 87%
Mewbourne Energy Partners 99-A, L.P.(7) .......... 20 5 7.81 2.12 79%
Mewbourne Energy Partners 00-A, L.P.(7) .......... 28 4 10.17 1.95 84%
Mewbourne Energy Partners 01-A, L.P.(7) .......... 35 6 15.9 2.69 86%
Mewbourne Energy Partners 02-A, L.P.(5)(7) ....... 12 1 5.79 0.65 90%
------------ ------------ ------------ ------------ ------------
Total ....................................... 207 35 68.34 11.21 86%
============ ============ ============ ============ ============
</Table>
- --------------
(1) Gross wells include all wells in which investors owned a working
interest.
(2) Net wells is the total percentage of working interest owned by the
partnership in the wells.
(3) This partnership was terminated on November 30, 1994.
(4) The activities of this partnership consisted solely of exploratory
drilling.
(5) As of December 31, 2002, this partnership was engaged in drilling and
completion activities.
(6) This partnership was terminated September 1, 1996.
(7) This partnership is currently operating.
(8) This partnership was terminated December 31, 2001.
62
PAYOUT AND NET CASH TABLES
The following tables provide information concerning the operating
results of partnerships sponsored by the managing partner or its affiliates.
PRIOR PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS
INVESTORS' PAYOUT TABLE
December 31, 2002
<Table>
<Caption>
Revenues Before
Total Expenditures Deducting
Investors' Funds Including Operating Operating
Partnership Invested (1) Costs (2) Costs (3)
===================================================== ================= ==================== ==================
Mewbourne Oil, Ltd. 1977(4)(5)................... $ 2,643,700 $ 6,269,489 $ 6,527,236
Mewbourne Oil, Ltd. 1978A(4)(9).................. 3,121,150 21,198,854 24,481,875
Mewbourne Oil, Ltd. 1978B(4) (8)................. 3,247,534 12,719,565 13,452,048
Mewbourne Oil, Ltd. 1979(4)(5)................... 3,541,520 11,371,906 17,853,374
Mewbourne Oil, Ltd. 1980(4)(5)(6)................ 1,637,969 3,464,815 1,555,414
Mewbourne Development Partners 92 GP(10)......... 1,049,800 1,685,617 1,150,878
Mewbourne Development Partners 93-A, L.P.(9)..... 1,250,848 2,045,189 1,382,545
Mewbourne Development Partners 93-B, L.P.(9)..... 1,175,725 2,112,683 1,640,642
Mewbourne Development Partners 94-A, L.P.(9)..... 1,080,690 2,002,064 1,668,032
Mewbourne Development Partners 94-B, L.P.(9)..... 914,151 1,888,696 1,827,467
Mewbourne Development Partners 94-C, L.P.(9)..... 932,253 1,837,518 1,798,015
Mewbourne Energy Partners 1994 Private L.P.(9)... 1,470,000 1,954,145 1,362,969
Mewbourne Energy Partners 95-A, L.P.(9).......... 1,619,000 2,690,362 3,339,845
Mewbourne Energy Partners 95-B, L.P.(9).......... 2,011,000 3,117,217 1,254,888
Mewbourne Energy Partners 96-A, L.P. (9)......... 3,872,000 5,931,957 4,384,057
Mewbourne Energy Partners 97-A, L.P.(9).......... 3,141,000 5,183,499 4,590,904
Mewbourne Energy Partners 98-A, L.P.(9).......... 3,698,000 5,211,788 4,547,381
Mewbourne Energy Partners 99-A, L.P.(9).......... 5,727,000 7,003,989 5,674,411
Mewbourne Energy Partners 00-A, L.P.(9).......... 10,000,000 11,367,470 5,986,288
Mewbourne Energy Partners 01-A, L.P.(9).......... 15,000,000 15,613,035 2,872,856
Mewbourne Energy Partners 02-A, L.P.(7).......... 16,072,000 12,031,835 0
</Table>
- --------------
(1) Total subscriptions less organization, promotion, and, if applicable,
management fees.
(2) Includes total of all subscriptions, organization, promotion, and
management fees, drilling and completion costs, and operating costs.
Assumes all investors paid cash for their interests.
(3) Represents all oil and gas revenues credited to the investors net of
royalties and other burdens. Does not include interest or other income.
(4) The sharing of the partnership revenues and costs between the managing
partner and the investors was significantly different than the sharing
of the revenues and costs between the managing partner and the general
and limited partners in the partnership.
(5) This partnership was terminated on November 30, 1994.
(6) The activities of this partnership consisted solely of exploratory
drilling.
(7) As of December 31, 2002, this partnership was engaged in drilling and
completion activities.
(8) This partnership was terminated on September 1, 1996.
(9) This partnership is currently operating.
(10) This partnership was terminated on December 31, 2001.
63
PRIOR PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS
INVESTORS' NET CASH TABLE
December 31, 2002
<Table>
<Caption>
Total Revenues
Total After Deducting Cash
Investors' Funds Expenditures Operating Costs Distributions
Partnership Invested (1) (2) (3) (4)
====================================================== ================= ================ ================== ===============
Mewbourne Oil, Ltd. 1977(5)(6)..................... $ 2,643,700 $ 3,716,418 $ 3,974,165 $ 3,223,641(7)
Mewbourne Oil, Ltd. 1978A(5)(11)................... 3,121,150 11,955,321 15,238,342 7,733,320(7)
Mewbourne Oil, Ltd. 1978B(5)(10)................... 3,247,534 7,687,559 8,420,042 4,861,930(7)
Mewbourne Oil, Ltd. 1979(5)(6)..................... 3,541,520 7,172,702 13,654,170 11,874,362(7)
Mewbourne Oil, Ltd. 1980(5)(6)(8).................. 1,637,969 2,895,049 985,648 0(7)
Mewbourne Development Partners 92 GP(12)........... 1,049,800 1,420,366 885,627 659,835(7)
Mewbourne Development Partners 93-A, L.P.(11)...... 1,250,848 1,568,897 906,253 775,356(7)
Mewbourne Development Partners 93-B, L.P.(11)...... 1,175,725 1,597,927 1,125,886 878,077(7)
Mewbourne Development Partners 94-A, L.P.(11)...... 1,080,690 1,526,776 1,192,744 898,345(7)
Mewbourne Development Partners 94-B, L.P.(11)...... 914,151 1,293,741 1,232,512 959,776(7)
Mewbourne Development Partners 94-C, L.P.(11)...... 932,253 1,298,854 1,259,351 1,000,065(7)
Mewbourne Energy Partners 1994 Private L.P.(11).... 1,470,000 1,554,428 963,252 888,592(7)
Mewbourne Energy Partners 95-A, L.P.(11)........... 1,619,000 2,042,249 2,691,732 2,312,871(7)
Mewbourne Energy Partners 95-B, L.P.(11)........... 2,011,000 2,626,745 764,416 629,748
Mewbourne Energy Partners 96-A, L.P.(11)........... 3,872,000 4,765,512 3,217,612 2,371,198
Mewbourne Energy Partners 97-A, L.P.(11)........... 3,141,000 4,224,982 3,632,387 2,610,529
Mewbourne Energy Partners 98-A, L.P.(11)........... 3,698,000 4,363,140 3,698,733 3,124,414
Mewbourne Energy Partners 99-A, L.P.(11)........... 5,727,000 5,933,618 4,604,040 4,546,332
Mewbourne Energy Partners 00-A, L.P.(11)........... 10,000,000 10,287,361 4,906,179 4,830,995
Mewbourne Energy Partners 01-A, L.P.(11)........... 15,000,000 15,102,341 2,362,162 2,539,000
Mewbourne Energy Partners 02-A, L.P.(9)............ 16,072,000 12,025,818 -6,017 0
</Table>
- --------------
(1) Total subscriptions less organization, promotion, and management fees.
(2) Includes total of all subscription, organization, promotion, and
management fees, and drilling and completion costs.
(3) Represents all oil and gas revenues credited to the investors net of
royalties, other burdens and operating costs. Does not include interest
or other income.
(4) Net cash distributed to investors.
(5) The sharing of the partnership revenues and costs between the managing
partner and the investors was significantly different than the sharing
of the revenues and costs between the managing partner and the general
and limited partners in the partnership.
(6) This partnership was terminated on November 30, 1994.
(7) The 1977 partnership retained $553,549 of distributable operating cash
flow to reinvest in additional drilling. The 1978A, 1978B, 1979 and
1980 partnerships retained $1,836,329, $3,580,177, $2,326,134 and
$223,343 of distributable operating cash flow to reinvest in additional
drilling, respectively, and $5,391,821, $30,072, $125,133 and $732,939
of distributable operating cash flow was used to repay borrowings of
the partnership, respectively. The 92 GP, 93-A, 93-B, 94-A, 94-B, 94-C,
MEP 94-Private, 95-B, 97-A, 98-A, 99-A, 00-A and 01-A partnerships
retained $64,165, $24,614, $76,838, $82,864, $124,975, $111,208,
$25,852, $5,732, $303,818, $27,029, $37,876, $77,825, and $152,100,
respectively of distributable operating cash flow to complete drilling
operations.
(8) The activities of this partnership consisted solely of exploratory
drilling.
(9) As of December 31, 2002, this partnership was engaged in drilling and
completion activities.
(10) This partnership was terminated on September 1, 1996.
(11) This partnership is currently operating.
(12) This partnership was terminated on December 31, 2001.
64
PRIOR PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS
MANAGING PARTNER'S PAYOUT TABLE
December 31, 2002
<Table>
<Caption>
Total Expenditures Revenues Before
Including Deducting
Partnership Operating Costs (1) Operating Costs (1)
================================================================= ========================= =========================
Mewbourne Oil, Ltd. 1977(3)(4)............................... $ 1,658,587 $ 2,293,090
Mewbourne Oil, Ltd. 1978A(3)(8).............................. 6,507,462 8,551,673
Mewbourne Oil, Ltd. 1978B(3)(7).............................. 3,732,499 4,975,412
Mewbourne Oil, Ltd. 1979(3)(4)............................... 3,024,062 6,603,302
Mewbourne Oil, Ltd. 1980(3)(4)(5)............................ 704,328 575,287
Mewbourne Development Partners 92 GP(9)...................... 219,735 287,719
Mewbourne Development Partners 93-A, L.P.(8)................. 301,976 345,636
Mewbourne Development Partners 93-B, L.P.(8)................. 317,408 410,160
Mewbourne Development Partners 94-A, L.P.(8)................. 299,166 417,008
Mewbourne Development Partners 94-B, L.P.(8)................. 304,781 456,866
Mewbourne Development Partners 94-C, L.P.(8)................. 291,074 449,504
Mewbourne Energy Partners 1994 Private L.P.(8)............... 130,688 13,767
Mewbourne Energy Partners 95-A, L.P.(8)...................... 187,459 499,058
Mewbourne Energy Partners 95-B, L.P.(8)...................... 150,643 187,512
Mewbourne Energy Partners 96-A, L.P.(8)...................... 363,300 655,089
Mewbourne Energy Partners 97-A, L.P.(8)...................... 312,250 685,997
Mewbourne Energy Partners 98-A, L.P.(8)...................... 297,645 679,494
Mewbourne Energy Partners 99-A, L.P.(8)...................... 3,287,080 3,782,941
Mewbourne Energy Partners 00-A, L.P.(8)...................... 5,075,991 3,990,859
Mewbourne Energy Partners 01-A, L.P.(8)...................... 4,188,064 1,915,237
Mewbourne Energy Partners 02-A, L.P.(6)(8)................... 1,923,291 0
</Table>
- --------------
(1) Includes managing partner's share of drilling and completion costs.
(2) Represents all oil and gas revenues credited to the managing partner
net of royalties and other burdens. Does not include interest or other
income.
(3) The sharing of the partnership revenues and costs between the managing
partner and the investors was significantly different than the sharing
of the revenues and costs between the managing partner and the general
and limited partners in the partnership.
(4) This partnership was terminated on November 30, 1994.
(5) The activities of this partnership consisted solely of exploratory
drilling.
(6) As of December 31, 2002, this partnership was engaged in drilling and
completion activities.
(7) This partnership was terminated on September 1, 1996.
(8) This partnership is currently operating.
(9) This partnership was terminated on December 31, 2001.
65
PRIOR PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS
MANAGING PARTNER'S NET CASH TABLE
December 31 2002
<Table>
<Caption>
Total Total Revenues
Expenditures After
Net of Deducting
Operating Costs Operating
Partnership (1) Costs(2) Cash Distributions(3)
====================================================== ================= =================== =====================
Mewbourne Oil, Ltd. 1977(4)(5).................... $ 762,173 $ 1,396,676 $ 1,137,362
Mewbourne Oil, Ltd. 1978A(4)(9)................... 3,370,756 5,414,967 3,355,544
Mewbourne Oil, Ltd. 1978B(4)(8)................... 1,871,615 3,114,528 1,890,870
Mewbourne Oil, Ltd. 1979(4)(5).................... 1,470,929 5,050,169 4,499,400
Mewbourne Oil, Ltd. 1980(4)(5)(6)................. 493,595 364,554 0
Mewbourne Development Partners 92 GP(10).......... 153,422 221,406 164,959
Mewbourne Development Partners 93-A, L.P.(9)...... 182,903 226,563 193,839
Mewbourne Development Partners 93-B, L.P.(9)...... 188,720 281,472 219,519
Mewbourne Development Partners 94-A, L.P.(9)...... 180,344 298,186 224,586
Mewbourne Development Partners 94-B, L.P.(9)...... 156,042 308,127 239,944
Mewbourne Development Partners 94-C, L.P.(9)...... 156,408 314,838 250,017
Mewbourne Energy Partners 1994 Private L.P.(9).... 126,650 9,729 8,976
Mewbourne Energy Partners 95-A, L.P.(9)........... 90,615 402,214 345,601
Mewbourne Energy Partners 95-B, L.P.(9)........... 77,355 114,224 94,100
Mewbourne Energy Partners 96-A, L.P.(9)........... 189,004 480,793 354,316
Mewbourne Energy Partners 97-A, L.P.(9)........... 169,023 542,770 390,079
Mewbourne Energy Partners 98-A, L.P.(9)........... 170,836 552,685 466,867
Mewbourne Energy Partners 99-A, L.P.(9)........... 2,573,499 3,069,360 3,030,888
Mewbourne Energy Partners 00-A, L.P.(9)........... 4,355,918 3,270,786 3,220,663
Mewbourne Energy Partners 01-A, L.P.(9)........... 3,847,602 1,574,775 1,692,667
Mewbourne Energy Partners 02-A, L.P.(7)(9)........ 1,919,280 -4,011 0
</Table>
- ----------
(1) Includes managing partner's share of drilling and completion costs,
exclusive of operating costs.
(2) Represents all oil and gas revenues credited to the managing partner
net of royalties, other burdens and operating costs. Does not include
interest or other income.
(3) Net cash distributed to managing partner. May include return of
capital.
(4) The sharing of the partnership revenues and costs between the managing
partner and the investors was significantly different than the sharing
of the revenues and costs between the managing partner and the general
and limited partners in the partnership.
(5) This partnership was terminated on November 30, 1994.
(6) The activities of this partnership consisted solely of exploratory
drilling.
(7) As of December 31, 2002, this partnership was engaged in drilling and
completion activities.
(8) This partnership was terminated on September 1, 1996.
(9) This partnership is currently operating.
(10) This partnership was terminated on December 31, 2001.
66
TAX DEDUCTIONS AND TAX CREDITS
The following two tables reflect the investors' share of the following
described partnerships' available tax deductions that were reported in the
partnerships' tax returns and such share of tax deductions as a percentage of
their subscriptions. The following percentages do not reflect the effect of the
revenues from the partnership's operations and are subject to audit adjustments
by the IRS. The following tables are based on past experience and should not be
considered as necessarily indicative of the results that may be expected from an
investment in a partnership. It is suggested that prospective subscribers
consult with their tax advisors concerning the tax benefits available to them
taking into account their individual tax circumstances. The tax benefits
available to each investor may vary materially depending upon their individual
tax circumstances.
PRIOR PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS
CUMULATIVE TAX BENEFITS TO INVESTORS
PER $10,000 INVESTMENT
December 31, 2002
<Table>
<Caption>
Aggregate First Year Cumulative Tax
First Year Tax Deductions Tax Benefits Through
Partnership Deductions (1) Thereafter (1) Benefits (2) December 31, 2001
======================================================= =============== ================ ============== ===================
Mewbourne Oil, Ltd. 1977(3)......................... $ 2,902 $ 3,326 $ 2,031 $ 4,336
Mewbourne Oil, Ltd. 1978A(7)........................ 5,709 14,477 3,996 12,086
Mewbourne Oil, Ltd. 1978B(6)........................ 2,896 9,445 2,027 8,293
Mewbourne Oil, Ltd. 1979(3)......................... 4,999 5,348 3,500 6,753
Mewbourne Oil, Ltd. 1980(3)(4)...................... 2,926 6,284 2,048 5,885
Mewbourne Development Partners 92 GP(8)............. 1,964 5,457 609 2,770
Mewbourne Development Partners 93-A, L.P.(7)........ 4,228 2,254 1,674 2,566
Mewbourne Development Partners 93-B, L.P.(7)........ 2,321 4,718 919 2,787
Mewbourne Development Partners 94-A, L.P.(7)........ 6,065 1,733 2,402 3,088
Mewbourne Development Partners 94-B, L.P.(7)........ 5,523 1,849 2,187 2,919
Mewbourne Development Partners 94-C, L.P.(7)........ 4,955 2,252 1,962 2,853
Mewbourne Energy Partners 1994 Private L.P.(7)...... 5,057 2,838 2,003 3,126
Mewbourne Energy Partners 95-A, L.P.(7)............. 5,239 857 2,075 2,414
Mewbourne Energy Partners 95-B, L.P.(7)............. 3,716 3,635 1,472 2,910
Mewbourne Energy Partners 96-A, L.P.(7)............. 3,479 3,168 1,378 2,633
Mewbourne Energy Partners 97-A, L.P.(7)............. 3,781 3,759 1,497 2,985
Mewbourne Energy Partners 98-A, L.P.(7)............. 2,867 3,822 1,135 2,648
Mewbourne Energy Partners 99-A, L.P.(7)............. 4,984 2,934 1,974 3,135
Mewbourne Energy Partners 00-A, L.P.(7)............. 6,908 1,909 2,736 3,492
Mewbourne Energy Partners 01-A, L.P.(7)............. 6,059 1,868 2,369 3,099
Mewbourne Energy Partners 02-A, L.P.(5)(7).......... 6,351 0 2,451 2,451
</Table>
- --------------
(1) Tax deductions include Non-Capital Expenditures.
(2) Tax benefits are tax deductions multiplied by the respective year's
maximum individual tax rate.
(3) This partnership was terminated on November 30, 1994.
(4) The activities of this partnership consisted solely of exploratory
drilling.
(5) As of December, 31, 2002, this partnership was engaged in drilling and
completion activities.
(6) This partnership was terminated on September 1, 1996.
(7) This partnership is currently operating.
(8) This partnership was terminated on December 31, 2001.
67
PRIOR PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS
CASH DISTRIBUTIONS AND TAX BENEFITS
AS A PERCENT OF TOTAL SUBSCRIPTIONS
December 31, 2002
(Investors' share only)
<Table>
<Caption>
Cash Distributions Tax Benefits Total Return
Partnership (1) (2) (3)
==================================================== ==================== ================= ===============
Mewbourne Oil, Ltd. 1977(4)(5)..................... 111.5%(6) 43.3% 154.9%
Mewbourne Oil, Ltd. 1978A(4)(10)................... 223.8%(6) 120.9% 344.6%
Mewbourne Oil, Ltd. 1978B(4)(9).................... 135.8%(6) 82.9% 218.7%
Mewbourne Oil, Ltd. 1979(4)(5)..................... 304.0%(6) 67.5% 371.5%
Mewbourne Oil, Ltd. 1980(4)(5)(7).................. 0.0%(6) 58.9% 58.9%
Mewbourne Development Partners 92 GP(11)........... 56.9%(6) 27.7% 84.6%
Mewbourne Development Partners 93-A, L.P.(10)...... 56.1%(6) 25.7% 81.8%
Mewbourne Development Partners 93-B, L.P.(10)...... 67.6%(6) 27.9% 95.5%
Mewbourne Development Partners 94-A, L.P.(10)...... 75.2%(6) 30.9% 106.1%
Mewbourne Development Partners 94-B, L.P.(10)...... 95.0%(6) 29.2% 124.2%
Mewbourne Development Partners 94-C, L.P.(10)...... 97.1%(6) 28.5% 125.6%
Mewbourne Energy Partners 1994 Private L.P.(10).... 60.5%(6) 31.3% 91.7%
Mewbourne Energy Partners 95-A, L.P.(10)........... 142.9%(6) 24.1% 167.0%
Mewbourne Energy Partners 95-B, L.P.(10)........... 31.3%(6) 29.1% 60.4%
Mewbourne Energy Partners 96-A, L.P.(10)........... 61.2%(6) 26.3% 87.6%
Mewbourne Energy Partners 97-A, L.P.(10)........... 83.1%(6) 29.9% 113.0%
Mewbourne Energy Partners 98-A, L.P.(10)........... 84.5% 26.5% 111.0%
Mewbourne Energy Partners 99-A, L.P.(10)........... 79.4% 31.4% 110.7%
Mewbourne Energy Partners 00-A, L.P.(10)........... 48.3% 34.9% 83.2%
Mewbourne Energy Partners 01-A, L.P.(8)(10)........ 16.9% 31.0% 47.9%
Mewbourne Energy Partners 02-A, L.P.(8)(10)........ 0.0% 24.5% 24.5%
</Table>
- --------------
(1) Represents total cash distributions made to partners divided by total
funds invested by partners. The first 100% of cash distributions made
to partners represents a return of capital.
(2) Total tax benefits divided by total funds invested by partners. This
table assumes investors were able to fully utilize all tax benefits at
the maximum marginal federal rate.
(3) Sum of (1) and (2).
(4) The sharing of the partnership revenues and costs between the managing
partner and the investors was significantly different than the sharing
of the revenues and costs between the managing partner and the general
and limited partners in the partnership.
(5) This partnership was terminated on November 30, 1994.
(6) The 1977 partnership retained $553,549 of distributable operating cash
flow to reinvest in additional drilling. The 1978A, 1978B, 1979 and
1980 partnerships retained $1,836,329, $3,580,177, $2,326,134 and
$223,343 of distributable operating cash flow to reinvest in additional
drilling, respectively, and $5,391,821, $30,072, $125,133 and $732,939
of distributable operating cash flow was used to repay borrowings of
the partnership, respectively. The 92 GP, 93-A, 93-B, 94-A, 94-B, 94-C
and MEP 94-Private, 95-B, 97-A, 98-A, 99-A, 00-A and 01-A partnerships
retained $65,165, $24,614, $76,838, $82,864, $124,975, $111,208,
$25,852, $5,732, $303,818, $27,029, $37,876, $77,825 and $152,100,
respectively of distributable operating cash flow to complete drilling
operations.
(7) The activities of this partnership consisted solely of exploratory
drilling.
(8) As of December 31, 2002, this partnership was engaged in drilling and
completion activities.
(9) This partnership was terminated on September 1, 1996.
(10) This partnership is currently operating.
(11) This partnership was terminated on December 31, 2001.
68
RESERVES AND FUTURE NET REVENUES OF PRIOR PROGRAMS
The following table summarizes as of January 1, 2003, the estimates of
the proved reserves of Mewbourne Development Partners 93-A, L.P., Mewbourne
Development Partners 93-B, L.P., Mewbourne Development Partners 94-A, L.P.,
Mewbourne Development Partners 94-B, L.P., Mewbourne Development Partners 94-C,
L.P., Mewbourne Energy Partners 95-A, L.P., Mewbourne Energy Partners 95-B,
L.P., Mewbourne Energy Partners 96-A, L.P., Mewbourne Energy Partners 97-A,
L.P., Mewbourne Energy Partners 98-A, L.P., Mewbourne Energy Partners 99-A,
L.P., Mewbourne Energy Partners 00-A, L.P., Mewbourne Energy Partners 01-A, L.P.
and Mewbourne Energy Partners 94 Private, the future net revenues attributable
to such reserves, and the present value of such future net revenues based on a
constant unescalated price of oil and gas and discounted at 10% per annum. Such
information was prepared, as of January 1, 2003, by Forrest A. Garb &
Associates, Inc., the partnerships' independent expert. Current reserve
information is not maintained by the managing partner or its affiliates for the
five private limited partnerships sponsored during the years 1977 through 1980
and therefore the reserves of such partnerships are not included in the
following table. Likewise, insufficient reserve information currently exists for
Mewbourne Energy Partners 02-A, L.P., which is currently engaged in drilling and
completion activities, for the reserves of that partnership to be included in
the following table.
THE RESULTS OF PRIOR OPERATIONS SHOULD NOT BE CONSTRUED AS BEING
INDICATIVE OF THE RESULTS TO BE EXPECTED FROM AN INVESTMENT IN A PARTNERSHIP OR
QUANTITIES OF OIL AND GAS WHICH MAY BE DERIVED FROM WELLS TO BE DRILLED BY A
PARTNERSHIP, BUT MERELY SERVE AS ESTIMATES OF PROVED RESERVES FOR A PRIOR
PROGRAM, THE ESTIMATED FUTURE NET REVENUES OF SUCH PROGRAM BASED ON SUCH
RESERVES AND THE PRESENT VALUE OF THE ESTIMATED DISCOUNTED FUTURE NET REVENUES
OF SUCH PROGRAM.
<Table>
<Caption>
PROVED RESERVES AND FUTURE NET REVENUES
AS OF JANUARY 1, 2003
- ----------------------------------------------------------------------------------------------------------------------------------
Present
Value
Net Oil Net Gas Estimated Discounted
Category of Proved Reserves Reserves Future Net at 10%
Partnership Reserves (BBLS) (MCF) Revenues Per Annum
- ------------------------------------------------- ------------------- ---------- ---------- ------------ -----------
Mewbourne Development Partners 93-A, L.P. (1)... Proved Developed 4,035 401,600 985,448 523,592
Mewbourne Development Partners 93-B, L.P. (1)... Proved Developed 18,016 394,223 1,208,189 623,163
Mewbourne Development Partners 94-A, L.P. (1)... Proved Developed 32,752 342,211 1,441,207 741,431
Mewbourne Development Partners 94-B, L.P. (1)... Proved Developed 73,847 279,873 1,872,750 710,835
Mewbourne Development Partners 94-C, L.P. (1)... Proved Developed 71,447 301,783 1,923,735 684,743
Mewbourne Energy Partners 94 Private L.P........ Proved Developed 3,078 588,765 1,371,505 685,050
Mewbourne Energy Partners 95-A, L.P. (2)........ Proved Developed 33,494 785,621 2,671,258 1,424,992
Mewbourne Energy Partners 95-B, L.P. (2)........ Proved Developed 13,965 346,544 984,868 463,076
Mewbourne Energy Partners 96-A, L.P. (2)........ Proved Developed 3,608 1,765,749 4,251,445 2,045,387
Mewbourne Energy Partners 97-A, L.P. (2)........ Proved Developed 561 1,687,248 4,319,012 2,150,130
Mewbourne Energy Partners 98-A, L.P. (2)........ Proved Developed 6,929 2,357,804 6,900,530 3,679,882
Mewbourne Energy Partners 99-A, L.P. (3)........ Proved Developed 62,120 4,490,915 13,200,812 6,784,053
Mewbourne Energy Partners 00-A, L.P. (3)........ Proved Developed 122,782 5,973,238 19,111,850 11,292,957
Mewbourne Energy Partners 01-A, L.P. (3)........ Proved Developed 78,257 11,801,475 34,128,683 20,051,830
Mewbourne Energy Partners 01-A, L.P. (3)........ Proved Undeveloped 167 429,408 916,288 589,663
Total Mewbourne Energy Partners 01-A, L.P.... 78,423 12,230,883 35,044,972 20,641,493
</Table>
- --------------
(1) Includes the partnership's 80.808081% ownership interest and the
managing partner's 19.191919% ownership interest arising under drilling
program agreement between the managing partner and such partnership.
(2) Includes the partnership's 87.878788% ownership interest and the
managing partner's 12.121212% ownership interest arising under the
drilling program agreement between the managing partner and such
partnership.
(3) Includes the partnership's 60% ownership interest and the managing
partner's 40% ownership interest arising under the drilling program
agreement between the managing partner and such partnership.
69
Reserve estimates and future net cash flow attributable to such
reserves were prepared using an unescalated price for oil and gas. The price
used was the price being received as of December 31, 2002 which on a weighted
average basis was $28.09 per barrel of oil and $4.10 per mcf of gas. In arriving
at estimated future net revenues, lease operating costs (including overhead
charges under operating agreements), transportation costs, costs of producing,
severance taxes, ad valorem taxes and estimated future capital expenditures were
deducted from revenue anticipated to be received and were not increased to
reflect the anticipated effects of inflation. No deduction was made for
partnership or program overhead expenses, federal income taxes, depletion,
depreciation or amortization or other indirect costs.
There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting the future rates of production and the timing
of development expenditures. The reserve data represents estimates only.
Estimates of economically recoverable oil and gas reserves and of the future net
revenues from such reserves are based on a number of factors and assumptions,
such as historical production of the properties as compared with similar
producing properties, the assumed effects of regulation by governmental
agencies, taxes, development costs and workover and remedial costs, all of which
may vary considerably from actual results.
FOR THE FOREGOING REASONS, ESTIMATES OF THE ECONOMICALLY RECOVERABLE
RESERVES OF OIL AND GAS ATTRIBUTABLE TO ANY PARTICULAR GROUP OF PROPERTIES, THE
CLASSIFICATION OF SUCH RESERVES AND ESTIMATES OF THE FUTURE NET REVENUES
EXPECTED THEREFROM, PREPARED AT DIFFERENT TIMES OR PREPARED BY DIFFERENT
ENGINEERS, MAY VARY CONSIDERABLY. THE FUTURE NET REVENUES SHOWN ON THE TABLE SET
FORTH ABOVE SHOULD NOT BE TAKEN AS THE FAIR MARKET VALUE OF THE ESTIMATED OIL
AND GAS RESERVES.
TAX ASPECTS
The following discussion is a general summary only of the United States
federal income and various other tax aspects of partnerships engaged in oil and
gas operations and the tax effects on their partners. It is impractical to
comment on all of the tax consequences of an investment in a partnership or of
the contemplated operations of the partnerships and the drilling programs. Such
consequences may vary depending on an investor partner's particular
circumstances. The discussion is directed primarily to individuals who are
citizens of the United States. Persons who are not individual U.S. citizens,
such as partnerships, corporations, trusts, or estates may have federal income
tax consequences substantially different from those discussed below. A
particular investor may be subject to various facts and circumstances that are
applicable only to him and that may give rise to additional considerations. The
following discussion generally does not address any of those additional
considerations. In addition, an investment in interests may have state and local
tax consequences to a particular investor that are not discussed below.
Accordingly, each potential investor is urged to consult his tax advisor prior
to purchasing interests, with specific reference to the effect of his particular
facts and circumstances on the matters discussed in this prospectus. See "--
General Tax Provisions" and "Terms of the Offering -- Suitability Standards."
The tax considerations and opinions of counsel discussed herein are
based on existing provisions of the Internal Revenue Code, existing Treasury
Regulations, published interpretations of the Internal Revenue Code and such
regulations by the IRS and existing court decisions, any of which could be
changed or become inapplicable at any time. Any new legislation, judicial
decisions, regulations, or other pronouncements may apply retroactively to
transactions prior to the date of such changes and could significantly modify
the statements made and tax considerations discussed in this prospectus.
A portion of the following discussion focuses on the characterization
of income or losses under various rules as ordinary income or loss or capital
gain or loss. At the present time, the marginal rate of federal income tax
applicable to long-term capital gains may be significantly more favorable for an
individual taxpayer, depending upon income level, than the rate on ordinary
income. Corporations, on the other hand, are taxable at the same rate on
ordinary income and capital gains.
OPINION OF COUNSEL
Vinson & Elkins L.L.P., counsel to the managing partner, has rendered
an opinion that addresses the material federal income tax consequences of an
investment in interests from the perspective of an individual investor who is a
U.S. citizen. The opinion of counsel states the following conclusions:
70
o At the time of its formation, a partnership and the related
drilling program will each be classified as a partnership for
federal income tax purposes.
o A partnership will not be classified as a corporation under
the "publicly traded partnership" rules of Section 7704 of the
Code.
o Except as noted below, the allocation of income, gains,
losses, and deductions between the general and limited
partners and the managing partner under the partnership
agreement, and between a partnership and the managing partner
as participants in the related drilling program and Mewbourne
Oil Company as drilling program manager under the drilling
program agreement, will be respected for federal income tax
purposes.
o The allocation provisions of the partnership agreement and the
program agreement should be in compliance with Section 704(c)
of the Code with respect to property contributed to a drilling
program by the managing partner.
o The passive activity loss limitations of Section 469 of the
Code will not limit deductions available to a general partner
in a partnership, prior to any conversion of his general
partner interest in the partnership to a limited partner
interest, in respect of the partnership's drilling and
operation of wells under working interests.
o A partnership will not be treated as a "publicly traded
partnership" for purposes of the application of the passive
activity loss limitations of Section 469 of the Code.
o The conversion of a general partner interest to a limited
partner interest will be nontaxable, provided, however, that
any reduction in a partner's share of partnership debt
resulting from such conversion will be treated as a cash
distribution which could result in recognition of income.
For the reasons hereinafter described, counsel is unable to render an
opinion with respect to the following specific federal income tax issues:
o The validity of any special allocation of an item that is
dependent on a partner's basis in an oil and gas property (see
"-- Partnership Taxation -- Allocations").
o The amount, if any, of the organization and offering expenses
that will be deductible or amortizable (see "-- Partnership
Taxation -- Organization and Offering Expenses Sale
Commissions and Due Diligence Fees").
o The amount, if any, of the initial administrative costs that
will be deductible or amortizable (see "-- Partnership
Taxation -- Management Fee," --Partnership Taxation --
Administrative Costs").
o The deductibility in a given year of any intangible drilling
costs incurred in a year prior to the drilling of the wells to
which such costs relate (see "-- Special Features of Oil and
Gas Taxation -- Intangible Drilling Costs").
o The availability or extent of percentage depletion deductions
to the partners (see "-- Special Features of Oil and Gas
Taxation -- Depletion").
Although counsel is unable to render an opinion as to the issues
described above, the discussion of federal income tax consequences set forth in
this prospectus under the headings "Risk Factors -- Tax Risks" and "Tax Aspects"
has been reviewed by counsel and, to the extent such discussion involves matters
of law, counsel is of the opinion that such discussion is accurate in all
material respects under the Code, the Treasury Regulations promulgated
thereunder and existing interpretations of such regulations and addresses fairly
the principal aspects of each material federal income tax issue relating to an
investment in interests by an individual citizen of the United States. Finally,
in light of the various opinions and assumptions described above, but subject to
the qualifications
71
and limitations placed thereon, counsel is of the opinion that the material
federal income tax benefits of an investment in interests, in the aggregate,
more likely than not will be realized in substantial part by an investor partner
who acquires his interests for profit, provided that an investor partner who
acquires limited partner interests either is not subject to the passive activity
loss limitations of Section 469 of the Code or has sufficient passive income
against which he can deduct his share of any partnership deductions and losses.
For a discussion of the timing of the realization of such tax benefits, see "--
Special Features of Oil and Gas Taxation -- Basis and At Risk Limitations."
The opinion of counsel is based on the facts described in this
prospectus and on representations made by the managing partner, which
representations are described in the following discussion. Any alterations of
the facts or representations may adversely affect the opinion rendered. An
opinion of counsel is not binding on the IRS. No rulings will be requested from
the IRS with respect to the tax consequences of ownership of interests in a
partnership, and no assurance can be given that the opinion expressed by counsel
herein would, if challenged, be sustained by a court, or that legislation,
judicial decision or administrative interpretation may not significantly modify
the conclusions expressed in such opinions.
Counsel has expressed no opinion with respect to the amount of
allowable deductions or losses that may be generated by a partnership, the
actual amount of an investor partner's share of allowable deductions or losses
from the activities of a partnership, the amount, if any, of taxable income that
may be generated by a partnership or the relationship between any such taxable
income and any distributions which may be made by a partnership.
EACH PROSPECTIVE INVESTOR PARTNER IS ADVISED TO CONSULT HIS TAX ADVISOR
WITH RESPECT TO THE UNITED STATES FEDERAL AND STATE INCOME TAX CONSEQUENCES OF
PARTICIPATION IN A PARTNERSHIP.
EXCEPT AS EXPRESSLY PROVIDED OTHERWISE, THE FOLLOWING DISCUSSION
RELATES TO THE PARTNERSHIPS AND THE DRILLING PROGRAMS SEPARATELY.
PARTNERSHIP TAXATION
General. A partnership is not a taxable entity under federal income tax
laws. Instead, each partner reports on his federal income tax return for the
taxable year in which the partnership's taxable year ends his distributive share
of the income, gains, losses, deductions, and credits of the partnership,
irrespective of any actual cash distributions made to such partner during his
taxable year. For example, a partner will be required to report his share of
partnership income as determined under the partnership's method of accounting,
notwithstanding that the revenues resulting in such income are retained in whole
or in part by the partnership for payment of any partnership expenses or debt
service or for working capital. A partner's share of any partnership losses in a
taxable year may be applied against his income from other sources only to the
extent of the tax basis of his interest in the partnership and to the extent
permitted under the "passive activity" and "at risk" limitations. See "--
Special Features of Oil and Gas Taxation -- Passive Activity Loss Limitations"
and "-- Special Features of Oil and Gas Taxation -- Basis and At Risk
Limitations."
Partnership Classification. Each partnership will invest in the related
drilling program, which will be a joint operation of that partnership, the
managing partner and the drilling program manager. Each drilling program is
intended to constitute a partnership for tax purposes only; it is not intended
to be a partnership under state law and will not be subject to state law
provisions comparable to those applicable to the partnerships. Expected tax
consequences resulting from an investment in interests are dependent upon the
classification of the partnerships and the drilling programs as partnerships for
federal income tax purposes. The expenditures made and income received by a
drilling program will, if the drilling program is classified as a partnership
for federal income tax purposes, flow through to the related partnership and, if
the partnership is classified as a partnership for federal income tax purposes,
ultimately to the partners in amounts equal to their respective distributive
shares of income, gain, loss, deduction and credit. In order for the anticipated
tax consequences of an investment in interests to materialize, however, the
partnerships and the drilling programs must be classified as partnerships for
federal income tax purposes and not as associations or "publicly traded
partnerships" taxable as corporations. Any references in the following
discussion to partnerships relate only to organizations treated as partnerships
for federal income tax purposes and do not imply that the drilling program is a
partnership for any other purpose.
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Treasury Regulations under Section 7701 of the Code provide that a
domestic business entity other than a "corporation," including a "publicly
traded partnership," may elect whether to be treated as a partnership or an
association (taxable at a corporation) for federal income tax purposes. Treasury
Regulation Section 301.7701-2 defines "corporations" to include corporations
denominated as such under applicable law, associations, joint stock companies,
insurance companies and other entities distinguishable from the partnerships and
the drilling programs. Under a default rule in the Treasury Regulations,
partnerships formed under a state statute, such as the partnerships, and joint
ventures, such as the drilling programs, are treated as partnerships for federal
income tax purposes, unless such entities affirmatively elect to be treated as
associations taxable as corporations. The partnerships and the drilling programs
will not elect to be treated as associations taxable as corporations for federal
income tax purposes.
Counsel to the managing partner is of the opinion that, at the time of
formation, each partnership and each drilling program will be treated as a
partnership for federal income tax purposes. Such opinion is based on the
following representations made by the managing partner:
o A partnership will be organized and operated in accordance
with all applicable state statutes and the partnership
agreement and the related drilling program will be organized
and operated in accordance with all applicable state statutes
and the drilling program agreement.
o No participant in a drilling program will elect to be excluded
from the provisions of Subchapter K of Chapter 1 of Subtitle A
of the Internal Revenue Code.
o The partnerships and the drilling programs will not elect to
be treated as corporations under the Section 7701 Treasury
Regulations.
No assurance can be given that a partnership or a drilling program will
not lose partnership status as a result of future changes in the law, or other
facts upon which the opinion of counsel is based.
The classification of a partnership or a drilling program as an
association taxable as a corporation for federal income tax purposes would have
a material adverse effect on the general and limited partners. If a drilling
program were determined to be taxable as a corporation, its income, deductions,
and credits would be reported by the drilling program and not its participants,
including the partnership, and the drilling program would be taxed directly on
its taxable income. Distributions by that drilling program to the related
partnership would be treated as taxable dividends to the extent of current and
accumulated earnings and profits of the drilling program. If a partnership were
determined to be taxable as a corporation, its income, deductions, and credits
would be reported by the partnership and not by its general and limited
partners, the partnership would be taxed directly on any net income, and
distributions to its general and limited partners would be treated as taxable
dividends to the extent of current and accumulated earnings and profits of the
partnership. Thus, any tax benefits anticipated from investment in a partnership
would be adversely affected or eliminated if either the partnership or the
related drilling program were treated as a corporation.
Section 7704 of the Internal Revenue Code treats certain "publicly
traded partnerships" as corporations for federal income tax purposes. Section
7704 defines a publicly traded partnership as a partnership in which the
partnership interests are traded on an established securities market or are
readily tradable on a secondary market or the substantial equivalent of a
secondary market. The rule taxing publicly traded partnerships as corporations,
however, is specifically inapplicable to a partnership for any year if at least
90% of the partnership gross income for such year and all preceding years
consists of, among other things, interest or income from the exploration,
development, production, processing, refining, transportation, or marketing of
oil and gas and gains from the sale of assets used to generate that income.
Counsel to the managing partner is of the opinion that neither partnership will
be taxable as a corporation under the "publicly traded partnership" rules of
Section 7704 of the Internal Revenue Code. Such opinion is based on the
following representations made by the managing partner:
o At least 90% of the gross income of each partnership in each
taxable year will consist of interest or income from the
exploration, development, production, processing, refining,
transportation, or marketing of oil and gas or gains from the
sale of assets used to generate that income.
73
o The managing partner does not plan to list interests with, or
trade interests on, an established securities exchange or to
itself make a secondary market in interests.
o The sum of the percentage interests in the capital or profits
of a partnership sold or otherwise disposed of, including
redemptions or repurchases other than repurchases made
pursuant to the right of presentment, during any taxable year
will not exceed 2% of the total interests in the partnership's
capital or profits.
o The managing partner is not aware of any current public or
secondary market, or substantial equivalent of such a market,
for interests and does not anticipate that any such market
will develop.
o The managing partner will enforce the restriction on transfers
in the partnership agreement to prevent the partnership from
qualifying as a "publicly traded partnership."
Such opinion is not binding on the IRS, and there can be no assurance that the
IRS will not assert that a partnership is a "publicly traded partnership"
subject to treatment as a corporation under Section 7704 of the Internal Revenue
Code.
THE FOLLOWING DISCUSSION IS PREDICATED ON THE ASSUMPTION THAT THE
PARTNERSHIPS AND THE DRILLING PROGRAMS WILL BE CLASSIFIED AS PARTNERSHIPS FOR
FEDERAL INCOME TAX PURPOSES AND WILL NOT BE CLASSIFIED AS "PUBLICLY TRADED
PARTNERSHIPS."
Taxation of Partners. For each taxable year, each investor partner will
be required to report on his individual federal income tax return his share of
partnership income, gain, loss, deduction, and credit for such taxable year.
Each investor partner is required to take his share into account in computing
his federal income tax liability regardless of whether he has received or will
receive any cash distributions from a partnership. Therefore, he may be required
to report and pay tax on income that the partnership has earned but that has not
been distributed to him. This may occur, for example, when a partnership uses
revenues to repay partnership borrowings or to pay nondeductible expenditures.
A distribution of cash to an investor partner generally is not taxable
to such investor partner unless the amount of the distribution exceeds the
investor partner's basis in his interests. Any such excess generally should be
taxable as capital gain, assuming those interests are held as a capital asset.
If, however, any portion of the distribution is considered to be in exchange for
the investor partner's interest in ordinary income items, including potential
recapture of intangible drilling cost, depletion, and depreciation deductions,
that portion will be taxed as ordinary income even if the amount of the
distribution did not exceed the investor partner's tax basis in his interests.
In addition, an investor partner could recognize income if cash distributions
made to him cause his at risk amount to be reduced below zero. See "Tax Aspects
- -- Special Features of Oil & Gas Taxation -- Basis and At Risk Limitations."
The partnerships and the drilling programs will use the calendar year
and the accrual method of accounting for federal income tax purposes. The IRS,
however, could require a partnership or a drilling program to treat particular
items of income, gain, loss, or deduction under a different method of accounting
if it determines that the use of the accrual method with respect to that item
does not clearly reflect income. A change in the method of accounting could
defer deductions or accelerate income.
Allocations. Under the partnership agreement, all items of partnership
income, gain, loss, deduction, and credit are allocated 100% to the general and
limited partners and 0% to the managing partner.
Each partnership and the related drilling program will maintain a
capital account for each partner or participant in the drilling program which
will be credited (increased) by his or its contributions to the partnership or
drilling program and all items of income and gain allocated to such partner or
participant. Such capital account will be debited (reduced) by all distributions
and all deductions and losses allocated to such partner or participant. On
dissolution and liquidation of a partnership or drilling program, each partner
or participant will be entitled, after payment or provision for debts and
liabilities and adjustment of the partners' or participants' capital accounts
for any
74
unrealized gain or loss in properties to be distributed in kind, to receive
assets equal in value to his or its respective positive capital account balance,
if any, as so adjusted.
Partners are not obligated to restore deficit capital account balances
following the liquidation of their respective interests in a partnership. As
discussed under "Participation in Costs and Revenues," the partnership agreement
provides for modifications in the allocations described above if necessary to
prevent or eliminate any deficit capital account balance for any partner, taking
into account reasonably expected deductions and distributions in subsequent
years.
The manner in which the drilling program agreement allocates among the
participants therein items of cost and revenue and items of income, gain, loss,
deduction, and credit for income tax purposes is discussed under "Participation
in Costs and Revenues." The drilling program agreement requires any participant
with a deficit capital account balance following the distribution of liquidation
proceeds to restore such deficit to the drilling program.
Partnership allocations of income, gain, loss, deduction, and credit
among partners are governed generally by Section 704(b) of the Internal Revenue
Code. Section 704(b) provides that partnership allocations will be recognized
for federal income tax purposes if such allocations either have "substantial
economic effect" or are made, or deemed made, in accordance with the partners'
respective interests in the partnership, determined by taking into account all
relevant facts and circumstances. If an allocation of an item does not have
substantial economic effect, such item will be reallocated among the partners in
accordance with their interests in the partnership.
Treasury Regulations section 1.704-1(b) indicates that allocations will
have economic effect if, throughout the term of the partnership:
(a) they are reflected in the partners' capital accounts,
(b) such capital accounts are respected upon liquidation of the
partnership, and
(c) a partner with a deficit in his capital account following the
distribution of liquidation proceeds is required to restore
the amount of such deficit to the partnership.
If requirements (a) and (b) are satisfied, but requirement (c) is not,
an allocation may nevertheless be considered to have economic effect if the
allocation does not cause or increase a deficit in the recipient partner's
capital account balance, determined after taking into account certain reasonably
anticipated deductions and distributions, and the partnership agreement contains
a "qualified income offset" which provides that a partner who unexpectedly
receives an adjustment, allocation or distribution which causes or increases a
deficit balance will be allocated items of income and gain in an amount and
manner sufficient to eliminate such deficit balance as quickly as possible.
Since:
o the allocations of items of income, gain, loss, and deduction
under the partnership agreement and the drilling program
agreement are reflected in the partners' and participants'
capital accounts,
o those capital accounts will be recognized upon liquidation of
a partnership,
o the drilling program agreement requires a participant with a
deficit capital account balance after the distribution of
liquidation proceeds to restore the amount of such deficit to
the drilling program,
o the partnership agreement contains a "qualified income offset"
provision, and
o the allocations in the partnership agreement and the program
agreement should have economic effect under Section 704(b).
75
The economic effect of an allocation will be "substantial" if there is
a reasonable possibility that the allocation will substantially affect the
dollar amounts to be received by the partners from the partnership, independent
of tax consequences.
Although the determination of whether economic effect is "substantial"
is a question of fact which may depend in part on the timing of income and
deductions and on consideration of the partners' and participants'
nonpartnership tax attributes, under present facts and circumstances, and except
as noted below, the economic effect of the allocations under the partnership
agreement and the drilling program agreement should be considered to be
substantial under Section 704(b) and regulations promulgated thereunder.
Counsel to the managing partner is of the opinion that, except as
discussed in the previous paragraph and below, the allocation of income, gains,
losses, and deductions between the general and limited partners and the managing
partner under the partnership agreement and between a partnership and the
managing partner as participants under the drilling program agreement will be
recognized for federal income tax purposes.
Under Section 704(c) of the Internal Revenue Code, income, gain, loss,
and deduction with respect to property contributed to a partnership by a partner
must be shared among its partners in a manner that takes into account the
variation between the partnership's adjusted tax basis in such property and the
fair market value of the property at the time of contribution. It is not
expected that property will be contributed to a partnership by an investor
partner but property will be contributed to the drilling program by the managing
partner. Under the drilling program agreement, the adjusted tax basis with
respect to such contributed property will be allocated to the managing partner
and only the managing partner will be entitled to claim cost depletion with
respect to such property. Accordingly, counsel to the managing partner is of the
opinion that the allocation provisions of the partnership agreement and the
drilling program agreement should be in compliance with Section 704(c) with
respect to property contributed or deemed contributed to a partnership or a
drilling program.
Elections and Returns. Each partnership and each drilling program will
be subject to the partnership provisions of the Internal Revenue Code and to
similar provisions of any applicable state income tax laws. Each partnership and
each drilling program will adopt the accrual method of accounting and calendar
year as its taxable year for income tax purposes. By March 15 of each year or as
soon thereafter as reasonably possible, each investor partner will receive a
report showing his distributive share of items of income, gain, loss, deduction,
and credit for the preceding year.
While no federal income tax is required to be paid by an organization
classified as a partnership for federal income tax purposes, a partnership must
file federal income tax information returns which are subject to audit by the
IRS. Any such audit may lead to adjustments, in which event the general and
limited partners may be required to file amended personal federal income tax
returns. Any such audit also may lead to an audit of an investor partner's
individual tax return and adjustments to items unrelated to an investment in
interests.
Determinations of Partnership Items at Partnership Level. For purposes
of reporting, audit, and assessment of additional federal income tax, the tax
treatment of "partnership items" is determined at the partnership level. Each
partner must report such items on his individual tax return in a manner
consistent with the partnership determination. The IRS generally cannot initiate
deficiency proceedings against an individual partner with respect to partnership
items without first conducting an administrative proceeding at the partnership
level as to the correctness of the partnership's treatment of the item. An
individual partner may not file suit for a credit or a refund arising out of a
partnership item without first filing a request for an administrative proceeding
by the IRS at the partnership level. Individual partners are entitled to notice
of such administrative proceedings and decisions made at such proceedings,
except in the case of partners with less than a 1% profits interest in a
partnership having more than 100 partners. If a group of partners having an
aggregate profits interest of 5% or more in such a partnership so requests,
however, the IRS also must mail notices to a partner appointed by that group to
receive notice. All general and limited partners, whether or not entitled to
notice, are entitled to participate in the administrative proceedings at the
partnership level, although the partnership agreement provides for waiver of
certain of these rights by the general and limited partners. All general and
limited partners in a partnership, including those not entitled to notice, may
be bound by a settlement reached by the partnership's "tax matters partner,"
which will be the managing partner. If a proposed tax deficiency is contested in
any court by any investor partner of a partnership or by the managing
76
partner, all general and limited partners of that partnership may be deemed
parties to such litigation and bound by the result reached therein.
Administrative Costs. The managing partner intends generally to take
the position that administrative costs reimbursed to the managing partner or the
drilling program manager by a partnership are deductible in the year of payment.
To the extent that administrative costs are determined to constitute an
organization or syndication cost or some other nondeductible cost, such amount
will not give rise to any deduction in the year of payment but, rather, will be
deductible (if at all) only over some period of time. The determination of the
portion (if any) of the Administrative Cost that is deductible and the timing of
any such deduction are factual issues. Therefore, counsel to the managing
partner is unable to render any opinion as to the amount, if any, of the
Administrative Cost reimbursement that will be deductible or amortizable.
Conversion of General Partner Interests. As discussed under "Terms of
the Offering -- Conversion of General Partner Interests," the general partner
interests in a partnership may be converted to limited partner interests
following the completion of the partnership's drilling activities. Such
conversion will not constitute a sale or exchange. Accordingly, a partner will
not recognize any gain or loss as a result of a conversion of a general partner
interest in a partnership into a limited partner interest in the partnership,
unless the converting general partner's relative share of any partnership
liabilities is reduced as a result of such conversion. Such a reduction would be
treated as a constructive distribution of cash to that general partner, which
would reduce the basis of his interests and would be taxable to the extent it
exceeds his basis or at risk amount. See "Tax Aspects -- Special Features of
Partnership Taxation -- Basis and At Risk Limitations."
A partnership will constructively terminate for federal income tax
purposes if 50% or more of the interests in profits and capital of the
partnership are sold or exchanged in any consecutive 12-month period. The IRS
has ruled that a conversion of a general partner interest to a limited partner
interest in the same partnership does not result in a deemed sale or exchange of
the converted interests and therefore is not taken into account in determining
whether a constructive termination has occurred. Assuming this ruling is not
revoked or modified, constructive termination of a partnership or a drilling
program is unlikely to occur by reason of the conversion of the interests held
by general partners to limited partner interests.
If a constructive termination of a partnership or a drilling program
occurred, the partnership or the drilling program would be treated as
transferring all of its assets and liabilities to a new partnership in exchange
for an interest in the new partnership and, immediately thereafter, the
partnership or the drilling program would be treated as distributing its
interest in the new partnership to the partners or the participants in
liquidation of the partnership or the drilling program. Such a constructive
termination could have adverse federal income tax consequences, such as the
bunching of taxable income within one taxable period with respect to any
investor partner whose taxable year differs from the partnership's, the
recognition of taxable income by any investor partner who is deemed to receive a
constructive distribution of cash in excess of his basis in interests or his "at
risk" amount at the time of the constructive termination, or the loss of
elections made by the partnership. For additional discussion of the tax
consequences of the conversion, see "-- Special Features of Oil and Gas Taxation
- -- Passive Activity Loss Limitations."
SPECIAL FEATURES OF OIL AND GAS TAXATION
Following is a summary of some of the principal features of United
States federal income taxation of oil and gas operations which may apply to the
partnerships and the drilling programs.
Lease Acquisition Costs. The cost of acquiring oil and gas leasehold or
similar property interests is a capital expenditure which must be recovered
through depletion deductions if the lease is productive. See "-- Special
Features of Oil and Gas Taxation -- Depletion" below. If a lease is proved
worthless and abandoned, the cost of acquisition less any depletion claimed may
be deducted as an ordinary loss in the year the lease becomes worthless. See "--
Special Features of Oil and Gas Taxation -- Depreciation" below.
Geophysical Costs. The cost of geophysical exploration must be
capitalized as a lease acquisition cost if a property is (or may be) acquired or
retained on the basis of data from such exploration. Otherwise, such costs
generally may be deducted as ordinary expenses.
77
Operating and Administrative Costs. Amounts paid for operating a
producing well are deductible as ordinary business expenses, as are
administrative costs to the extent they constitute ordinary and necessary
business expenses which are reasonable in amount.
Intangible Drilling Costs. Owners of working interests in oil and gas
properties may elect to deduct intangible drilling costs they incur, such as
expenditures for drilling, labor, wages, hauling, fuel, supplies, and other
costs incident to and necessary for the drilling and preparation of wells for
production. The partnerships and the drilling programs will elect to deduct all
intangible drilling costs. Assuming proper elections, each investor partner will
be entitled to deduct his distributive share of the intangible drilling costs
incurred by or allocable to a partnership, subject to the basis, at risk and
passive activity loss limitations discussed below. See "-- Special Features of
Oil and Gas Taxation -- Basis and At Risk Limitations" and "-- Special Features
of Oil and Gas Taxation -- Passive Activity Loss Limitations." Any intangible
drilling costs allocable to a partnership which are incurred prior to the
formation of the partnership are not deductible by the partners even if paid by
the partnership. Such costs must be capitalized as lease acquisition costs. See
"-- Special Features of Oil and Gas Taxation -- Lease Acquisition Costs."
Some capital contributions to a partnership may be expended through the
related drilling program in one year as required under drilling contracts for
services to be performed in the following year. A partnership may deduct such
expenses in the year incurred only if "economic performance" with respect to
such partnership occurs in such year or, subject to limitations, within 90 days
after the close of such year, and all other requirements for deductions by
accrual basis taxpayers are met. In the case of the drilling of an oil and gas
well by an entity such as a partnership, "economic performance" is generally
deemed to occur when the well is spudded (i.e., boring is commenced). Even if
all of these requirements are met, general and limited partners will be entitled
to deduct their share of any such prepayments only to the extent of the "cash
basis" of their interests, determined without regard to any liability of the
partnership and any amount borrowed by an investor partner with respect to the
partnership. If any of these requirements are not satisfied in the year the
expense is incurred, any deductions attributable to such expense would be
deferred to the subsequent year in which the contract to which such expense
relates is performed and subject to tax law in effect at such time. The
deductibility of any intangible drilling costs by a partnership in the year
incurred is an inherently factual determination predicated largely on future
events. Accordingly, counsel to the managing partner is unable to express any
opinion as to the deductibility in a given year of any intangible drilling costs
paid or incurred in a year prior to the performance of the drilling activities
to which such costs relate. If general and limited partners are admitted to a
partnership late in a calendar year and the partnership expends a substantial
portion of its capital or contracts for required prepayments in such year which
do not meet the requirements discussed above, a significant portion of any
material tax benefits associated with an investment in that partnership that
would otherwise be realized in the year of admission would be deferred to a
subsequent year or years and subject to the tax law in effect at such time.
Subject to the limitations discussed above, an investor partner who
qualifies as an "independent producer" (see -- Special Features of Oil and Gas
Taxation -- Depletion) will be entitled to deduct his full share of domestic
intangible drilling costs for federal income tax purposes. An investor partner
who does not qualify as an "independent producer" may currently deduct 70% of
the intangible drilling costs and may amortize the remaining 30% of such costs
over a period of 60 months, except that all costs of dry holes may be deducted
in the year the drilling is completed.
Previously deducted intangible drilling costs will be recaptured as
ordinary income upon the disposition by a partnership of property to which such
deductions relate (to the extent of the gain recognized) or upon the disposition
by an investor partner of interests. See "-- Special Features of Oil and Gas
Taxation -- Sale of Gas Property" and "-- Special Features of Oil and Gas
Taxation -- Sale of interests."
Depreciation. The cost of equipment such as casing, tubing, tanks,
pumping units, and other similar property may not be deducted currently. Such
costs must be capitalized and recovered through depreciation. The depreciation
deduction for most equipment used in domestic oil and gas exploration and
production is calculated using an accelerated recovery method and a seven-year
recovery period. Such property will be eligible for an additional first year
depreciation deduction equal to 30% of the adjusted basis of the property if the
property is acquired by the partnership for its original use prior to September
11, 2004 and is placed in service prior to January 1, 2005. The basis of the
property and the depreciation allowances in the year of purchase and later years
are
78
appropriately adjusted to reflect the additional first year depreciation
deduction. Each investor partner will be entitled to his distributive share of a
partnership's depreciation deductions, subject to the general restrictions
discussed in this prospectus.
Depletion. Except as discussed below, an investor partner may deduct
percentage depletion with respect to each oil and gas property of a partnership.
General and limited partners must compute their own depletion allowance and
maintain records of the adjusted basis of property for depletion and other
purposes. While a partnership will furnish its general and limited partners with
information relating to this computation, these requirements may impose an
administrative burden on an investor partner.
Percentage depletion is calculated by the owner of an economic interest
in an oil or gas property, or a partner in a partnership (such as the
partnerships and the drilling programs) which holds such an economic interest as
an amount equal to 15% (and in the case of marginal production an additional 1%,
subject to a maximum increase of 10%, for each whole dollar by which $20 exceeds
the average domestic wellhead price for crude oil for the immediately preceding
fiscal year) of his gross income from the depletable property for the taxable
year. The percentage depletion deduction in respect of any property is limited,
however, to 100% of the taxable income of the owner, or partner, from the
property for each taxable year, computed without the depletion allowance. The
100% of the taxable income limitation does not apply to marginal wells
(substantially all of the production is heavy oil or the average daily
production does not exceed 15 barrels) for taxable years beginning before
January 1, 2004. See "-- General Tax Provisions -- Alternative Minimum Tax."
Percentage depletion is generally available only with respect to
domestic oil and gas production of certain "independent producers," which, in
general, are persons not directly or indirectly involved in the retail sale of
oil, natural gas, or derivative products or the operation of a major refinery.
An independent producer may deduct percentage depletion only to the
extent his average daily production of domestic crude oil, or the natural gas
equivalent, does not exceed 1,000 barrels. This depletable amount may be
allocated between crude oil and natural gas production, with 6,000 cubic feet of
domestic natural gas production regarded as equivalent to one barrel of crude
oil. The 1,000 barrel limitation must be allocated among the independent
producer and controlled or related persons and family members in proportion to
the respective production by such persons during the period in question.
In addition to the foregoing limitation, the percentage depletion
deduction otherwise available is limited to 65% of the taxpayer's total taxable
income for the year. Any percentage depletion deduction disallowed because of
the 65% limitation may be deducted in the following taxable year if the
percentage depletion deduction for such year plus the deduction carryover does
not exceed 65% of the taxpayer's total taxable income for that year. The
carryover period resulting from the 65% net income limitation is indefinite.
All or a portion of any gain recognized on the disposition of a
depletable property or of interests may be taxed as ordinary income to the
extent of recapture of depletion deductions, except for percentage depletion
deductions in excess of the basis of the property. See "-- Special Features of
Oil and Gas Taxation -- Sale of Property" and "-- Special Features of Oil and
Gas Taxation -- Sale of interests."
Because depletion will be computed separately by each investor partner
and not at the partnership level, no assurance can be given, and counsel to the
managing partner is unable to express any opinion, as to the availability or
extent of percentage depletion deductions to the general and limited partners.
Each prospective investor partner should consult his personal tax advisor to
determine whether percentage depletion would be available to him.
Passive Activity Loss Limitations. Generally, a taxpayer can deduct
losses from "passive activities" only against income from passive activities and
can utilize passive activity tax credits only to offset the tax attributable to
passive activity income. The taxpayer cannot use passive activity losses to
offset personal earnings, active business income, or investment or portfolio
income, such as interest, dividends, royalties, or gains from the sale of assets
that generate investment or portfolio income, and cannot reduce his tax
liability attributable to those items with passive activity credits.
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A passive activity is generally defined as any activity that involves
the conduct of a trade or business in which the taxpayer does not materially
participate. Ownership of limited partner interests will be a passive activity
and a limited partner will be subject to the passive activity loss limitations
with respect to his share of partnership losses and deductions. Consequently, a
limited partner's share of partnership losses and deductions may be deducted
only to the extent of his share of partnership income and any income from other
passive activities. Passive activity losses that may not be utilized because of
the passive activity loss limitations may be carried forward to offset passive
activity income in subsequent years.
Interest income, including interest from any production payments
treated as loans for federal income tax purposes and interest from the
investment of a partnership's working capital or other funds, and royalty income
are treated as portfolio income under the passive activity rules and are not
considered to be income from a passive activity. The Treasury Department also
has the authority to prescribe regulations "requiring net income or gain from a
limited partnership or other passive activity to be treated as not from a
passive activity." No such regulations have been issued to date, and the
Treasury Department has indicated that any subsequent regulations on this
subject would be prospective only. No assurance can be given, however, that
subsequent regulations will not retroactively characterize various items of
partnership income as non-passive.
When a limited partnership disposes of an activity, the limited
partners can deduct their suspended passive activity losses attributable to that
activity. Although unclear, each oil or gas property may constitute a separate
activity for purposes of the passive activity rules. Assuming that each oil or
gas property is a separate activity, whenever a partnership sells an oil or gas
property to an unrelated party or abandons it, each limited partner in that
partnership will then be able to deduct any suspended passive activity losses
attributable to that property. If a partnership disposes of only part of its
interest in a property, however, limited partners will be able to offset only
their suspended passive activity losses attributable to that property against
the gain on the disposition. Any remaining suspended passive activity losses
will remain suspended. Notwithstanding whether an oil and gas property is a
separate activity, when a limited partner sells all his interests, and has no
further interest in the partnership, he will be able to deduct all his suspended
passive activity losses attributable to that partnership.
A taxpayer's interest in an oil or gas well drilled or operated under a
working interest does not constitute a passive activity so long as the taxpayer
owns the working interest directly or through an entity that does not limit the
taxpayer's liability with respect to such drilling or operation. In general, an
entity will be considered to limit the liability of the taxpayer with respect to
the drilling or operation of a well only if, under applicable state law, the
taxpayer's potential liability is limited to a determinable fixed amount.
Indemnification agreements, insurance, stop loss arrangements, or other similar
arrangements are not taken into account in determining whether a taxpayer holds
a working interest through an entity that limits the taxpayer's liability.
Counsel to the managing partner is of the opinion that the passive activity loss
limitations will not apply to general partners in a partnership, prior to any
conversion of their general partner interests to limited partner interests, to
the extent that the partnership drills or operates wells under working
interests. Consequently, each general partner should be entitled to deduct
currently his share of intangible drilling costs and other deductible expenses
allocable to the drilling or operation of wells pursuant to working interests
without regard to the passive activity loss limitations, but subject to the
basis and at risk limitations discussed below. A general partner's share of
partnership income will be non-passive income, however, that may not be offset
by losses from any passive activities. As discussed below, this rule continues
to apply to income attributable to a general partner's interests that have been
converted. The exception for working interests would not be applicable to any
operations of a partnership other than the drilling and operation of wells
pursuant to working interests. Therefore, if a partnership acquires an interest
or participates in other activities, such activities will be treated as passive
activities to the general partners of that partnership and any losses derived by
those general partners with respect to such activities will be passive activity
losses allowable only to the extent discussed above.
It should be noted that if a general partner is an S corporation, a
limited partnership, a limited liability company, or a trust, the working
interest exception will not apply to the shareholders, limited partners, or
beneficiaries thereof because that form of ownership limits the liability of the
ultimate owners.
As discussed under "Terms of the Offering -- Conversion of General
Partner Interests," the general partner interests in a partnership may be
converted to limited partner interests following the completion of the
partnership's drilling activities. So long as such conversion does not occur
until that time, the interests of the general partners will
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not be treated as a passive activity during the drilling period. If, however, a
general partner claims any loss that is treated as an active loss under the
working interest exception, any net income in succeeding taxable years
attributable to the working interest, and any other properties the value of
which is enhanced by drilling, logging, seismic testing, or other activities any
part of the costs of which were borne by the taxpayer as a result of owning such
working interest, will be treated as active income. Thus, if a partnership
incurs net losses during its initial taxable years, any subsequent net income
from the partnership will generally be treated as active income to an investor
partner who acquires general partner interests even after those interests have
been converted to limited partner interests.
If the general partners of a partnership deduct losses under the
working interest exception and their interests are then converted to limited
partner interests during a taxable year, deductions with respect to net loss
wells that are incurred in the year of conversion but after the date of the
conversion are considered passive activity deductions, even if the converted
partners have net income for the taxable year. If the general partner interests
in a partnership are converted to limited partner interests during a taxable
year, this rule may increase both the active income and the passive loss
allocable for such year to the general and limited partners holding those
interests. If the conversion occurs at the beginning of a taxable year, any net
losses of the converted partners for such year will be passive.
The passive activity rules do not apply to corporations, other than S
corporations, personal service corporations, and closely held C corporations. A
closely held C corporation is a corporation in which not more than five
individuals own, directly or indirectly, more than 50% of the value of the
outstanding stock during the last half of the year. An additional exception from
the passive activity rules applies to closely held C corporations that are not
personal service corporations. Such closely held C corporations may deduct
passive activity losses against all of their income except portfolio income.
A special provision of the passive activity rules applies to publicly
traded partnerships. If this special provision were to apply to a partnership,
additional limitations would apply, the most significant of which is that a
limited partner could only deduct his share of partnership losses and deductions
against his share of passive activity income from the partnership. The
definition of "publicly traded partnership" for purposes of this special
provision is the same as the definition of "publicly traded partnership" in
section 7704 of the Internal Revenue Code, except that this special provision
does not include the 90% gross income exception. See "Tax Aspects -- Partnership
Taxation -- Partnership Classification." Based on representations of the
managing partner concerning the anticipated lack of public trading or public
markets for the interests, counsel to the managing partner is of the opinion
that the partnership will not be treated as "publicly traded partnership" for
purposes of the application of the passive activity loss limitations.
Limitations on Interest Deductions. Generally, a taxpayer may deduct
"investment interest" only to the extent of his "net investment income." The
taxpayer may carry forward any unused investment interest to later years when he
has additional net investment income. Investment interest is interest paid on
debt incurred or continued to acquire or carry property held for investment. Net
investment income includes gross income and gains from property held for
investment reduced by any expenses directly connected with the production of
such income and gains. To the extent that interest is attributable to a passive
activity, it is treated as a passive activity deduction and is subject to
limitation under the passive activity rules and not under the investment
interest limitation rules.
Consequently, if a general partner borrows money to purchase interests,
the investment interest limitation may apply to the interest on the debt. In
addition, a general partner's share of partnership income and losses will be
considered investment income and losses for purposes of the investment interest
limitation, and his share of partnership losses will therefore reduce his net
investment income and may affect the deductibility of his other investment
interest, whether or not he borrows to purchase interests.
Interest expense on debt used by a taxpayer to purchase or carry an
interest in a passive activity will be taken into account in computing the
taxpayer's income or loss from the passive activity. There are detailed tracing
and allocation rules with respect to the allocation of interest expense to
specific expenditures. As a result, the deductibility of interest expense by a
limited partner will depend upon such limited partner's personal tax situation.
Potential investors who contemplate using borrowed funds to purchase limited
partner interests are urged to consult with their tax advisors with respect to
the application and interaction of the investment interest and passive activity
limitations.
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It is unclear at present whether, after any conversion of the general
partner interests in a partnership to limited partner interests, interest on
debt incurred by a general partner to purchase his interests will be treated as
investment interest or will be taken into account in computing such partner's
income or loss as a limited partner.
Interest on indebtedness incurred or continued to purchase or carry
tax-exempt securities is not deductible. Investors who currently own or
anticipate acquiring tax-exempt securities and contemplate purchasing interests
with borrowed funds are urged to consult their tax advisors.
Because the deductibility of any interest expense by an investor
partner will depend on such investor partner's personal tax situation, counsel
to the managing partner is unable to express any opinion regarding the federal
income tax treatment of interest expense on indebtedness incurred by an investor
partner to acquire his interests.
For Profit Limitation. In addition to the passive activity limitations
discussed above, an individual who engages in an activity without the intent to
make an economic profit therefrom aside from federal income tax benefits may not
take deductions attributable to such activity in excess of the gross income he
derives from the activity, except for deductions allowable without regard to
profit motive. Thus, in any taxable year in which the deductions of a
partnership exceed its gross income, any investor partner who invested in the
partnership without the requisite economic profit motive may be unable to deduct
substantially all of his distributive share of such excess.
Basis and At Risk Limitations. A partner may not deduct in any year any
amount attributable to his share of partnership losses, if any, which is in
excess of his adjusted tax basis in his interest in the partnership at the end
of the partnership tax year. An investor partner's initial adjusted tax basis in
his interest in a partnership will equal his cash contributions to the
partnership. It will be increased by any additional cash contributions when
made, by his distributive share of partnership income and gain and by his share
of certain borrowings of the partnership. It will be decreased, but not below
zero, by distributions from the partnership, his distributive share of
partnership losses, depletion deductions on his share of partnership oil and gas
income and any decrease in his share of borrowings of the partnership. Decreases
in an investor partner's share of liabilities that have given rise to a basis
increase will be treated as distributions of cash and, thus, will reduce basis.
In addition to the limitation of losses to an investor partner's
adjusted tax basis, losses allocable to such investor partner in excess of
allocable income during a taxable year may be deducted only to the extent of the
amount with respect to which such investor partner is "at risk" at the close of
the taxable year. An investor partner will be at risk as to the amount of money
contributed, assuming such investor partner uses his personal funds to make such
contribution or borrows the funds on a recourse basis from a lender unrelated to
the partnership, and amounts borrowed for use in the partnership for which the
investor partner is personally liable. The at risk amount will be increased by
such investor partner's share of partnership income and gains and the amount by
which such investor partner's percentage depletion deductions with respect to
partnership property exceed such investor partner's share of the basis of such
property. An investor partner will not be at risk with respect to amounts
protected against loss through nonrecourse financings, guarantees, stop loss
agreements, or "other similar arrangements" (which would include the managing
partner's indemnification obligation to general partners for liabilities in
excess of their capital contributions) or with respect to amounts borrowed from
other parties having an interest in the partnership, family members or other
related parties. The at risk amount is reduced by the amount of the allowable
losses for the taxable year, the amount of distributions made to the investor
partner and such investor partner's depletion deductions, and the reduced amount
determines the extent to which losses sustained in future years will be
deductible. Any loss disallowed as a result of the application of the at risk
provisions may be deducted in future years to the extent the taxpayer increases
his amount at risk. Losses deducted in a year are subject to recapture in a
later year at ordinary income rates in the event, and to the extent, a
taxpayer's adjusted amount at risk falls below zero.
The at risk limitation applies on an activity-by-activity basis, and in
the case of oil and gas properties, each property is treated as a separate
activity. Thus, an investor's interest in each oil or gas property is treated
separately so that a loss from any one property is limited to the at risk amount
for that property and not the at risk amount for all the investor's oil and gas
properties. It is uncertain how this rule is implemented in the case of multiple
oil and gas properties owned by a single partnership. However, for taxable years
ending on or before the date on which further guidance is published, the IRS
will permit aggregation of properties owned by a partnership in computing a
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partner's at risk limitation with respect to such partnership. If an investor
partner must compute his at risk amount separately with respect to each property
owned by the partnership, he may not be allowed to utilize his share of losses
or deductions attributable to a particular property even though he has a
positive at risk amount with respect to the partnership as a whole.
Sale of Property. When a partnership sells property, it will recognize
gain to the extent that the amount realized on the sale exceeds its basis in the
property and will recognize loss to the extent that its basis exceeds the amount
realized. In the case of a sale of an oil or gas property, each investor partner
will compute his gain or loss individually based on his share of the amount
realized, as allocated to him under the partnership agreement and the drilling
program agreement, and his share of the basis in such property. The amount
realized will include the amount of money received and the fair market value of
any other property received. If the purchaser assumes a liability in connection
with the sale or takes the property subject to a liability, the amount realized
will include the amount of such liability.
If gain is recognized on such sale, the portion of the gain that is
treated as recapture of intangible drilling cost, depletion, or depreciation
deductions will be treated as ordinary income and the remainder generally will
constitute "Section 1231 gain." If loss is recognized on such sale, such loss
generally will constitute "Section 1231 loss."
Each investor partner will be required to report his share of the
portion of the gain that constitutes recapture as ordinary income and must also
take into account his share of the Section 1231 gains and losses along with his
Section 1231 gains and losses from other sources. The characterization of the
investor partner's share of the Section 1231 gains and Section 1231 losses
attributable to partnership properties as either ordinary or capital will depend
on the total amount of the investor partner's Section 1231 gains and the total
amount of his Section 1231 losses from all sources for the year. Generally, if
the total amount of the gains exceeds the total amount of the losses, all such
gains and losses will be treated as capital gains and losses, and if the total
amount of the losses exceeds the total amount of the gains, all such gains and
losses will be treated as ordinary income and losses. An investor partner's net
Section 1231 gains, however, will be treated as ordinary income to the extent of
the investor partner's net Section 1231 losses during the immediately preceding
five years, reduced by the Section 1231 losses previously recaptured under this
rule.
Termination of a Partnership. When a partnership is terminated, each
investor partner in that partnership will be taxable, in the taxable year in
which the termination occurs, on his share of partnership income, gain, loss,
and deduction arising prior to the date of termination. General and limited
partners must also take into account their shares of gains or losses resulting
from the sale or other disposition of partnership assets in liquidation of the
partnership.
Upon the termination of a partnership, each investor partner in the
partnership will be required to recognize gain to the extent that the amount of
money distributed to him exceeds the basis of his interests or his amount at
risk with respect to the partnership. See "Tax Aspects -- Special Features of
Oil & Gas Taxation -- Basis and At Risk Limitations." An investor partner will
recognize no loss unless he receives only money, unrealized receivables, and
inventory. In such a case, the investor partner could recognize loss to the
extent that the basis of his interests exceeds the aggregate of the money and
the partnership basis of the property received. If, however, an investor partner
receives more or less than his share of ordinary income items, including
potential recapture of intangible drilling cost, depletion, and depreciation
deductions, the investor partner will be required to recognize ordinary income
or loss to that extent.
An investor partner's basis in any distributed property will be equal
to the basis of his interests, reduced by any money received. The investor
partner's basis will first be allocated to ordinary income assets in an amount
equal to the partnership basis in such assets, which generally will be zero. Any
remaining basis will be allocated, in general, to other properties to the extent
of the partnership's basis in those properties subject to reallocation among
properties designed to reduce basis - value disparities to the extent possible.
Thus, basis increases are allocated to properties with unrealized appreciation
and basis decreases are allocated to properties with unrealized depreciation.
Any basis adjustment remaining after the partnership's basis has been fully
carried over and reallocated is first allocated among those properties with
unrealized
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appreciation to the full extent of each property's unrealized appreciation. To
the extent that the increase is not fully allocated at this point, it is
allocated in proportion to the properties' respective fair market values.
Sale of Interests. When an investor partner sells an interest,
including by exercising the right of presentment, he will recognize gain or loss
measured by the difference between the amount realized on the sale and his basis
in the interest sold. The investor partner's amount realized will be the selling
price plus his share of any liabilities that increased his basis in such
interest. For a discussion of the computation of the tax basis in interests, see
"Tax Aspects -- Special Features of Oil & Gas Taxation -- Basis and At Risk
Limitations."
To the extent that the portion of the amount realized attributable to
ordinary income items, including potential recapture of intangible drilling
cost, depletion, and depreciation deductions) exceeds the portion of the basis
allocable to such items, which generally will be zero, the gain will be ordinary
income. Therefore, a substantial portion of any gain realized upon the sale of
interests may constitute ordinary income. So long as the investor partner holds
his interests as a capital asset, generally, an asset held as an investment, the
remainder of the gain will be capital gain and any loss will be capital loss.
The investor partner will be required to recognize the full amount of the
ordinary income portion even if it exceeds the overall gain on the sale (in
which event the investor partner will also recognize capital loss to the extent
the ordinary income exceeds the overall gain) or there is an overall loss on the
sale (in which event the investor partner will recognize an offsetting capital
loss equal to the ordinary income portion and an additional capital loss equal
to the overall loss on the sale). Gain or loss realized by a general partner
upon the sale of interests will generally constitute active income or loss,
while gain or loss realized by a limited partner upon such a sale will
constitute passive income or loss, which passive loss may be used to offset
active income only upon a complete disposition of interests, except in
circumstances where a limited partner has received his interest in a conversion.
See "Tax Aspects -- Special Features of Oil & Gas Taxation -- Passive Activity
Loss Limitations."
Net capital gains of individual taxpayers currently are taxed at a
minimum statutory rate (generally 20% for capital assets held for more than 12
months) which is less than the maximum statutory rate applicable to other income
(38.6%). Net capital gains means the excess of net long-term capital gain over
net short-term capital loss.
Generally, the sale of an interest in a partnership has no effect on
the partnership's basis in its assets. If, however, the partnership has made an
election under Section 754 of the Internal Revenue Code, the partnership's basis
in its assets is adjusted for the benefit of the purchase to reflect the gain or
loss realized by a partner upon the sale of an interest in the partnership. As a
result of the tax accounting complexities inherent in, and the substantial
expense attendant to, the election to adjust the tax basis of partnership
property upon sales of interests, the managing partner does not currently intend
to make this election on behalf of either partnership. Under the partnership
agreement, such election may be made only with the consent of the managing
partner. The absence of any such election and of the power to compel the making
of such an election may reduce the value of interests to a potential transferee
and may be an additional impediment to the transferability of interests.
An investor partner who sells interests must notify that partnership of
the transaction and must attach a statement to his federal income tax return
reciting certain facts regarding the sale. Such notice must be given in writing
within 30 days of the sale, or, if earlier, by January 15 of the year following
the year in which the sale occurs, and must include the names and addresses of
the buyer and seller, the taxpayer identification numbers of the buyer and
seller, if known, and the date of the sale. An investor partner who fails to
furnish the relevant information to the partnership may be penalized $50 for
each such failure, unless it is shown that such failure was due to reasonable
cause and not willful neglect. In addition, the partnership will be required to
notify the IRS of any sale of an interest of which it has notice or knowledge
and to report the names, addresses, and taxpayer identification numbers of the
buyer and seller, along with other required information. The partnership is also
required to provide copies of the information it provides to the IRS to the
buyer and seller.
Section 1060 of the Internal Revenue Code may also require both the
buyer and seller of an interest to file statements with their federal income tax
returns stating their agreement, if any, concerning the allocation of the
purchase price among assets.
Farmouts and Backin Interests. One of the various ways in which a
partnership, through the drilling program, may acquire an oil and gas lease is
through a farmout, discussed above under "Proposed Activities --
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Farmouts." Some farmouts may be characterized for tax purposes as partnerships
entered into by the related drilling program and the other party to the farmout.
The manner in which the parties to these farmouts agree to allocate income,
gain, loss, deduction, and credit, or any item of income, gain, loss, deduction
and for credit, may be disallowed under Section 704 of the Internal Revenue
Code. See "-- Partnership Taxation -- Allocations." If the farmout creates a
co-ownership arrangement, the drilling program may be required to capitalize a
portion of the intangible drilling costs paid in excess of its fractional share
of the working interest acquired under the agreement. If the farmout creates an
arrangement that is classified as an association taxable as a corporation for
federal income tax purposes, the tax benefits of investing in that partnership
would be adversely affected, or eliminated See -- "Partnership Taxation --
Partnership Classification." One type of farmout in which a drilling program
might be involved is a transaction in which, in exchange for the drilling of a
well on a particular drill site, the drilling party becomes entitled to an
assignment of 100% of the leasehold interest in the drill site acreage, until
such time as his or its drilling, completion and production costs are recovered
out of production therefrom, with a lesser percentage thereafter, and a lesser
fractional interest in the portion of the tract exclusive of the drill site
acreage. The IRS has ruled, in Revenue Ruling 77-176, 1977-1 C.B. 77, that any
transfer of rights in property other than the drill site acreage in this type of
transaction would be deemed a sale of such other property by the party
transferring the property on which gain or loss is realized. The IRS further
ruled that, while the party receiving the acreage and incurring the cost of
drilling the well on the drill site may elect to deduct such costs as intangible
drilling and development costs, such party would realize ordinary income equal
to the value of the acreage earned exclusive of the drill site acreage.
The managing partner will attempt to structure any farmout or similar
transaction in a way which either eliminates or minimizes to the fullest extent
possible the tax consequences set forth in this ruling and the other adverse tax
consequences described above. Nonetheless, the ruling may have adverse tax
implications for a drilling program and the related partnership if and when a
drilling program enters into such farmouts, since such drilling program may
recognize gain or loss upon the transfer or receipt of an interest in the
property.
GENERAL TAX PROVISIONS
Following is a brief summary of some additional federal income tax laws
which may impact upon an investor partner.
OTHER TAX CONSEQUENCES
Alternative Minimum Tax. The individual alternative minimum tax is
imposed at graduated rates of 26% and 28% on "alternative minimum taxable
income" in excess of exemption amounts. The tax thus computed is reduced by the
taxpayer's regular tax liability.
Alternative minimum taxable income is computed by increasing regular
taxable income by tax preference items and recomputing certain items. For an
individual taxpayer, adjustments include such items as the difference between
accelerated depreciation deductions and depreciation deductions under the
alternative system of Section 168(g) of the Internal Revenue Code.
The passive activity limitations also apply for purposes of computing
alternative minimum taxable income, although tax preference items taken into
account for purposes of the passive activity rules are not taken into account in
computing alternative minimum taxable income.
Corporations are subject to an alternative minimum tax of 20% of
alternative minimum taxable income to the extent that such amount exceeds the
greater of (a) the corporation's federal income tax liability or (b) certain
exemption amounts. Corporate items of tax preference include items similar to
those described above for individuals, and a number of additional items.
Because an investor partner's liability for the alternative minimum tax
is computed by taking into account his regular income tax liability, the extent
to which any tax preference items directly or indirectly resulting from an
investment in interests would be subject to the alternative minimum tax will
depend on the facts of his particular situation. For a taxpayer with substantial
tax preference items, the alternative minimum tax could reduce the after-
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tax economic benefit of his investment in interests. Each potential investor
should consult his tax advisor concerning the impact of the alternative minimum
tax on his investment in interests.
Tax Shelter Registration. An organizer of a "tax shelter" must register
the tax shelter with the Secretary of the Treasury and obtain an identification
number which must be included on the tax returns of investors in the shelter.
Any person who organizes any "potentially abusive tax shelter" must maintain
lists of investors therein and make such information available to the Secretary
of the Treasury upon request.
In view of the expansive definition of the term "tax shelter" under
temporary regulations, the tax shelter registration provisions could be
interpreted to apply to the partnerships. The managing partner will apply for
and obtain a tax shelter registration number with respect to each partnership.
The registration number of a partnership will be furnished to its general and
limited partners, who must include the number on their tax returns for any year
in which any deduction, loss, credit, other tax benefit or any income
attributable to the partnership is claimed or reported, and must furnish the
number to any transferee of their interests, together with other required
information. The managing partner also must maintain lists of investors in the
partnerships and make such lists available to the IRS on request.
ISSUANCE OF A REGISTRATION NUMBER DOES NOT INDICATE THAT THIS
INVESTMENT OR THE CLAIMED TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED OR APPROVED
BY THE INTERNAL REVENUE SERVICE.
Changes in Federal Income Tax Laws. Significant and fundamental changes
in the nation's federal income tax laws have been made in recent years and
additional changes are likely. Any such change may affect the partnerships and
the general and limited partners. Moreover, judicial decisions, regulations or
administrative pronouncements could unfavorably affect the tax consequences of
an investment in a partnership.
Compliance Provisions. Taxpayers are subject to several penalties and
other provisions which encourage compliance with the federal income tax laws,
including an addition to tax of 20% of a "substantial understatement" of federal
income tax. This addition is imposed if an understatement of tax exceeds the
greater of (a) 10% of the tax required to be shown on the return or (b) $5,000
($10,000 for a corporation other than an S corporation or a personal holding
company).
Except in the case of understatements attributable to "tax shelter"
items, an item of understatement will not give rise to the penalty if (a) there
is or was "substantial authority" for the taxpayer's treatment of the item or
(b) all facts relevant to the tax treatment of the item are disclosed on the
return or on a statement attached to the return. In the case of partnerships,
the disclosure is to be made on the return of the partnership. However, an
individual partner may make adequate disclosure with respect to partnership
items if specific conditions are met.
In the case of understatements attributable to "tax shelter" items, the
substantial understatement penalty may be avoided only if the taxpayer
establishes that, in addition to having substantial authority for his position,
he reasonably believed the treatment claimed was more likely than not the proper
treatment of the item. A "tax shelter" item is one that arises from a
partnership, or other form of investment, a significant purpose of which is the
avoidance or evasion of federal income tax. An entity should not be considered
to have a significant purpose of avoidance or evasion of federal income tax
merely because it avails itself of percentage depletion allowances, intangible
drilling cost deductions, or certain other deductions. The managing partner does
not believe that tax avoidance is a significant purpose of either partnership
and does not anticipate that these provisions would apply to any understatement
attributable to the disallowance of a partnership item. Investors are cautioned,
however, to consult their tax advisors with respect to the possible application
of the substantial understatement penalty.
Consistency Requirements. General and limited partners must generally
treat partnership items on their federal income tax returns consistently with
the treatment of such items on the partnership information return, unless an
investor partner files a statement with the IRS identifying the inconsistency or
otherwise satisfies the requirements for waiver of the consistency requirement.
Failure to satisfy this requirement will result in an adjustment to conform the
investor partner's treatment of the item with the treatment of the item on the
partnership return. Intentional or negligent disregard of the consistency
requirement may subject an investor partner to substantial penalties.
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Nominees. A person who holds a partnership interest as a nominee for
another person must furnish to the partnership the name and address of the
beneficial owner, along with any other information prescribed by form or
regulations. A notice issued by the IRS requires the nominee to furnish to the
partnership the nominee's name, address, and taxpayer identification number, the
taxpayer identification number of the beneficial owner and information
concerning the partnership interests held, acquired, and disposed of by the
nominee on behalf of others during the partnership taxable year. The nominee
also must provide certain information to the beneficial owner of the interest,
and the partnership must furnish certain information to the nominee. Regulations
to be issued may impose additional requirements. Any prospective investor who is
acting as a nominee for another person should consult his tax advisor regarding
these requirements.
Social Security Benefits; Self-Employment Tax. A general partner's
share of any income or loss attributable to interests will constitute "net
earnings from self-employment" for both social security and self-employment tax
purposes, while a limited partner's share of such items will not constitute net
earnings from self-employment. Thus, no quarters of coverage or increased
benefits under the Social Security Act will be earned by limited partners. If a
general partner is receiving Social Security benefits, his taxable income
attributable to his investment in interests may be taken into account in
determining any reduction in benefits because of "excess earnings."
State Law Tax Aspects. A partnership, through the related drilling
program, will operate in states and localities which impose taxes on the
partnership's assets or income or on each investor partner based upon his share
of any income derived from partnership activities in such jurisdictions.
Depending upon the location of the partnership's properties and applicable state
and local laws, deductions or credits available to an investor partner for
federal income tax purposes may not be available for state or local income tax
purposes.
It is anticipated that a significant portion of the partnerships'
activities will be in Texas, which imposes a franchise tax on corporations and
limited liability companies "doing business" in that state. General partners
which are corporations or limited liability companies not otherwise considered
to be doing business in Texas which invest through a partnership may be deemed
to be doing business in Texas for purposes of this tax.
To the extent a partnership operates in certain jurisdictions, estate
or inheritance taxes may be payable therein upon the death of an investor
partner. Therefore, an investor partner may be subject to income taxes, estate
or inheritance taxes or both in states or localities in which the partnership
does business as well as in his own state and domicile.
ANTICIPATED FEDERAL INCOME TAX DEDUCTIONS
The managing partner expects that approximately 70% to 80% of an
investor partner's capital contribution to a partnership will be deductible or
eligible for deduction for federal tax purposes either in the tax year in which
such capital contribution is made or in the subsequent tax year. Due to the
application of the passive activity loss limitations, the percentages of capital
contributions of limited partners that will be deductible will depend largely
upon each such limited partner's tax situation independent of his investment in
interests, and are thus impossible to estimate. These estimates are based upon
the managing partner's assumptions concerning the offering termination dates for
the partnerships and the managing partner's previous experience concerning the
deductibility of the costs of drilling and completing wells and current federal
income tax law. Further, the estimates are based upon a number of factual
assumptions, including an assumption that contracts calling for the expenditure
of a substantial portion of the capital of each partnership will be entered into
in such year and that such expenditures will meet applicable statutory and
judicial requirements for deductibility in that year. See "Risk Factors -- Tax
Risks -- Current Tax Deductions." ACCORDINGLY, THERE CAN BE NO ASSURANCE THAT
THESE ESTIMATED PERCENTAGES OF CAPITAL CONTRIBUTIONS WILL BE DEDUCTIBLE OR
ELIGIBLE FOR DEDUCTIBILITY IN THE YEAR IN WHICH THE CAPITAL CONTRIBUTION IS
MADE.
INDIVIDUAL TAX ADVICE SHOULD BE SOUGHT
THE TAX CONSIDERATIONS ATTENDANT TO AN INVESTMENT IN A PARTNERSHIP ARE
COMPLEX AND VARY WITH INDIVIDUAL CIRCUMSTANCES. EACH PROSPECTIVE INVESTOR
PARTNER SHOULD REVIEW SUCH TAX CONSEQUENCES WITH HIS TAX ADVISOR.
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COMPETITION, MARKETS AND REGULATION
COMPETITION
There are a large number of companies and individuals engaged in
exploration for oil and gas and development of oil and gas properties.
Accordingly, the partnerships will encounter strong competition from independent
operators and major oil companies in acquiring oil and gas leases suitable for
development by the partnerships and the related drilling programs. Many of the
companies so engaged have financial resources and staffs considerably larger
than those available to the partnerships.
MARKETS FOR SALE OF PRODUCTION
The ability of a partnership to market oil and natural gas found and
produced, if any, will depend on numerous factors beyond the control of the
partnership, the effect of which factors cannot be accurately predicted or
anticipated. Some of these factors include, without limitation the availability
of other domestic and foreign production, the marketing of competitive fuels,
the proximity and capacity of pipelines, fluctuations in supply and demand, the
availability of a ready market, the effect of United States federal and state
regulation of production, refining, transportation and sales and general
national and worldwide economic conditions. There is no assurance that a
partnership will be able to market any oil or natural gas produced by it, or, if
such oil or natural gas is marketed, that favorable prices can be obtained by
the partnership. See "Risk Factors -- General Risks Relating to Oil and Natural
Gas -- Dependence on Future Prices, Supply and Demand for Oil and Gas."
The United States natural gas market has undergone several significant
changes over the past few years. The majority of federal price ceilings were
removed in 1985 and the remainder were lifted by the Natural Gas Wellhead
Decontrol Act of 1989. Thus, currently, the United States natural gas market is
operating in a free market environment in which the contracts between the seller
and buyer determine the price of gas.
At the same time, the domestic natural gas industry has also seen a
dramatic change in the manner in which gas is bought, sold, and transported.
Newly developed supplies of natural gas are, in most cases, no longer sold to a
pipeline company. Instead, the pipeline company now serves the role of
transporter primarily, and gas producers are free to sell their product to
marketers, local distribution companies, end users, or a combination thereof.
This process, which began with the issuance of the Federal Energy Regulatory
Commission ("FERC") open access transportation program, often known as Order No.
436, and culminated with the implementation of FERC Order No. 636 - the
restructuring rule, has greatly enhanced a producer's ability to avoid shut-ins
or curtailments because in the new gas environment, a producer now has a
multitude of buyers to choose from.
Recently there has been substantial improvement in the price received
for natural gas. Many analysts believe that the industry is finally experiencing
the combined effects of declining deliverability, reduced reserve replacement
and increased demand for natural gas as a fuel of choice. While this trend is
expected to continue, natural gas prices will still probably remain somewhat
seasonal in nature and, for this reason, it is particularly difficult to
estimate accurately future prices of gas, and any assumptions concerning future
prices may prove incorrect. See "Competition, Markets and Regulation".
The United States average daily production of oil declined from 9.0
million barrels in 1985 to approximately 5.8 million barrels in 2002. The
reduced production level is in part the result of decreased drilling activity in
the United States. Drilling activity is measured by the United States rig count.
The United States rig count hit an historical high in 1981 of over 4,500 rigs
and was 862 rigs as of the end of 2002. Another factor contributing to the
reduction of United States oil production is the plugging and abandoning of
wells which are uneconomical due to the significant decrease in the price of
oil.
The United States import levels for oil have increased significantly
since 1985. In 1985, imports of foreign oil represented 27% of the United
States' demand. During the year 2002 imports averaged approximately 59% of the
United States' consumption.
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In view of the many uncertainties affecting the supply and demand for
oil, gas, and refined petroleum products, the managing partner is unable to
predict future oil and gas prices or the overall effect, if any, that the
decline in demand for and the oversupply of such products will have on a
partnership.
REGULATION OF PRODUCTION
The production of oil and gas found by a drilling program, if any, will
be subject to United States federal and state laws and regulations, and orders
of regulatory bodies under those laws and regulations, governing a wide variety
of matters, including the drilling and spacing of wells on producing acreage,
allowable rates of production, marketing, prevention of waste and pollution, and
protection of the environment. Such laws, regulations, and orders may restrict
the rate of oil and gas production below the rate which would otherwise exist in
the absence of such laws, regulations, and orders, and may restrict the number
of wells which may be drilled on a particular oil and gas lease.
NATURAL GAS PRICES
The Natural Gas Wellhead Decontrol Act of 1989 was enacted on July 26,
1989, and provides that all gas prices are decontrolled at the wellhead
effective January 1, 1993. Accordingly, sales of natural gas by a partnership
generally will not be subject to the maximum lawful price ceilings set by the
Natural Gas Policy Act of 1978, as amended. Thus, market conditions will
determine the prices that a partnership receives from the sale of natural gas
produced from program wells.
OIL AND LIQUID HYDROCARBON PRICE CONTROLS
There are currently no federal price controls on oil production, and
sales of oil, condensate, and natural gas liquids by a partnership can be made
at uncontrolled market prices. However, there can be no assurance that Congress
will not enact controls at any time.
State statutory provisions relating to oil and gas generally require
permits for the drilling of wells and also cover the spacing of wells, the
prevention of waste, the rate of production, the prevention and clean-up of
pollution, and other matters. For example, the Railroad Commission of Texas
determines the amount of gas producers can produce and purchasers can take from
oil and gas leases located within the State of Texas.
POSSIBLE LEGISLATION
Currently there are many legislative proposals pertaining to regulation
of the oil and gas industry, which proposals may directly or indirectly affect
the activities of a partnership. No prediction can be made as to what additional
energy legislation may be proposed, if any, nor which bills may be enacted nor
when any such bills, if enacted, would become effective.
REGULATION OF THE ENVIRONMENT
The exploration, development, and production of oil and gas is subject
to various federal and state laws and regulations to protect the environment.
Various states and governmental agencies are considering, and some have adopted,
other laws and regulations regarding environmental control which could adversely
affect the business of a partnership. Compliance with such legislation and
regulations, together with any penalties resulting from noncompliance therewith,
will increase the cost of oil and gas development and production. All or a
portion of these costs may ultimately be borne by a partnership.
The preceding discussion of regulation of the oil and gas industry is
necessarily brief, and is not intended to constitute a complete discussion of
the various statutes, rules, regulations, or governmental orders to which the
partnerships' and the drilling programs' operations may be subject.
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LIABILITY OF GENERAL AND LIMITED PARTNERS
GENERAL PARTNERS
By law, each general partner in a partnership is liable for all of the
liabilities and recourse obligations of the partnership. Accordingly, a single
general partner legally could be held responsible for the liabilities and
obligations of an entire partnership. Furthermore, under some circumstances,
joint working interest owners may be jointly and severally liable for
obligations arising in connection with the development and operation of the oil
and gas lease in which they jointly own an interest. See "Risk Factors --
Particular Risks Relating to the Interests -- Liability of Joint Working
Interest Owners." Because a partnership will own a working interest in leases in
which the participants in the drilling program, and likely others, own working
interests, the partnership, and therefore the general partners of that
partnership, could be liable for obligations of all such joint working interest
owners.
Under the terms of the partnership agreements, the general partners and
the managing partner of each partnership will agree that, as among themselves,
each general partner and the managing partner will be responsible only to pay
his pro rata share of that partnership's liabilities and obligations, and will
be entitled to contribution from other general partners and the managing partner
of a partnership if he incurs liability in excess of his pro rata share.
Furthermore, the managing partner will indemnify each general partner of the
partnership. The managing partner will undertake to indemnify each general
partner for any and all partnership-related obligations and liabilities
otherwise allocable to or paid by such general partner which are in excess of
such general partner's share of the partnership's undistributed assets. However,
such contribution rights and indemnity do not legally negate a general partner's
liability for a partnership's obligations, and a general partner still could be
subject to liability in excess of the amount of his capital contribution if the
managing partner should become bankrupt or for any other reason are unable to
meet the financial commitments of the indemnity. This liability could result in
the necessity for a general partner to make additional payments to the
partnership. Due to the uncertain nature of any such liability, it is not
possible to determine the amount of any such liability.
The managing partner will conduct the operations of each partnership in
a manner designed to reduce the risk that a general partner could be required to
make such additional payments. See "Insurance."
LIMITED PARTNERS
Under Delaware law, a limited partner is not liable for the obligations
of a limited partnership unless he is also a general partner or, in addition to
the exercise of his rights and powers as a limited partner, he participates in
the control of the partnership's business, and then only to persons who transact
business with the limited partnership reasonably believing, based upon the
limited partner's conduct, that the limited partner is a general partner.
Delaware law provides that certain acts, including the exercise of the right to
vote on matters specified in the partnership agreement, do not constitute
participation by a limited partner in the control of a limited partnership's
business. Assuming that a limited partner does not take part in the control of a
partnership's business and that he otherwise acts in conformity with the
provisions of the partnership agreement, his liability under Delaware law will
be limited, subject to possible exceptions, generally to the amount of capital
he has contributed to the partnership. Under Delaware law (i) a limited partner
is obligated to a partnership to perform any promise to contribute cash or
property or perform services, even if he is unable to perform because of death,
disability, or other reason, and such obligation may be enforced by a third
party creditor of the partnership and (ii) a limited partner may be liable to
the extent of prohibited distributions (as described below) made to the limited
partner, if he knew, at the time of the distribution, that it was prohibited. A
limited partner's liability for the return of any distribution terminates,
however, after the expiration of three years from the date of the distribution.
Under Delaware law, a limited partner may not receive a distribution from a
partnership to the extent that at the time of and after giving effect to the
distribution, all liabilities of the partnership, other than liabilities to
limited partners on account of their interests, exceed the fair value of the
partnership's assets. Under Delaware law, an assignee who becomes a substituted
limited partner of a partnership is liable for the obligation of his assignor to
make capital contributions, except that the assignee is not obligated for
liabilities unknown to him at the time he became a limited partner and that
could not be ascertained from the partnership agreement.
It is currently anticipated that the partnerships will conduct
substantially all of their business in the states of Texas, Oklahoma, Kansas and
New Mexico, where each partnership will register to do business as a foreign
limited
90
partnership. A partnership may also be deemed to be conducting business in
various states, other than Texas, Oklahoma, Kansas and New Mexico, in which the
partnership acquires and operates properties. The applicability of state laws to
limited partners of a limited partnership such as a partnership in such a
situation and limitations of the liability of limited partners for the
obligations of the limited partnership have not been clearly established in many
jurisdictions. If it were determined that the right or exercise of the right by
the limited partners as a group to remove or replace the managing partner, to
make certain amendments to the partnership agreement, or to take other action
under the partnership agreement, constitute "control" of a partnership's
business for the purposes of the statutes of any relevant jurisdiction, a
limited partner might be held personally liable for a partnership's obligations
under the laws of such jurisdiction. Further, under the laws of certain
jurisdictions, a limited partner might be liable for other amounts, such as the
amount of any undistributed profits to which such limited partner is entitled,
with interest, or interest on the amount of capital contributions rightfully
returned to him. Maintenance of limited liability will require compliance with
legal requirements in such jurisdictions. The partnerships and the drilling
programs will operate in such a manner as its managing partner deems reasonable,
necessary and appropriate to preserve the limited liability of limited partners.
The following table summarizes the key differences in the treatment
afforded limited partners, general partners and the managing partner under
Delaware law.
<Table>
<Caption>
LIMITED PARTNERS GENERAL PARTNERS MANAGING PARTNER
- ---------------------------------- ------------------------- ------------------------- -----------------------
General liability for all of the No Yes Yes
obligations of a partnership
Limited liability for the Yes No Yes
obligations of a partnership to (subject to
the extent of capital indemnification)
contributions
Right to indemnification by us Not Applicable Yes Yes
for any amounts due in excess of
capital contributions to the
partnership
Right to participate in the No No Yes
management and operations of the (delegated to managing
partnership partner)
Right to deduct intangible Yes (but limited to Yes (not limited to Yes (not limited to
drilling costs deductions against deductions against deductions against
income from passive income from passive income from passive
activities) activities but subject activities but
to "At Risk" and basis subject to "At Risk"
limitations) and basis limitations)
</Table>
SUMMARY OF PARTNERSHIP AGREEMENT AND DRILLING PROGRAM AGREEMENT
The following is a summary of the provisions of the partnership
agreements and the drilling program agreements. This summary is qualified in all
respects by reference to the full text of the Form of Partnership Agreement,
which appears as Exhibit A to this prospectus; and the Form of Drilling Program
Agreement, which appears as Exhibit B to this prospectus. Each prospective
purchaser is urged to review, and be advised with respect to the effect of, the
provisions of the partnership agreement and the drilling program agreement.
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TERM
Each partnership will be organized under the Delaware Revised Uniform
Limited Partnership Act. Each drilling program will be a partnership for income
tax purposes only and, for all other purposes, is intended to be an agreement
among Mewbourne Oil Company, as drilling program manager, and the managing
partner and a partnership as joint owners or tenants-in-common of undivided
working interests in the drilling program's oil and gas properties. Each
partnership and the related drilling program will continue until terminated as
provided for in the partnership agreement and the drilling program agreement.
See "-- Dissolution, Liquidation and Termination" below.
RIGHTS AND POWERS OF PARTNERS
General and Limited Partners. Under the terms of the partnership
agreements, general and limited partners will have the following rights and
powers with respect to their respective partnership:
(a) to share all charges, credits, and distributions in accordance
with the partnership agreement and share all charges, credits,
and distributions of the related drilling program through the
partnership as discussed under "Participation in Costs and
Revenues",
(b) to inspect at their expense books and records relating to the
activities of the partnership through the drilling program,
upon adequate notice and at all reasonable times, other than
geophysical, geological and other similar data and information
and studies, maps, evaluations, and reports derived therefrom
which for a reasonable period of time may be kept confidential
because the managing partner has agreed to keep such matters
confidential or has determined in good faith that such matters
should be kept confidential considering the interests of the
partnership and each of its partners, and upon written request
at their expense to have a copy of a list of names and
addresses of all partners mailed to them,
(c) to have on demand true and full information of all activities
of the partnership, through the drilling program, and a formal
account of affairs whenever circumstances render it just and
reasonable,
(d) to have dissolution and winding up of the partnership by
decree of court as provided under Delaware law,
(e) to reconstitute the partnership with a new managing partner
upon the withdrawal or retirement of the managing partner from
the partnership, directly or as a result of a bankruptcy,
dissolution, or similar event that would dissolve the
partnership, which causes the dissolution of the partnership
upon the election of a majority in interest of the general and
limited partners,
(f) to terminate any contract between the partnership and the
managing partner or any affiliate of the managing partner by a
vote or written consent of a majority in interest of the
general and limited partners, without penalty upon 60 days'
written notice,
(g) to approve the sale of all or substantially all of the assets
of the partnership, except upon liquidation of the
partnership, by the affirmative vote of a majority in interest
of the general and limited partners, except in connection with
a roll-up transaction which requires the affirmative vote of
at least 66% in interest of the general and limited partners,
(h) to dissolve the partnership at any time upon the election of a
majority in interest of the general and limited partners,
(i) to permit the assignment by the partnership or the managing
partner of their obligations under the drilling program
agreement, if such permission is required under the drilling
program agreement, by the affirmative vote of a majority in
interest of the general and limited partners,
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(j) to agree to the termination or amendment, except for certain
conformatory amendments and amendments necessary to conform to
the Internal Revenue Code or that do not adversely affect the
general and limited partners, of the drilling program
agreement or the waiver of any rights of the partnership under
the drilling program agreement by the affirmative vote of a
majority in interest of the general and limited partners,
(k) to remove the managing partner and substitute a new managing
partner to operate and carry on the business of the
partnership or, to remove the drilling program manager and
substitute a successor to act in such capacity by the
affirmative vote of a majority in interest of the general and
limited partners, and(l) to propose and vote on certain
matters affecting the partnership as provided in the
partnership agreement.
Limited Partners. Limited partners of a partnership will take no part
in the control of the business or affairs of the partnership or the related
drilling program and will have no voice in the management or operations of that
partnership or drilling program. This lack of management and control is
necessary to insulate the limited partners from liability in excess of their
investment in the partnership and their share of undistributed profits from the
partnership. See "Risk Factors -- Particular Risks Relating to the Interests --
Liability of Limited Partners" and "Liability of General and Limited Partners --
Limited Partners." Notwithstanding the foregoing, limited partners shall:
o have the rights described in paragraphs (a) through (l) under
the caption "general and limited partners" above, and
o have their liability for operations of the partnership and the
drilling program limited to the amount of their capital
contributions and to their shares of partnership capital and
undistributed net revenues of the partnership, if any;
provided, however, that under Delaware law the limited
partners may under certain circumstances be required to repay
the partnership amounts previously distributed to them by the
partnership if the partnership does not have sufficient other
assets to satisfy the claims of creditors.
General Partners. The general partners will delegate to the managing
partner the responsibility for the day-to-day operations of the partnerships. In
addition, the general partners will covenant not to exercise the following
rights granted to them under Delaware law:
o the right to withdraw from the partnership,
o the right to act as agent of the partnership or to execute
documents on behalf of the partnership, and
o the right to act other than together with other general
partners constituting a majority in interest of the general
and limited partners to cause the managing partner on behalf
of the partnership to convey partnership property or take any
other action binding on the partnership.
A general partner who violates such covenants is obligated to indemnify the
partnership and the other partners for any loss or liability caused by such
violation. Furthermore, in the event of a dissolution caused by a withdrawing
general partner, upon reconstitution of the partnership, the withdrawing general
partner shall remain subject as a general partner to any liabilities or
obligations of the partnership arising prior to such withdrawal. Upon withdrawal
from the partnership, a general partner is entitled to continue to receive any
distributions to which he is otherwise entitled under the partnership agreement
for the period prior to his withdrawal; however, such general partner shall not
be entitled to receive the fair value of his interest in the partnership as of
the date of such withdrawal based upon his right to share in distributions from
the partnership, and neither the partnership nor the managing partner has any
obligation to repurchase any interest in the partnership from the withdrawing
general partner. The withdrawing general partner will no longer be entitled to
receive any distributions nor shall such general partner have any rights as an
investor partner under the partnership agreement. The sharing ratios will be
recalculated among the general and limited partners without regard to the
withdrawing general partner's capital contribution. See "-- Reconstitution of
the Partnership" below.
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RIGHTS AND POWERS OF THE MANAGING PARTNER
The managing partner has full and exclusive power, except as limited by
the partnership agreement and applicable law, to manage, control, administer,
and operate the properties, business, and affairs of a partnership. The managing
partner has the authority to enter into a drilling program agreement on behalf
of a partnership. Under the drilling program agreements, Mewbourne Oil Company
as drilling program manager will have the power and authority to act on behalf
of a partnership with respect to the management, control, and administration of
the business and affairs of the related drilling program and the properties
subject to the drilling program agreement.
Under the partnership agreements, the managing partner is required to
devote only such time and effort to the business of the partnership as may be
necessary to promote adequately the interests of that partnership and the mutual
interests of the partners. The managing partner is permitted to engage in any
other business ventures, including the ownership and management of oil and gas
properties and the organization and management of other drilling programs. See
"Conflicts of Interest."
INDEMNIFICATION OF THE MANAGING PARTNER AND ITS AFFILIATES
The partnership agreements provides that neither the managing partner
nor any of its affiliates shall be liable to a partnership or the general and
limited partners for any loss suffered by the partnership which arises out of
any action or inaction performed or omitted by the managing partner or such
affiliate, if the managing partner in good faith has determined, as of the time
of the conduct or omission, that the course of conduct or omission was in the
best interest of the partnership, the managing partner or such affiliate was
acting on behalf of or performing services for the partnership, and that such
conduct or omission did not constitute negligence or misconduct. The drilling
program manager and its affiliates, under the drilling program agreement, have
similar liability.
The partnership agreements also provide that the managing partner and
its affiliates shall be indemnified by a partnership, only from the tangible net
assets of the partnership and not from other assets of the partners, from and
against all losses, judgments, liabilities, expenses, and settlements sustained
by them in connection with acts performed or omitted by the managing partner or
affiliates acting on behalf of or performing services for that partnership or
the related drilling program; provided that, unless otherwise ordered by a
court, the managing partner has determined in good faith, as of time of the
conduct or omission, that the course of conduct or omission was in the best
interests of the partnership and that the conduct or omission did not constitute
negligence or misconduct. Each partnership is authorized to purchase insurance
against liabilities asserted against and expenses incurred by such persons in
connection with the partnership's activities, provided that the partnership will
not bear the cost of that portion of any insurance, other than insurance
customary for the partnership's business, which insures the managing partner for
any liability for which the managing partner may not be indemnified as discussed
above. The drilling program manager has similar rights with respect to
insurance, and the drilling program manager and its affiliates are entitled to
similar indemnification under the drilling program agreement.
The partnership agreements further limit indemnification of the
managing partner by providing that the managing partner, its affiliates and any
person acting as a broker-dealer will not be indemnified for any losses,
liabilities or expenses arising from or out of a violation of federal or state
securities laws unless:
o there has been a successful adjudication on the merits of each
count involving alleged securities law violations as to the
particular indemnitee and the court approves indemnification
of the litigation costs,
o such claims have been dismissed with prejudice on the merits
by a court of competent jurisdiction as to the particular
indemnitee and the court approves indemnification of the
litigation costs, or
o a court of competent jurisdiction approves a settlement of the
claims against a particular indemnitee and finds that
indemnification of the settlement and related costs should be
made.
Insofar as indemnification for liabilities under the Securities Act of
1933 may be permitted to the managing partner by a partnership agreement, the
partnership has been advised that in the opinion of the Securities and
94
Exchange Commission and certain state securities authorities such
indemnification is against public policy as expressed in the Securities Act of
1933, and is therefore unenforceable.
RIGHT OF PRESENTMENT
Each investor partner in a partnership may request that the managing
partner purchase for cash all, but not less than all, of that investor partner's
interests subject to certain limitations. The managing partner may also cause
its affiliate to fulfill its obligation to purchase such investor's interests.
Unless extended by the managing partner, partners in a partnership formed in
2002 may make such requests in each of the years 2006 through 2011 and partners
in a partnership formed in 2003 may make such request in each of the years 2007
through 2012. If the interests are subsequently listed on a national securities
exchange or are traded through the National Association of Securities Dealer's
Automated Quotation System or in the over-the-counter market, the right of
presentment may be terminated at the option of the managing partner. Any such
listing could have an adverse effect on the tax consequences of an investment in
interests. See "Tax Aspects - Classification of a Partnership for Tax Purposes"
and "Tax Aspects - General Features of Partnership Taxation - Passive Activity
Loss Limitations." If the obligation of the managing partner or its purchaser
designee to purchase interests from general and limited partners is determined
to violate any existing or future laws, such obligation will be eliminated or
modified appropriately. See "Terms of the Offering -- Right of Presentment."
ASSIGNABILITY OF INTERESTS
Assignability of interests is limited. Except by gift or operation of
law or when consented to by the managing partner, an investor partner in a
partnership may assign only whole interests unless the investor partner owns
less than a whole interest and transfers all his interests to one person or
unless such assignment is to the partnership, the managing partner, an affiliate
of the managing partner, or a third person specified by the managing partner,
and an investor partner must retain at least a whole interest in the event fewer
than all of his interests are assigned to any person other than the partnership,
the managing partner, an affiliate of the managing partner, or a third person
specified by the managing partner. In addition, general and limited partners who
are residents of either the State of California or Iowa are subject to
additional restrictions concerning the amount of their interests that may be
transferred. See "Terms of the Offering - Additional Requirements." interests
may only be assigned to a person otherwise qualified to become a substituted
general partner or a limited partner, as the case may be. In no event may any
assignment be made which, in the opinion of counsel to that partnership, would
result in the partnership being considered to have been terminated for purposes
of Section 708 of the Internal Revenue Code or might result in a change in the
status of the partnership to a "publicly traded partnership" within the meaning
of Section 7704 of the Internal Revenue Code, unless the managing partner
consents to such an assignment, or which, in the opinion of counsel to the
partnership, may not be effected without registration under the Securities Act
or 1933 or would result in the violation of any applicable state securities
laws. A partnership will not be required to recognize any assignment until the
instrument of assignment has been delivered to the managing partner. In the case
of a mere assignee of interests, the transferring general partner or limited
partner retains all rights other than the right to receive distributions as a
general partner or limited partner. However, an assignee of interests may become
a substituted general partner or limited partner, as the case may be, and thus
be entitled to all of the rights of a general partner or limited partner, only
upon meeting certain conditions, including:
o obtaining the consent of the assignor and the consent of the
managing partner to such substitution, which consent may only
be withheld to the extent legally necessary (as set forth in
an opinion of counsel) to preserve the tax status of the
partnership or the classification of partnership income for
tax purposes,
o paying all costs and expenses incurred in connection with such
substitution,
o making certain representations to the managing partner, and
o executing appropriate documents to evidence its agreement to
be bound by all of the terms and provisions of the applicable
partnership agreement.
95
A partnership will amend its records at least once each calendar
quarter to effect the substitution of substituted partners. In the case of
assignments, where the assignee does not become a substituted partner, a
partnership shall recognize the assignment not later than the last day of the
calendar month following receipt of notice of assignment and required
documentation. The restrictions on transfer contained in the partnership
agreement of a partnership may have the effect of reducing interest in the
partnership as a potential acquisition target or encouraging persons considering
an acquisition or takeover of the partnership to negotiate with the
partnership's managing partner rather than pursue non-negotiated acquisition or
takeover attempts, although no assurance can be given that they will have that
effect.
The rights and obligations of the managing partner in a partnership may
not be assigned except in limited circumstances set forth in the partnership
agreement, including without limitation assignments to affiliates of the
managing partner that agree to assume a proportionate share of the obligations
of the assigning managing partner, dispositions arising out of the merger,
consolidation, reorganization, or similar transaction of the managing partner,
and any pledge by the managing partner. The rights and obligations of the
managing partner and its affiliates with respect to a drilling program under the
drilling program agreement may be assigned to affiliates and successors in
interest by reason of merger, consolidation, reorganization, or similar
transaction, without the consent of a majority in interest of the general and
limited partners of the partnership, subject to limitations set forth in the
drilling program agreement, and the managing partner and its affiliates will
have the right at any time to mortgage or pledge its interest in properties of
the drilling program.
REMOVAL OR WITHDRAWAL
A majority in interest of the general and limited partners shall have
the right to remove the managing partner and to elect and substitute a new
managing partner. In such event, the removed managing partner shall be required
to offer to sell a minimum of 20% of, and shall have the right to offer to sell
the remaining 80% of such managing partner's interest in the partnership to the
new managing partner at a price and method of payment mutually agreeable to the
removed managing partner and the new managing partner. If the new managing
partner and the removed managing partner are unable to agree within ten days on
the purchase price of such interest, the new managing partner and the removed
managing partner shall select a mutually agreeable independent expert to
determine such purchase price. In addition, a majority in interest of the
general and limited partners shall have the right to remove Mewbourne Oil
Company as the drilling program manager. In such event, Mewbourne Oil Company
and its affiliates shall have the right to offer to sell up to 100% of their
collective ownership interests in oil and gas leases subject to the drilling
program agreement to the new drilling program manager. The method of payment for
the removed managing partner's and Mewbourne Oil Company's interest must be fair
and must protect the solvency and liquidity of the partnership.
In the event the managing partner withdraws or retires from a
partnership and such withdrawal or retirement causes dissolution of the
partnership, a majority in interest of the general and limited partners shall be
entitled to reconstitute the partnership and elect and substitute a new managing
partner. Such new managing partner shall be entitled to acquire the partnership
interest of the retiring managing partner on the same basis and in the same
manner as set forth above. The managing partner may not voluntarily withdraw
from a partnership prior to the later to occur of:
o the completion of the partnership's primary drilling
activities under the related drilling program, and
o the fifth anniversary of the date that general and limited
partners were admitted to the partnership.
In order to exercise its right of withdrawal, the managing partner must
give the general and limited partners at least 120 days' advance written notice.
DISSOLUTION, LIQUIDATION AND TERMINATION
A partnership shall be dissolved upon:
o the occurrence of December 31, 2053,
96
o the vote or consent in writing of a majority in interest of
the general and limited partners at any time,
o the sale, disposition, or termination of all or substantially
all of the oil and gas leases then owned by the partnership,
o the withdrawal, bankruptcy, insolvency, or dissolution in
certain circumstances of the managing partner, the occurrence
of any other event which would permit a trustee or receiver to
acquire control of the property or affairs of the managing
partner or any other event of withdrawal from the partnership
by the managing partner as provided for by law; provided that
neither the dissolution of the managing partner as a
consequence of merger, consolidation, recapitalization, or
other corporate reorganization effected under the partnership
agreement shall cause dissolution of the partnership,
o the adjudication of insolvency or bankruptcy of the
partnership, or an assignment by the partnership for the
benefit of creditors,
o the withdrawal or retirement of the managing partner, or
o the occurrence of any other event which, under applicable law,
causes the dissolution of the partnership.
If dissolution of a partnership occurs due to the withdrawal or
bankruptcy of a general partner, the partnership shall not be terminated but
shall automatically be reconstituted. Upon dissolution of a partnership for any
reason other than bankruptcy or withdrawal of a general partner, unless it is
reconstituted as provided under "-- Rights and Powers of Partners" above, the
managing partner or a liquidator appointed by the managing partner shall wind up
the affairs of the partnership and make final distribution of its assets. In the
event the managing partner is unable to serve as liquidator, the liquidator
shall be appointed by a majority in interest of the general and limited
partners.
After making a proper accounting and paying or making provision for the
payment of existing and contingent liabilities, the liquidator of a partnership
shall sell all remaining assets of the partnership for cash at the best price
available therefor and distribute the proceeds of such sales to the partners. In
the case of a sale in liquidation, the liquidator shall adjust the capital
accounts of the partners under the terms of the partnership agreement to account
for all gain and loss on such sales and shall distribute the proceeds of such
sales to the partners in accordance with their respective capital account
balances, as so adjusted. partners in a partnership will not be obligated to
restore any negative balance in their capital accounts after the liquidation of
their interests in a partnership. The distribution of cash or properties to the
partners will constitute a complete distribution to the partners of their
respective interests in that partnership and its property.
In the event of a dissolution and liquidation of a partnership as a
result of an exchange or tender offer, the liquidator may assume the sale of all
remaining assets of the partnership for cash at the respective fair market
values of such assets and then debit or credit each partner's capital account
with its respective share of the hypothetical gains or losses resulting from
such assumed sales in the same manner as such capital account would be debited
or credited on the actual sales of such assets. If such exchange or tender offer
is conducted through a sale of all or substantially all of the assets of a
partnership or is otherwise binding on the partners, the liquidator shall
distribute all securities or other assets received from the sale of the
partnership assets to the partners proportionately based on the partners'
positive capital account balances, as so adjusted. In the event of an exchange
offer that is not binding upon all partners, the liquidator shall then exchange
for securities offered in the exchange or tender offer partnership oil and gas
properties having a fair market value equal to the sum of the positive balances
in the capital accounts, as so adjusted, of the partners who elect to accept the
exchange or tender offer. The liquidator shall distribute such securities to
such accepting partners on a basis reflecting the partners' respective positive
capital account balances, adjusted as provided above.
97
RECONSTITUTION OF A PARTNERSHIP
In the event the managing partner of a partnership withdraws or retires
from the partnership, directly or as a result of a bankruptcy, dissolution, or
similar event that would dissolve the partnership, a majority in interest of
general and limited partners, acting at a meeting to be held within 90 days
following receipt of written notice of such event from the managing partner,
shall be entitled to reconstitute the partnership and elect and substitute a new
managing partner, which may be the retiring managing partner.
In the event a majority in interest but less than all of the general
and limited partners in a partnership elect to reconstitute the partnership, the
partners' capital accounts shall be adjusted by assuming the sale of all assets
of the partnership for cash at the respective fair market values of such assets
as of the date of dissolution of the partnership and debiting or crediting each
partner's capital account with its respective share of the hypothetical gains or
losses resulting from such assumed sales in the same manner as such capital
account would be debited or credited on the actual sales of such assets.
The new managing partner shall then sell for cash partnership oil and
gas properties having a fair market value equal to the fair market value of all
partnership oil and gas properties times the ratio of the aggregate of the
positive balances in the capital accounts, as so adjusted, of the general and
limited partners that have not elected to reconstitute the partnership and the
retiring managing partner, to the extent the retiring managing partner's
aggregate partnership interest was not purchased by the new managing partner, to
the positive balances of all partners. The new managing partner shall then
distribute such cash to the general and limited partners that have elected not
to reconstitute the partnership and to the managing partner, to such extent, in
proportion to the positive balances of their respective capital accounts.
The new managing partner, on behalf of the partners that have elected
not to form the reconstituted partnership, shall retain for the benefit of the
reconstituted partnership an undivided interest in all oil and gas properties of
the partnership remaining after the distributions provided for above.
Each general partner of a partnership will covenant not to cause a
dissolution of that partnership by voluntary withdrawal or other voluntary act.
In the event of such a dissolution, however, upon reconstitution of the
partnership, the withdrawing general partner shall remain subject as a general
partner with respect to any liabilities or obligations of the partnership
arising prior to such withdrawal. Upon withdrawal from the partnership, a
general partner is entitled to continue to receive any distributions to which he
is otherwise entitled under the partnership agreement for the period prior to
his withdrawal; however, such general partner shall not be entitled to receive
the fair value of his interest in the partnership as of the date of such
withdrawal based upon his right to share in distributions from the partnership,
and neither the partnership nor the managing partner has any obligation to
repurchase any interest in the partnership from the withdrawing general partner.
The withdrawing general partner will not be entitled to receive any
distributions for the period subsequent to his withdrawal nor shall such general
partner have any rights as an investor partner under the partnership agreement.
The sharing ratios will be recalculated among the general and limited partners
without regard to the withdrawing general partner's capital contribution. If the
partnership is reconstituted due to the bankruptcy of a general partner, the
trustee, receiver, or other successor in interest of the bankrupt general
partner shall become liable for all of the debts and obligations of the bankrupt
general partner.
AMENDMENTS
A majority in interest of the general and limited partners of a
partnership may require the amendment of the partnership agreement without the
consent of the managing partner, except that any amendment which would increase
the liability or duties of any partner, change the contributions required of a
partner, provide for the reallocation of profits, losses, or deductions to the
detriment of a partner, establish any new priority in one or more partners as to
the return of capital contributions or as to profits, losses, deductions, or
distributions to the detriment of a partner or cause the partnership to be taxed
as a corporation, must be approved by such partner before it will be binding
upon him. Minor and conformatory amendments and amendments that do not adversely
affect the general and limited partners in any material respect may be made by
the managing partner without the consent of the general and limited partners.
98
REPORTS TO PARTNERS
The managing partner will furnish to the general and limited partners
of each partnership semi-annual and annual reports which will contain financial
statements, including a balance sheet and statements of income, partners' equity
and cash flows, all of which shall be prepared in accordance with generally
accepted accounting principles, which statements at fiscal year end will be
audited by an independent certified public accountant. Financial statements
furnished in a partnership's semi-annual reports will not be audited.
Semi-annually, all general and limited partners will also receive a summary
itemization of the transactions between the managing partner or any affiliate of
the managing partner and the partnership showing all items of compensation
received by the managing partner and its affiliates, including without
limitation the average price paid by any affiliate of the managing partner
during the two most recent calendar quarters for oil and gas produced by program
wells purchased by such affiliate and the highest average price paid by any
other substantial purchaser of comparable oil or gas produced in the field where
such program wells are located. Annually beginning with the fiscal year ending
December 31, 2003, as to a partnership formed in 2002, and ending December 2004,
as to a partnership formed in 2003, oil and gas reserve estimates prepared by an
independent petroleum engineer will also be furnished to the general and limited
partners. Annual reports will be provided to the general and limited partners
within 120 days after the close of the partnership fiscal year, and semi-annual
reports will be provided within 75 days after the close of the first six months
of the partnership fiscal year. In addition, the general and limited partners in
a partnership shall receive on a monthly basis while the partnership is
participating in the drilling and completion activities of a drilling program,
reports containing a description of the partnership's acquisition of interests
in prospects, including farmins and farmouts, and the drilling, completion and
abandonment of wells thereon. All general and limited partners will receive a
report containing information necessary for the preparation of their federal
income tax returns and any required state income tax returns by March 15 of each
calendar year or as soon as practicable thereafter. The managing partner will
furnish to the general and limited partners information regarding differences
between tax basis of accounting and the basis of generally accepted accounting
principles in accordance with generally accepted accounting principles. General
and limited partners in a partnership will also receive in such monthly reports
a summary of the status of wells drilled by the partnership. The managing
partner may provide such other reports and financial statements as it deems
necessary or desirable.
ACCESS TO LIST OF GENERAL AND LIMITED PARTNERS
An alphabetical list of the investor's names, addresses and business
telephone numbers of the general and limited partners in a partnership
identified as general partners or limited partners along with the number of
interests held by each of them will be maintained as a part of the books and
records of the partnership and will be available for inspection by any general
and limited partners or his or her designated agent at the principal office of
the partnership upon the request of an investor partner. The investor list will
be updated at least quarterly to reflect changes in the information contained in
such list. A copy of the investor list for a partnership will be mailed to any
investor partner in the partnership requesting the investor list within ten days
of the request. The copy of the investor list will be printed in alphabetical
order, on white paper, and in a readily readable type size, in no event smaller
than 10-point type. A reasonable charge for copy work may be charged by the
partnership. The purposes for which an investor partner may request a copy of
the investor list include, without limitation, matters relating to general and
limited partners' voting rights under the partnership agreement and the exercise
of general and limited partners' rights under federal proxy laws. If the
managing partner neglects or refuses to exhibit, produce, or mail a copy of the
investor list as requested, the managing partner will be liable to any investor
partner requesting the list for the costs, including attorneys fees, incurred by
that investor partner for compelling the production of the investor list, and
for actual damages suffered by any investor partner by reason of such refusal or
neglect. It shall be a defense that the actual purpose and reason for the
requests for inspection or for a copy of the investor list is to secure the list
of general and limited partners or other information for the purpose of selling
such list or information or copies of such list, or of using the same for a
commercial purpose other than in the interest of the applicant as an investor
partner relative to the affairs of the partnership. The managing partner may
require the investor partner requesting the investor list to represent that the
list is not requested for a commercial purpose unrelated to the investor
partner's interest in the partnership. The above remedies in favor of an
investor partner requesting copies of the investor list are in addition to, and
shall not in any way limit, other remedies available to general and limited
partners under federal law, or the laws of any state.
99
POWER OF ATTORNEY
In signing the special subscription instructions and the subscription
agreement in the form attached as Exhibit C and Exhibit D to this prospectus,
each investor adopts the terms and provisions of the partnership agreement for
the partnership to which such investor is admitted, including representations
and warranties contained in the partnership agreement, and makes the power of
attorney set forth in Section 10.3 of the partnership agreement. Pursuant to the
partnership agreement, each investor partner of a partnership will appoint the
managing partner as his attorney-in-fact, on his behalf and in his name, to
execute, swear to and file all documents or instruments necessary or desirable:
o to comply with the laws of any state in which the partnership
does business,
o to amend the partnership agreement to admit a new or
substituted general partner or limited partner or make changes
required by amendments thereto adopted by the general and
limited partners,
o to amend the partnership agreement to effect the conversion of
the general partners to limited partners,
o to conduct the business and affairs of the partnership,
o to reflect the agreement of all of the general and limited
partners if the required majority in interest of the general
and limited partners has approved any action under the
partnership agreement and amendments to the partnership
agreement to implement such action, and
o to perform other ministerial acts in connection with the
partnership and its operations, all subject to compliance with
the partnership agreement.
Such appointment shall constitute a power coupled with an interest,
shall not be revocable and shall be effectuated under Section 10.3 of the
partnership agreement by an investor partner's execution of such special
subscription instructions and subscription agreement.
LEGAL OPINIONS
The validity of the interests offered by this prospectus and federal
income tax matters as discussed under "Tax Aspects" in this prospectus has been
passed upon by Vinson & Elkins L.L.P., 3700 Trammel Crow Center, 2001 Ross
Avenue, Dallas, Texas 75201-2975.
EXPERTS
The financial statements of Mewbourne Development Corporation as of and
for the year ended June 30, 2002, and the balance sheet of Mewbourne Energy
Partners 03-A, L.P. as of February 19, 2003, included in this Registration
Statement on Form S-1, have been so included in reliance on the reports of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The information included in this Registration Statement on Form S-1
regarding the summary of the reserve report as of January 1, 2003, for Mewbourne
Development Partners 93-A, L.P., Mewbourne Development Partners 93-B, L.P.,
Mewbourne Development Partners 94-A, L.P., Mewbourne Development Partners 94-B,
L.P. Mewbourne Development Partners 94-C, L.P., Mewbourne Energy Partners 94
Private L.P., Mewbourne Energy Partners 95-A, L.P., Mewbourne Energy Partners
95-B, L.P., Mewbourne Energy Partners 96-A, L.P., Mewbourne Energy Partners
97-A, L.P., Mewbourne Energy Partners 98-A, L.P., Mewbourne Energy Partners
99-A, L.P., Mewbourne Energy Partners 00-A, L.P. and Mewbourne Energy Partners
01-A, L.P. was audited by Forrest A. Garb & Associates, Inc. and is included
in this prospectus in reliance upon the report of such firm as experts with
respect to the matters covered by its report and the giving of its report.
100
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on behalf of the partnerships
with the Securities and Exchange Commission under the Securities Act of 1933
relating to the interests being offered by this prospectus. This prospectus does
not contain all of the information set forth in the registration statement,
certain portions of which have been omitted pursuant to the rules and
regulations of the Securities and Exchange Commission.
For further information about us, the partnerships and the interests
being offered, please review the registration statement, including the exhibits
that are filed with it. Statements made in the registration statement that
describe documents may not necessarily be complete. We recommend that you also
review the documents that we have filed with the registration statement to
obtain a more complete understanding of those documents. A copy of the
registration statement is available for inspection without charge at the public
reference facilities maintained by the Securities and Exchange Commission at 450
Fifth Street, N.W., Washington, D.C., 20549. Information regarding the operation
of the public reference facilities may be obtained by calling the Securities and
Exchange Commission at 1-800-SEC-0330. The registration statement may also be
obtained from the Web site maintained by the Securities and Exchange Commission
at http://www.sec.gov. Copies of any materials filed as a part of the
registration statement may be obtained for a fee from the Public Reference
Section of the Securities and Exchange Commission at 450 Fifth Street, N.W.,
Washington, D.C., 20549.
The delivery of this prospectus at any time does not imply that the
information contained in this prospectus is correct as of any time subsequent to
the date of this prospectus.
101
INDEX TO FINANCIAL STATEMENTS
<Table>
Financial Statements of Mewbourne Development Corporation:
Report of Independent Accountants.....................................................................F1-1
Balance Sheet as of June 30, 2002.....................................................................F1-2
Statement of Operations and Comprehensive Income for the Year Ended June 30, 2002.....................F1-3
Statement of Changes in Stockholder's Equity for the Year Ended June 30, 2002.........................F1-4
Statement of Cash Flows for the Year Ended June 30, 2002..............................................F1-5
Notes to Financial Statements.........................................................................F1-6
Unaudited Financial Statements of Mewbourne Development Corporation:
Balance Sheet as of December 31, 2002.................................................................F2-1
Statement of Operations for the Six Months Ended December 31, 2002....................................F2-2
Statement of Changes in Stockholder's Equity for the Six Months Ended December 31, 2002...............F2-3
Statement of Cash Flows for the Six Months Ended December 31, 2002....................................F2-4
Notes to Unaudited Financial Statements...............................................................F2-5
Financial Statement of Mewbourne Energy Partners 03-A, L.P.:
Report of Independent Accountants.....................................................................F3-1
Balance Sheet as of February 19, 2003.................................................................F3-2
Note to Balance Sheet.................................................................................F3-3
</Table>
THE FOLLOWING FINANCIAL STATEMENTS INCLUDE THOSE OF THE MANAGING
PARTNER, MEWBOURNE DEVELOPMENT CORPORATION, IN WHICH THE GENERAL AND LIMITED
PARTNERS WILL ACQUIRE NO INTEREST.
102
MEWBOURNE DEVELOPMENT CORPORATION
FINANCIAL STATEMENTS WITH REPORT
OF INDEPENDENT ACCOUNTANTS
JUNE 30, 2002
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Mewbourne Development Corporation:
In our opinion, the accompanying balance sheet and the related statements of
operations and comprehensive income, changes in stockholder's equity and of cash
flows present fairly, in all material respects, the financial position of
Mewbourne Development Corporation at June 30, 2002, and the results of its
operations and its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
/s/ PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
February 14, 2003
F1-1
MEWBOURNE DEVELOPMENT CORPORATION
BALANCE SHEET
JUNE 30, 2002
<Table>
<Caption>
ASSETS 2002
-------------
Current assets:
Cash and cash equivalents $ 593,133
Accounts receivable, related party 814,243
-------------
Total current assets 1,407,376
Investments in partnerships 140,697
Oil and gas properties - full-cost method, net 12,367,302
-------------
Total assets $ 13,915,375
=============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable, related party $ 1,462,787
Deferred income taxes 1,366,511
-------------
Total liabilities 2,829,298
-------------
Stockholder's equity:
Common stock, $1 par value, 1,000 shares authorized,
issued and outstanding 1,000
Paid-in capital in excess of par value of common stock 1,190,262
Retained earnings 9,894,815
-------------
Total stockholder's equity 11,086,077
-------------
Total liabilities and stockholder's equity $ 13,915,375
=============
</Table>
The accompanying notes are an integral part of these
financial statements.
F1-2
MEWBOURNE DEVELOPMENT CORPORATION
STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE YEAR ENDED JUNE 30, 2002
<Table>
<Caption>
2002
------------
Revenues and Other Income:
Oil and gas sales $ 4,267,431
Interest and dividends 84,456
Gain on sales of securities 314,630
------------
Total revenues and other income 4,666,517
------------
Expenses:
Production 1,191,671
General and administrative 287,659
Depreciation, depletion and amortization 1,479,936
Other 40,358
------------
Total expenses 2,999,624
------------
1,666,893
Equity in partnership income 16,171
------------
Income before taxes 1,683,064
Income tax expense 539,234
------------
Net income 1,143,830
Other comprehensive income, net of tax:
Decrease in net unrealized gain on marketable securities (178,954)
------------
Comprehensive income $ 964,876
============
Basic and diluted net income per common share $ 1,143.83
============
</Table>
The accompanying notes are an integral part of these
financial statements.
F1-3
MEWBOURNE DEVELOPMENT CORPORATION
STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE YEAR ENDED JUNE 30, 2002
<Table>
<Caption>
COMMON STOCK NET
------------------------- UNREALIZED
GAIN ON
PAID-IN MARKETABLE RETAINED
SHARES AMOUNT CAPITAL SECURITIES EARNINGS TOTAL
----------- ----------- ----------- ----------- ----------- ------------
Balance at June 30, 2001 1,000 1,000 1,190,262 178,954 8,750,985 10,121,201
Net income
1,143,830 1,143,830
Decrease in net unrealized gain on
marketable securities (net of tax)
(178,954) (178,954)
-------- --------- ----------- ---------- ----------- ------------
Balance at June 30, 2002 1,000 $ 1,000 $ 1,190,262 $ -- $ 9,894,815 $ 11,086,077
======== ========= =========== ========== =========== ============
</Table>
The accompanying notes are an integral part of these
financial statements.
F1-4
MEWBOURNE DEVELOPMENT CORPORATION
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 2002
<Table>
<Caption>
2002
-------------
Cash flows from operating activities:
Net income $ 1,143,830
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization 1,479,936
Equity in partnership income (16,171)
Deferred tax expense (19,979)
Accrued interest on marketable securities (55,223)
Gain on sales of securities (314,630)
Changes in operating assets and liabilities:
Accounts receivable, related party 465,561
Accounts payable, related party 23,411
-------------
Net cash provided by operating activities 2,706,735
-------------
Cash flows from investing activities:
Investment in oil and gas properties (5,745,024)
Proceeds from the sale of marketable securities 1,541,887)
Contributions to partnerships (1,619)
Distributions from partnerships 45,350
-------------
Net cash used in investing activities (4,159,406)
-------------
Net decrease in cash and cash equivalents (1,452,671)
Cash and cash equivalents, beginning of year 2,045,804
-------------
Cash and cash equivalents, end of year $ 593,133
=============
Supplemental disclosure of cash flow activity:
Income taxes paid $ 1,249,986
=============
</Table>
The accompanying notes are an integral part of these
financial statements.
F1-5
MEWBOURNE DEVELOPMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
------------------
1. SIGNIFICANT ACCOUNTING POLICIES
FINANCIAL STATEMENT PRESENTATION
Mewbourne Development Corporation (the "Company") is a wholly-owned
subsidiary of Mewbourne Holdings, Inc. (the "Stockholder"). The Company is
principally involved in the exploration and production of oil and gas in
Texas, Oklahoma and New Mexico.
The Company follows the full-cost method of accounting for its oil and gas
activities, all of which are located in the Continental United States.
Under the full-cost method, all productive and nonproductive costs incurred
in the acquisition, exploration and development of oil and gas properties
are capitalized. All such costs are directly identified with acquisition,
exploration and development activities and do not include any costs related
to production, general corporate overhead, or similar activities.
Depreciation, depletion and amortization of oil and gas properties is
computed on the units-of-production method, using the proved reserves
underlying the oil and gas properties. At June 30, 2002, all capitalized
costs were subject to amortization. Gains and losses on the sale or other
disposition of properties are not recognized unless such adjustments would
significantly alter the relationship between capitalized costs and proved
reserves of oil and gas.
Capitalized costs are subject to a ceiling test that limits such costs to
the aggregate of the present value of future net revenues of proved
reserves discounted at 10%, based on oil and gas prices and operating
conditions at the balance sheet date, and the lower of cost or fair value
of unproved properties. There was no ceiling write-down required at June
30, 2002.
REVENUE RECOGNITION
Revenue is normally recognized from jointly owned properties as oil and gas
is produced and sold for the Company's account, although the various
interest owners may take more or less than their proportionate ownership of
the production. The Company uses the sales method of accounting for
imbalances. There are no material imbalances at June 30, 2002.
MANAGEMENT'S ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
In addition, oil and gas reserves require significant estimates which, in
the near term, could materially differ from amounts ultimately realized.
See Note 7.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments, those with original
maturities of three months or less at the date of acquisition, to be cash
equivalents.
A substantial portion of the Company's cash and cash equivalents is
maintained in one financial institution.
F1-6
MARKETABLE SECURITIES
All marketable securities are classified as "available for sale".
Accordingly, such securities are carried at fair value with unrealized
holding gains or losses, net of related income tax effects, recorded as a
separate component of stockholder's equity. Realized gains and losses on
sales of securities are determined utilizing the specific identification
method. During 2002, all marketable securities were sold.
INVESTMENTS IN PARTNERSHIPS
The Company is managing partner of several oil and gas partnerships. The
Company accounts for its investment in partnerships using the equity method
of accounting.
2. OIL AND GAS PROPERTIES
Oil and gas properties consist of the following as of June 30, 2002:
<Table>
Proved oil and gas properties $ 20,136,752
Accumulated depreciation, depletion and amortization (7,769,450)
--------------
Net proved oil and gas properties $ 12,367,302
==============
</Table>
3. INCOME TAXES
Federal income tax expense is calculated on a current basis at the
Stockholder (consolidated) level and is allocated to its subsidiaries based
on their respective taxable income or loss, and a payable or receivable is
established with the Stockholder. As of June 30, 2002, federal income tax
payable to the Stockholder was $485,409.
In accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," the Company calculates its deferred tax
liability as if it were a separate tax paying entity. Deferred income taxes
are recognized for the tax consequences in future years of differences
between the tax basis of assets and liabilities and their financial
reporting amounts at the balance sheet date based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established
when necessary to reduce deferred tax assets to the amount expected to be
realized.
The entire deferred tax liability balance at June 30, 2002 is attributable
to the Company's oil and gas properties.
The components of income tax expense for the year ended June 30, 2002 are
as follows:
<Table>
Current income taxes:
Federal $ 485,409
State 73,804
Deferred income taxes:
Federal (17,876)
State (2,103)
-----------
$ 539,234
===========
</Table>
A reconciliation of income tax computed at the federal statutory income tax
rate to income tax expense reported herein for the year ended June 30,
2002, is as follows:
<Table>
Tax computed at statutory rate $ 572,241
Excess tax depletion (86,973)
</Table>
F1-7
<Table>
State taxes, net of federal benefit, and other 53,966
-----------
$ 539,234
===========
</Table>
4. COMMITMENTS AND CONTINGENCIES
The Company is obligated, subject to certain limitations, to purchase or
cause to be purchased by an affiliate or the Stockholder, limited
partnership interests, if tendered. For the majority of the partnerships in
which this obligation exists, the obligation generally commences once the
partnership has been in existence for 3 years and extends for a period of 5
years; on certain others, the obligation remains throughout the life of the
partnership. The obligation to purchase interests in a single calendar year
is generally limited to no more than 5% of the total number of interests of
the partnership outstanding at the beginning of the calendar year.
Additionally, the total amount of limited partnership interests which the
Company is obligated to purchase upon redemption is limited to $500,000 per
year. If the partnership interests are tendered in future years, it is
anticipated that the Company or Stockholder will use funds provided by
operations or borrow funds to satisfy such repurchase obligations.
Historically, the amount of limited partnership interests tendered has been
immaterial.
5. RELATED PARTY TRANSACTIONS
Under the terms of an operating agreement, substantially all services and
charges relating to the oil and gas properties in which the Company invests
are billed by and paid to a wholly-owned subsidiary of the Stockholder as
operator of the oil and gas properties.
6. RECENTLY ISSUED ACCOUNTING STANDARDS
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 143 ("FAS 143"), "Accounting for
Asset Retirement Obligations". This statement changes financial accounting
and reporting for obligations associated with the retirement and disposal
of long-lived assets, which includes the Company's oil and gas properties,
and the associated asset retirement costs. The Company will adopt FAS 143
on July 1, 2002.
As of July 1, 2002, the Company will recognize future oil and gas well
plugging and abandonment costs over the estimated useful life of the well
in accordance with the provisions of FAS 143. A liability for the estimated
fair value of the future plugging and abandonment costs will be recorded
with a corresponding increase in the full cost pool at the time a new well
is drilled. The Company will recognize accretion expense in connection with
the discounted liability over the remaining life of the well.
Upon adoption of FAS 143 at July 1, 2002, the Company will recognize a
one-time cumulative effect adjustment of $(86,759), net of deferred tax
expense of $53,174. The cumulative effect adjustment will include an
increase of $462,913 for the reversal of cumulative depreciation on the
estimated salvage value of equipment on the Company's oil and gas
properties. Prior to the adoption of FAS 143, the Company assumed salvage
value approximated plugging and abandonment costs. As such, estimated
salvage value was not excluded from depreciation and plugging and
abandonment costs were not accrued for over the life of the oil and gas
properties.
In October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144 ("FAS 144"), "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement changes
financial accounting and reporting for the impairment or disposal of
long-lived assets and is effective for the Company in the fiscal year
ending June 30, 2003. The Company does not expect the adoption of FAS 144
to have any impact on the financial statements.
In November 2002, the Financial Accounting Standards Board issued
Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees", which changes
financial accounting and reporting for obligations under certain
guarantees. The initial recognition and measurement provisions of the
interpretation are effective for the Company for all
F1-8
guarantees issued or modified after December 31, 2002. The disclosure
requirements in FIN 45 are effective for financial statements of interim or
annual periods ending after December 15, 2002. The Company is currently
evaluating the recognition and measurement provisions of FIN 45 (see Note
4).
In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest
Entities," which provides guidance on when certain entities should be
consolidated or the interests in those entities should be disclosed by
companies that do not control them through majority voting interest. The
Company does not expect FIN 46 to have a material impact on the financial
statements.
7. SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED)
The tables presented below provide supplemental information about oil and
gas exploration and production activities as defined by SFAS No. 69,
"Disclosures about Oil and Gas Producing Activities".
Capitalized costs related to oil and gas acquisition, exploration and
development activities at June 30, 2002 are as follows:
<Table>
Proved property costs $ 8,500,160
Producing assets 7,847,753
Other 3,788,839
-------------
Total capitalized costs 20,136,752
Accumulated depreciation, depletion and amortization (7,769,450)
-------------
Net capitalized costs $ 12,367,302
=============
</Table>
Costs incurred in property acquisitions and development activities during
the year ended June 30, 2002 are as follows:
<Table>
Proved property acquisition costs $ 3,017,910
Development costs 1,017,639
Other 1,709,475
-------------
Total $ 5,745,024
=============
</Table>
Other costs included in capitalized costs and costs incurred as of and for
the year ended June 30, 2002 consist of organization and offering costs
paid by the Company as managing partner of various oil and gas
partnerships.
Depletion, depreciation and amortization per equivalent unit of production
for the year ended June 30, 2002 was $5.44.
The estimates of proved oil and gas reserves utilized in the preparation of
these financial statements were estimated in accordance with guidelines
established by the Securities and Exchange Commission and the Financial
Accounting Standards Board, which require that reserve reports be prepared
using oil and gas prices and operating conditions at the balance sheet date
with no provision for price and cost escalation except by contractual
agreement. The price of oil and gas at June 30, 2002 was $24.01 per barrel
and $2.90 per mcf, respectively. Proved oil and gas reserves are defined as
estimated quantities of crude oil, natural gas, and natural gas liquids
which geological and engineering data demonstrate with reasonable certainty
to be recoverable in future years from known reservoirs under existing
economic and operating conditions. These estimates may change as future
information becomes available. All of the Company's reserves are located
onshore in the Continental United States.
F1-9
Changes in proved oil and gas reserves for the year ended June 30, 2002 are
as follows:
<Table>
<Caption>
GAS OIL
(MMcf) (MBbls)
---------- ----------
Proved reserves at June 30, 2001 9,334 127
Revisions to previous estimates (358) 44
Extensions, discoveries and other additions 4,545 40
Production (1,542) (15)
--------- ---
Proved reserves at June 30, 2002 11,979 196
========= ===
</Table>
Substantially all of the Company's proved reserves at June 30, 2002 and
June 30, 2001 are developed.
As required by the Financial Accounting Standards Board, the standardized
measure of discounted future cash flows is computed by applying year-end
prices and costs and a discount factor of 10 percent to net proved
reserves.
The standardized measure of discounted future net cash flows as of June 30,
2002 is as follows:
<Table>
Future cash inflows $ 39,480,309
Future productions costs (15,446,617)
Future development costs (638,517)
Future income tax expense (2,590,731)
--------------
20,804,444
Discount at 10% (8,464,786)
--------------
Standardized measure of discounted future net flows
from estimated production of proved oil and gas
reserves after income taxes $ 12,339,658
==============
</Table>
Changes in the standardized measure of discounted future net cash flows for
the year ended June 30, 2002 are as follows:
<Table>
Standardized measure of discounted future net cash flows at June 30, 2001 $ 12,227,196
Change in value of previous year reserves due to:
Value of reserves added due to extensions, discoveries and other additions 5,184,000
Accretion of discount 1,554,414
Development costs incurred during the year 1,017,639
Changes in estimated development costs (1,404,707)
Sales of oil and gas produced during the year, net of production costs (3,075,760)
Revisions of previous reserve estimates (97,163)
Net change in prices (4,488,539)
Net change in income taxes 1,780,377
Timing and other (357,799)
--------------
Standardized measure of discounted future net cash flows at June 30, 2002 $ 12,339,658
==============
</Table>
F1-10
MEWBOURNE DEVELOPMENT CORPORATION
FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 2002
MEWBOURNE DEVELOPMENT CORPORATION
BALANCE SHEET
DECEMBER 31, 2002
(UNAUDITED)
<Table>
<Caption>
ASSETS
Current assets:
Cash and cash equivalents $ 750,741
Accounts receivable, related party 1,528,430
------------
Total current assets 2,279,171
------------
Investment in partnerships 130,666
Oil and gas properties-full-cost method, net 15,911,400
------------
Total assets $ 18,321,237
============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable, related party $ 2,938,608
Noncurrent liabilities:
Long term debt 1,000,000
Asset retirement obligation plugging liability 785,381
Deferred income taxes 1,537,336
------------
Total noncurrent liabilities 3,322,717
------------
Total liabilities 6,261,325
============
Stockholder's equity:
Common stock, $1.00 par value, 1,000 shares authorized
issued and outstanding 1,000
Paid-in capital in excess of par value of common stock 1,190,262
Retained earnings 10,868,650
------------
Total stockholder's equity 12,059,912
------------
Total liabilities and stockholder's equity $ 18,321,237
============
</Table>
The accompanying notes are an integral part of the
financial statements.
F2-1
MEWBOURNE DEVELOPMENT CORPORATION
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2002
(UNAUDITED)
<Table>
Revenues and Other Income:
Oil and gas sales $ 3,190,662
Interest and dividends 4,395
---------------
Total revenues and other income 3,195,057
---------------
Expenses:
Production 700,602
General and administrative 173,675
Depreciation, depletion, and amortization 908,873
Asset retirement obligation accretion 18,060
Other 1,171
---------------
Total expenses 1,802,381
---------------
Equity in partnership income 8,857
---------------
Income before income taxes 1,401,533
Income tax expense 514,457
---------------
Income before cumulative effect of accounting change 887,076
---------------
Cumulative effect of accounting change (net of tax effect of $53,174)
86,759
---------------
Net income 973,835
Basic and diluted net income per common share:
Before cumulative effect of accounting change $ 887.08
Cumulative effect of accounting change $ 86.76
---------------
Net income $ 973.84
===============
</Table>
The accompanying notes are an integral part of the
financial statements.
F2-2
MEWBOURNE DEVELOPMENT CORPORATION
STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE SIX MONTHS ENDED DECEMBER 31, 2002
(UNAUDITED)
<Table>
<Caption>
COMMON STOCK
---------------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------------ ------------ ------------ ------------ ------------
Balance at June 30, 2002 1,000 $ 1,000 1,190,262 $ 9,894,815 $ 11,086,077
Net income 0 0 0 973,835 973,835
------------ ------------ ------------ ------------ ------------
Balance at December 31, 2002 1,000 $ 1,000 $ 1,190,262 $ 10,868,650 $ 12,059,912
============ ============ ============ ============ ============
</Table>
The accompanying notes are an integral part of the
financial statements.
F2-3
MEWBOURNE DEVELOPMENT CORPORATION
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2002
(UNAUDITED)
<Table>
Cash flow from operating activities:
Net income $ 973,835
Adjustments to reconcile net income/(loss) to net cash
provided by operating activities:
Cumulative effect of accounting change (86,759)
Depreciation, depletion, and amortization 908,873
Equity in partnership income (8,857)
Deferred tax expense 117,651
Accretion expense 18,060
Change in operating assets and liabilities:
Accounts receivable (714,187)
Accounts payable 1,475,821
------------
Net cash provided by operating activities 2,684,437
------------
Cash flows from investing activities:
Purchase of property and equipment (3,545,717)
Distributions from partnerships 18,888
------------
Net cash used in investing activities (3,526,829)
------------
Cash flows from financing activities:
Additions to long term debt 1,000,000
------------
Net cash provided by financing activities 1,000,000
------------
Net increase in cash and cash equivalents 157,608
Cash and cash equivalents, beginning of period 593,133
------------
Cash and cash equivalents, end of period $ 750,741
============
</Table>
The accompanying notes are an integral part of the
financial statements.
F2-4
MEWBOURNE DEVELOPMENT CORPORATION
NOTES TO FINANCIAL STATEMENTS
--------------------
1. Significant Accounting Policies:
Financial Statement Presentation
Mewbourne Development Corporation (the "Company"), is a wholly-owned
subsidiary of Mewbourne Holdings, Inc. (the "Stockholder"). The Company is
principally involved in the exploration and production of oil and gas in
Texas, Oklahoma, and New Mexico.
The Company follows the full-cost method of accounting for its oil and gas
activities, all of which are located in the Continental United States.
Under the full-cost method, all productive and nonproductive costs incurred
in the acquisition, exploration and development of oil and gas properties
are capitalized. All such costs are directly identified with acquisition,
exploration and development activities and do not include any costs related
to production, general corporate overhead or similar activities.
Depreciation, depletion, and amortization of oil and gas properties is
computed on the units-of-production method, using the proved reserves
underlying the oil and gas properties. Gains and losses on the sale or
other disposition of properties are not recognized unless such adjustment
would significantly alter the relationship between capitalized costs and
proved reserves of oil and gas.
Capitalized costs are subject to a ceiling test that limits such costs to
the aggregate of the present value of future net revenues of proved
reserves discounted at 10%, based on oil and gas prices and operating
conditions at the balance sheet date, and the lower of cost or fair value
of unproved properties. There was no ceiling write-down required at
December 31, 2002.
Revenue recognition
Revenue is normally recognized from jointly owned properties as oil and gas
is produced and sold for the Company's account, although the various
interest owners may take more or less than their proportionate ownership of
the production. The Company uses the sales method of accounting for
imbalances. There are no material imbalances at December 31, 2002.
Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
In addition, oil and gas reserves require significant estimates which, in
the near term, could materially differ from amounts ultimately realized.
See note 9.
Cash and Cash Equivalents
The Company considers all highly liquid investments, those with original
maturities of three months or less at the date of acquisition, to be cash
equivalents.
A substantial portion of the Company's cash and cash equivalents is
maintained in one financial institution.
F2-5
Investments in Partnerships
The Company is the managing partner of several oil and gas partnerships.
The Company accounts for its investments in partnerships using the equity
method of accounting.
Asset Retirement Obligations
On July 1, 2002, the Company adopted Statement of Financial Accounting
Standard No. 143 ("FAS 143"), "Accounting for Asset Retirement
Obligations." This statement changes financial accounting and reporting for
obligations associated with the retirement and disposal of long-lived
assets, including the Company's oil and gas properties, and the associated
asset retirement costs.
As of July 1, 2002, the Company recognizes future oil and gas well plugging
and abandonment costs over the estimated useful life of the well in
accordance with the provisions of FAS 143. A liability for the estimated
fair value of the future plugging and abandonment costs is recorded with a
corresponding increase in the full cost pool at the time a new well is
drilled. The Company recognizes accretion expense in connection with the
discounted liability over the remaining life of the well.
2. Oil and Gas Properties
Oil and gas properties consist of the following as of December 31, 2002:
<Table>
Proved oil and gas properties $ 24,322,227
Accumulated depreciation, depletion, and amortization (8,410,827)
Net proved oil and gas properties $ 15,911,400
============
</Table>
3. Long Term Debt
On October 24, 2002, the Company executed a $4,000,000 bank revolving
credit agreement. Interest payments are due each month beginning November
1, 2002. Principal is due on September 30, 2004. The company has the option
to borrow at either prime minus .25% or at the Eurodollar Fixed Period Rate
plus 2.5%. The revolving credit agreement also contains certain covenants
including the maintenance of minimum proven oil and gas reserves. The
revolving credit agreement is uncollateralized; however, the Company has
given a negative pledge whereby it has promised not to pledge any assets
not presently encumbered. As of December 31, 2002, the amount borrowed
under this revolving credit agreement totaled $1,000,000. The interest rate
on the outstanding borrowings was 4% at December 31, 2002.
4. Asset Retirement Obligation
In accordance with FAS 143, the Company has recognized an estimated
liability for future oil and gas well plugging and abandonment costs (see
Note 1). The estimated liability is based on historical experience and
estimated well lives. The liability is discounted using the credit-adjusted
risk-free rate of approximately 4.75%. Revisions to the liability could
occur due to changes in well plugging and abandonment costs or well useful
lives, or if federal or state regulators enact new well restoration
requirements.
Upon adoption of FAS 143 on July 1, 2002, the Company recorded a discounted
liability of $701,849, increased the full cost pool by $841,782 and
recognized a one-time cumulative effect adjustment of $(86,759), net of
deferred tax expense of $53,174. The increase in the full cost pool
included $462,913 for the reversal of cumulative depreciation on the
estimated salvage value of equipment on the Company's oil and gas
properties. Prior to the adoption of FAS 143, the Company assumed salvage
value approximated plugging and abandonment costs. As such, estimated
salvage value was not excluded from depreciation and plugging and
abandonment costs were not accrued for over the life of the oil and gas
properties.
A reconciliation of the Company's liability for well plugging and
abandonment costs for the six months ended December 31, 2002, is as
follows:
F2-6
<Table>
Balance upon adoption at July 1, 2002 $ 701,849
Liabilities incurred 65,472
Accretion expense 18,060
---------
Balance at December 31, 2002 $ 785,381
=========
</Table>
5. Income Taxes
Federal income tax expense calculated on a current basis at the Stockholder
(consolidated) level is allocated to its subsidiaries based on their
respective taxable income or loss, and a payable or receivable is
established with the Stockholder. As of December 31, 2002, federal and
state income tax payable to the Stockholder was $947,790.
In accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes", the Company calculates its deferred tax
liability as if it were a separate tax paying entity. Deferred income taxes
are recognized for the tax consequences in future years of differences
between the tax basis of assets and liabilities and their financial
reporting amounts at the balance sheet date based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established
when necessary to reduce deferred tax assets to the amount expected to be
realized.
As of December 31, 2002, the Company's net deferred tax liability is
comprised of the following temporary differences:
<Table>
Oil and gas properties $ 1,835,781
Asset retirement obligation (298,445)
-----------
$ 1,537,336
===========
</Table>
The components of income tax expense for the period ended December 31,
2002 are as follows:
<Table>
Current income taxes:
Federal $ 353,487
State 43,319
Deferred income taxes:
Federal 105,264
State 12,387
----------
$ 514,457
==========
</Table>
Additionally, the cumulative effect of accounting change of $(86,759) is
net of deferred tax expense of $53,174.
6. Commitments and Contingencies
The Company is obligated, subject to certain limitations, to purchase or
cause to be purchased by an affiliate or the Stockholder, limited
partnership interests, if tendered. For the majority of the partnerships in
which this obligation exists, the obligation generally commences once the
partnership has been in existence for 3 years and extends for a period of 5
years; on certain others, the obligation remains throughout the life of the
partnership (generally 50 years). The obligation to purchase interests in a
single calendar year is generally limited to no more than 5% of the total
number of interests of the partnership outstanding at the beginning of the
calendar year. Additionally, the total amount of limited partnership
interests which the Company is obligated to purchase upon redemption is
limited to $500,000 per year. If the partnership interests are tendered in
future years, it is anticipated that the Company or Stockholder will use
funds provided by operations or borrow funds to satisfy such repurchase
obligations. Historically, the amount of limited partnership interests
tendered has been immaterial.
F2-7
7. Related Party Transactions
Under the terms of an operating agreement, substantially all services and
charges relating to the oil and gas properties in which the Company invests
are billed by and paid to a wholly-owned subsidiary of the Stockholder as
operator of the oil and gas properties.
8. Recently Issued Accounting Standards
In November 2002, the Financial Accounting Standards Board issued
Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees", which changes
financial accounting and reporting for obligations under certain
guarantees. The initial recognition and measurement provisions of the
interpretation are effective for the Company for all guarantees issued or
modified after December 31, 2002. The disclosure requirements in FIN 45 are
effective for financial statements of interim or annual periods ending
after December 15, 2002. The Company is currently evaluating the
recognition and measurement provisions of FIN 45 (see note 6).
In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest
Entities," which provides guidance on when certain entities should be
consolidated or the interests in those entities should be disclosed by
companies that do not control them through majority voting interest. The
Company does not expect FIN 46 to have a material impact on the financial
statements.
9. Supplemental Oil and Gas Information
The estimates of proved oil and gas reserves utilized in the preparation of
these financial statements were estimated in accordance with guidelines
established by the Securities and Exchange Commission and the Financial
Accounting Standards Board, which require that reserve reports be prepared
using oil and gas prices and operating conditions at the balance sheet date
with no provision for price and cost escalation except by contractual
agreement. The price of oil and gas at December 31, 2002 was $27.92 per
barrel and $4.12 per mcf, respectively. Proved oil and gas reserves are
defined as estimated quantities of crude oil, natural gas, and natural gas
liquids which geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs under
existing economic and operating conditions. These estimates may change as
future information becomes available. All of the Company's reserves are
located onshore in the Continental United States.
As of December 31, 2002, the Company had proved oil reserves of 268,652
barrels and proved gas reserves of 14,128,513 thousand cubic feet
(mcf). Future net cash flows from these reserves are as follows as of
December 31, 2002:
<Table>
Future cash inflows $ 65,687,469
Future production costs (21,422,492)
Future development costs (787,892)
Future income tax expense (6,989,502)
-------------
36,487,583
Discount at 10% (15,259,804)
-------------
Standard measure of discounted future net cash flows from
estimated production of proved oil and gas reserves after
income taxes $ 21,227,779
=============
</Table>
F2-8
MEWBOURNE ENERGY
PARTNERS 03-A, L.P.
BALANCE SHEET WITH REPORT OF
INDEPENDENT ACCOUNTANTS
FEBRUARY 19, 2003 (DATE OF INCEPTION)
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Mewbourne Development Corporation
In our opinion, the accompanying balance sheet presents fairly, in all
material respects, the financial position of Mewbourne Energy Partners 03-A L.P.
at February 19, 2003 (date of inception) in conformity with accounting
principles generally accepted in the United States of America. This financial
statement is the responsibility of the Company's management; our responsibility
is to express an opinion on this financial statement based on our audit. We
conducted our audit of this statement in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the balance
sheet is free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the balance sheet,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall balance sheet presentation. We believe
that our audit of the balance sheet provides a reasonable basis for our opinion.
/s/ PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
March 4, 2003
F3-1
MEWBOURNE ENERGY PARTNERS 03-A, L.P.
BALANCE SHEET
FEBRUARY 19, 2003 (DATE OF INCEPTION)
<Table>
ASSETS
Cash $ 100
-------
Total assets $ 100
=======
PARTNERS' CAPITAL
Partners' capital $ 100
-------
Total partners' capital $ 100
=======
</Table>
The accompanying note is an integral part of this
balance sheet.
F3-2
MEWBOURNE ENERGY PARTNERS 03-A, L.P.
NOTE TO BALANCE SHEET
1. ORGANIZATION
Mewbourne Energy Partners 03-A, L.P. (the "Partnership") was formed on
February 19, 2003. The Partnership was organized to offer partnership
interests to participate in a program consisting of the acquisition,
drilling and development of oil and gas prospects. The offering of limited
and general partner interest has not begun; as such, the Partnership's
operations have not commenced. Mewbourne Development Corporation ("MDC")
serves as managing partner.
F3-3
EXHIBIT A
AGREEMENT OF PARTNERSHIP
-----------------
MEWBOURNE ENERGY PARTNERS ___-A, L.P.
-----------------
AGREEMENT OF PARTNERSHIP
MEWBOURNE ENERGY PARTNERS ___-A, L.P.
TABLE OF CONTENTS
<Table>
<Caption>
Page
----
ARTICLE I
FORMATION OF PARTNERSHIP
Section 1.1 Formation..............................................................................1
Section 1.2 Name...................................................................................1
Section 1.3 Business...............................................................................1
Section 1.4 Principal Office.......................................................................1
Section 1.5 Names and Addresses of Partners........................................................2
Section 1.6 Term...................................................................................2
Section 1.7 Filings................................................................................2
Section 1.8 Title to Partnership Property..........................................................2
Section 1.9 Conversion of General Partner Interests into Limited Partner Interests.................2
ARTICLE II
DEFINITIONS AND REFERENCES
Section 2.1 Defined Terms..........................................................................3
Section 2.2 References and Titles.................................................................10
ARTICLE III
CAPITALIZATION
Section 3.1 Capital Contributions of Investor Partners............................................11
Section 3.2 Contributions of Managing Partner.....................................................11
Section 3.3 Return of Contributions...............................................................11
Section 3.4 Additional Contributions..............................................................11
ARTICLE IV
ALLOCATIONS AND DISTRIBUTIONS
Section 4.1 Allocation Among Partners.............................................................11
Section 4.2 Allocations...........................................................................12
Section 4.3 Distributions.........................................................................13
Section 4.4 Allocations on Transfers..............................................................14
ARTICLE V
MANAGEMENT
Section 5.1 Power and Authority of Managing Partner...............................................14
Section 5.2 Certain Restrictions on Managing Partner's Power and Authority........................17
</Table>
A-i
<Table>
Section 5.3 Services of Managing Partner..........................................................19
Section 5.4 Liability of Managing Partner and Its Affiliates......................................19
Section 5.5 Indemnification of Managing Partner and Its Affiliates................................20
Section 5.6 Reporting and Legal Expenses..........................................................21
Section 5.7 Administrative Costs..................................................................21
Section 5.8 Restrictions on Certain Transactions..................................................22
Section 5.9 Restriction on Voting Interests Held by Managing Partner..............................28
Section 5.10 Tax Elections.........................................................................28
Section 5.11 Tax Matters Partner...................................................................28
ARTICLE VI
RIGHTS AND OBLIGATIONS OF INVESTOR PARTNERS
Section 6.1 Rights of Investor Partners...........................................................29
Section 6.2 Access of Investor Partners to Geophysical Data.......................................29
Section 6.3 Return of Capital Contribution........................................................29
Section 6.4 Meetings..............................................................................29
Section 6.5 Voting Rights of Investor Partners....................................................30
Section 6.6 Conduct of Meeting....................................................................30
Section 6.7 General Partners Not Agents...........................................................30
Section 6.8 Liabilities of Partners...............................................................31
ARTICLE VII
BOOKS, RECORDS, CAPITAL ACCOUNTS, REPORTS, AND BANK ACCOUNTS
Section 7.1 Books, Records, and Capital Accounts..................................................31
Section 7.2 Reports...............................................................................33
Section 7.3 Bank Accounts.........................................................................35
ARTICLE VIII
ASSIGNMENT AND PURCHASE OF INTERESTS; SUBSTITUTION
Section 8.1 Assignments by Investor Partners......................................................36
Section 8.2 Assignment by Managing Partner........................................................38
Section 8.3 Right of Presentment..................................................................39
Section 8.4 Notices of and Limitations on Right of Presentment....................................39
Section 8.5 Cessation of Right of Presentment.....................................................41
Section 8.6 Removal of Managing Partner...........................................................41
ARTICLE IX
DISSOLUTION, RECONSTITUTION, LIQUIDATION, AND TERMINATION
Section 9.1 Dissolution...........................................................................42
Section 9.2 Covenant Not to Withdraw..............................................................43
Section 9.3 Reconstitution........................................................................44
Section 9.4 Liquidation and Termination...........................................................46
</Table>
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<Table>
ARTICLE X
REPRESENTATIONS AND WARRANTIES OF THE MANAGING PARTNER AND POWER
OF ATTORNEY
Section 10.1 Representations and Warranties of the Managing Partner................................48
Section 10.2 Power of Attorney.....................................................................49
ARTICLE XI
MISCELLANEOUS
Section 11.1 Notices...............................................................................50
Section 11.2 Amendment.............................................................................50
Section 11.3 Partition.............................................................................51
Section 11.4 Entire Agreement......................................................................51
Section 11.5 Severability..........................................................................51
Section 11.6 No Waiver.............................................................................51
Section 11.7 Evidence of Interest..................................................................51
Section 11.8 Applicable Law........................................................................52
Section 11.9 Successors and Assigns................................................................52
Section 11.10 Counterparts..........................................................................52
</Table>
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AGREEMENT OF PARTNERSHIP
MEWBOURNE ENERGY PARTNERS ___-A, L.P.
THIS AGREEMENT OF PARTNERSHIP (herein called this "Agreement") dated
February ___, 20__, is made by and among Mewbourne Development Corporation, a
Delaware corporation ("MD" and also herein called the "Managing Partner" when
acting in its capacity as Managing Partner of the Partnership), Curtis W.
Mewbourne, a resident of Tyler, Texas (the "Organizational Partner"), and those
persons who execute or adopt this Agreement or counterparts hereof as Investor
Partners and become such (herein called the "Investor Partners"). In
consideration of the mutual covenants and agreements contained herein, the
parties hereto do hereby agree as follows:
ARTICLE I
FORMATION OF PARTNERSHIP
Section 1.1 Formation. Subject to the provisions of this Agreement, the
parties hereto do hereby form a limited partnership (herein called the
"Partnership") pursuant to the provisions of the Delaware Act.
Section 1.2 Name. The name of the Partnership shall be Mewbourne Energy
Partners ___-A, L.P. Subject to all applicable laws, the business of the
Partnership may be conducted under such other name or names (including the name
of the Managing Partner) as the Managing Partner shall determine to be necessary
or desirable. The Managing Partner shall cause to be filed on behalf of the
Partnership such partnership or assumed or fictitious name certificate or
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 the
following: (a)to become a party to the Program Agreement; (b)to acquire Leases
from MOC and its Affiliates and from third parties in accordance with the terms
of the Program Agreement; (c)to explore, drill, develop, operate, and dispose of
such Leases; (d)to produce, collect, store, treat, deliver, market, sell, or
otherwise dispose of oil, gas, and related minerals from such Leases; and (e)to
take all such actions which may be incidental thereto as the Managing Partner
may determine. The Partnership may also purchase or acquire equipment,
processing facilities, and other property associated with such Leases and
acquire interests in and invest in joint ventures and other partnerships
(including affiliated joint ventures or affiliated partnerships) or other
entities (including corporations) that hold or are formed to acquire Leases in
Prospects if, in the judgment of the Managing Partner, such acquisitions or
investments are necessary or desirable to the acquisition by the Partnership of
Leases in Prospects or the drilling and completion of wells thereon. In
addition, the Partnership may participate in any other type of transaction
relating to Leases or Prospects or the drilling and completion of wells thereon
if the economic effect of such transactions is the same as the ownership of such
Leases or Prospects by the Partnership.
Section 1.4 Principal Office. The location of the principal place of
business of the Partnership shall be 3901 South Broadway, Tyler, Texas 75701.
The Managing 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
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Managing Partner shall determine to be necessary or desirable, provided notice
thereof is given to the Investor Partners within 30 days of such change or
establishment. The registered office of the Partnership in the State of Delaware
shall be at Corporation Trust Center, 1209 Orange Street, Wilmington, County of
Newcastle, Delaware 19801, and its registered agent for service of process on
the Partnership at such registered office shall be Corporation Trust
Corporation.
Section 1.5 Names and Addresses of Partners. MD is the sole Managing
Partner of the Partnership and its address is 3901 South Broadway, Tyler, Texas
75701. The Organizational Partner's name is Curtis W. Mewbourne and his address
is 3901 South Broadway, Tyler, Texas 75701. Upon admission of Investor Partners
to the Partnership, the Organizational Partner will withdraw from the
Partnership and his contribution to the capital of the Partnership will be
returned without interest. The name and business, residence, or mailing address
of each Investor Partner will be maintained in the Partnership records. The date
upon which each such person became an Investor Partner shall be the date set
forth in Partnership records. The address of each Investor Partner for the
purpose of receiving notices and all other communications hereunder shall be the
address shown in the Subscription Agreement executed by such Investor Partner or
such other address as may be supplied by such Investor Partner to the Managing
Partner in the manner specified in Section 11.1.
Section 1.6 Term. The Partnership shall commence upon the completion of
filing for record of an initial Certificate of Limited Partnership for the
Partnership in accordance with the Delaware Act and shall continue until
terminated in accordance with Article IX.
Section 1.7 Filings. Upon the request of the Managing Partner, the
parties hereto shall immediately execute and deliver all such certificates and
other instruments conforming hereto as shall be necessary for the Managing
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
formation, qualification, and operation of a limited partnership (or a
partnership in which the Investor Partners have limited liability) in all other
jurisdictions where the Partnership shall propose to conduct business.
Section 1.8 Title to Partnership Property. All property owned 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 shall hold its assets in
its own name, except that its interests in Leases may be held in the name of the
Program Manager as contemplated by the Program Agreement.
Section 1.9 Conversion of General Partner Interests into Limited
Partner Interests. As soon as practicable after the completion of the
Partnership's drilling activities, the Interests held by the General Partners
will be converted to Limited Partner Interests. In order to accomplish such
conversion, the Managing Partner will (a) file an amended certificate of limited
partnership with the Secretary of State of the State of Delaware removing the
General Partners as general partners of the Partnership and (b)take such other
actions as are necessary or appropriate to accomplish conversion of the General
Partner Interests held by the General Partners to Limited Partner Interests.
Notwithstanding the foregoing, the Managing Partner shall not be obligated to
cause the conversion of the General Partner Interests held by the General
Partners to Limited
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Partner Interests, or may delay such conversion, if the Managing Partner
determines that such conversion at that time would not be in the best interests
of the Investor Partners or the Partnership; provided that if the Managing
Partner determines that such conversion would not be in the best interests of
the Investor Partners or the Partnership, the insurance coverage limits,
including umbrella policy limits, will not be reduced unless such coverage
becomes unobtainable or is only available at premiums which are prohibitively
more expensive than the premiums now being paid for such policies. If conversion
is so delayed, the Managing Partner will continue to have the power and
authority to cause such conversion at any time during the term of the
Partnership if the Managing Partner determines that conversion is in the best
interests of the General Partners and the Partnership. Upon filing the amended
certificate of limited partnership reflecting the conversion of the General
Partner Interests held by General Partners to Limited Partner Interests, the
conversion will be effective and thereafter each General Partner will have the
rights and obligations of a Limited Partner and will be entitled to limited
liability to the extent provided by the Delaware Act; provided that those
General Partners will remain liable to the Partnership for their proportionate
shares of Partnership obligations and liabilities arising prior to the
conversion of their General Partner Interests to Limited Partner Interests.
ARTICLE II
DEFINITIONS AND REFERENCES
Section 2.1 Defined Terms. When used in this Agreement and unless the
context otherwise requires, the following terms shall have the respective
meanings set forth below:
"Administrative Costs" shall mean all customary and routine expenses
incurred by the Managing Partner or its Affiliates for the conduct of the
administration of the Partnership or the Drilling Program, including: legal,
finance, accounting, secretarial, travel, office rent, telephone, data
processing, and other items of a similar nature.
"Adjusted Capital Account" shall mean the capital account maintained
for each Partner as provided in Section 7.1(c) as of the end of each fiscal
year, (a) increased by (i) an amount equal to such Partner's allocable share of
the Partnership's Minimum Gain, as computed on the last day of such fiscal year
in accordance with Treasury Regulation 1.704-2(g), and (ii) the amount of
Partnership indebtedness allocable to such Partner under Section 752 of the Code
with respect to which such Partner is personally liable, and (b) reduced by (i)
depletion deductions reasonably expected to be allocated to such Partner in
subsequent years and charged to such Partner's capital account as provided in
Section 7.1(c), (ii) the amount of all losses and deductions reasonably expected
to be allocated to such Partner in subsequent years under Section 704(e)(2) or
706(d) of the Code and Treasury regulation 1.751-1(b)(2)(ii), and (iii) the
amount of all distributions reasonably expected to be made to such Partner to
the extent that they exceed offsetting increases in such Partner's capital
account that are reasonably expected to occur during (or prior to) the year in
which such distributions are reasonably expected to be made.
"Affiliate" shall mean with respect to another person, (a) any person
directly or indirectly owning, controlling, or holding with power to vote 10% or
more of the outstanding voting securities of or equity interests in such other
person; (b) any person 10% or more of whose outstanding voting securities or
equity interests are directly or indirectly owned, controlled, or held with
power to vote by such other person; (c) any person directly or indirectly
controlling,
A-3
controlled by, or under common control with such other person; (d) any employee,
officer, director, or partner of such other person; and (e) any company for
which any such officer, director, or partner acts in any such capacity. For
purposes of this Agreement an Affiliate of MD shall include Affiliated Programs.
"Affiliated Program" shall mean a drilling, producing property, income,
royalty, or other program (whether in the form of a partnership, joint venture,
or otherwise) for or of which the Managing Partner or an Affiliate thereof
serves as manager or managing partner or acts in a similar capacity.
"Agreement" shall mean this Agreement of Partnership, as amended from
time to time.
"Base Rate" shall mean an effective rate per annum equal to the lesser
of the following rates of interest (a)the highest rate of interest publicly
announced from time to time by Bank of America of Texas, N.A., Tyler, Texas, as
its prime rate for its largest and most credit worthy domestic corporate
customers for 90 day unsecured loans, plus 1%, or (b)the "Maximum Legal Rate."
The term "Maximum Legal Rate" means the maximum rate of interest from time to
time permitted to be contracted for, charged, or collected by the specified
recipient under any laws from time to time applicable to the indebtedness of the
payor to the recipient with respect to the amounts subject to such Base Rate.
"Capital Contribution" shall mean for any particular Partner the total
dollar amount of the contribution to the capital of the Partnership made by such
Partner.
"Capital Contributions" shall mean the aggregate amount of the Capital
Contribution paid by all Partners to the Partnership.
"Capital Expenditures" shall mean those costs associated with property
acquisition and the drilling and completion of oil and gas wells which are
generally accepted as capital expenditures pursuant to the provisions of the
Code.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Delaware Act" shall mean the Delaware Revised Uniform Limited
Partnership Act, as amended from time to time, and any successor to such act.
"Direct Costs" shall mean all actual and necessary costs directly
incurred for the benefit of the Drilling Program and generally attributable to
the goods and services provided to the Drilling Program by parties other than
the Managing Partner or its Affiliates. Direct costs shall not include any cost
otherwise classified as Organization and Offering Expenses, Administrative
Costs, Operating Costs, or Lease Acquisition Costs. Direct Costs include
Reporting and Legal Expenses and may include the cost of services provided by
the Managing Partner or its Affiliates if such services are provided pursuant to
written contracts and in compliance with the terms set forth under Section 5.10
hereof.
"Drilling Program" shall mean the drilling program to be conducted by
the Partnership, MOC, and MD pursuant to the Program Agreement and the rights,
interests, and properties of MD and the Partnership under or subject to the
Program Agreement.
A-4
A "farmout" shall mean an agreement whereby the owner of the Lease
agrees to assign his interest in certain specific acreage to the assignees,
retaining some interest such as an Overriding Royalty Interest, an oil and gas
payment, offset acreage, or other type of interest, subject to the drilling of
one or more specific wells or other performance as a condition of the
assignment.
"General Partner" shall mean each person who executes or adopts this
Agreement or a counterpart hereof as a General Partner and is accepted by the
Managing Partner as such and any person who becomes a substituted General
Partner in accordance with the terms hereof. General Partner shall not include
the Managing Partner except to the extent that the Managing Partner owns General
Partner Interests.
"General Partner Interest" shall mean a General Partner's unit of
interest in the Partnership representing a $1,000 Capital Contribution.
"Horizon" shall mean a zone of a particular formation; that part of a
formation of sufficient porosity and permeability to form a petroleum reservoir.
"Independent Expert" shall mean a person with no material relationship
to the Managing Partner or its Affiliates who is qualified and who is in the
business of rendering opinions regarding the value of oil and gas properties
based upon the evaluation of all pertinent economic, financial, geologic, and
engineering information available to the Managing Partner.
"Interest" shall mean an Investor Partner's unit of interest in the
Partnership representing a $1,000 Capital Contribution.
"Investor Partners" shall mean the General Partners and the Limited
Partners and shall not include the Managing Partner, except to the extent that
the Managing Partner owns Interests.
"Lease" shall mean an oil and gas lease or an oil, gas, and mineral
lease; a Working Interest; an interest (including certain non-consent interest)
arising under a pooling order or operating agreement; an interest acquired under
a farmout; operating rights under governmental tracts; a mineral interest,
royalty, or other interest in and to oil, gas, and related hydrocarbons (or a
contractual right to acquire or earn such an interest) or an undivided interest
therein or portion thereof (including those covering only certain Horizons or
depths), together with all easements, permits, licenses, servitudes, and
rights-of-way situated upon or used or held for future use in connection with
the exploration, development, or operation of such interest.
"Lease Acquisition Costs" shall mean, when used to describe the costs
of any Lease, the sum of (a) all monetary consideration paid or given for such
Lease to a non-Affiliate of the Managing Partner, including but not limited to
lease bonuses and advance rentals paid to a non-Affiliate of the Managing
Partner, (b) all costs of lease acquisition and title examination, including but
not limited to curing or defending title, title insurance or examination costs,
brokerage commissions, the fees and wages of landmen and lease brokers and their
expenses, filing fees, recording costs, transfer taxes, and like charges paid in
connection with the acquisition of such Lease, (c) all delay rentals and other
similar payments and ad valorem taxes paid with respect to such Lease, (d) such
portion as may be allocated to such Lease in accordance with generally accepted
accounting principles and industry standards of all reasonable,
A-5
necessary, and actual costs and expenses of MD or its Affiliates for geological,
geophysical, seismic, land, engineering, drafting, accounting, legal, and other
like services together with related administrative and general overhead costs
involved in lease acquisition and Prospect evaluation including such costs and
expenses which could otherwise be classified hereunder as Administrative Costs,
(e) such portion as may be allocated to such Lease in accordance with generally
accepted accounting principles and industry standards of all costs and expenses
incurred in the acquisition of farmouts, subleases, pooling orders, or other oil
and gas interests, (f) interest and points actually incurred on funds borrowed
to pay any of the costs and expenses described in clauses (a) through (e) above
calculated from the date of their incurrence until the date of their
reimbursement by the Drilling Program at the time a Lease is acquired by the
Drilling Program, and (g)with respect to Leases held on the date hereof by or
acquired thereafter by MD or an Affiliate thereof, in which an interest is
transferred to the Participants pursuant to the Program Agreement, the costs of
such transfer; provided that the expenses described in clauses (c), (d), (e),
and (f) shall have been incurred by MOC or its Affiliates not more than 36
months prior to the acquisition by the Drilling Program of such Lease; and
provided further, that such time limitation shall not be applicable to Leases
having a primary term of five or more years. Lease Acquisition Costs of a Lease
shall not include any costs or expenses otherwise allocable herein to such Lease
and which represent costs or expenses incurred in connection with the past
drilling of wells which are not producers of sufficient quantities of oil or
natural gas to make commercially reasonable their continued operation.
"Limited Partner" shall mean each person who executes or adopts this
Agreement or a counterpart hereof as a Limited Partner and is accepted by the
Managing Partner as such and any person who becomes a substituted Limited
Partner in accordance with the terms hereof. Limited Partner shall not including
the Managing Partner, except to the extent that the Managing Partner owns
Limited Partner Interests.
"Limited Partner Interest" shall mean a Limited Partner's unit of
interest in the Partnership representing a $1,000 Capital Contribution.
"Majority in Interest" shall mean, with respect to any agreement or
vote of the Investor Partners, Investor Partners whose combined Interests, at
the time of determination thereof, exceed 50% of the total Interests held of
record by Investor Partners who are eligible to participate in such agreement or
vote.
"Managing Partner" shall mean MD which will serve as the initial
managing partner of the Partnership, and any person who becomes a substituted
Managing Partner in accordance with the terms hereof.
"Minimum Gain" shall mean the amount of gain that would be realized by
the Partnership if it disposed of (in a taxable transaction) all Partnership
properties which are subject to non-recourse liabilities of the Partnership in
full satisfaction of such liabilities, computed in accordance with the
provisions of Treasury regulation 1.704-2(b)(2).
"MOC" shall mean Mewbourne Oil Company, a Delaware corporation.
A-6
"Operating Agreement" shall mean a Model Form Operating Agreement based
upon the American Association of Petroleum Landmen Form 610-1989 and among the
other attached exhibits thereto, an accounting procedure for joint operations
issued by the Council of Petroleum Accountants Societies of North America, each
of which containing modifications that are customary and usual for the
geographic area in which the Partnership intends to conduct operations.
"Operating Costs" shall mean all expenditures made and costs incurred
in producing and marketing oil and gas from completed wells, including, in
addition to labor, fuel, repairs, hauling, materials, supplies, utility charges,
and other costs incident to or therefrom, ad valorem and severance taxes,
insurance and casualty loss expense, and compensation to well operators or
others for services rendered in conducting such operations.
"Organizational Partner" shall mean Curtis W. Mewbourne, a resident of
Tyler, Texas, who has agreed to serve as an initial limited partner.
"Overriding Royalty Interest" shall mean an interest in the oil and gas
produced pursuant to a specified Lease or Leases, or the proceeds from the sale
thereof, carved out of the Working Interest, to be received free and clear of
all costs of development, operation, or maintenance.
"Partners" shall mean the Managing Partner and the Investor Partners.
"Partnership" shall have the meaning assigned to such term in Section
1.1.
"Partnership Year" shall mean a period of one year with the first
Partnership Year commencing as of the date the Investor Partners are first
admitted to the Partnership and ending immediately prior to the anniversary of
such date and with each succeeding Partnership Year commencing as of the
anniversary of such date and ending immediately prior to the next succeeding
anniversary date.
"person" shall refer to any natural person, partnership, corporation,
association, trust, or other legal entity.
"Production Purchase or Income Program" shall mean any program whose
investment objective is to directly acquire, hold, operate, and/or dispose of
producing oil and gas properties. Such a program may acquire any type of
ownership interest in a producing property, including but not limited to,
Working Interests, royalties, or production payments. A program which spends at
least 90% of Capital Contributions and funds borrowed (excluding Organization
and Offering Expenses) in the above described activities is presumed to be a
Production Purchase or Income Program.
"Program Agreement" shall mean the Program Agreement by and among the
Partnership, MD, and MOC.
"Program Manager" shall mean MOC and any person who becomes the
successor Program Manager in accordance with the Program Agreement.
A-7
"Program Well" shall mean any oil and gas well in which the
Participants have an interest pursuant to the Program Agreement.
"Prospect" shall mean an area covering lands which, in the opinion of
the Program Manager, contains subsurface structural or stratigraphic conditions
making it susceptible to the accumulation of oil or gas in commercially
productive quantities at one or more Horizons. The area, which may be different
for different Horizons, shall be designated by the Program Manager in writing
prior to the conduct of Partnership operations and shall be enlarged or
contracted from time to time on the basis of subsequently acquired information
to define the anticipated limits of the associated oil and gas reserves and to
include all acreage encompassed therein. A "Prospect" with respect to a
particular Horizon may be limited to the minimum area permitted by state law or
local practice, whichever is applicable, to protect against drainage from
adjacent wells if the well to be drilled by the Partnership is to a Horizon
containing Proved Reserves.
"Proved Reserves" shall mean those quantities of crude oil, natural
gas, and natural gas liquids which, upon analysis of geological and engineering
data, appear with reasonable certainty to be recoverable in future years from
known oil and gas reservoirs under existing economic and operating conditions.
Proved Reserves are limited to those quantities of oil and gas which can be
expected, with little doubt, to be recoverable commercially at current prices
and costs, under existing regulatory practices and with existing conventional
equipment and operating methods. Depending upon their status or development,
Proved Reserves will be subdivided into the following classifications and have
the following definitions.
(a) "Proved Developed Reserves" shall mean Proved Reserves
which can be expected to be recovered through existing wells with existing
equipment and operating methods. This classification shall include:
(i) "Proved Developed Producing Reserves," which are Proved
Developed Reserves which are expected to be produced from existing completion
intervals now open for production in existing wells; and
(ii) "Proved Developed Non-Producing Reserves," which are
Proved Developed Reserves which exist behind the casing of existing wells, or at
minor depths below the present bottom of such wells, which are expected to be
produced through these wells in the predictable future, where the cost of making
oil and gas available for production is relatively small compared to the cost of
a new well.
Additional oil and gas expected to be obtained through the application
of improved recovery techniques are included as Proved Developed Reserves only
after testing by a pilot project or after the operation of an installed program
has confirmed through production that increased recovery will be achieved.
(b) "Proved Undeveloped Reserves" shall mean all reserves which are
expected to be recovered from additional wells on undrilled acreage or from
existing wells where a relatively major expenditure is required for
recompletion. Such reserves on undrilled acreage are limited to those drilling
units offsetting productive units which are reasonably certain of production
when drilled. Proved Reserves for other undrilled units are claimed only where
it can be
A-8
demonstrated with reasonable certainty, based on accepted geological,
geophysical, and engineering studies and data, that there is continuity of
reservoir from an existing productive formation. No estimates for Proved
Undeveloped Reserves are attributable to any improved recovery technique
contemplated for any acreage, unless the techniques to be employed have been
proved effective by actual tests in the same areas and reservoir.
"Reconstituted Partnership" shall mean the Partnership, as
reconstituted by a Majority in Interest of the Investor Partners pursuant to
Section 9.3.
"Reporting and Legal Expenses" shall mean all third party accounting
fees, costs, and expenses associated with obtaining audits of books and records,
third party engineering fees, costs, and expenses associated with annual reserve
reports and third party attorney's fees and other legal fees, costs, and
expenses associated with matters that are attributable to the Drilling Program's
or the Partnership's business.
"Right of Presentment" shall mean the right of Investor Partners to
request the Managing Partner to purchase for cash all of that Investor Partner's
Interests, subject to certain conditions.
"Roll-Up" shall mean a transaction involving the acquisition, merger,
conversion, or consolidation, either directly or indirectly, of the Partnership
and the issuance of securities of a Roll-Up Entity. Such term does not include a
transaction involving securities of any Partnership that have been listed for at
least 12 months on a national exchange or traded through the National
Association of Securities Dealers Automated Quotation National Market System or
a transaction involving the conversion to corporate, trust, or association form
of only the Partnership if, as a consequence of the transaction, there will be
no significant adverse change in any of the following:
(i) voting rights;
(ii) the term of existence of the Partnership;
(iii) Sponsor compensation; or
(iv) the Partnership's investment objectives.
"Roll-Up Entity" shall mean a partnership, trust, corporation, or other
entity that would be created or survive after the successful completion of a
proposed Roll-Up transaction.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Sharing Ratio" shall mean for any Partner the proportion obtained by
dividing (i) the amount of such Partner's Capital Contribution to the
Partnership by (ii) the sum of all Capital Contributions paid by the Partners to
the Partnership; provided that in the event of an assignment (voluntarily, by
operation of law or this Agreement, or otherwise) by an Investor Partner of
Interests in the Partnership (other than an assignment solely of an interest in
distributions of Partnership revenues), the Sharing Ratio of such Investor
Partner shall be proportionately reduced, based upon the number of Interests
assigned compared to the total number of Interests owned by such Investor
Partner prior to such assignment, and the assignee of such Interests shall
succeed to a proportionate share of the Sharing Ratio of his assignor that is
attributable to the Interests transferred to such assignee.
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"Simulated Basis" shall have the meaning assigned to such term in
Section 7.1(c).
"Simulated Depletion" shall have the meaning assigned to such term in
Section 7.1(c).
"Simulated Gain" shall have the meaning assigned to such term in
Section 7.1(c).
"Simulated Loss" shall have the meaning assigned to such term in
Section 7.1(c).
"Sponsor" shall mean any person directly or indirectly instrumental in
organizing, wholly or in part, the Partnership, or any person who will manage or
is entitled to manage or participate in the management or control of the
Partnership. "Sponsor" includes the Managing Partner and any other person who
actually controls or selects any person who controls 25% or more of the
exploratory, developmental, or producing activities of the Partnership, or any
segment thereof, even if that person had not entered into a contract at the time
of formation of the Partnership. "Sponsor" does not include wholly independent
third parties such as attorneys, accountants, and underwriters whose only
compensation is for professional services rendered in connection with the
offering of the Interests. Whenever the context of this Agreement so requires,
the term "Sponsor" shall be deemed to include Affiliates of the person deemed to
be a Sponsor.
"Subscription Agreement" shall mean, with respect to an Investor
Partner, the subscription agreement executed and delivered by such Investor
Partner in connection with his subscription to purchase Interests and containing
certain representations, warranties, covenants, and agreements of such Investor
Partner.
"Super Majority in Interest" shall mean, with respect to any agreement
or vote of Investor Partners, Investor Partners whose combined Interests, at the
time of the determination thereof, exceed 66% of the total Interests held by
Investor Partners who are eligible to participate in such agreement or vote.
"Valuation Date" shall mean for purposes of the exercise of the Right
of Presentment granted to Investor Partners pursuant to Section 8.3, December 31
of the year immediately preceding the year in which the Right of Presentment is
being exercised.
"Working Interest" shall mean an interest in an oil and gas leasehold
which is subject to some portion of the costs of development, operation, or
maintenance.
Section 2.2 References and Titles. All references in this Agreement to
articles, sections, subsections, and other subdivisions refer to corresponding
articles, sections, subsections, and 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," "this instrument," "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.
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ARTICLE III
CAPITALIZATION
Section 3.1 Capital Contributions of Investor Partners. Each subscriber
shall be accepted as an Investor Partner only after (a) such subscriber has
deposited or has had deposited on its behalf in a segregated escrow account at
Regions Bank-Tyler, or another federally insured institution designated by MD,
the full amount of the Capital Contribution of such subscriber in cash and (b)
the Managing Partner has approved and accepted the Subscription Agreement
executed by such subscriber. By executing and delivering the Subscription
Agreement, upon its acceptance, each Investor Partner shall be irrevocably
committed to contribute to the capital of the Partnership the amount stated in
such Investor Partner's Subscription Agreement as the Capital Contribution of
such Investor Partner. If the sum of Capital Contributions committed and
accepted at or prior to the end of the subscription period is at least
$1,000,000, the Managing Partner may cause all subscribers who have been
approved by the Managing Partner to be admitted to the Partnership as Limited
Partners or General Partners, and the Capital Contributions shall be paid to the
Partnership. If less than $1,000,000 of Capital Contributions shall have been
committed by the Investor Partners and accepted at the end of the subscription
period, the amount of the Capital Contribution paid by each subscriber shall be
returned with any interest earned thereon.
Section 3.2 Contributions of Managing Partner. The Managing Partner
shall not be required to make any contribution to the capital of the
Partnership. Although the Managing Partner is personally liable under applicable
laws for the debts and obligations of the Partnership, all such debts and
obligations shall be paid or discharged first with Partnership assets (including
insurance proceeds) before the Managing Partner shall be obligated to pay or
discharge any such debt or obligation with its personal assets.
Section 3.3 Return of Contributions. Except as otherwise provided in
this Agreement, no interest shall accrue on any Capital Contributions to the
Partnership. No Partner shall have the right to withdraw or to be repaid any
capital contributed by such Partner except as otherwise specifically provided in
this Agreement or required by law.
Section 3.4 Additional Contributions. No Investor Partner shall be
required or obligated (a) to contribute any capital to the Partnership other
than as provided in Section 3.1 hereof or (b) to lend any funds to the
Partnership. The Interests are nonassessable; however, General Partners are
liable, in addition to their Capital Contributions, for Partnership obligations
and liabilities represented by their ownership of interests as general partners,
in accordance with the Delaware Act.
ARTICLE IV
ALLOCATIONS AND DISTRIBUTIONS
Section 4.1 Allocation Among Partners. Except as provided in Section
4.2 below, each Partner shall share Partnership items of costs, expenditures,
deductions (other than depletion), credits, income, revenues, gain, loss, and
distributions allocated, charged, or credited to the Partners hereunder in
accordance with the proportion that the Sharing Ratio of such Investor Partner
bears to the aggregate Sharing Ratios of all Partners.
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Section 4.2 Allocations.
(a) Except as provided in subsections (b) through (f) below,
all costs and revenues (including without limitation, revenues derived by the
Partnership from, and distributed to the Partnership by, the Drilling Program)
of the Partnership and all items of income, gain, amount realized, loss,
deduction, recapture, and credit for purposes of any applicable federal, state,
or local income tax law, rule, or regulation shall be allocated to the Partners
in accordance with their respective Sharing Ratio.
(b) All costs incurred by the Partnership in connection with
the performance of any special services requested by a Partner and any tax
deductions relating thereto shall be allocated 100% to the Partner requesting
such services.
(c) All interest income directly or indirectly resulting from
the investment of the Investor Partners' Capital Contributions following the
payment thereof to the Partnership shall be allocated 100% to the Investor
Partners, and shall be allocated among such Investor Partners proportionately
based on each Investor Partner's respective cash contributions actually paid to
the Partnership.
(d) Cost and percentage depletion deductions and the gain or
loss on the sale or other disposition of property the production from which is
or would be (in the case of nonproducing properties) subject to depletion
(herein sometimes called "depletable property") shall be computed separately by
the Partners rather than the Partnership. For purposes of making such
computations the Partnership's adjusted basis in each depletable property shall
be allocated under Section 613A(c)(7)(D) of the Code to the Partners in
accordance with their respective Sharing Ratio. The amount realized on the sale
or other disposition of each such property shall be allocated to the Partners in
proportion to each Partner's respective share of the revenues from the sale or
other disposition of such property provided for in Section 4.2(a). For purposes
of allocating amounts realized upon any such sale or disposition which are
deemed to be received for federal income tax purposes and which are attributable
to Partnership indebtedness or indebtedness to which the depletable property is
subject at the time of such sale or disposition, such amounts shall be allocated
in the same manner as Partnership revenues used for the repayment of such
indebtedness would have been allocated under Section 4.2(f).
(e) Notwithstanding any other provision of this Section 4.2 to
the contrary, if during any taxable year of the Partnership the allocation of
any loss or deduction (net of any income or gain) to any Partner (the "Deficit
Partner") would cause or increase a deficit balance in the Deficit Partner's
Adjusted Capital Account as of the end of such taxable year, only the amount of
such loss or deduction that reduces the balance to zero shall be allocated to
the Deficit Partner and the remaining loss or deduction shall be allocated to
the Partners whose Adjusted Capital Accounts have positive balances remaining at
such time in proportion to such positive balances. After any such allocation,
any Partnership income or gain (or amount realized in excess of Simulated Basis)
that would otherwise be allocated to the Deficit Partner for any fiscal year
under this Section 4.2 which is in excess of the cash distributions to the
Deficit Partner for such fiscal year shall be allocated instead to the Partners
to whom the Deficit Partner's share of losses and deductions were allocated
under the preceding sentence until the amount of such
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income or gain (or amount realized) so allocated equals the amount of loss or
deduction previously so allocated to such other Partner.
(f) Notwithstanding the foregoing provisions of this Section
4.2, prior to making any other allocation under this Section 4.2, the
Partnership shall allocate the following items of income to the Partners:
(i) Pursuant to section 1.704-2(f) of the Treasury
Regulations (relating to minimum gain chargebacks), if there is a net decrease
in Minimum Gain for such year (or if there was a net decrease in Minimum Gain
for a prior fiscal year and the Partnership did not have sufficient amounts of
profit during prior years to allocate among the Partners under this Section
4.2(f)(1), then items of Partnership income or revenue shall be allocated,
before any other allocation is made pursuant to the preceding provisions of this
Section 4.2 for such year, to each Partner in an amount equal to such Partner's
share of the net decrease in such minimum gain (as determined under section
1.704-2(g)(2) of the Treasury Regulations).
(ii) Pursuant to section 1.704-1(b)(2)(ii)(d) of the
Treasury Regulations (relating to "qualified income offsets"), items of
Partnership income or revenue shall be allocated, before any other allocation is
made pursuant to the preceding provisions of this Section 4.2 for such year,
among the Partners with deficit balances in their Adjusted Capital Accounts (as
determined, after giving effect to all adjustments attributable to the
allocations provided for in Section 4.2(f)(1) hereof and as increased by any
amounts which such Partner is deemed obligated to restore under sections 1.704-1
and 1.704-2 of the Treasury Regulations but before giving effect to any
adjustment attributable to other allocations provided for in succeeding
provisions of this Section 4.2) in amounts and the manner sufficient to
eliminate such deficit balances as quickly as possible.
Section 4.3 Distributions.
(a) All interest earned by the Partnership as the result of
the investment of the Partners' Capital Contributions following the payment
thereof to the Partnership shall be distributed periodically to the Partners at
such time or times as the Managing Partner shall in its discretion determine.
(b) At least quarterly, all cash funds of the Partnership
(other than interest as described in Section 4.3(a) above, borrowed funds, if
any, and Capital Contributions) which the Managing Partner reasonably determines
are not needed for the payment of existing or anticipated Partnership
obligations and expenditures shall be distributed to the Partners. All cash
funds of the Partnership to be distributed to the Partners shall be distributed
to the Partners in the same respective percentages as the revenues from which
such cash funds are derived are allocated to such Partners pursuant to Section
4.2 (after deducting therefrom the costs charged to such Partners pursuant to
Section 4.2). In addition to restrictions set forth in Section 5.2(a), in no
event, shall funds be advanced or borrowed for purposes of distributions, if the
amount of such distributions would exceed the Partnership's accrued and received
revenues for the previous four quarters, less paid and accrued operating costs
with respect to such revenues. The determinations of such revenues and costs
shall be made in accordance with generally accepted accounting principles
consistently applied. Cash distributions from the Partnership to the
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Managing Partner shall only be made in conjunction with distributions to
Investor Partners and only out of funds properly allocated to the Managing
Partner's account.
(c) Any distribution in liquidation of a Partner's interest in
the Partnership other than pursuant to Section 8.3, Section 8.6, Section 9.3, or
Section 9.4 shall be in an amount of cash or fair market value of property equal
to the positive capital account balance of such Partner at the time his interest
is liquidated, after such capital account balance has been adjusted in
accordance with Section 7.1(c) and the applicable Treasury Regulations under
Section 704(b) of the Internal Revenue Code and shall be made by the later of
(i) the end of the Partnership taxable year in which such liquidation occurs or
(ii) 90 days after the date of such liquidation. No Partner with a deficit
balance in his or its capital account after a distribution in liquidation of
such Partner's interest in the Partnership shall be liable to the Partnership
for such deficit balance.
(d) In the event an amount of Partnership funds equal to the
total Capital Contributions of the Partners has not been expended or committed
for expenditure within 12 months after the admission of the Investor Partners to
the Partnership, the Managing Partner shall distribute, as a return of capital,
to the Partners, proportionately in accordance with their respective Sharing
Ratios as of the date of the Investor Partners' admission to the Partnership,
the amount of such unexpended and uncommitted Partnership funds (together with a
proportionate amount of the Management Fees), after deducting therefrom an
amount that the Managing Partner reasonably determines will be equal to the
operating capital to be required by the Partnership that will not be provided by
anticipated revenues from Partnership operations.
Section 4.4 Allocations on Transfers. In the event of an assignment of
a Partner's interest in the Partnership pursuant to Article VIII, deductions,
credits, and income of the Partnership for federal, state, and local income tax
purposes shall, unless otherwise required by applicable Treasury Regulations, be
allocated between the assignor and assignee based on the number of days of the
year during which each party owned such interest.
ARTICLE V
MANAGEMENT
Section 5.1 Power and Authority of Managing Partner. The Partners
hereby designate MD as the Managing Partner of the Partnership and, except as
provided by Section 5.2 and elsewhere in this Agreement and except as otherwise
provided by applicable law, hereby delegate to the Managing Partner full and
exclusive power and authority on behalf of the Partnership to manage, control,
administer, and operate the properties, business, and affairs of the Partnership
and to do or cause to be done any and all acts deemed by the Managing Partner to
be necessary or appropriate thereto. The scope of such power and authority shall
encompass all matters in any way connected with such business or incident
thereto, including without limitation, the power and authority:
(a) To enter into the Program Agreement and to purchase or
otherwise acquire on behalf of the Partnership Leases as provided in the Program
Agreement;
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(b) To 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;
(c) To borrow monies for the business of the Partnership and
from time to time to draw, make, execute, and issue promissory notes and other
negotiable or nonnegotiable instruments and evidences of indebtedness; to secure
the payment of the sums so borrowed and to mortgage, pledge, or assign in trust
all or any part of the property of the Partnership; to assign any monies owing
or to be owing to the Partnership; and to engage in any other means of financing
customary in the oil and gas industry; provided that any such financing shall
provide that the lender has recourse only against Partnership assets and not
against any Investor Partner individually;
(d) To enter into any agreement for the sharing of profits,
joint venture, or partnership with any person, firm, corporation, or government
or agency thereof engaged in any business or transaction in which the
Partnership is authorized to engage, or any business or transaction capable of
being conducted, so as to directly or indirectly benefit the Partnership, and to
cause the obligations of the Partnership thereunder to be performed;
(e) To 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 parties for such purposes;
(f) To maintain, explore, develop, operate, manage, and defend
Partnership property and to drill, test, plug and abandon or complete and equip,
rework, and recomplete any number of wells on Partnership Leases for the
production of oil and gas located thereunder, and to contract with third parties
for such purposes, to carry out a program or programs of secondary recovery on
Partnership property, 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 exploration,
development, operation, and management of its own property, including without
limitation, making consent or non-consent elections under any applicable joint
operating agreement;
(g) To enter into and execute leases, drilling contracts,
farmout agreements, farmin contracts, dry and bottom hole and acreage
contribution letters, participation agreements, and any other agreements
customarily employed in the oil and gas industry in connection with the
acquisition, sale, exploration, development, or operation of oil and gas
properties, agreements as to rights-of-way and any and all other instruments or
documents considered by the Managing 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 Managing Partner in its sole discretion may determine, and
to cause the obligations of the Partnership thereunder to be performed;
(h) To sell the production accruing to the Leases acquired by
the Partnership 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 any property;
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(i) To farmout, sell, assign, convey, or otherwise dispose of,
for such consideration and upon such terms and conditions as the Managing
Partner in its sole discretion may determine, 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 Managing Partner may determine;
(j) To employ on behalf of the Partnership agents, employees,
managers, consultants, accountants, lawyers, geologists, geophysicists,
engineers, landmen, clerical help, and such other assistance and services as the
Managing Partner may deem proper and to pay therefor such remuneration and
compensation as the Managing Partner may deem reasonable and appropriate;
(k) To purchase, lease, rent, or otherwise acquire or obtain
the use of 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, and to incur expenses for travel, telephone, telegraph, insurance,
and for such other things, whether similar or dissimilar, as may be deemed
necessary or appropriate for carrying on and performing the business of the
Partnership;
(l) To pay delay rentals, shut-in royalty payments, property
taxes, and any other amounts necessary or appropriate to the maintenance or
operation of any Partnership property;
(m) To make and enter into such agreements and contracts with
such parties and to give such receipts, releases, and discharges with respect to
any and all of the foregoing and any matters incident thereto as the Managing
Partner may deem advisable or appropriate;
(n) To procure and maintain in force such insurance as the
Managing 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 and the Managing Partner on behalf of the Partnership; provided,
however, that the Managing Partner shall notify the Investor Partners of any
adverse material reduction in the insurance coverage of the Partnership as soon
as possible after learning of such change and if possible at least 30 days in
advance of the change in insurance coverage, and in the event that the insurance
procured and maintained on behalf of the Investor Partners is materially
reduced, the Partnership will halt all drilling activity until such time as
comparable replacement insurance coverage is obtained;
(o) To pay, extend, renew, modify, adjust, submit to
arbitration, prosecute, defend, or compromise on behalf of the Partnership, upon
such terms as the Managing Partner may determine and upon such evidence as they
may deem sufficient, any obligation, suit, liability, cause of action, or claim,
including a suit or claim for taxes, in favor of or against the Partnership;
(p) To quitclaim, assign, convey, surrender, release, or
abandon any Partnership property with or without consideration therefor;
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(q) To make such classifications, determinations, and
allocations as the Managing Partner may deem advisable, having due regard for
any relevant generally accepted accounting principles;
(r) To enter into soliciting dealer agreements and to perform
all of the Partnership's obligations thereunder, to issue and sell Interests
pursuant to the terms and conditions of this Agreement and the Subscription
Agreements, to accept and execute on behalf of the Partnership Subscription
Agreements, and to admit original and substituted Investor Partners;
(s) To take such action as may be necessary for the
safekeeping of all funds and assets of the Partnership, whether or not within
the Managing Partner's control and to employ, or permit another person to
employ, such funds or assets in any manner except for the exclusive benefit of
the Partnership; and
(t) To take such other actions, execute and deliver such other
documents, and perform such other acts as may be deemed by the Managing Partner
to be appropriate to carry out the business and affairs of the Partnership.
In accomplishing all of the foregoing and except as otherwise provided
in this Agreement, the Managing Partner may, in its sole discretion, use its own
personnel, properties, and equipment or those of any of its Affiliates (subject
to Section 5.11); or the Managing Partner may hire or rent those of third
parties and may employ on a temporary or continuing basis outside accountants,
attorneys, consultants, and others on such terms as the Managing Partner deems
advisable. No person, firm, or corporation dealing with the Partnership shall be
required to inquire into the authority of the Managing Partner to take any
action or make any decision.
Section 5.2 Certain Restrictions on Managing Partner's Power and
Authority. Notwithstanding any other provisions of this Agreement to the
contrary, the Managing Partner shall not have the power or authority to, and
shall not do, perform, or authorize any of the following:
(a) Borrow any money in the name or on behalf of the
Partnership or otherwise do any of the acts or things provided in Section 5.1(c)
if the total amount of the borrowings or financings then outstanding made by the
Managing Partner on behalf of the Partnership (including the amount outstanding
under the Partnership's reimbursement obligation under Section 5.6) would exceed
an amount equal to 20% of the Capital Contributions of the Investor Partners;
provided, however, that the terms of any such financing shall provide that the
lender has recourse only against Partnership assets and not against any Investor
Partner individually; provided further, that the Managing Partner may borrow
monies in the name and on behalf of the Partnership even if the Capital
Contributions of the Partners have not yet been fully expended or committed for
expenditure;
(b) Without having first received the prior consent of a Super
Majority in Interest of the Investor Partners, cause the Partnership to
participate in a proposed Roll-Up transaction; provided, however, the
participation of the Partnership in a proposed Roll-Up transaction shall be
subject to the restrictions set forth in Section 5.9(j);
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(c) Except for a sale of all or substantially all of the
assets of the Partnership by the Managing Partner acting in its capacity as
liquidator made in connection with the liquidation and termination of the
Partnership as such is contemplated in Section 9.4, without having first
received the prior consent of a Majority in Interest of the Investor Partners,
sell all or substantially all of the assets of the Partnership other than in the
ordinary course of business;
(d) Without having first received the prior consent of a
Majority in Interest of the Investor Partners, assign the rights or obligations
of the Partnership, or, except as otherwise provided in the Program Agreement,
consent to the assignment by the Managing Partner or any Affiliate thereof of
its rights or obligations under the Program Agreement, prior to the substantial
completion of the drilling activities of the Partnership;
(e) Without having first received the prior consent of a
Majority in Interest of the Investor Partners, agree to the termination or
amendment of the Program Agreement or waive any rights of the Partnership
thereunder, except for amendments to the Program Agreement which the Managing
Partner believes are necessary or advisable to ensure that the Program Agreement
conforms with any changes in or modifications to the Code or do not adversely
affect the Investor Partners in any material respect;
(f) Guarantee in the name or on behalf of the Partnership the
payment of money or the performance of any contract or other obligation of any
other person;
(g) Bind or obligate the Partnership with respect to any
matter outside the scope of the Partnership business;
(h) Use the Partnership name, credit, or property for other
than Partnership purposes;
(i) Take any action, or permit any other person to take any
action, with respect to the assets or property of the Partnership which does not
primarily benefit the Partnership, including without limitation, the commitment
of future production or the utilization of funds of the Partnership as
compensating balances for its own benefit;
(j) Benefit from any arrangement for the marketing of oil and
gas production or other relationships affecting the property of the Managing
Partner and the Partnership, unless such benefits are fairly and equitably
apportioned among the Managing Partner and Affiliates thereof and the
Partnership;
(k) Invest Partnership funds in the securities of another
person except in the following instances:
(i) investments in working interests or undivided
lease interests made in the ordinary course of the Partnership's business;
(ii) temporary investments made in compliance with
Section 7.3;
(iii) investments involving less than 5% of program
capital which are a necessary and incidental part of a property acquisition
transaction; and
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(iv) investments in entities established solely to
limit the Partnership's liabilities associated with the ownership or operation
of property or equipment, provided, in such instances duplicative fees and
expenses shall be prohibited; or
(l) Take any action that will:
(i) cause the Partnership to participate in any other
partnership or joint venture that will result in a duplication or unreasonable
increase in the amount of costs and expenses of the Partnership;
(ii) Substantively alter the fiduciary and
contractual relationship between the Managing Partner and the Investor Partners
as such exists pursuant to this Agreement; or
(iii) diminish the voting rights hereunder of the
Investor Partners.
Section 5.3 Services of Managing Partner. During the existence of the
Partnership, the Managing Partner shall devote such time and effort to the
Partnership business as may be necessary to promote adequately the interests of
the Partnership and the mutual interests of the Partners; however, it is
specifically understood and agreed that the Managing Partner shall not be
required to devote full time to Partnership business, and the Managing Partner
and its Affiliates may at any time and from time to time engage in and possess
interests in other business ventures of any and every type and description,
independently or with others, including without limitation, the acquisition,
ownership, exploration, development, operation, and management of oil and gas
properties for themselves and other persons and the organization and management
of other partnerships and joint ventures similar to the Partnership, and neither
the Partnership nor any Investor Partner shall by virtue of this Agreement or
the law of partnership opportunity have any right, title, or interest in or to
such independent ventures. It is specifically recognized that the Managing
Partner and its Affiliates are currently engaged in the exploration for and
production of oil and gas both for their account and for others, and nothing
herein contained shall be deemed to prevent any of them from continuing such
activities, individually, jointly with others, or as a part of any other
partnership or joint venture to which any of them is or may become a party, in
any locale, and in fields or areas of operation in which the Partnership may
likewise be active, or from dealing with the Partnership as an independent
party, nor as requiring any of them to permit the Partnership to participate in
any such operations in which any of them may be interested and each Investor
Partner hereby waives, relinquishes, and renounces any such right or claim of
participation. However, except as otherwise provided herein, the Managing
Partner and any of its Affiliates may pursue business opportunities that are
consistent with the Partnership's investment objectives for their own account
only after they have determined that such opportunity either cannot be pursued
by the Partnership because of insufficient funds or because it is not
appropriate for the Partnership under the existing circumstances.
Section 5.4 Liability of Managing Partner and Its Affiliates. Neither
the Managing Partner nor any of its Affiliates shall have any liability to the
Partnership or to any Partner for any loss suffered by the Partnership which
arises out of any action or inaction performed or omitted by the Managing
Partner or such Affiliate, if the Managing Partner in good faith has determined,
as of the time of the conduct or omission, that the course of conduct or
omission was
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in the best interests of the Partnership, the Managing Partner or such Affiliate
was acting on behalf of or performing services for the Partnership, and that
such conduct or omission did not constitute negligence or misconduct.
Section 5.5 Indemnification of Managing Partner and Its Affiliates.
(a) The Partnership shall indemnify the Managing Partner and
its Affiliates against any losses, judgments, liabilities, expenses, and
settlements sustained or incurred by the Managing Partner or such Affiliate as a
result of any threatened, pending, or completed claim, action, suit, or
proceeding, whether civil, criminal, administrative, arbitrative, or
investigative, any appeal in such a claim, action, suit, or proceeding, and any
inquiry or investigation that could lead to such a claim, action, suit, or
proceeding and which in any such case relates or which otherwise arises from or
is attributable to any acts, omissions, or operations performed or omitted by
the Managing Partner or its Affiliates acting on behalf of or performing
services for the Partnership that are within the scope of its authority as set
forth in this Agreement or the Program Agreement or which otherwise relates to
the activities and business affairs of the Partnership; provided that the
Managing Partner has determined in good faith, as of the time of the conduct or
omission, that the conduct or omission was in the best interests of the
Partnership and that the conduct or omission did not constitute negligence or
misconduct.
(b) Notwithstanding anything to the contrary contained in
Sections 5.4 and 5.5(a), neither the Managing Partner, its Affiliates, nor any
person acting as a broker-dealer shall be indemnified by the Partnership for any
losses, liabilities, or expenses arising from or out of an alleged violation of
federal or state securities laws unless (i) there has been a successful
adjudication on the merits of each count involving alleged securities laws
violations as to the particular indemnitee and the court approves
indemnification of the litigation costs, (ii) such claims have been dismissed
with prejudice on the merits by a court of competent jurisdiction as to the
particular indemnitee and the court approves indemnification of the litigation
costs, or (iii) a court of competent jurisdiction approves a settlement of the
claims against a particular indemnitee and finds that indemnification of the
settlement and related costs should be made, and the court considering the
request for indemnification has been advised of the position of the Securities
and Exchange Commission, and all state securities regulatory authorities in
which Interests in the Partnership were offered or sold as to indemnification
for violations of securities laws.
(c) The Partnership may purchase and maintain insurance on
behalf of the Managing Partner and its Affiliates against any liabilities
asserted against or expenses incurred by the Managing Partner and its Affiliates
in connection with Partnership or Drilling Program activities, provided that the
Partnership shall not incur the cost of that portion of any insurance, which
insures the Managing Partner or its Affiliates against any liability with
respect to which the Managing Partner and its Affiliates are denied
indemnification under the provisions of Sections 5.4 and 5.5; provided, however,
that nothing contained herein shall preclude the Partnership from purchasing and
paying for such types of insurance including extended coverage liability and
casualty and workers' compensation, as would be customary for any person owning
comparable assets and engaged in a similar business, or from naming the Managing
Partner and its Affiliates as additional insured parties thereunder, provided,
that the naming of such additional insured parties does not add to premiums
payable by the Partnership.
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(d) The termination of any claim, action, suit, or proceeding
by judgment, order, settlement, conviction, or a plea of nolo contendere or its
equivalent does not alone establish that a person seeking indemnification under
this Section 5.5 is disqualified. Any person who is determined to be not
entitled to indemnification under this Section 5.5 may petition a court of
competent jurisdiction for a determination that in view of all facts and
circumstances that such person is fairly and equitably entitled to indemnity and
the Partnership shall provide such indemnity as may be determined proper by such
court; provided, however, that the court has determined that such person has met
the standard set forth in Section 5.5(a) above.
(e) Legal fees and expenses and other costs incurred as a
result of a claim described in this Section 5.5(a) shall be paid by the
Partnership from time to time in advance of the final disposition of such claim
if: (i) the claim relates to the performance or non-performance of duties or
services by the Managing Partner or its Affiliates on behalf of the Partnership;
(ii)the claim is initiated by a third party who is not an Investor Partner, or
the claim is initiated by an Investor Partner and a court of competent
jurisdiction specifically approves such advancement; and (iii)the Managing
Partner or such Affiliate undertakes to repay the advanced funds to the
Partnership, together with the applicable legal rate of interest thereon, in the
event it is later determined that the Managing Partner or such Affiliate is not
entitled to indemnification under the provisions of this Section 5.5(a).
(f) To the extent that the Managing Partner or its Affiliates
are successful on the merits or in defense of any claim, issue, or matter
therein, the Partnership shall indemnify the Managing Partner or its Affiliates,
against the expenses, including attorneys' fees, actually incurred by the
Managing Partner or such Affiliate in connection therewith.
(g) The indemnification provided by this Section 5.5 shall
continue as to the Managing Partner and its Affiliates in the event it ceases to
be a managing partner of the Partnership with respect to claims relating to the
period in which the Managing Partner was a managing partner of the Partnership
and such indemnification shall inure to the benefit of the successors and
assigns of the Managing Partner and such Affiliates.
(h) The indemnification provided by this Section 5.5 shall be
made, and shall be recoverable by the Managing Partner or its Affiliates, only
out of the tangible net assets of the Partnership and not from the Investor
Partners.
Section 5.6 Reporting and Legal Expenses. The Partnership shall
reimburse the Program Manager and the Managing Partner and its Affiliates for
its share of the Reporting and Legal Expenses incurred by the Program Manager,
the Managing Partner, or any Affiliate thereof in managing and conducting the
business and affairs of the Drilling Program or of the Partnership, as
applicable. The Reporting and Legal Expenses reimbursed by the Partnership shall
be determined by the party seeking reimbursement in good faith and as being
reasonable for such party. Such reimbursements shall be made periodically
throughout the term of the Partnership.
Section 5.7 Administrative Costs. The Partnership shall reimburse the
Program Manager and the Managing Partner and its Affiliates for all
Administrative Costs and other costs and expenses incurred by the Program
Manager, the Managing Partner, or any Affiliate thereof
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in managing and conducting the business and affairs relating to the
Partnership's interest in the Drilling Program or of the Partnership, as
applicable, including expenses incurred in providing or obtaining such
professional, technical, administrative, and other services and advice as the
Program Manager, the Managing Partner, or such Affiliates may deem necessary or
desirable. The general, administrative, and other costs reimbursed by the
Partnership shall be determined by the party seeking reimbursement in good faith
and as being reasonable for such party. The amount of Administrative Costs that
are to be reimbursed by the Partnership shall be determined and allocated to the
Partnership and its Drilling Program on a basis conforming with generally
accepted accounting principles and must be supported in writing as to the
application thereof and as to the amount charged. Such reimbursements shall be
made periodically throughout the term of the Partnership. Such reimbursement
obligation shall also apply to all Administrative Costs incurred by the Program
Manager, the Managing Partner or any of its Affiliates on behalf of the
Partnership or the Drilling Program from the beginning of the calendar year in
which the Partnership is formed to the date of the admission of the Investor
Partners. Regardless of the actual amount of Administrative Costs incurred by
the Managing Partner or Program Manager in connection with the affairs of a
Partnership, during any particular calendar year the total amount of
Administrative Costs allocable to the Partnership shall not exceed the greater
of (a) 3.5% of the Partnership's gross revenues from the sale of oil and natural
gas production during such year (calculated without any deduction for Operating
Costs or other costs and expenses) or (b) the sum of $50,000 plus .25% of the
Capital Contributions of the Investor Partners to the Partnership. The above
limitation on Administrative Costs shall not be applicable to Administrative
Costs otherwise allocable to the Partnership which are extraordinary and
non-recurring or to the fixed overhead fee chargeable by an operator of Program
Wells including the fixed overhead fee chargeable under the Operating Agreement
by MOC with respect to the Program Wells operated by the Program Manager. No
portion of the salaries of the directors or of the executive officers of MOC or
MD may be reimbursed as Administrative Costs.
An independent certified public accountant shall provide annually to the
Investor Partners, a written attestation to be included as part of the annual
report required pursuant to Section 7.2 wherein such accountant shall verify
that the method used to make the allocations was consistent with the method
described in this Agreement and that the total amount of costs allocated to the
Investor Partners does not materially exceed amounts actually incurred by the
Managing Partner.
Section 5.8 Restrictions on Certain Transactions.
(a) The Partnership may enter into contracts and agreements
with the Managing Partner and its Affiliates for the rendering of services and
the sale, rental, or lease of supplies and equipment, provided that (i) such
entity is engaged, independently of the Drilling Program and as an ordinary and
ongoing business, in the business of rendering such services or selling or
leasing such equipment and supplies to a substantial extent to other persons in
the industry in addition to programs in which the Managing Partner or its
Affiliates have an interest and (ii) the amount of the compensation, price, or
rental that can be charged to the Partnership therefor must be no less favorable
to the Partnership than that generally available (at the time the relevant
contract or agreement was entered into) from unrelated third parties in the area
engaged in the business of rendering comparable services or selling, renting, or
leasing comparable equipment and supplies which could reasonably be made
available to the Partnership. If the Managing Partner or its Affiliate is not
engaged in the business as required by clause (i) of this
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Section 5.10(a) above, then such compensation, price, or rental shall be the
cost of such services, equipment, or supplies to such entity, or the competitive
rate which could be obtained in the area, whichever is less. In addition, any
drilling services rendered by the Managing Partner or its Affiliates to the
Partnership shall be billed on a per foot, per day, or per hour rate, or some
combination thereof. All services for which the Managing Partner or its
Affiliates are to receive compensation shall be embodied in written contracts
which precisely describe the services to be rendered and all compensation to be
paid. Advance payments to the Managing Partner are prohibited, except where
necessary to secure tax benefits of prepaid drilling costs. All contracts
between the Partnership and the Managing Partner or its Affiliates shall be
terminable by the Partnership (by a vote or written consent of a Majority in
Interest of the Investor Partners) without penalty upon 60 days' written notice.
(b) The Partnership may borrow money on a non-recourse basis
from the Managing Partner or any of its Affiliates, provided that on any loans
made available by the Managing Partner or any of its Affiliates to the
Partnership, the Managing Partner or such Affiliate shall not receive interest
in excess of the lesser of (i) the maximum rate permitted by applicable law or
(ii) the effective interest rate then being paid by the Managing Partner or such
Affiliate for similar type borrowings. In no event shall any such loan bear
interest in excess of the amount which would be charged to the Partnership
(without reference to the Managing Partner's financial abilities or guaranties)
by independent third parties for the same purpose. In connection with any loans
to the Partnership by the Managing Partner or its Affiliates, the Managing
Partner or its Affiliates shall not receive points or other financing charges or
fees, regardless of the amount.
(c) The Partnership shall acquire in certain instances
interests in Prospects from the Managing Partner or its Affiliates on the terms
and conditions set forth in the Program Agreement.
(d) No Partnership Leases shall be farmed out by the
Partnership unless the Managing Partner, exercising the standard of care of a
normal and prudent operator in the management of its own property, shall
determine that either (i) the Partnership lacks sufficient funds for the
drilling of a well on such Lease and cannot obtain suitable alternative
financing for such drilling, (ii) the Lease has been downgraded by events
occurring after the acquisition thereof by the Partnership pursuant to the
Program Agreement so that the drilling of a well on such Lease would no longer
be desirable for the Partnership, (iii) drilling on such Lease would result in
an excessive concentration of Partnership funds, creating in the opinion of the
Managing Partner undue risk to the Partnership and the Investor Partners, or
(iv) the best interests of the Partnership would be served by such farmout or
other disposition. The Partnership may enter into a farmout agreement (in the
capacity as either farmor or farmee) with the Managing Partner, any of its
Affiliates, provided that the Managing Partner, exercising the standards of a
normal and prudent operator in the management of its own property, shall
determine that the farmout is in the best interests of the Partnership and that
the terms of any such farmout are consistent with and in any case no less
favorable to the Partnership than those utilized in the same geographic area for
similar arrangements. The Partnership's ability to enter into a farmout
agreement with the Managing Partner or an Affiliate thereof is subject to the
same restrictions as its ability to purchase property from or sell property to
the Managing Partner or an Affiliate thereof as provided in Section 5.8(c) and
Section 5.8(f), respectively.
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(e) The Partnership shall make no loans to the Managing
Partner or its Affiliates.
(f) The Partnership may sell or transfer its Leases to the
Managing Partner or its Affiliates, including Affiliated Programs, only pursuant
to a transaction which is fair and reasonable to the Partnership and then
subject to the following restrictions:
(i) A sale, transfer, or conveyance, including a
farmout, of an undeveloped Lease (i.e., a Lease not having any Proved Developed
Reserves attributable to it) from the Partnership to the Managing Partner or any
Affiliate thereof, other than an Affiliated Program, must be made at the higher
of the Lease Acquisition Costs or fair market value.
(ii) A sale, transfer, or conveyance of a developed
Lease (i.e., a property having Proved Developed Reserves attributable to it)
from the Partnership to the Managing Partner or any Affiliate thereof, other
than an Affiliated Program in which the interest of the Managing General Partner
or its Affiliate is substantially similar to or less than its interest in the
Partnership, is not permitted except in connection with the liquidation of the
Partnership and then only at fair market value.
(iii) Except in connection with farmouts or joint
ventures made in compliance with the restrictions described in Section 5.8(d), a
transfer of an undeveloped Lease from the Partnership to an Affiliated Program
must be made at fair market value if the Lease has been held for more than two
years; otherwise, if the Managing Partner deems it to be in the best interests
of the Partnership, the transfer may be made at the Lease Acquisition Costs.
(iv) Except in connection with farmouts or joint
ventures made in compliance with the restrictions described in Section 5.8(d)
above, a transfer of any Lease from the Partnership to an Affiliated Production
Purchase or Income Program must be made at fair market value if the Lease has
been held for more than six months or there have been significant expenditures
made in connection with the Lease; otherwise, if the Managing Partner deems it
to be in the best interests of the Partnership, the transfer may be made at the
Lease Acquisition Costs as adjusted for intervening operations.
A determination of fair market value as required by this paragraph (f) must be
supported by an appraisal from an Independent Expert. Such opinion and any
associated supporting information will be maintained in the Partnership's
records for at least six years.
(g) No rebates or give-ups may be received by the Managing
Partner or any Affiliate, nor may the Managing Partner or any Affiliate
participate in any reciprocal business arrangements which do not primarily
benefit the Partnership.
The Partnership will acquire only Leases that are reasonably required
for the stated purpose of the Partnership, and no Leases will be acquired for
the purpose of subsequent sale or farmout, unless the acquisition of such
property by the Partnership is made after a well has been drilled to a depth
sufficient to indicate that such an acquisition is believed to be in the best
interests of the Partnership.
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(h) Neither the Managing Partner, nor any Affiliate thereof,
including an Affiliated Program, shall be permitted to sell, transfer, or convey
any Lease to the Partnership, directly or indirectly, except pursuant to a
transaction which is fair and reasonable to the Partnership and in accordance
with the following restrictions:
(i) The Managing Partner and its Affiliates may only
sell a Lease to the Partnership at a price equal to its Lease Acquisition Costs
unless the transferor has cause to believe that the Lease Acquisition Costs are
materially more than the fair market value of such Lease, in which case such
sale must be made at a price not in excess of its fair market value; provided,
however, that if the sale is from an Affiliated Program that has held the Lease
for more than two years and in which Affiliated Program the interest of the
Managing Partner or its Affiliate is substantially similar to, or less than, its
interest in the Partnership, the sale may be made at fair market value.
(ii) If the Managing Partner, or an Affiliate
thereof, sells any Lease within a Prospect to the Partnership, it must, at the
same time, sell to the Partnership an equal proportionate interest in all other
Leases that it owns in the same Prospect.
(iii) If at any time within a period of five years
from the creation of the Partnership, the Managing Partner or an Affiliate
thereof proposes to acquire an interest from a non-Affiliated person in a
Prospect in which the Partnership possesses an interest or in a Prospect in
which the Partnership's interest has been terminated without compensation within
one year preceding such proposed acquisition, the following conditions will
apply: (A) if the Managing Partner or any Affiliate thereof does not currently
own property in the Prospect separately from the Partnership, then neither the
Managing Partner nor any Affiliate thereof will be permitted to purchase an
interest in the Prospect and (B) if the Managing Partner or any Affiliate
thereof currently owns a proportionate interest in the Prospect separately from
the Partnership, then the interest to be acquired will be divided between the
Partnership and the Managing Partner, or an Affiliate thereof in the same
proportion as is the other property in the Prospect; provided, however, if cash
or financing is not available to the Partnership to enable it to consummate a
purchase of the additional interest to which it is entitled, then neither the
Managing Partner, nor any Affiliate thereof may purchase any additional interest
in the Prospect during such five year period.
(iv) If the area constituting a Partnership's
Prospect is subsequently enlarged to encompass any area wherein the Managing
Partner or any Affiliate thereof owns a separate Lease, such separate Lease or a
portion thereof must be sold, transferred, or conveyed to the Partnership, in
accordance with the provisions described in this Section 5.8(h), if the
activities of the Partnership were material in establishing the existence of
Proved Undeveloped Reserves which are attributable to such Lease.
(v) Except for the carried interests created by the
Program Agreement, a sale, transfer, or conveyance to the Partnership of less
than all of the ownership of the Managing Partner or any Affiliate thereof in
any Lease is prohibited unless the interest retained by the Managing Partner or
such Affiliate is a proportionate Working Interest, the respective obligations
of the Managing Partner, or such Affiliate and the Partnership are substantially
the same after the sale of the interest by the Managing Partner or such
Affiliate and its interest in
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revenues does not exceed the amount proportionate to its retained Working
Interest. Except for the carried interests created by the Program Agreement,
neither the Managing Partner nor any Affiliate thereof may retain any Overriding
Royalty Interest or other burden on an interest conveyed to the Partnership.
(vi) For the purposes of the preceding four
paragraphs, the term "Affiliate" does not include an Affiliated Program in which
the interest of the Managing Partner or an Affiliate thereof is substantially
similar to or less than its interest in the Partnership.
(vii) If the Partnership acquires a Lease pursuant to
a farmout or joint venture from an Affiliated Program, the Managing Partner's,
and any Affiliate's thereof aggregate compensation associated with the property
and any direct or indirect ownership interest in the property may not exceed the
lower of the compensation and ownership interest the Managing Partner, and such
Affiliates could receive if the property were separately owned or retained by
either the Partnership or such other Affiliated Program.
A determination of fair market value as required by this paragraph (h) must be
supported by an appraisal from an Independent Expert. Such opinion and any
associated supporting information will be maintained in the Partnership's
records for at least six years.
(i) If the Partnership participates in other partnerships or
joint ventures (multi-tier arrangements), the terms of any such arrangements
shall not result in the circumvention of any of the requirements or prohibitions
contained in this Partnership Agreement, including the following:
(i) there will be no duplication or increase in the
Managing Partner's compensation, Partnership expenses, or other fees and costs;
(ii) there will be no substantive alteration in the
fiduciary and contractual relationship between the Managing Partner and the
Investor Partners; and
(iii) there will be no diminishment in the voting
rights of the Investor Partners.
(j) In connection with a proposed Roll-Up, the following shall
apply:
(i) An appraisal of all Partnership assets shall be
obtained from a competent Independent Expert. If the appraisal will be included
in a prospectus used to offer the securities of a Roll-Up Entity, the appraisal
shall be filed with the Securities and Exchange Commission as an exhibit to the
registration statement for the offering. The appraisal shall be based on all
relevant information, including current reserve estimates prepared by an
independent petroleum consultant, and shall indicate the value of the
Partnership's assets assuming an orderly liquidation as of a date immediately
prior to the announcement of the proposed Roll-Up transaction. The appraisal
shall assume an orderly liquidation of Partnership assets over a 12-month
period. The terms of the engagement of the Independent Expert shall clearly
state that the engagement is for the benefit of the Partnership and the Investor
Partners. A summary of the independent
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appraisal, indicating all material assumptions underlying the appraisal, shall
be included in a report to the Investor Partners in connection with a proposed
Roll-Up.
(ii) In connection with a proposed Roll-up, Investor
Partners who vote "no" on the proposal shall be offered the choice of:
(a) accepting the securities of the Roll-Up
Entity;
(b) either (A) remaining as Limited Partner
or General Partner in the Partnership and preserving his or her
interest in the Partnership on the same terms and conditions as existed
previously, or (B) receiving cash in an amount equal to his or her
pro-rata share of the appraised value of the net assets of the
Partnership.
(iii) The Partnership shall not participate in any
proposed Roll-Up which, if approved, would result in the diminishment of any
Investor Partner's voting rights under the Roll-Up Entity's chartering
agreement. In no event shall the democracy rights of Investor Partners in the
Roll-Up Entity be less than those provided for under Sections 6.4 and 6.5 of
this Agreement. If the Roll-Up Entity is a corporation, the democracy rights of
Investor Partners shall correspond to the democracy rights provided for in this
Agreement to the greatest extent possible.
(iv) The Partnership shall not participate in any
proposed Roll-Up transaction which includes provisions which would operate to
materially impede or frustrate the accumulation of shares by any purchaser of
the securities of the Roll-Up Entity (except to the minimum extent necessary to
preserve the tax status of the Roll-Up Entity); nor shall the Partnership
participate in any proposed Roll-Up transaction which would limit the ability of
an Investor Partner to exercise the voting rights of its securities of the
Roll-Up Entity on the basis of the number of Partnership Interests held by that
Investor Partner.
(v) The Partnership shall not participate in a
Roll-Up in which Investor Partners' rights of access to the records of the
Roll-Up Entity will be less than those provided for under Section 7.1(a) and (b)
of this Agreement.
(vi) The Partnership shall not participate in any
proposed Roll-Up transaction in which any of the costs of the transaction would
be borne by the Partnership if less than a Super Majority in Interest of the
Investor Partners vote to approve the proposed Roll-Up.
(vii) The Partnership shall not participate in a
Roll-Up transaction unless the Roll-Up transaction is approved by a Super
Majority in Interest.
(k) Turnkey drilling contracts or other contracts with the
Managing Partner or its Affiliates that establish a fixed price for drilling
services shall not be permitted.
To the extent the restrictions set forth above apply to the Managing Partner or
its Affiliates and except as otherwise provided herein, the term "Affiliate"
includes, but is not limited to, MOC in its capacity as Program Manager. Except
as otherwise set forth in this Section 5.8 of the Partnership Agreement, the
Managing Partner and its Affiliates may pursue business opportunities that are
consistent with the Partnership's investment objectives for their own
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account only after they have determined that such opportunity either cannot be
pursued by the Partnership because of insufficient funds or because it is not
appropriate for the Partnership under the existing circumstances.
Section 5.9 Restriction on Voting Interests Held by Managing Partner.
Interests owned by the Managing Partner or its Affiliates shall have full voting
rights under this Agreement, provided that during the time period that MD or an
Affiliate thereof is serving as the Managing Partner of the Partnership any
Interests owned by MD or its Affiliates which in the aggregate represent more
than 20% of the total Interests held by Investor Partners shall not have any
voting rights under this Agreement and shall not be counted for voting purposes
or for purposes of determining a quorum. In addition, none of the Interests
owned by the Managing Partner or its Affiliates shall be counted for voting
purposes or for purposes of determining a quorum or have any voting rights under
this Agreement concerning the removal of the Managing Partner or any transaction
between the Partnership and the Managing Partner or its Affiliates.
Section 5.10 Tax Elections. The Managing Partner shall make the
following elections on behalf of the Partnership:
(a) to elect, in accordance with Section 263(c) of the Code
and applicable regulations and comparable state law provisions, to deduct as an
expense all intangible drilling and development costs with respect to productive
and nonproductive wells and the preparation of wells for the production of oil
or gas;
(b) to elect the calendar year as the Partnership's fiscal
year;
(c) to elect the accrual method of accounting;
(d) to elect, in accordance with Section 709(b) of the Code
and applicable regulations and comparable state law provisions, to amortize and
deduct organization expenses (as such term is defined in Section 709 of the
Code) over a period of 60 months beginning with the month in which the
Partnership begins business; and
(e) to elect with respect to such other federal, state, and
local tax matters as the Managing Partner deems advantageous to the Partnership;
provided that no election shall be made by the Partnership in accordance with
Section 754 of the Code and applicable regulations and comparable state law
provisions without the consent of the Managing Partner, the granting or denying
of which consent shall be in its sole and absolute discretion.
Section 5.11 Tax Matters Partner. The Managing Partner shall be
designated the tax matters partner (in this Section 5.11 called the "TMP") as
defined in Section 6231(a)(7) of the Code with respect to operations conducted
by the Partners pursuant to this Agreement. The TMP is authorized to take such
actions and to execute and file all statements and forms on behalf of the
Partnership which may be permitted or required by the applicable provisions of
the Code or Treasury Regulations issued thereunder, and the Investor Partners
will take all other action that may be necessary or appropriate to effect the
designation of the Managing Partner as the TMP. In the event of an audit of the
Partnership's income tax returns by the Internal Revenue Service, the TMP may,
at the expense of the Partnership, retain accountants and other professionals to
participate in the audit. All expenses incurred by the TMP in its capacity as
such shall be
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expenses of the Partnership and shall be paid by or reimbursed to the TMP from
Partnership funds.
ARTICLE VI
RIGHTS AND OBLIGATIONS OF INVESTOR PARTNERS
Section 6.1 Rights of Investor Partners. In addition to any other
rights specifically set forth herein, all Investor Partners shall have the right
to: (a) have the Partnership books kept at the principal place of business of
the Partnership and upon adequate written notice at all reasonable times inspect
and, at such Investor Partner's expense, copy any of them personally or through
a representative; (b) have on demand true and full information of all things
affecting the Partnership and a formal account of Partnership affairs, whenever
permitted by law; and (c) have dissolution and winding up by decree of court as
provided for in the Act.
Section 6.2 Access of Investor Partners to Geophysical Data. During the
term of the Partnership, the Partnership may acquire or have access to
geophysical, geological, and other similar data and information. Each Investor
Partner shall during the term of the Partnership have the right, after adequate
notice, during normal business hours at the offices of the Partnership to
inspect and review all such data and information and studies, maps, evaluations,
or reports derived therefrom and material related thereto in the actual custody
of the Managing Partner; provided, however, that the Managing Partner may refuse
for a reasonable period of time to grant a Investor Partner access to such data
and information and studies, maps, evaluations, and reports which the Managing
Partner (a) has agreed to keep confidential or (b) determines in good faith
should be kept confidential considering the interests of the Partnership and
each of its Partners.
Section 6.3 Return of Capital Contribution. No Investor Partner shall
be entitled to (a) withdraw from the Partnership except upon assignment by an
Investor Partner of his Interests and the substitution of such Investor
Partner's assignee as a substituted Investor Partner of the Partnership in
accordance with Section 8.1 or as required by law, or (b) the return of his
Capital Contribution except (i) as otherwise provided in this Agreement or as
required by law, (ii) to the extent, if any, that distributions made pursuant to
the express terms of this Agreement may be considered as such by law or by
unanimous agreement of the Partners, or (iii) upon dissolution of the
Partnership, and then only to the extent expressly provided for in this
Agreement and as permitted by law.
Section 6.4 Meetings. Meetings of the Partners may be called by the
Managing Partner at any time and from time to time or may be called by Investor
Partners whose combined Sharing Ratios equal at least 10%. The Managing Partner
shall, within 15 days after its receipt of a written request for any such call
by Investor Partners for a Partners' meeting, give all Investor Partners written
notice of the time, place, and purpose of such meeting. The meeting shall be
held at a reasonable time and place on a date not less than 30 nor more than 60
days after the date of the mailing of such notice; provided that the date for
notice of such a meeting may be extended for a period of up to 60 days, if in
the opinion of the Managing Partner such additional time is necessary to permit
preparation of proxy or information statements or other documents required to be
delivered in connection with such meeting by the Securities and Exchange
Commission, state securities administrators or other regulatory authorities. The
Partners may conduct any Partnership business at such meeting which is permitted
under this Agreement and
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is specified in such notice. Investor Partners may vote in person or by proxy at
any such meeting, and the presence in person or by proxy of a Majority in
Interest of the Investor Partners shall be necessary to constitute a quorum for
the transaction of business at such meeting.
Section 6.5 Voting Rights of Investor Partners. Except as otherwise
provided in Section 5.2(b) and 5.8(j), any vote, consent, approval, election, or
other action by the Investor Partners on or with respect to any Partnership
matter (including, without limitation, those matters set forth in Sections
5.2(c), 5.2(e), 8.6(a), 8.6(b), 9.1(b), 9.3(a) and 11.2) shall be duly and
validly made only if made by a Majority in Interest of the Investor Partners
(without the necessity for the concurrence by the Managing Partner), and in the
event of any such vote, consent, approval, or election, each Investor Partner
that does not vote for, consent to, approve of, or elect with respect to such
matter hereby agrees to be bound by the decision of a Majority in Interest of
the Investor Partners and hereby approves such matter to the extent such
approval is required for such matter to be effective under the Delaware Act or
any other applicable law, rule, or regulation.
Section 6.6 Conduct of Meeting. The Managing Partner shall have full
power and authority concerning the manner of conducting any meeting of the
Investor Partners or solicitation of consents in writing, including without
limitation, the determination of persons entitled to vote, the existence of a
quorum, the satisfaction of the requirements of Section 6.4, the conduct of
voting, the validity and effect of any proxies, votes, or consents, and the
determination of any controversies, votes, or challenges arising in connection
with or during the meeting or voting. The Managing Partner shall designate a
person to serve as chairman of any meeting and shall further designate a person
to take the minutes of any meeting, in either case, including without
limitation, a partner or a director or an officer of the Managing Partner. All
minutes shall be kept with the records of the Partnership maintained by the
Managing Partner. The Managing Partner may make such other regulations
consistent with applicable law and this Agreement as it may deem advisable
concerning the conduct of any meeting of the Investor Partners or solicitation
of consents in writing, including regulations in regard to the appointment of
proxies, the appointment and duties of inspectors of votes and consents, the
submission and examination of proxies and other evidence of the right to vote,
and the revocation of consents in writing.
Section 6.7 General Partners Not Agents. Pursuant to Section 5.1 the
General Partners have elected to delegate to the Managing Partner authority to
manage, control, and administer and operate the property, business, and affairs
of the Partnership. Each General Partner agrees that no General Partner or group
of General Partners constituting less than a Majority in Interest may cause the
Managing Partner on behalf of the Partnership to act as agent for the
Partnership, execute documents on behalf of the Partnership, convey Partnership
property, or take any other action binding on the Partnership. Each General
Partner further agrees that in no circumstance will a Partner other than the
Managing Partner have the right to act as agent for the Partnership, execute
documents on behalf of the Partnership, convey Partnership property, or take any
other action binding on the Partnership. Any General Partner who takes action
contravening this Section 6.7 agrees to indemnify the Partnership and all other
Partners from any loss, liability, or expense caused by such action.
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Section 6.8 Liabilities of Partners.
(a) Pursuant to the Delaware Act, the General Partners are
liable jointly and severally for all liabilities and obligations of the
Partnership. Notwithstanding the foregoing, as among themselves, the General
Partners hereby agree that each shall be solely and individually responsible
only for his pro rata share (based on Capital Contributions made) of the
liabilities and obligations of the Partnership, and any General Partner who
incurs liability in excess of his pro rata share shall be entitled to
contribution from the other General Partners. Pursuant hereto, the Managing
Partner further agrees to indemnify each General Partner for any and all
Partnership-related obligations and liabilities otherwise allocable to or paid
by such General Partner which are in excess of such General Partner's share of
the Partnership's undistributed assets. Under no circumstances shall any Partner
be required to indemnify the Managing Partner, except to the extent of such
Partner's (i) Capital Contribution and (ii) share of Partnership assets.
(b) The Partnership may purchase and maintain insurance on
behalf of all Partners against any liabilities asserted against or expenses
incurred by the Partners in connection with Partnership activities, provided
that the Partnership shall not incur the costs of that portion of such
insurance, if any, which insures the Managing Partner for any liability with
respect to which the Managing Partner is denied indemnification under the
provisions of this Agreement. Such insurance may be in such amounts as the
Managing Partner shall determine is sufficient to protect the Partners from the
maximum amount of such liabilities and expenses.
ARTICLE VII
BOOKS, RECORDS, CAPITAL ACCOUNTS, REPORTS, AND BANK ACCOUNTS
Section 7.1 Books, Records, and Capital Accounts.
(a) The Managing Partner shall keep just and true records and
books of account with respect to the operations of the Partnership and shall
maintain and preserve during the term of the Partnership and for four years
thereafter all such records, books of account, and other relevant Partnership
documents. The Managing Partner shall maintain for at least six years all
records necessary to substantiate the fact that Interests were sold only to
purchasers for whom such Interests were suitable. Such books shall be maintained
at the principal place of business of the Partnership and shall be kept on the
accrual method of accounting.
(b) Any records maintained by the Partnership in the regular
course of its business, including the names and addresses of Investor Partners,
books of account and records of Partnership proceedings, may be kept on or be in
the form of magnetic tape, photographs, micrographics, or any other information
storage device, provided that the records so kept are convertible into clearly
legible written form within a reasonable period of time. An alphabetical list of
the names, addresses, and business telephone numbers of the Investor Partners of
the Partnership along with the number of Interests held by each of them (the
"participant list") shall be maintained as a part of the books and records of
the Partnership and shall be available for the inspection by any Investor
Partner or his designated agent at the principal office of the Partnership upon
the request of the Investor Partner. The participant list shall be updated at
least quarterly to reflect changes in the information contained therein. A copy
of the participant list shall be mailed to any Investor Partner requesting the
participant list within ten days of the request. The copy of the participant
list shall be printed in alphabetical order, on white paper, in
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a readily readable type size (in no event smaller than 10-point type). A
reasonable charge for copy work may be charged by the Partnership. The purposes
for which an Investor Partner may request a copy of the participant list
include, without limitation, matters relating to voting rights under the
Partnership Agreement and the exercise of Investor Partners' rights under
federal proxy laws. If the Managing Partner of the Partnership neglects or
refuses to exhibit, produce, or mail a copy of the participant list as
requested, the Managing Partner shall be liable to any Investor Partner
requesting the list for the costs, including attorneys' fees, incurred by that
Investor Partner for compelling the production of the participant list, and for
actual damages suffered by any Investor Partner by reason of such refusal or
neglect. It shall be a defense that the actual purpose and reason for the
requests for inspection or for a copy of the participant list is to secure the
list of Investor Partners or other information for the purpose of selling such
list or information or copies thereof, or of using the same for a commercial
purpose other than in the interest of the applicant as an Investor Partner
relative to the affairs of the Partnership. The Managing Partner may require the
Investor Partner requesting the participant list to represent that the list is
not requested for a commercial purpose unrelated to the Investor Partner's
interest in the Partnership. The remedies provided hereunder to Investor
Partners requesting copies of the participant list are in addition to, and shall
not in any way limit, other remedies available to Investor Partners under
federal law or the laws of any state.
(c) An individual capital account shall be maintained by the
Partnership for each Partner as provided below:
(i) The capital account of each Partner shall, except
as otherwise provided herein, be (A) credited by such Partner's Capital
Contributions when made, (B) credited by the fair market value of any property
contributed to the Partnership by such Partner (net of liabilities secured by
such contributed property that the Partnership is considered to assume or take
subject to under Section 752 of the Code), (C) credited with the amount of any
item of taxable income or gain and the amount of any item of income or gain
exempt from tax allocated to such Partner, (D) credited with the Partner's share
of Simulated Gain as provided in Section 7.1(c)(ii), (E) debited by the amount
of any item of tax deduction or loss allocated to such Partner, (F) debited by
the Partner's share of Simulated Depletion and Simulated Loss as provided in
Section 7.1(c)(ii), (G) debited by such Partner's allocable share of
expenditures of the Partnership not deductible in computing the Partnership's
taxable income and not properly chargeable as Capital Expenditures, including
any non-deductible book amortizations of capitalized costs, and (H) debited by
the amount of cash or the fair market value of any property distributed to such
Partner (net of liabilities secured by such distributed property that such
Partner is considered to assume or take subject to under Section 752 of the
Code). Immediately prior to any distribution of property by the Partnership that
is not pursuant to a liquidation of the Partnership, the Partners' capital
accounts shall be adjusted by (A) assuming that the distributed assets were sold
by the Partnership for cash at their respective fair market values as of the
date of distribution by the Partnership and (B) crediting or debiting each
Partner's capital account with its respective share of the hypothetical gains or
losses resulting from such assumed sales determined in the same manner as gains
or losses provided for under Sections 4.2 and 7.1(c)(ii) for actual sales of
such properties.
(ii) The allocation of basis prescribed by Section
613A(c)(7)(D) of the Code and provided for in Section 4.2(g) and each Partner's
separately computed depletion
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deductions shall not reduce such Partner's capital account, but such Partner's
capital account shall be decreased by an amount equal to the product of the
depletion deductions that would otherwise be allocable to the Partnership in the
absence of Section 613A(c)(7)(D) of the Code (computed without regard to any
limitations which theoretically could apply to any Partner) times such Partner's
percentage share of the adjusted basis of the property with respect to which
such depletion is claimed (herein called "Simulated Depletion"). The
Partnership's basis in any oil or gas property as adjusted from time to time for
the Simulated Depletion allocable to all Partners (and where the context
requires, each Partner's allocable share thereof) is herein called "Simulated
Basis." No Partner's capital account shall be decreased, however, by Simulated
Depletion deductions attributable to any depletable property to the extent such
deductions exceed such Partner's remaining Simulated Basis in such property.
Upon the sale or other disposition of an interest in a depletable property, each
Partner's capital account shall be credited with the gain ("Simulated Gain") or
debited with the loss ("Simulated Loss") determined by subtracting from his
allocable share of the amount realized on such sale or disposition his Simulated
Basis, as adjusted by Simulated Depletion.
(iii) Adjustments of basis of Partnership property
provided for under Sections 734 and 743 of the Code and comparable provisions of
state law (resulting from an election under Section 754 of the Code or
comparable provisions of state law) and elections by individual Partners under
Section 59(e)(4) of the Code to capitalize and amortize such Partner's share of
intangible drilling and development costs shall not affect the capital accounts
of the Partners, and the Partners' capital accounts shall be debited or credited
pursuant to the terms of this Section 7.1 as if no such election had been made,
unless otherwise required by applicable Treasury Regulations.
(iv) Capital accounts shall be adjusted, in a manner
consistent with this Section 7.1, to reflect any adjustments in items of
Partnership income, gain, loss, or deduction that result from amended returns
filed by the Partnership or pursuant to an agreement by the Partnership with the
Internal Revenue Service or a final court decision.
(v) In the case of property contributed to the
Partnership by a Partner, the Partners' capital accounts shall be debited or
credited for items of depreciation, cost recovery, Simulated Depletion,
amortization, and gain or loss with respect to such property computed in the
same manner as such items would be computed if the adjusted tax basis of such
property were equal to its fair market value on the date of its contribution to
the Partnership, in lieu of the capital account adjustments provided above for
such items, all in accordance with Treasury Regulation 1.704-1(b)(2)(iv)(g).
(vi) It is the intention of the Partners that the
capital account of each Partner be kept in the manner required under Treasury
Regulation 1.704-1(b)(2)(iv). To the extent any additional adjustment to the
capital accounts is required by such regulation, the Managing Partner is hereby
authorized to make such adjustment after notice to the General Partners.
Section 7.2 Reports. The Managing Partner shall deliver to each
Investor Partner the following financial statements and reports at the times
indicated below:
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(a) Semiannually within 75 days after the end of the first six
months of each fiscal year and annually within 120 days after the end of each
fiscal year, financial statements, including a balance sheet and statements of
income, Partners' equity, and cash flow, all of which shall be prepared in
accordance with generally accepted accounting principles. The annual financial
statements shall be accompanied by a report of an independent certified public
accountant designated by the Managing Partner, stating that an audit of such
financial statements has been made in accordance with generally accepted
auditing standards and that in its opinion such financial statements present
fairly the financial condition, results of operations, and cash flows of the
Partnership in accordance with generally accepted accounting principles
consistently applied.
(b) Annually by March 15 of each year or as soon thereafter as
is reasonably possible, a report containing such information as may be needed to
enable each Investor Partner to prepare and file his federal income tax return
and any required state income tax return.
(c) Annually within 120 days after the end of each fiscal year
beginning with the fiscal year ended December 31 of the year following the year
in which the Partnership commences operation, (i) a summary of the computations
of the total estimated oil and gas Proved Reserves of the Partnership as of the
end of such fiscal year and the dollar value thereof at then existing prices and
a computation of each Investor Partner's interest in such value, such reserve
computations to be based upon engineering reports prepared by qualified
independent petroleum engineers, (ii) an estimate of the time required for the
extraction of such Proved Reserves and the present worth thereof (discounted at
a rate generally accepted in the oil and gas industry and undiscounted), and
(iii) a statement that because of the time period required to extract such
reserves the present value of revenues to be obtained in the future is less than
if such revenues were immediately receivable. Each such report shall be prepared
in accordance with customary and generally accepted standards and practices for
petroleum engineers and shall be prepared by a recognized independent petroleum
engineer selected from time to time by the Managing Partner. No later than 90
days following the occurrence of an event resulting in a reduction in an amount
of 10% or more of the estimated value of the oil and gas Proved Reserves as last
reported to the Investor Partners, other than a reduction resulting from normal
production, sales of reserves or product price changes, a new summary conforming
to the requirements set forth above in this Section 7.2(c) shall be delivered to
the Investor Partners.
(d) Semiannually within 75 days after the end of the first six
months of each fiscal year and annually within 120 days after the end of each
fiscal year, (i) a summary itemization, by type or classification, of any
transaction of the Partnership since the date of the last such report with the
Managing Partner or any Affiliate thereof and the total fees, compensation, and
reimbursement paid by the Partnership (or indirectly on behalf of the
Partnership) to the Managing Partner and its Affiliates, including without
limitation, the average price paid by any Affiliate of the Managing Partner
during the two most recent calendar quarters for oil and gas produced by Program
Wells purchased by such Affiliate and the highest average price paid by any
other substantial purchaser of comparable oil or gas produced in the field where
such Program Wells are located, and (ii) a schedule reflecting (A) the total
costs of the Partnership (and, where applicable, the costs pertaining to each
Prospect) and the costs paid by the Managing Partner and by the Investor
Partners and (B) the total revenues of the Partnership and the revenues received
by or credited to the accounts of the Managing Partner and the
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Investor Partners. Each semi-annual report delivered by the Managing Partner may
contain summary estimates of the information described in subdivision (i) of
this Section 7.2(d).
(e) Monthly within 30 days after the end of each calendar
month while the Partnership is participating in the drilling and completion of
wells in which it has an interest until the end of such activity, and thereafter
for a period of three years semiannually within 75 days after the end of the
first six months of each fiscal year and annually within 120 days after the end
of each fiscal year, (i) a description of each Prospect or field in which the
Partnership owns Leases (provided that after the initial description of each
such Prospect or field has been provided to the Investor Partners only material
changes, if any, with respect to such Prospect or field need be described), (ii)
a description of all farmouts entered into by the Partnership since the date of
the last such report, including the reason therefor, the location and timing
thereof, the parties to the farmout and the terms thereof, and (iii) a summary
of the wells drilled by the Partnership and the status thereof, indicating
whether each of such wells is being drilled or has been completed or plugged and
abandoned, a statement of the cost of each well completed or abandoned, and the
reason for abandoning any well after commencement of production. Each report
delivered by the Managing Partner may contain summary estimates of the
information described in clause (iii) of this Section 7.2(e).
(f) Such other reports and financial statements as the
Managing Partner shall determine from time to time.
The cost of such reporting shall be paid by the Partnership as a
Partnership expense.
Section 7.3 Bank Accounts. The Managing Partner shall cause one or more
accounts to be maintained in a state or federally chartered bank or savings and
loan association, which accounts shall be used for the payment of the
expenditures incurred by the Managing Partner in connection with the business of
the Partnership, and in which shall be deposited any and all receipts of the
Partnership. All such amounts shall be and remain the property of the
Partnership and shall be received, held, and disbursed by the Managing Partner
for the purposes specified in this Agreement. There shall not be deposited in
any of said accounts any funds other than funds belonging to the Partnership,
and no other funds shall in any way be commingled with such funds. The Managing
Partner may invest Partnership funds which they deem untimely or inappropriate
to use or commit for Partnership purposes or to distribute to the Partners in
such United States Treasury Bills, other short-term governmental obligations or
bank certificates of deposit or other certificates, securities or evidences of
indebtedness on such terms and for such security, if any, as they may deem
necessary or desirable. The Managing Partner shall have a fiduciary
responsibility for the safekeeping and use of all funds and assets of the
Partnership, whether or not in the Managing Partner's possession or control, and
shall not employ or permit another to employ such funds or assets in any manner
except for the benefit of the Partnership.
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ARTICLE VIII
ASSIGNMENT AND PURCHASE OF INTERESTS; SUBSTITUTION
Section 8.1 Assignments by Investor Partners.
(a) The interest of any Investor Partner in the Partnership
shall be assignable, in whole or in part, subject to the following:
(i) No such assignment shall be made if, in the
opinion of counsel to the Partnership, such assignment would cause the
termination of the Partnership for federal income tax purposes under Section 708
of the Code or might result in a change in the status of the Partnership to a
"publicly traded partnership" within the meaning of Section 7704 of the Code,
unless the Managing Partner consents to such assignment, or if in the opinion of
counsel to the Partnership such assignment may not be effected without
registration under the Securities Act of 1933, as amended, or would result in
the violation of any applicable state securities laws;
(ii) The Partnership shall not be required to
recognize any such assignment until the instrument conveying such interest has
been delivered to the Managing Partner for recordation on the books of the
Partnership;
(iii) Unless an assignee becomes a substituted
Investor Partner in accordance with the provisions set forth below, such
assignee shall not be entitled to any of the rights granted to an Investor
Partner hereunder, other than the right to receive all or part of the share of
the profits, losses, cash distributions, or returns of capital to which his
assignor would otherwise be entitled;
(iv) Except by will, intestate succession, or gift
or, in unusual circumstances when consented to by the Managing Partner, the
assigning Investor Partner (A)may not assign fewer than a whole Interest (five
Interests for Investor Partners who are residents of either the States of
California, Iowa, or Minnesota) to any person other than the Partnership, the
Managing Partner, an Affiliate thereof, or a third person designated by the
Managing Partner in its sole discretion, unless such Investor Partner owns less
than a whole Interest (less than five Interests for Investor Partners who are
residents of either the States of California, Iowa, or Minnesota) and transfers
all his Interest to one person, and (B)must retain at least a whole Interest
(five Interests for Investor Partners who are residents of either the States of
California, Iowa, or Minnesota), in the event fewer than all such Investor
Partner's Interests are assigned to any person other than the Partnership,
Managing Partner, an Affiliate thereof, or a third person designated by the
Managing Partner in its sole discretion; and
(v) The assignor shall notify the Managing Partner of
such assignment and provide the Managing Partner with such information regarding
the transferee and the transfer (including without limitation, the name,
address, and taxpayer identification number of the transferor and transferee and
the date of the transfer) as is required under Section 6050K of the Code (if the
transfer is a sale or exchange described in Section 751(a) of the Code) and
Section 6112 of the Code (relating to tax shelter investor lists) and Treasury
Regulations promulgated thereunder by the Internal Revenue Service in the manner
and at the time prescribed by law.
An assignment by an Investor Partner in violation of clause (i) or clause (ii)
of this Section 8.1(a) shall be void and ineffectual and shall not bind the
Partnership or any other Partner. The assignee of an Investor Partner's interest
in the Partnership shall pay all costs and expenses incurred by the Partnership
in connection with such assignment, which costs and expenses shall
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not be less than $50. In the discretion of the Managing Partner, such costs and
expenses may be collected out of revenues otherwise allocable to such assignee
under this Agreement.
(b) An assignee of the interest of an Investor Partner, or any
portion thereof if permitted hereunder, shall become a substituted Investor
Partner entitled to all the rights of an Investor Partner if, and only if:
(i) The assignor gives the assignee such right;
(ii) The Managing Partner consents to such
substitution, which consent may only be withheld to the extent legally necessary
(as set forth in an opinion of counsel) to preserve the tax status of the
Partnership or the classification of Partnership income for tax purposes;
(iii) The assignee pays to the Partnership all costs
and expenses incurred in connection with such substitution; including without
limitation, costs incurred in amending filings referred to in Section 1.7, which
costs and expenses, in the discretion of the Managing Partner, may be collected
out of revenues otherwise allocable to such substituted Investor Partner under
this Agreement;
(iv) The assignee executes and delivers such
instruments, in form and substance satisfactory to the Managing Partner, as the
Managing 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
provisions of this Agreement; and
(v) The assignee delivers to the Managing Partner a
written representation as to each of the matters set forth in the Subscription
Agreement.
The consent of the Investor Partners shall not be required for admission to the
Partnership of a substituted Investor Partner who meets the above requirements.
The Partnership and the Managing 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 record owner until such time as a written assignment of such
interest has been received and accepted by the Managing Partner and recorded on
the books of the Partnership. In no event shall any Partnership interest, or any
portion thereof, be sold, transferred, or assigned to a minor or incompetent or
any other person not qualified to become an Investor Partner hereunder, and any
such attempted sale, transfer, or assignment shall be void and ineffectual and
shall not bind the Partnership or the Managing Partner. Unless an assignee
becomes a substituted Investor Partner, any assignment by the assigning Investor
Partner of the right to receive Partnership distributions shall not release such
Investor Partner of any obligations connected with the interest in the
Partnership being assigned. In no event shall any purported transfer, by
operation of law or otherwise, require the accounting by the Managing Partner to
more than one person with respect to the Partnership interest transferred unless
the transfer is consented to by the Managing Partner in accordance with the
foregoing and the Partnership interest transferred represents a whole number of
Interests owned by the Investor Partner. The effective date of any assignment
shall be the date on which all of the prerequisites to the assignment specified
in this Section 8.1 have been met. The Partnership will amend its
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records at least once each calendar quarter to effect the substitution of
substituted partners. In the case of assignments where the assignee does not
become a substituted Investor Partner, the Partnership shall recognize the
assignment not later than the last day of the calendar month following receipt
of the notice of assignment and the required documentation.
Section 8.2 Assignment by Managing Partner.
(a) The interest of the Managing Partner in the Partnership
shall not be assignable, in whole or in part, except in the event of the
following assignments:
(i) A disposition by the Managing Partner of all or
any portion of its Partnership interest to one or more Affiliates of the
Managing Partner that agree to assume all or a proportionate part of the
obligations of the Managing Partner with respect to such interest in the
Partnership;
(ii) A disposition by the Managing Partner of all or
any part of its Partnership interest to one or more persons that have as the
result of a merger, consolidation, corporate reorganization, or other
transaction acquired all or substantially all of the assets of the Managing
Partner and have assumed the obligations of the Managing Partner hereunder; or
(iii) An assignment or transfer by the Managing
Partner of all or any portion of its Partnership interest by way of mortgage,
pledge, or charge as security for an advance of monies to it, provided that the
mortgagee or pledgee shall hold such interest subject to all of the terms of
this Agreement.
(b) In the event of a disposition, assignment, or transfer
referred to in clause (i) or clause (ii) of Section 8.2(a), such successor,
assignee, or transferee shall be and become a substituted Managing Partner and
shall continue the business of the Partnership without the occurrence of any
dissolution and the assigning Managing Partner shall be released from all of its
obligations thereafter arising hereunder; and each Investor Partner (and any
person who hereafter becomes a substituted Investor Partner by his execution,
adoption, or acceptance of this Agreement) does hereby consent to the admission
of such successor, assignee, or transferee as a substituted Managing Partner to
the extent required by the Delaware Act and to the continuance of the business
of the Partnership by such substituted Managing Partner, and authorizes the
Managing Partner or substituted Managing Partner to ratify on his behalf
pursuant to the power of attorney granted in Section 10.2 such Investor
Partner's consent to the admission of the new Managing Partner as a Managing
Partner of the Partnership.
(c) The Partnership shall take such actions as the Managing
Partner in its sole discretion deems necessary or appropriate to effect or
facilitate a disposition, assignment, or transfer referred to in Section 8.2(a),
including without limitation, providing notice thereof to the Investor Partners
and entering into appropriate escrow arrangements; provided, however, that no
such disposition, assignment, or transfer (in the absence of the bankruptcy,
withdrawal, removal, or dissolution of a Managing Partner) shall result in
dissolution of the Partnership.
(d) Except as otherwise provided in Section 8.2(b), Section
8.6 or Section 9.3, no assignee or transferee of a Managing Partner shall become
a substituted Managing Partner without the written consent of all of the
Investor Partners.
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Section 8.3 Right of Presentment. During the first calendar quarter of
each of the years ______ through _______, an Investor Partner (other than the
Managing Partner or an Affiliate thereof) may request in writing that the
Managing Partner repurchase all, but not less than all, of his Interests (the
"Right of Presentment"). The repurchase price to be paid upon any repurchase of
an Investor Partner's Interests will be the pro rata share represented by his
Interests of:
(a) 100% of the sum of
(i) 65% of the unescalated (i.e., not increased by
any interest rate or any other factor) value as of such Valuation Date of the
future net revenues attributable to the Partnership's Proved Developed Producing
Reserves, as estimated by the Independent Expert retained by the Managing
Partner to prepare the most recent engineering report furnished to the Investor
Partners pursuant to Section 7.2(c);
(ii) 50% of the unescalated (i.e., not increased by
any interest rate or any other factor) value as of such Valuation Date of the
future net revenues attributable to the Partnership's Proved Developed
Non-Producing Reserves, as estimated by the Independent Expert retained by the
Managing Partner to prepare the most recent engineering report furnished to the
Investor Partners pursuant to Section 7.2(c);
provided that prior to the calculation of the value of such future net revenues,
that value (A) shall be adjusted by the Independent Expert to reflect the risks
of production and development of such reserves and any other economic
contingencies that would normally be considered by a purchaser of Proved
Reserves and (B) shall be discounted to present value at a rate equal to 10%;
MINUS
(b) the amount of all liabilities, indebtedness, expenses, and
obligations of the Partnership as of the Valuation Date as shown on the
Partnership's most recent audited financial statements furnished to the Investor
Partners pursuant to Section 7.2(a) that were allocable as of the end of such
fiscal year to the Investor Partners; and
(c) any distributions made to Investor Partners between the
Valuation Date and the date of payment of the repurchase attributable to the
Interests being repurchased shall be deducted from the repurchase price. The
effective date of any such sale for purposes of determining such deduction will
be deemed to be the day on which payment of the repurchase price is transmitted.
Section 8.4 Notices of and Limitations on Right of Presentment.
(a) Prior to May 31 of each year in which the Right of
Presentment exists, the Managing Partner shall notify each Investor Partner
requesting repurchase under Section 8.3 of the amount that will be paid to
repurchase each Interest and the method by which that repurchase price was
calculated. Upon their receipt of such notification, the requesting Investor
Partners who wish to present their Interests for repurchase shall do so by
properly completing and executing the form of assignment that will accompany the
Managing Partner's notification and returning it to the Managing Partner within
20 calendar days after the date of the notification. Such presentment by an
Investor Partner shall constitute his acceptance of the repurchase offer of the
Managing Partner, subject to the terms of this Article 8. Payment for Interests
presented for
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repurchase during a year will be made in cash not less than 60 nor more than 75
calendar days after receipt by the Managing Partner of the assignments of the
Interests so repurchased.
(b) The maximum number of Interests that the Managing Partner
(or an Affiliate thereof) shall be required to purchase during any calendar year
in which the right to present Interests exists shall not exceed 5% of the total
number of Interests outstanding at the beginning of such calendar year.
(c) In addition to the limitation imposed by subsection (b)
above, the obligation of the Managing Partner or Affiliates thereof, to purchase
Interests and to purchase interests in Affiliated Programs previously or
subsequently organized by the Managing Partner or Affiliates thereof shall not
exceed $500,000 in any calendar year, and such persons may elect not to purchase
the excess. If a greater number of Interests and interests in such previously or
subsequently organized Affiliated Programs are presented for repurchase than are
required to be accepted under this subsection (c), those Interests and interests
will be accepted for repurchase in the following manner: (i) all required
repurchases will be allocated among the other affected partnerships (adjusted to
reflect repurchases within the previous twelve months) pro rata based on their
initial subscribed capital, (ii) to the extent that the amount allocated to any
partnership described in clause (i) exceeds the repurchase price of interests in
that partnership presented for repurchase, such amount shall be allocated among
the other of those partnerships in the manner described in clause (i) until the
entire $500,000 limitation (as adjusted) has been allocated, and (iii) interests
in each partnership described in clause (i) shall be accepted for repurchase in
amounts equal to the portion of the $500,000 limitation allocated to each such
partnership.
(d) In determining if the required number of the outstanding
Interests pursuant to subsection (c) above have been repurchased during any
calendar year, all purchases by the Managing Partner or Affiliates thereof of
Interests and interests in Affiliated Programs previously or subsequently
organized by the Managing Partner or Affiliates thereof, which purchases have
been made at any time during the twelve-month period ending on the date on which
such persons are to purchase Interests hereunder shall be included in the
calculation of the Interests and other interests repurchased. If a greater
number of Interests are presented for repurchase than those persons are required
to repurchase, the Interests to be repurchased will be selected by lot or by
such other method as the Managing Partner deems reasonable. Participation by
Investor Partners in any such lottery shall be determined by calculating the
proportion that the number of Interests presented for repurchase by each
Investor Partner bears to the total number of Interests presented for repurchase
at that time. If any Interests presented for repurchase are not purchased, they
will be returned to the record owners thereof and will be eligible for
repurchase during succeeding years only if new repurchase requests are made and
the Interests are again presented for repurchase. Interests not repurchased in
the year presented for repurchase will have no priority with respect to
repurchase in subsequent years.
(e) If, prior to May31 of the year in which the Right of
Presentment exists, the price for either oil or gas received by the Partnership
from its Program Wells decreases by 20% or more as compared to the price being
received as of the Valuation Date, the Managing Partner may, in its sole and
absolute discretion, refuse to repurchase any Interests presented for
repurchase. Further, if the Managing Partner or Affiliates thereof have
purchased the required number of Interests at any time during the twelve-month
period ending on the date on which the
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Managing Partner is to purchase Interests from the Investor Partners pursuant to
the Right of Presentment, the Managing Partner's obligation to purchase
Interests is discharged. In such event, the Managing Partner shall notify the
presenting Investor Partners of the Managing Partner's election not to
repurchase any of the Interests presented for repurchase and the basis for such
refusal and shall provide to any presenting Investor Partner who so requests
access to such books and records of the Partnership as shall be reasonably
necessary for such Investor Partner to verify the basis for such refusal.
(f) For purposes of this Agreement, Interests repurchased and
held by the Managing Partner or an Affiliate thereof shall continue to be
outstanding.
Section 8.5 Cessation of Right of Presentment. In the event the
obligation of the Managing Partner or any Affiliate thereof to repurchase
Interests from Investor Partners pursuant to their Right of Presentment is
determined by counsel to the Partnership to be in violation of any existing or
future laws or to expose the Partnership or the Investor Partners to material
adverse federal income tax consequences, such obligation shall become null and
void and of no further force or effect, but only to the extent necessary in the
opinion of counsel to the Partnership to comply with such laws or to avoid such
consequences.
Section 8.6 Removal of Managing Partner.
(a) A Majority in Interest of the Investor Partners shall have
the right to remove the Managing Partner and to elect and substitute a new
Managing Partner. In such event, the removed Managing Partner shall be required
to offer to sell a minimum of 20% of, and shall have the right to offer to sell
up to the remaining 80% of, its interest in the Partnership to the new Managing
Partner at a price, Method of Payment (as determined pursuant to this section),
and on such other terms and conditions as are mutually agreeable to the new
Managing Partner. If after the new Managing Partner and the removed Managing
Partner have agreed on the amount of the removed Managing Partner's Partnership
interest that is to be sold to and purchased by the new Managing Partner (which
agreement must be reached within 10 days of the removal of the Managing
Partner), such parties are unable to agree within 10 days on the purchase price
of such interest, the new Managing Partner and the removed Managing Partner
shall select a mutually agreeable Independent Expert to determine such purchase
price. Such Independent Expert, in determining such price, shall take into
account appropriate discount factors in light of the risk of recovery of the oil
and gas reserves attributable to the Partnership. The closing of the purchase of
such Partnership interest shall take place at the office of the removed Managing
Partner within 15 days following the agreement upon or determination of the
purchase price for the interest to be acquired by the new Managing Partner, or
at such other time or place as the removed Managing Partner and the new Managing
Partner may agree upon in writing. In the event the new Managing Partner agrees
to purchase less than all of the offered interest of the removed Managing
Partner in the Partnership, the removed Managing Partner shall have the right to
have distributed to it in kind such Partnership assets and properties
attributable to the Partnership interest not purchased by the new Managing
Partner as it would have been entitled to receive if the Partnership were
dissolved and terminated pursuant to Section 9.4 at such time. The removed
Managing Partner shall cause, to the extent legally possible, all of its
contractual rights, obligations, and duties as Managing Partner of the
Partnership to be assigned to the new Managing Partner, and the new Managing
Partner shall continue the business of the Partnership
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without the occurrence of any dissolution and shall accept all responsibilities
of the removed Managing Partner and make arrangements satisfactory to the
removed Managing Partner to release it from and indemnify it against personal
liability for any Partnership indebtedness and liabilities. This Agreement shall
thereafter be duly amended to delete the removed Managing Partner and to name
the new Managing Partner. Each Investor Partner (and any person who hereafter
becomes a substituted Investor Partner by his execution, adoption, or acceptance
of this Agreement) hereby consents to the admission of the new Managing Partner
as the substituted Managing Partner and to the continuance of the business of
the Partnership by such substituted Managing Partner, and authorizes such
Managing Partner to certify on his behalf pursuant to the power of attorney
granted in Section 10.2 such Investor Partner's consent to the admission of such
new Managing Partner as the Managing Partner of the Partnership and to execute
any amendments to this Agreement required for such purpose. If, under the laws
of any jurisdiction to which the Partnership or this Agreement is subject, the
removal or withdrawal of the Managing Partner pursuant to this Section 8.6(a)
results in the Partnership being dissolved, then the Partnership shall be deemed
dissolved and reconstituted. Each Investor Partner (and any person who hereafter
becomes a substituted Investor Partner by his execution, adoption, or acceptance
of this Agreement) hereby consents to the continuation or reconstitution of the
Partnership pursuant to this Section 8.6(a) and authorizes the substituted
Managing Partner to certify on his behalf pursuant to the power of attorney
granted in Section 10.2, such Investor Partner's consent to the continuation or
reconstitution of the Partnership and to execute any amendments to this
Agreement required for such purpose.
The "Method of Payment" by the new Managing Partner for the removed
Managing Partner's interest must be fair and must protect the solvency and
liquidity of the Partnership. Where the termination is voluntary, the method of
payment will be deemed presumptively fair where it provides for a non-interest
bearing unsecured promissory note with principal payable, if at all, from
distributions which the terminated Managing Partner otherwise would have
received under the Partnership Agreement had the Managing Partner not been
terminated. Where the termination is involuntary, the method of payment will be
deemed presumptively fair where it provides for an interest bearing promissory
note coming due in no less than five years with equal installments each year.
(b) The Partnership, acting in accordance with a vote or
consent of a Majority in Interest of the Investor Partners, shall have the right
pursuant to Section 7 of the Program Agreement to remove MOC as Program Manager
and substitute a successor to act in such capacity.
ARTICLE IX
DISSOLUTION, RECONSTITUTION, LIQUIDATION, AND TERMINATION
Section 9.1 Dissolution. The Partnership shall be dissolved upon the
occurrence of any of the following:
(a) December 31, 20___;
(b) the vote at a duly held meeting or consent in writing of a
Majority in Interest of the Investor Partners at any time;
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(c) the sale, disposition, or termination of all or
substantially all of the Leases then owned by the Partnership;
(d) the bankruptcy, insolvency, or dissolution (except
dissolution as a consequence of merger, consolidation, recapitalization, or
other reorganization effected in accordance with Section 8.2) of the Managing
Partner or the occurrence of any other event which would permit a trustee or
receiver to acquire control of the property or affairs of the Managing Partner;
provided that neither the Managing Partner's filing of a voluntary petition or
answer seeking reorganization or similar relief under bankruptcy law, nor the
Managing Partner's reorganization or obtaining similar relief under such law
shall cause the dissolution of the Partnership;
(e) the adjudication of insolvency or bankruptcy of the
Partnership, or an assignment by the Partnership for the benefit of creditors;
(f) the withdrawal or retirement of the Managing Partner; or
(g) except as otherwise provided in this Section 9.1, the
occurrence of any other event which, under the laws of the State of Delaware,
causes the dissolution of a limited partnership.
The death, retirement, insanity, legal disability, insolvency, dissolution, or
withdrawal of any Investor Partner will not result in the dissolution or
termination of the Partnership, and, upon the occurrence of any such event, the
estate, personal representative, guardian, or other successor in interest of any
such Investor Partner or the Investor Partner, as the case may be, (i) will
continue to be liable for all of the debts and obligations of such Investor
Partner pursuant to this Agreement, (ii) may become a substituted Investor
Partner only pursuant to the provisions of Section 8.1, (iii) may transfer the
Partnership interest of such Investor Partner only pursuant to the provisions of
Article VIII hereof, and (iv)will not have any right to withdraw the Capital
Contribution of such Investor Partner except as expressly set forth in Section
9.3 of this Agreement.
Section 9.2 Covenant Not to Withdraw. Except as permitted by Section
9.3(c), each Partner covenants and agrees that it shall not cause the
dissolution of the Partnership by its voluntary withdrawal therefrom, either
directly, by dissolution or by any other voluntary act, provided that the
Managing Partner may withdraw upon the later to occur of (i) the completion of a
Partnership's primary drilling activities under the Drilling Program and (ii)
the fifth anniversary of the date that Investor Partners were admitted to the
Partnership. In order to exercise its right of withdrawal, the Managing Partner
must give the Investor Partners at least 120 days' advance written notice. In
the event the Managing Partner assigns its interest in the Partnership to a
person who becomes a substituted Managing Partner of the Partnership pursuant to
Section 8.2, the subsequent dissolution of the old Managing Partner shall not
terminate the Partnership and shall not be deemed to constitute a breach or
violation of the covenant contained in this Section 9.2.
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Section 9.3 Reconstitution.
(a) In addition to the other rights and remedies the Investor
Partners may have hereunder or otherwise, in the event the Managing Partner
withdraws or retires from the Partnership (directly or as a result of the events
causing dissolution under Section 9.1(e)) and such withdrawal or retirement
causes dissolution of the Partnership, a Majority in Interest of the Investor
Partners, acting at a meeting of the Investor Partners to be held within 90 days
following receipt of written notice of such event from the Managing Partner,
shall be entitled to reconstitute the Partnership (the Partnership, as
reconstituted, is referred to herein as the "Reconstituted Partnership") and
elect and substitute a new Managing Partner (which may be the retiring Managing
Partner). Such new Managing Partner shall be entitled to acquire the Partnership
interest of the retiring Managing Partner on the same basis and in the same
manner as is set forth in Section 8.6. In connection with such acquisition the
actions described in Section 8.6 shall be taken by the new Managing Partner and
the retiring Managing Partner, and each Investor Partner (and any person who
hereafter becomes a substituted Investor Partner by his execution, adoption, or
acceptance of this Agreement) hereby consents to the admission of such new
Managing Partner as a substituted Managing Partner of the Partnership in the
same manner, and with the same effect, as consent is provided by the Investor
Partners in Section 8.6. The retiring Managing Partner will pay all expenses
concerning the valuation of its Partnership Interest and expenses associated
with transferring management control incurred as a result of its withdrawal or
retirement from the Partnership.
(b) In the event a Majority in Interest but less than all of
the Investor Partners elect to reconstitute the Partnership pursuant to this
Section 9.3, the Partners' capital accounts shall be adjusted by (i) assuming
the sale of all assets of the Partnership for cash at their respective fair
market values (as determined by an appraiser selected by the new Managing
Partner) and the payment of all Partnership debts and liabilities as of the date
of the reconstitution of the Partnership and (ii) debiting or crediting each
such capital account (other than the new Managing Partner's capital account, but
including the retiring Managing Partner's capital account (to the extent that
the retiring Managing Partner's Partnership interest was not purchased by the
new Managing Partner pursuant to subsection (a) above)) with its respective
share of the hypothetical gains or losses resulting from such assumed sales and
the hypothetical deductions or losses, if any, resulting from the assumed
payment of such debts and liabilities in the same manner as such capital account
would be debited or credited on the actual sales of such assets and the actual
payment of such debts and liabilities.
The new Managing Partner shall then sell for cash an amount of
Partnership oil and gas properties having a fair market value (as determined by
such appraiser) equal to the fair market value (so determined) of all
Partnership oil and gas properties times the ratio of the aggregate of the
positive capital account balances, as so adjusted, of the Investor Partners that
have not elected to reconstitute the Partnership and the retiring Managing
Partner (to the extent that the retiring Managing Partner's Partnership interest
was not purchased by the new Managing Partner pursuant to subsection (a) above)
to the positive capital account balances, as so adjusted, of all Partners. The
new Managing Partner shall then distribute such cash to the Investor Partners
that have elected not to reconstitute the Partnership and to the Managing
Partner (to the extent provided above) in proportion to the positive balances of
their respective capital accounts, as so adjusted. Such distribution shall take
place by the later of (i) the end of the Partnership taxable year in which the
reconstitution occurs or (ii) 90 days after the date of such reconstitution.
Neither the retiring Managing Partner nor any Investor Partner that has elected
not to reconstitute
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the Partnership shall be liable to the Partnership or any other Partner for the
amount of any deficit balance in his or its capital account after a distribution
in liquidation of his or its interest in the Partnership.
Notwithstanding the foregoing, the retiring Managing Partner shall have
the right to elect to receive a distribution in kind of oil and gas properties
having a fair market value (as determined by such appraiser) equal to the fair
market value (so determined) of all Partnership oil and gas properties times the
ratio of the positive balance in its capital account, adjusted as provided
above, to the positive capital account balances, as so adjusted, of all
Partners, subject to an obligation to become a party to the Program Agreement
and any operating agreements to which such properties are subject. Any interest
in Partnership properties distributed to the retiring Managing Partner shall be
subject to such liens, encumbrances, and restrictions as affect the properties
on the date of such distribution and will be subject to and operated in
accordance with the operating agreements then in effect.
All gain, loss, and amounts realized on the sale of Partnership oil and
gas properties by the new Managing Partner to provide cash for distribution to
such Investor Partners and to the retiring Managing Partner shall be allocated
to such Investor Partners and the retiring Managing Partner in the same
proportions as the proceeds of such sale are distributed; provided that if the
retiring Managing Partner or any Investor Partner elects to receive a
distribution of Partnership properties in kind, all gain, loss, and amounts
realized on such sales shall be allocated solely to the Partners receiving cash
in the same proportions as the proceeds of such sale are distributed.
The new Managing Partner, on behalf of the Investor Partners that have
elected to form the Reconstituted Partnership, shall retain for the benefit of
the Reconstituted Partnership all oil and gas properties of the Partnership
remaining after the distribution provided for above, and all other Partnership
assets, and the Reconstituted Partnership shall assume all debts and liabilities
of the Partnership. The Partnership oil and gas properties retained by the
Reconstituted Partnership shall be subject to such liens, encumbrances, and
restrictions as affect such properties on the date of the reconstitution of the
Partnership and will be subject to and operated in accordance with the operating
agreements then in effect. If the amount of property as of the date of the
reconstitution of the Partnership is not sufficient to satisfy the positive
balances in all of the Partners' capital accounts, as so adjusted, Partnership
property shall be sold (or distributed) and retained by the new Managing Partner
in the manner described above in proportion to the positive balances of the
Partners' respective capital accounts.
(c) In the event an Investor Partner withdraws from the
Partnership, the remaining Investor Partners hereby agree that the Partnership
is to be reconstituted immediately. The remaining Investor Partners hereby
authorize the Managing Partner to take such action as the Managing Partner deems
necessary or appropriate to effect such reconstitution and to continue the
business of the Partnership without interruption, including use by the Managing
Partner of the power of attorney granted by each remaining Investor Partner
pursuant to Section 10.2 to execute on behalf of each such remaining Investor
Partner any amendments to this Agreement required for such purpose. The
withdrawing Investor Partner will pay all expenses incurred as a result of his
withdrawal from the Partnership. The withdrawing General Partner shall remain
subject as a General Partner with respect to any liabilities or obligations of
the Partnership arising prior to such withdrawal. Upon withdrawal from the
Partnership, a General
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Partner is entitled to continue to receive any distributions to which he is
otherwise entitled under this Agreement for the period prior to his withdrawal;
however, such General Partner shall not be entitled to receive the fair value of
his interest in the Partnership as of the date of such withdrawal based upon his
right to share in distributions from the Partnership, and neither the
Partnership nor the Managing Partner has any obligation to repurchase any
interest in the Partnership from the withdrawing General Partner. The
withdrawing General Partner will no longer be entitled to receive any
distributions nor shall such General Partner have any rights as an Investor
Partner under this Agreement. The Sharing Ratios will be recalculated among the
Investor Partners without regard to the withdrawing General Partner's Capital
Contribution.
(d) In the event the Partnership is reconstituted pursuant to
subsection (c), the Partners' capital accounts shall be adjusted by (i) assuming
the sale of all assets of the Partnership for cash at their respective fair
market values (as determined by the Managing Partner or an appraiser selected by
the Managing Partner) and the payment of all Partnership debts and liabilities
as of the date of the reconstitution of the Partnership and (ii) debiting or
crediting each such capital account with its respective share of the
hypothetical gains or losses resulting from such assumed sales and the
hypothetical deductions or losses, if any, resulting from the assumed payment of
such debts and liabilities in the same manner as such capital account would be
debited or credited on the actual sales of such assets and the actual payment of
such debts and liabilities.
(e) The distribution of cash or property to the Investor
Partners that have elected not to reconstitute the Partnership in accordance
with the provisions of this Section 9.3 shall constitute a complete return to
each such Investor Partner of his Capital Contributions, to which each Investor
Partner (and any person who hereafter becomes a substituted Investor Partner by
his execution, adoption or acceptance of this Agreement) hereby consents, and a
complete distribution to such Investor Partner of his interest in the
Partnership and all Partnership property, and no such Investor Partner shall
have any recourse against the new or the retiring Managing Partner, the
Reconstituted Partnership or any other Investor Partner if the cash or property
so distributed or received shall be insufficient to return in full his Capital
Contributions.
(f) In the event of the bankruptcy of a General Partner which
pursuant to the Delaware Act results in the dissolution of the Partnership, each
of the remaining Partners hereby agrees that the Partnership shall be
reconstituted immediately, and authorizes the Managing Partner to take the
actions described in subsection (c) above. The trustee, receiver, or other
successor in interest of the bankrupt General Partner (i) will continue to be
liable for all of the debts and obligations of such General Partner pursuant to
this Agreement, (ii) may become a substituted General Partner only pursuant to
the provisions of Section 8.1, (iii) may transfer the Partnership interest of
such General Partner only pursuant to the provisions of Article VIII hereof, and
(iv) will not have any right to withdraw the Capital Contribution of such
General Partner except as expressly set forth in Section 9.4 of this Agreement.
Section 9.4 Liquidation and Termination. Upon dissolution of the
Partnership (unless it is reconstituted in accordance with Section 9.3), no
further business shall be conducted except for the taking of such action as
shall be necessary for the winding up of the affairs of the Partnership and the
distribution of its assets to the Partners. The Managing Partner shall act as
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liquidator or may appoint in writing one or more liquidators who shall have full
authority to wind up the affairs of the Partnership and make final distribution
as provided herein; provided, however, that, if the Managing Partner is not able
to serve as liquidator and does not appoint a liquidator within a reasonable
time after dissolution, the liquidator shall be a person selected in writing by
a Majority in Interest of the Investor Partners. The liquidator shall proceed
diligently to wind up the affairs of the Partnership and make final distribution
as provided herein. Until final distribution, the liquidator shall continue to
operate the Partnership properties with all of the power and authority of the
Managing Partner. The liquidator is hereby authorized to take the following
action without the further consent or joinder of any Partner:
(a) As promptly as possible after dissolution and again after
completion of the liquidation and termination of the Partnership, the liquidator
shall cause a proper accounting to be made of the Partnership's assets,
liabilities, and operations through the last day of the month in which the
dissolution or termination occurs.
(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 but not limited to the establishment
of a cash escrow fund for contingent liabilities in such amount and for such
term as the liquidator may determine). To the extent cash required for this
purpose is not otherwise available, the liquidator may sell assets of the
Partnership for cash.
(c) 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. All gain, loss and amount realized on such sales shall
be allocated to the Partners as provided in this Agreement, and the capital
accounts of the Partners shall be adjusted accordingly. The liquidator shall
then distribute the proceeds of such sales to the Partners to satisfy any
positive balances in their capital accounts, as so adjusted.
(d) Notwithstanding Section 9.4(c), in the event of a
dissolution and liquidation of the Partnership pursuant to an exchange or tender
offer, the liquidator may, after making provision for all debts and liabilities
of the Partnership, first adjust the capital account of each Partner by (i)
assuming the sale of all remaining assets of the Partnership for cash at their
respective fair market values (as determined by the liquidator in a manner
consistent with the terms of such exchange or tender offer) as of the date of
the dissolution of the Partnership and (ii) debiting or crediting each such
capital account with such Partner's respective share of the hypothetical gains
or losses resulting from such assumed sales in the same manner as such capital
account would be debited or credited on the actual sales of such assets. If such
exchange or tender offer is conducted pursuant to a disposition of all or
substantially all of the assets of the Partnership or is otherwise binding on
the Partners, the liquidator shall distribute all securities or other assets
received from the disposition of the Partnership assets to the Partners
proportionately based on the Partners' positive capital account balances, as so
adjusted.
In the event of an exchange or tender offer that is not binding upon
all Partners, the liquidator shall then exchange for securities offered in the
exchange or tender offer oil and gas properties having a fair market value (as
determined by the liquidator as provided above) equal to the sum of the positive
balances in the capital accounts, as so adjusted, of the Partners who
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elect to accept the exchange or tender offer. The liquidator shall then
distribute such securities to such accepting Partners on a basis reflecting the
Partners' respective positive balances, as so adjusted. The Managing Partner
shall have, with respect to its Interests, the right to elect to receive a
distribution in kind of Partnership oil and gas properties having a fair market
value (as determined by the liquidator as provided above) equal to the positive
balance in its capital account, adjusted as provided above. The liquidator shall
then sell the remaining property and distribute to the Investor Partners who
elect not to accept the exchange or tender offer all remaining cash in amounts
proportionate to any positive balances in such Partners' capital accounts, as so
adjusted. All gain, loss and amount realized on the sale of Partnership oil and
gas properties by the liquidator to provide cash for distribution to such
Investor Partners shall be allocated to such Investor Partners in the same
proportions as the proceeds of such sale are distributed.
(e) Any distributions to the Partners in liquidation of the
Partnership shall be made by the later of (i) the end of the taxable year in
which the liquidation (as such term is defined in Treasury Regulation
1.704-1(b)(2)(ii)(g)) occurs, or (ii) 90 days after the date of such
liquidation. No Partner with a deficit balance in his or its capital account
after such distribution shall be liable to the Partnership or any other Partner
for the amount of such deficit balance.
(f) Notwithstanding the foregoing, if upon dissolution of the
Partnership any Partner shall be indebted to the Partnership as a result of the
failure to make a Capital Contribution required under this Agreement or
otherwise, the liquidator shall retain such Partner's share of cash or property
that would otherwise be distributed and apply such cash or property and the
income therefrom to the liquidation of such indebtedness and the cost of the
operation of such assets during the period of such liquidation; provided, if the
amount of such indebtedness has not been liquidated pursuant to the above
procedure or otherwise paid by such Partner within six months of the dissolution
of the Partnership, the liquidator may sell all or any portion of such property
at a public or private sale for what is in the sole judgment of the liquidator
the best price obtainable. The proceeds of such sale shall be applied to the
liquidation of the indebtedness then owing by such Partner, and the balance of
such proceeds, if any, shall be distributed to such Partner.
(g) The liquidator shall comply with any requirements of the
Delaware Act and all other applicable laws pertaining to the winding up of the
affairs of the Partnership and the final distribution of its assets. The
distribution of cash or property to the Partners in accordance with the
provisions of this Section 9.4 shall constitute a complete return to the
Partners of their Capital Contributions and a complete distribution to the
Partners of their interests in the Partnership and all Partnership property, and
no Partner shall have any recourse against the Managing Partner or any other
Partner if the cash so distributed shall be insufficient to return in full his
Capital Contributions.
ARTICLE X
REPRESENTATIONS AND WARRANTIES OF THE MANAGING PARTNER AND POWER
OF ATTORNEY
Section 10.1 Representations and Warranties of the Managing Partner.
The Managing Partner hereby represents, warrants, and agrees as follows:
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(a) The organization and operation of the Partnership are and
will continue to be in accordance with all applicable state statutes related to
limited partnerships.
(b) No election will be made by the Partnership to be excluded
from the provisions of Subchapter K of Chapter 1 of Subtitle A of the Code.
(c) The Managing Partner now has and will continue to have
substantial assets (in addition to its interest in the Partnership) which can be
reached by creditors of the Partnership and is acting and will continue to act
as Managing Partner on its own behalf and in no way merely as the agent of the
Investor Partners.
Section 10.2 Power of Attorney. Each Investor Partner by his execution
or adoption of this Agreement or a counterpart hereof irrevocably constitutes
and appoints the Managing Partner or its authorized agents and successors, each
with full power of substitution, the agent and attorney-in-fact of each Investor
Partner in the name, place, and stead of such Investor Partner to do any act
necessary or, in the opinion of the Managing Partner, appropriate to qualify the
Partnership to do business under the laws of any jurisdiction in which it is
necessary to file any instrument in writing in connection with such
qualification, and to make, execute, swear to, verify, acknowledge, amend, file,
record, deliver, and publish any instrument or document which may be necessary
or appropriate to carry out the provisions of this Agreement, including without
limitation, (a) a counterpart of this Agreement and a certificate of limited
partnership, (b) upon conversion of the General Partner Interests in accordance
with Section 1.9 any amended certificate of limited partnership or amendments to
any certificate of limited partnership required or permitted to be filed or
recorded under the statutes relating to limited partnerships under the laws of
any jurisdiction in which the Partnership shall engage or seek to engage in
business, (c) a counterpart of any amendment to this Agreement for the purpose
of (i) converting the General Partner Interests to Limited Partner Interests as
contemplated by Section 1.9, or (ii) admitting any substituted Managing Partner
or original or substituted Investor Partner or effecting any amendment of this
Agreement permitted to be made solely by the Managing Partner pursuant to
Section 9.3 and 11.2, (d) a counterpart of this Agreement or any amendment
hereto for the purpose of filing or recording such counterpart in any
jurisdiction in which the Partnership may own property or transact business, (e)
all certificates and other instruments necessary to qualify or continue the
Partnership as a limited partnership or a partnership wherein the Limited
Partners have limited liability, in the jurisdictions where the Partnership may
own property or be doing business, (f) any fictitious or assumed name
certificate required or permitted to be filed by or on behalf of the
Partnership, (g) any other instrument which is now or which may hereafter be
required by law to be filed for or on behalf of the Partnership which does not
increase the obligations of the Investor Partners, (h) any offers to lease,
Leases, assignments, and requests for approval of assignments, statements of
citizenship, interest and holdings, and any other instruments or communications
now or hereafter required or permitted to be filed on behalf of the Partnership
or the several Partners of the Partnership in their capacities as such under any
law relating to the leasing of government land for oil and gas exploration or
production, (i) an authorized certificate or other instrument evidencing the
dissolution or termination of the Partnership when such shall be appropriate, in
each jurisdiction in which the Partnership shall own property or do business,
(j) all ballots, consents, approvals, or certificates and other instruments
appropriate or necessary, in the judgment of the Managing Partner, to make,
evidence, give, confirm, or certify any vote, consent, approval, election,
agreement, or other
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action which is made or given hereunder or which is deemed to be made or given
hereunder or is consistent with the terms of this Agreement or appropriate or
necessary, in the judgment of the Managing Partner, to effectuate the terms or
intent of this Agreement, and all amendments to this Agreement giving effect to,
implementing, adopting or reflecting any such vote, consent, approval, election,
agreement, or other action; provided, however, that when any such vote, consent,
approval, election, agreement, or other action may be made or given only by a
Majority in Interest of the Investor Partners, the Managing Partner may exercise
the power of attorney granted in this clause (j) only after a Majority in
Interest of the Investor Partners has so acted, and (k)any other instruments
necessary to conduct the operations of the Partnership which do not increase the
obligations of the Investor Partners, and to perform any other duty or function
necessary to conduct the business and operations of the Partnership pursuant
hereto. The existence of such power of attorney shall not preclude execution of
any such instrument by an Investor Partner individually on any such matter. The
power of attorney granted herein is irrevocable and shall survive the assignment
or transfer by an Investor Partner of all or any part of his interest in the
Partnership and, being coupled with an interest, shall survive the death,
incompetency, incapacity, dissolution or termination of any Investor Partner.
Any person dealing with the Partnership may conclusively presume and rely upon
the fact that any instrument executed by such agent and attorney-in-fact is
authorized, valid and binding without further inquiry. This Agreement shall be
controlling in the event of any conflict between the terms and provisions of
this Agreement and any document executed, filed or recorded by the Managing
Partner pursuant to the power of attorney granted herein.
ARTICLE XI
MISCELLANEOUS
Section 11.1 Notices. All notices, elections, demands, or other
communications required or permitted to be made or given pursuant to this
Agreement shall be in writing and shall be considered as properly given or made
if given by (i) personal delivery, (ii) expedited delivery service with proof of
delivery, (iii) registered or certified United States mail, postage prepaid, or
(iv) prepaid telegram, telex, or telecopier facsimile (provided that such
telegram, telex, or telecopier facsimile is confirmed by expedited delivery
service or by mail in the manner previously described), sent to the respective
addresses specified in Section 1.5, and shall be deemed to have been given
either at the time of personal delivery or, in the case of delivery service or
mail, as of the date of delivery at the address and in the manner provided
herein. Any Investor Partner may change his address by giving notice in writing
to the Managing Partner of his new address, and the Managing Partner may change
its address by giving notice in writing of its new address to the Investor
Partners.
Section 11.2 Amendment. In addition to the right of the Managing
Partner to amend this Agreement as provided below, any change, modification, or
amendment to this Agreement shall be effective if made by an instrument in
writing duly executed by a Majority in Interest of the Investor Partners.
Notwithstanding the foregoing, with respect to any change, modification, or
amendment to this Agreement which would (a) increase the liability or duties of
any of the Partners, (b) change the contributions required of any of the
Partners, (c) provide for any reallocation of profits, losses, or deductions to
the detriment of a Partner, (d) establish any new priority in one or more
Partners as to the return of Capital Contributions or as to profits, losses,
deductions, or distributions to the detriment of a Partner, or (e) cause the
Partnership to be taxed
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as a corporation, such change, modification or amendment shall not be binding on
such Partner unless contained in a written instrument duly executed by such
Partner. With respect to any change, modification, or amendment to this
Agreement which would change the name of the Partnership or the location of the
principal place of business of the Partnership or of the Managing Partner, admit
new or substituted Investor Partners, modify the Managing Partner's interest in
the Partnership as the result of a transfer of a portion thereof pursuant to
Section 8.2, Section 8.6 or Section 9.3, or cure any ambiguity, formal defect,
or omission or correct or supplement any provision contained herein that may be
inconsistent with any other provision contained herein, any change, modification
or amendment which the Managing Partner determines does not adversely affect the
Investor Partners in any material respect, and any change, modification, or
amendment which the Managing Partner believes is necessary or advisable to
ensure that the Partnership is not and will not be treated as an association
taxable as a corporation for federal income tax purposes or to conform with
changes in applicable tax law (provided such changes do not have a material
adverse effect on the Investor Partners), and any other changes, modifications,
or amendments similar to any one or more of the foregoing, such change,
modification, or amendment may be contained in a written instrument executed
solely by the Managing Partner, provided that the Managing Partner notifies the
Investor Partners of such change, modification, or amendment.
Section 11.3 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 Partnership property.
Section 11.4 Entire Agreement. This Agreement, the Program Agreement,
and the Subscription Documents executed by the Investor Partners constitute the
full and complete agreement of the parties hereto with respect to the subject
matter hereof, and supersedes all previous oral and written and all
contemporaneous oral negotiations, commitments, writings, and understandings.
Section 11.5 Severability. Every provision in this Agreement is
intended to be severable. If any term or provision hereof is determined to be
invalid, illegal, or unenforceable for any reason whatsoever, such invalidity,
illegality, or unenforceability shall not affect the validity, legality, and
enforceability of the remainder of this Agreement.
Section 11.6 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
be 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 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 11.7 Evidence of Interest. At the sole option of the Managing
Partner, an Interest may be evidenced by a certificate in a form approved by the
Managing Partner. The Managing Partner shall not be required to issue any such
certificates, and, if such certificates are issued to any Investor Partner, the
Managing Partner shall not be required to issue similar certificates to all
Investor Partners.
A-51
Section 11.8 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,
except that (a) any laws of the State of Delaware regarding choice or conflicts
of law shall not be applied if the result would be the application of a
procedural or substantive law of another state or other jurisdiction and (b)
certain rights of the Investor Partners may be governed by the laws of their
state of residence.
Section 11.9 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
his rights or interest in the Partnership or under this Agreement except as
provided in Article VIII.
Section 11.10 Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be an original and all of which shall
constitute but one and the same document. The signature of any Investor Partner
on the Subscription Documents shall constitute the execution of this Agreement
by such Investor Partner.
A-52
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
MANAGING PARTNER
MEWBOURNE DEVELOPMENT CORPORATION
By:
--------------------------------------
Its:Chief Financial Officer and Treasurer
ORGANIZATIONAL PARTNER
-----------------------------------------
Curtis W. Mewbourne
A-53
EXHIBIT B
DRILLING PROGRAM AGREEMENT
among
MEWBOURNE OIL COMPANY
MEWBOURNE DEVELOPMENT CORPORATION
and
MEWBOURNE ENERGY PARTNERS ____-A , L.P.
Dated as of
, 200__
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
Section 1. Certain Defined Terms and References................................................................B-1
Section 2. Acquisition of Interests in Prospects...............................................................B-4
Section 3. Allocation of Costs.................................................................................B-5
Section 4. Allocation of Revenues..............................................................................B-6
Section 5. Ownership of Production.............................................................................B-7
Section 6. Management of Program...............................................................................B-7
Section 7. Removal of the Program Manager......................................................................B-9
Section 8. Reimbursement of the Program Manager...............................................................B-10
Section 9. Tax Partnership....................................................................................B-10
Section 10. Sales of Interests by MD..........................................................................B-10
Section 11. Assignment........................................................................................B-10
Section 12. Term and Amendment of Agreement...................................................................B-11
Section 13. Insurance.........................................................................................B-11
Section 14. Partnership Agreement.............................................................................B-11
Section 15. Entire Agreement..................................................................................B-11
Section 16. Headings..........................................................................................B-11
Section 17. Governing Law.....................................................................................B-11
Section 18. Attachments.......................................................................................B-12
Section 19. Counterparts......................................................................................B-12
</Table>
Attachment A Tax Partnership Provisions - Incorporated by
reference to the form of Operating Agreement filed as
Exhibit 10.3 to the Registration Statement on Form
S-1, Registration No. 333-
Attachment B Form of Operating Agreement - Incorporated by
reference to the form of Operating Agreement filed as
Exhibit 10.4 to the Registration Statement on Form
S-1, Registration No. 333-
DRILLING PROGRAM AGREEMENT
THIS DRILLING PROGRAM AGREEMENT (this "Agreement"), dated as of
________ , 200__ is made by and among Mewbourne Oil Company, a Delaware
corporation ("MOC"), Mewbourne Development Corporation, a Delaware corporation
("MD"), and Mewbourne Energy Partners -A, L.P., a Delaware Limited Partnership
("Partnership") of which MD is the managing general partner.
WHEREAS, MD and the Partnership desire to participate in a drilling
program (the "Program"), whereunder MD and the Partnership will (a) jointly
acquire interests in certain Prospects and (b) participate in the development of
such Prospects, on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, the parties hereto do hereby agree as follows:
Section 1. Certain Defined Terms and References.
(a) Certain Defined Terms. When used in this Agreement, the following
terms shall have the respective meanings assigned to them in this subsection (a)
or in the sections, subsections, or other subdivisions referred to below:
"Administrative Costs" shall mean customary and routine
expenses incurred by MD or its Affiliates for the conduct of the
administration of a Partnership or a Program, including, legal,
finance, accounting, secretarial, travel, office rent, telephone, data
processing, and other items of a similar nature.
"Affiliate" shall mean, with respect to another person,
(a) any person directly or indirectly owning, controlling
or holding with power to vote 10% or more of the
outstanding voting securities of or equity interests
in such other person,
(b) any person 10% or more of whose outstanding voting
securities or equity interests are directly or
indirectly owned, controlled, or held with power to
vote by such other person,
(c) any person directly or indirectly controlling,
controlled by, or under common control with such
other person,
(d) any officer, director, or partner of such other
person, and
(e) any company for which any such officer, director, or
partner acts in any such capacity. For purposes of
this Agreement, unless otherwise indicated, an
affiliate of MD shall include Affiliated Programs.
"Affiliated Program" shall mean a drilling, producing
property, income, royalty, or other program (whether in the form of a
partnership, joint venture, or otherwise), including the Partnership,
for or of which the Managing Partner or an Affiliate thereof serves as
manager or managing partner or acts in a similar capacity.
"Agreement" shall mean this Drilling Program Agreement, as
amended from time to time.
"Code" shall mean the Internal Revenue Code of 1986, as
amended.
"Due Diligence Fees" shall mean fees to be paid to the
soliciting dealers, which may be in an amount of up to .5% of the sales
price of interests sold to persons other than
o officers, directors or employees of MD or its
Affiliates,
o officers, directors, employees, or registered
representatives of a soliciting dealer, or
B-2
o an Affiliate of MD.
"Lease" shall mean an oil and gas lease or an oil, gas and
mineral lease, a Working Interest, an interest (including certain
non-consent interest) arising under a pooling order or operating
agreement, an interest acquired under a farmout, operating rights under
governmental tracts, a mineral interest, royalty, or other interest in
and to oil, gas, and related hydrocarbons (or a contractual right to
acquire or earn such an interest), or an undivided interest therein or
portion thereof (including those covering only certain Horizons or
depths), together with all easements, permits, licenses, servitudes,
and rights-of-way situated upon or used or held for future use in
connection with the exploration, development, or operation of such
interest.
"Lease Acquisition Cost" shall mean, when used to describe the
costs of any Lease, the sum of (a) all monetary consideration paid or
given for such Lease to a non-Affiliate of the Managing Partner,
including but not limited to lease bonuses and advance rentals paid to
a non-Affiliate of the Managing Partner, (b) all costs of lease
acquisition and title examination including but not limited to curing
or defending title, title insurance or examination costs, brokerage
commissions, the fees and wages of landmen and lease brokers and their
expenses, filing fees, recording costs, transfer taxes, and like
charges paid in connection with the acquisition of such Lease, (c) all
delay rentals and other similar payments and ad valorem taxes paid by
the seller with respect to such Lease, (d) such portion as may be
allocated to such Lease in accordance with generally accepted
accounting principles and industry standards of all reasonable,
necessary, and actual costs and expenses of MD or its Affiliates for
geological, geophysical, seismic, land, engineering, drafting,
accounting, legal, and other like services together with related
administrative and general overhead costs involved in lease acquisition
and Prospect evaluation including such costs and expenses which could
otherwise be classified hereunder as Administrative Costs, (e) such
portion as may be allocated to such Lease in accordance with generally
accepted accounting principles and industry standards of all costs and
expenses incurred in the acquisition of farmouts, subleases, pooling
orders, or other oil and gas interests, (f) interest and points
actually incurred on funds borrowed to pay any of the costs and
expenses described in clauses (a) through (e) above calculated from the
date of their incurrence until the date of their reimbursement by the
Drilling Program at the time a Lease is acquired by the Drilling
Program, and (g) with respect to Leases held on the date hereof by or
acquired thereafter by MD or an Affiliate thereof, an interest in which
is transferred to the Participants pursuant to this Agreement, the
costs of such transfer; provided that the expenses described in clauses
(c), (d), (e), and (f) shall have been incurred by MOC or its
Affiliates not more than 36 months prior to the acquisition by the
Drilling Program of such Lease; and provided further, that such time
limitation shall not be applicable to Leases having a primary term of
five or more years. Lease Acquisition Costs of a Lease shall not
include any costs or expenses otherwise allocable herein to such Lease
and which represent costs or expenses incurred in connection with the
past drilling of wells which are not producers of sufficient quantities
of oil or natural gas to make commercially reasonable their continued
operation.
"Managing Partner" shall mean Mewbourne Development
Corporation, a Delaware corporation, and any person who becomes a
substituted managing partner of a Partnership, in accordance with the
terms of the Partnership Agreement.
"Operating Agreement" shall mean a Model Form Operating
Agreement based upon the American Association of Petroleum Landmen Form
610-1989 and, among the other attached exhibits thereto, an accounting
procedure for joint operations issued by the Council of Petroleum
Accountants Societies of North America, each of which containing
modifications that are customary and usual for the geographic area in
which the Partnership intends to conduct operations.
"Operating Costs" shall mean all expenditures made and costs
incurred in producing and marketing oil and gas from completed wells,
including, in addition to labor, fuel, repairs, hauling, materials,
supplies, utility charges, and other costs incident to or therefrom, ad
valorem and severance taxes, insurance and casualty loss expense, and
compensation to well operators or others for services rendered in
conducting such operations.
"Participants" shall mean MD and the Partnership, and
"Participant" shall mean MD or the Partnership, individually.
"Partners" shall mean the partners of the Partnership.
B-3
"Partnership" shall have the meaning assigned to such term in
the preamble to this Agreement.
"Partnership Agreement" shall mean the Agreement of
Partnership dated ____________, 200__ creating the Partnership and
designating MD as the Managing Partner of the Partnership.
A "person" shall mean any natural person, partnership,
corporation, association, trust, or other legal entity.
"Program" shall have the meaning assigned to such term in the
preamble to this Agreement.
"Program Manager" shall mean MOC and any person who becomes
the manager of the business and affairs of the Program in accordance
with Section 7 of this Program Agreement.
"Program Well" shall mean any well in which the Participants
have an interest pursuant hereto.
"Prospect" shall mean an area covering lands which, in the
opinion of the Program Manager, contains subsurface structural or
stratigraphic conditions making it susceptible to the accumulation of
oil or gas in commercially productive quantities at one or more zones
or horizons. The area, which may be different for different Horizons,
shall be designated by the Program Manager in writing prior to the date
on which a well is spudded (i.e. boring is commenced) thereon and shall
be enlarged or contracted from time to time on the basis of
subsequently acquired information to define the anticipated limits of
the associated oil and gas reserves and to include all acreage
encompassed therein. A "Prospect" with respect to a particular Horizon
may be limited to the minimum area permitted by state law or local
practice, whichever is applicable, to protect against drainage from
adjacent wells if the well to be drilled by the Partnership is to a
Horizon containing Proved Reserves.
"Prospectus" shall mean the Prospectus dated ________, 200__,
as amended or supplemented from time to time, describing the offer and
sale of interests in the Partnership.
"Reporting and Legal Expenses" shall mean all third party
accounting fees, costs, and expenses associated with obtaining audits
of books and records, third party engineering fees, costs, and expenses
associated with annual reserve reports, and third party attorney's fees
and other legal fees, costs, and expenses associated with matters that
are attributable to the Drilling Program's or the Partnership's
business.
"Sales Commissions" shall mean the sales commissions to be
paid to the Soliciting Dealers, which may be in an amount of up to 8%
of the sales price of interests sold to persons other than:
o officers, directors or employees of MD or its
Affiliates,
o officers, directors, employees, or registered
representatives of a soliciting dealer, or
o an Affiliate of MD.
"Soliciting Dealers" shall mean those persons who are
authorized to act as registered representatives by the National
Association of Securities Dealers, Inc. and have contracted with MD to
offer and sell interests in a Partnership.
"Working Interest" shall mean an interest in an oil and gas
lease which is subject to some portion of the costs of development,
operation, or maintenance.
(b) Other Defined Terms. The following terms shall have the respective
meanings assigned to them in the Prospectus:
"Intangible Drilling Costs"
"Organization and Offering Expenses"
"Proved Reserves"
"Tangible Costs"
B-4
(c) References. All references in this Agreement to sections,
subsections, and other subdivisions refer to corresponding sections,
subsections, and other subdivisions of this Agreement unless expressly provided
otherwise. The words "this Agreement," "this instrument," "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. Words
in the singular form shall be construed to include the plural and vice versa,
unless the context otherwise requires.
Section 2. Acquisition of Interests in Prospects.
(a) Prospects Subject to this Agreement. Subject to the terms and
conditions hereof, the Participants shall acquire undivided interests in Leases
within Prospects selected by the Program Manager in its sole discretion from
time to time. At the time any Lease within a Prospect is acquired, the Program
Manager shall designate the area comprising the Prospect in the manner provided
in the definition of such term (if the Prospect has not been previously so
designated). Prospects may be limited to certain stated depths and may include
areas in which Leases may or may not have been acquired. The Program Manager
shall maintain records showing the Prospects (and depths if limited by depth) so
designated. In the case of certain Prospects, the designation of Prospects may
conform generally to the geographic limits of individual Leases. In some cases,
where known reservoirs cover large geographic areas and subsequent drilling does
not depend directly on results obtained by the Program Wells, Prospects may be
directly adjacent or in close proximity to other Prospects. Leases on lands
which are contiguous or in the vicinity of each other may constitute more than
one Prospect, and a zone or horizon under an area may constitute a Prospect
separate and apart from another zone or horizon which lies in whole or in part
under the same area. With respect to any Prospect that is not limited to a
particular zone or horizon and which is in any large continuous known
stratigraphic trend or formation which could be defined as a continuous
reservoir, the Program Manager may reduce the areal extent included in such
Prospect to that area which covers the spacing unit or proration unit prescribed
by the appropriate regulatory authority on such Prospect or permitted by local
practice, whichever is applicable, and such additional area, if any, as the
Program Manager determines reasonable. A Prospect which is limited to a
particular zone or horizon may be limited to that area which covers the spacing
unit or proration unit prescribed by the appropriate regulatory authority on
such Prospect or permitted by local practice, whichever is applicable, to
protect against drainage from adjacent wells if the well to be drilled by the
Program is to a horizon containing Proved Reserves. The area of a Prospect may
be enlarged or contracted from time to time by the Program Manager in the
reasonable exercise of its judgment. The Program Manager and its Affiliates
shall have no obligation to assign to any of the Participants any Lease held as
of the date hereof by the Program Manager or any such Affiliate or any Lease
acquired by the Program Manager or any such Affiliate after the date hereof.
The amount of the undivided interest in Leases to be assigned to the
Participants by the Program Manager shall be determined solely by the Program
Manager and the Managing Partner of the Partnership, taking into account the
nature of the risks associated with the drilling of wells on such Leases, the
estimated costs of such drilling, the amount of funds available from the
Partnership for such drilling and such other factors as the Program Manager and
the Managing Partner shall in good faith determine. The Program shall have no
right to acquire the entire interest in any such Lease, and the Program Manager
and Affiliates thereof shall have the right to acquire or retain a portion of
such interest in their own name, for their own account, or for the account of
others. Any such interest so acquired or retained by the Program Manager or such
Affiliate shall be held independently and not as a part of the Program and shall
not be subject to the terms and provisions of this Agreement.
The undivided interests in all Leases acquired by the Program shall be
acquired and held by the Program Manager for the benefit of the Participants
hereto as follows: the Partnership 60% and MD 40%. Following commencement of
production from a Program Well, the Program Manager shall assign and convey to
the Partnership and MD the above-described undivided interests in the Leases
proportionally reduced as to the interest acquired by the Program insofar as
such Leases pertain to the spacing or proration unit prescribed by regulatory
authority for such productive Program Well.
(b) Sales of Leases to the Program. Any sale, transfer, or conveyance
of a Lease to the Program by the Managing Partner or any Affiliate thereof,
including an Affiliated Program, shall be subject to the restrictions contained
in Section 5.10(h) of the Partnership Agreement.
(c) Acquisition Price. The price to be paid by the Participants with
respect to their acquisition of an interest in a Lease pursuant to this Section
2 shall be an amount equal to the Participants' respective shares, as set forth
in Section
B-5
3(a) of either (i) the Lease Acquisition Costs with respect to such Lease or
(ii) as provided in Section 5.10(h) of the Partnership Agreement, the fair
market value of such Lease.
(d) Conveyance. With respect to the Leases within Prospects that are
acquired by the Participants hereunder, the interests in such Leases so acquired
shall cover all depths and horizons designated by the Program Manager as
comprising such Prospect and as contemplated in Section 2(a) such interests
shall be assigned, conveyed and transferred by the Program Manager or an
Affiliate thereof pursuant to a special warranty deed. Further, any such
assignment by the Program Manager or an Affiliate thereof shall be made with
full substitution and subrogation in and to all rights and actions of warranty
which the Program Manager or such Affiliate may have against all former owners.
(e) Assignments of Record. Following commencement of production from a
Program Well, as contemplated in Section 2(a) the Program Manager shall cause
record title to the Participants' respective interests in such Program Well to
be placed in the names of MD and the Partnership (or its designated nominee),
except (i) where record title is held in the name of a third party (as in the
case where pursuant to industry practice record title is held by a third party,
such as a pooled operating interest), in which event the Program Manager shall
place of record MD's and the Partnership's interests promptly following the
receipt by the Program Manager or an Affiliate thereof of an assignment from
such third party, (ii) in the case of a federal, state, or other Lease where an
approval to the transfer is required, in which event the Program Manager shall
take steps to obtain approval from appropriate authorities of the assignment of
MD's and the Partnership's interests in any such Lease as promptly as possible
following the time that such assignment is to be made hereunder (iii) in the
case where delays in the recording of assignments occur because of the practices
of the recording office or officers, (iv) in the case of Indian or other Leases
where the royalty interest or other term of any such Lease is required to be
renegotiated as a condition to the lessor's consent to the assignment of MD's
and the Partnership's interests, in which event MD's and the Partnership's
interests in such Lease shall be held in the name of the Program Manager as
nominee for MD and the Partnership so long as any such arrangement does not
jeopardize the validity or substance of such Lease or subject it to forfeiture
or other penalty, or (v) where the interests in the Lease to be assigned to MD
and the Partnership cannot be exactly determined because of pooling or
unitization laws, rules or regulations or agreements, the rights of third
parties under area of mutual interest or other agreements, or other similar
circumstances, in which event the Program Manager shall promptly proceed to
determine such interests and shall place them of record as promptly as possible.
(f) Title Examination. Prior to drilling a Program Well on a Prospect,
the Program Manager shall cause to be done or be satisfied that there has been
done such title examination and other title curative work as the Program
Manager, in its sole discretion, shall determine to be necessary or appropriate
in accordance with general industry standards.
Section 3. Allocation of Costs. The costs of activities and operations
conducted pursuant to this Agreement shall be allocated to and paid by the
parties hereto as follows:
(a) Organization and Offering Expenses, Sales Commissions and Due
Diligence Fees. All Organization and Offering Expenses, Sales Commissions and
due Diligence Fees attributable to the Partnership shall be allocated to and
paid to MD and MD shall receive a contribution credit in respect of such
Organization and Offering Expenses, Sales Commissions and Due Diligence Fees;
provided that such credit may not exceed an amount equal to 15% at the initial
capital contributions made to the Partnership by the Partnership.
(b) Lease Acquisition Costs. MD shall contribute or cause to be
contributed to the Program all Leases to be acquired by the Program and shall
receive a contribution credit in respect of the contributed Leases equal to the
acquisition costs of the contributed Leases (which shall be determined in
accordance with Section 2(c)).
(c) Intangible Drilling Costs. All Intangible Drilling Costs shall be
allocated entirely to the Partnership.
(d) Tangible Costs. All Tangible Costs shall be allocated entirely to
the Partnership; provided, however, that to the extent, if any, that the total
costs allocated to MD pursuant to paragraphs (a) and (b) above are less than an
amount equal to 42% of the aggregate capital contributions initially made by
Partners to the Partnership ("Deficit Amount"), then MD shall be allocated an
amount of Tangible Costs equal to the Deficit Amount; provided, further, that in
determining the amount of total costs allocated to MD pursuant to paragraphs (a)
and (b) above for purposes of this paragraph (d) any costs allocated pursuant to
paragraph (a) above in excess of an amount equal to 15% of the initial capital
contributions made to the Partnership by the Partners shall not be considered.
B-6
(e) Operating Costs and Reporting and Legal Expenses. All Operating
Costs and Reporting and Legal Expenses incurred with respect to Program Wells
shall be allocated 40% to MD and 60% to the Partnership.
(f) Administrative Costs. All Administrative Costs incurred by the
Program Manager or any of its Affiliates in managing and conducting the business
and affairs of the Partnership or the Program, including expenses incurred in
providing or obtaining such professional, technical, administrative and other
services and advice as the Program Manager may deem necessary or desirable shall
be allocated 40% to MD and 60% to the Partnership and shall be reimbursed by the
Participants pursuant to Section 8.
(g) Other Costs. All other costs incurred shall be allocated 40% to MD
and 60% to the Partnership.
Section 4. Allocation of Revenues. Except as provided in Attachment A
attached hereto, all revenues attributable to the activities and operations
conducted pursuant to this Agreement shall be allocated to and received by the
parties hereto as follows:
(a) Revenues from Program Operations. Subject to subparagraph (b)
below, all revenues from Program operations, including without limitation, all
revenues directly or indirectly resulting from the investment of revenues from
Program operations, shall be allocated 40% to MD and 60% to the Partnership.
(b) Revenues from Disposition of Program Assets.
(i) Revenues resulting from the sale or other taxable
disposition of an oil and gas property (as such term is defined in
Section 614 of the Code) shall be allocated, (A) to the extent such
revenues constitute a recovery of the Program's simulated tax basis in
such property, to the parties in the same percentages as the simulated
tax basis of the property sold was allocated up to an amount equal to
the Program's simulated tax basis in such property at the time of such
sale, and (B) thereafter, to the parties in a manner which will cause
the aggregate of all revenues allocated to the parties from such sale
or disposition and from all prior sales (to the extent possible) to
equal the amounts which would have been allocated to the parties if all
such revenues had been allocated 40% to MD and 60% to the Partnership.
For purposes of computing the simulated tax basis of any such property,
depletion deductions shall be computed as provided in paragraph 4(c) of
Attachment A without regard to depletion deductions actually claimed by
the parties under paragraph 6(d) of Attachment A.
(ii) All revenues resulting from the rental, sale or other
disposition of any item of depreciable property shall be allocated (A)
to the extent such revenues constitute a recovery of the Program's
adjusted tax basis in such property, to the parties in the same
percentages as the adjusted tax basis of the property sold was
allocated up to an amount equal to the Program's adjusted tax basis in
such property at the time of such sale, and (B) thereafter, to the
parties in a manner which will cause the aggregate of all revenues
allocated to the parties from such rental, sale or other disposition
and from all prior rentals or sales (to the extent possible) to equal
the amounts which would have been allocated to the parties if all such
revenues had been allocated 40% to MD and 60% to the Partnership.
(iii) All revenues resulting from the disposition of any other
property shall be allocated 40% to MD and 60% to the Partnership.
(iv) All dry hole and bottom hole and similar contributions
shall not be considered to be revenues hereunder but shall be applied
to reduce the Intangible Drilling Costs of the respective Program Wells
to which they relate.
Section 5. Ownership of Production.
Each Participant shall have the right to take in kind or separately
dispose of its proportionate share of all oil and gas produced from any Lease
subject to the Program pursuant to the terms of this Agreement. Any extra
expenditure incurred in the taking in kind or separate disposition by any party
hereto of its proportionate share of production shall be borne by such party.
Each party shall execute such division orders and contracts as may be necessary
for the sale of its interest in production from any such Lease. The proceeds
from the sale of all production produced, saved, and sold from any Prospect
herein shall be paid to MOC by all purchasing companies purchasing such
production, and by the execution
B-7
of this Agreement, MOC and the Participants covenant and agree to hold harmless
all purchasing companies from any and all liability by reason of paying any such
proceeds to MOC. Further, the Participants authorize and direct MOC to deduct
from their proportionate share of such proceeds from such sales all Operating
Costs and other expenses and costs of all types owed to MOC provided for under
the terms of this Agreement and remit the balance from the sale to the
Participants. In the event any party shall fail to make the arrangements
necessary to take in kind or separately dispose of its proportionate share of
oil and gas produced from any such Lease, the Program Manager shall have the
right, but not the obligation, subject to the revocation at will by the party
owning such production, to purchase such oil and gas or sell it to others at any
time and from time to time for the account of such party at a price competitive
with the best price obtainable in the area for such production. Any such
purchase or sale by the Program Manager shall be subject to the right of the
owner of the production to exercise at any time its right to take in kind, or
separately dispose of, its share of all oil and gas not previously delivered to
a purchaser. Any purchase or sale by the Program Manager of any other party's
share of oil and gas shall be only for such reasonable periods of time as are
consistent with the minimum needs of the industry under the particular
circumstances.
Section 6. Management of Program.
(a) Program Affairs. The Participants hereby designate MOC as the
Program Manager who shall have the full and exclusive power and authority to
manage, control and administer the business and affairs of the Program and the
properties of the parties subject to this Agreement, except to the extent
otherwise set forth herein and in the Partnership Agreement.
(b) Well Operations. The Participants, hereby designate MOC, and MOC
agrees to act, as operator with respect to the drilling, testing, and any
attempted completion and equipping and operating (or plugging and abandoning, if
necessary) of any Program Well to be drilled or developed hereunder, except in
those instances in which (i) the Leases on which such Program Well is to be
drilled is already subject to an existing operating agreement under which a
third party (not MOC) has already been designated as operator, (ii) the
requisite number of third parties being joint working interest owners in such
Program Well decline to approve MOC as operator or (iii) a good faith
determination is made by MOC that it is not in the best interests of the
Participants and of MOC for it to act as operator. In conducting operations on a
Prospect, MOC may use its own personnel (including consultants retained by MOC),
properties and equipment and may subcontract with any other Affiliate of MOC to
perform such operations. The charge to MD and the Partnership for the use of
MOC's personnel (including consultants retained by MOC), properties and
equipment, the basis of pricing materials purchased by MD and the Partnership
from MOC or any Affiliate thereof and the basis of pricing materials purchased
by MOC or any Affiliate thereof from MD and the Partnership shall be as provided
in the Operating Agreement, subject to the terms of the Partnership Agreement.
(c) Operating Agreement. With respect to each Program Well for which
MOC is to serve as operator as contemplated in Section 6(b), all operations
relating to such Program Well, including without limitation, all costs and
expenditures of drilling, testing, completing, and equipping and operating such
Program Well shall be conducted pursuant to an Operating Agreement between MOC
as operator, and the Participants as non-operator. In the event, at the time of
acquisition of a Lease by the Participants, such Lease is subject to another
operating agreement or if MOC enters into an operating agreement with third
parties that are joint operating interest owners in such Program Well,
nevertheless, the Operating Agreement between MOC and the Participants shall
govern operations as between them, provided that MOC and the Managing Partner
shall have the right to amend the Operating Agreement between MOC and the
Participants covering certain of the Leases to conform to such other operating
agreement (provided, the Operating Agreement may not be amended as provided
above in any manner that the Managing Partner determines will adversely affect
the Partnership or the Partners in any material respect) and MOC shall have the
right to charge the Joint Account under the Operating Agreement between MOC and
the Participants a share attributable to the Participants' interest of any costs
or expenses incurred by MOC under such other operating agreement which are not
otherwise provided for herein or in the Operating Agreement between MOC and the
Participants. To the extent that the terms of this Agreement and the terms of
the Operating Agreement attached hereto conflict, this Agreement governs and
takes precedence over the Operating Agreement.
(d) Program Funds; Distributions. Funds held by the Program Manager on
behalf of the Program, subsequent to their allocation to the Program, shall not
be commingled with funds of any other entity. If the Program Manager elects at
any time to distribute funds derived from revenues from Program operations or
the disposition of Program assets to any of the Participants, the Program
Manager shall be obligated at the same time to make distributions of funds from
such sources to the other Participants. All such distributions shall be made to
the Participants in the same percentages as the Participants are allocated
revenues of the Program pursuant to Section 4. At no time shall the Program or
the Program Manager on behalf
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of the Program retain in its accounts funds required to be distributed to the
Participants pursuant to the preceding sentence. At least quarterly, any cash
funds of the Program which the Program Manager reasonably determines are not
needed for the payment of existing or anticipated Program obligations and
expenditures shall be distributed to the Participants.
(e) Access to Records. Each Participant and the Partners thereof shall
have access during normal business hours to all books and records relating to
the business and operations of the Program as provided in the Operating
Agreement, provided that the Program Manager may refuse for a reasonable time to
grant any Participant or any Partner thereof access to such books and records as
the Program Manager (i) has agreed shall be kept confidential or (ii) has
determined in good faith should be kept confidential considering the interests
of the Program and the Participants.
(f) Liability and Indemnification of Program Manager.
(i) Neither the Program Manager nor its Affiliates shall have
any liability to the Participants for any loss suffered by a
Participant that arises out of any action or inaction performed or
omitted relating to its duties or obligations or services rendered or
to be rendered pursuant to this Agreement or the Operating Agreement,
if the Managing Partner in good faith has determined, as of the time of
the conduct or omission, that the Program Manager's or its Affiliate's
course of conduct or omission was in the best interest of the
Participants, that the Program Manager or such Affiliate was acting on
behalf of or performing services for the Participants, and that such
conduct or omission did not constitute negligence or misconduct.
Termination of any action, suit or proceeding will not create a
presumption that the Managing Partner or its Affiliate did not act in
the best interest of the Partnership.
(ii) The Partnership shall indemnify the Program Manager and
its Affiliates against any losses, judgments, liabilities, expenses,
and settlements sustained or incurred by the Program Manager or such
Affiliates as a result of any threatened, pending or completed claim,
action, suit, or proceeding, whether civil, criminal, administrative,
arbitrative, or investigative, any appeal in such claim, action, suit,
or proceeding, and any inquiry or investigation that could lead to such
a claim, action, suit, or proceeding and which in any such case relates
or which otherwise arises from or is attributable to (a) the fact that
the Program Manager is serving in such capacity or in the capacity as
the operator under the Operating Agreement or (b) any acts, omissions
or operations performed or omitted by the Program Manager or such
Affiliate on behalf of the Program or the Partnership or which
otherwise relates to the activities and business affairs of the Program
or the Partnership; provided that the Managing Partner has determined
in good faith, as of the time of the conduct or omission, that the
conduct or omission was in the best interest of the Partnership and
that the conduct or omission did not constitute negligence or
misconduct. Any such indemnity will be satisfied only out of the assets
of the Partnership and in no event will the Investor Partners be liable
therefor.
(iii) The Program Manager, acting on behalf of the Program,
may purchase and maintain insurance on behalf of the Program Manager
and its Affiliates against any liabilities asserted against or expenses
incurred by the Program Manager or its Affiliates in connection with
Program activities; provided, however, that the Participants (other
than MD) shall not incur the cost of that portion of such insurance, if
any, which insures the Program Manager or its Affiliates against any
liability with respect to which the Program Manager or its Affiliates
are denied indemnification under the provisions of this Agreement;
provided, however, that nothing contained herein shall preclude the
Program Manager from purchasing and paying for such types of insurance
including without limitation, extended coverage liability and casualty
and workers' compensation, as would be customary for any person owning
comparable assets and engaged in a similar business, or from naming the
Program Manager and its Affiliates as additional insured parties
thereunder, provided, that the naming of such additional insured
parties does not add to premiums payable by the Program.
(iv) The termination of any claim, action, suit, or proceeding
by judgment, order, settlement, conviction, or a plea of nolo
contendere or its equivalent does not alone establish that a person
seeking indemnification under this Section 6(f) is disqualified. Any
person who is determined to be not entitled to indemnification under
this Section 6(f) may petition a court of competent jurisdiction for a
determination that in view of all facts and circumstances that such
person is fairly and equitably entitled to indemnity and the
Partnership shall provide such indemnity as may be determined proper by
such court; provided, however, that the court has determined that such
person has met the standard set forth in Section 6(f)(ii) above.
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(v) Legal fees and expenses and other costs incurred as a
result of a claim described in this Section 6(f) shall be paid by the
Partnership from time to time in advance of the final disposition of
such claim if: (a) the claim relates to the performance or
non-performance of duties or services by the Program Manager or its
Affiliates rendered on behalf of the Program and the Participants, (b)
the claim is initiated by a third party who is not an Investor Partner,
or the claim is initiated by an Investor Partner and a court of
competent jurisdiction specifically approves such advancement, and (c)
the Program Manager or its Affiliate undertakes to repay the advanced
funds to the Partnership in the event it is later determined that the
Program Manager or such Affiliate is not entitled to indemnification
under the provisions of this Section 6(f).
(vi) To the extent that the Program Manager or its Affiliates
are successful on the merits or otherwise in defense of any claim,
action, suit, or proceeding referred to in this Section 6(f) or in
defense of any claim, issue, or matter therein, the Partnership shall
indemnify the Program Manager or its Affiliates, against the expenses,
including attorneys' fees, actually incurred by the Program Manager or
such Affiliate in connection therewith.
(vii) The indemnification provided by this Section 6(f) shall
continue as to the Program Manager and its Affiliates in the event the
Program Manager ceases to act in the capacity of manager of the Program
or as operator under the Operating Agreement with respect to events
occurring prior to the time such Program Manager or its Affiliate
ceased to act in such capacity and shall inure to the benefit of the
successors and assigns of the Program Manager and such Affiliates.
Section 7. Removal of the Program Manager.
The Partnership shall have the right to remove MOC as Program Manager
and to elect and substitute a successor to act in the capacity as Program
Manager; provided, the Partnership shall not have the right to remove MOC as
Program Manager and to elect and substitute a successor to act in such capacity
during the term that MD or any of its Affiliates serve in the capacity of
Managing Partner.
Section 8. Reimbursement of the Program Manager.
As may be requested by the Program Manager from time to time, the
Program Manager shall be reimbursed by the Participants for their respective
share of all General and Administrative Expenses and other costs and expenses
incurred by the Program Manager or any of its Affiliates in managing and
conducting the business and affairs of the Program, including expenses incurred
in providing or obtaining such professional, technical, administrative, and
other services and advice as the Program Manager may deem necessary or
desirable. Reimbursements of General and Administrative Expenses made by the
Partnership as a Participant hereunder shall be made in accordance with Section
5.9 of the Partnership Agreement, including without limitation, the provisions
contained in Section 5.9 of the Partnership Agreement which limit the amount of
such reimbursement.
Section 9. Tax Partnership.
This Agreement and Attachment A attached hereto are not intended and
shall not be construed to create a joint venture, mining or other partnership
(general, limited, or otherwise) or association or to render the parties hereto
liable as partners. The parties expressly agree that no party hereto shall be
responsible for the obligations of the other parties, each party being severally
responsible only for its obligations arising hereunder and liable only for its
allocable share of the costs and expenses incurred hereunder. Each of the
Participants hereby agrees that this Agreement creates a partnership for federal
and state income tax purposes only, which tax partnership shall function and
exist as set forth in Attachment A attached hereto.
Section 10. Sales of Interests by MD.
Subject to paragraph 7 of Attachment A, MD shall have the right to sell
or otherwise dispose of the ownership interests in Leases held by it as part of
the Program and subject to this Agreement without obtaining the consent of the
Partnership. MOC, MD, and their Affiliates shall have the right to sell or
otherwise dispose of the ownership interests in Leases held by them for their
own account outside the Program and not subject to this Agreement on terms more
or less favorable to the party or parties acquiring such interests than those
terms contained in this Agreement with respect to the
B-10
acquisition of interests in such Leases by the Partnership, and the Partnership
shall not have any claim or right to any consideration or benefits derived
therefrom.
Section 11. Assignment.
Except as otherwise provided herein, no party hereto shall have the
right to assign its rights or obligations under this Agreement without the
express written consent of the other parties, except in the event of the
following assignments:
(a) A disposition by MD of all or any portion of its rights or
obligations hereunder to one or more Affiliates of MD;
(b) A disposition by MD or any Affiliate thereof of all or any
part of its rights or obligations hereunder to one or more persons that
have as a result of a merger, consolidation, corporate reorganization,
or other transaction acquired all or substantially all of the assets of
MD and have assumed the obligations of MD hereunder; or
(c) A disposition by MD or any Affiliate thereof of all or any
portion of its rights or obligations hereunder after the cessation of
substantially all drilling activities of the Program.
Any assignment shall be subject to paragraph 7 of Attachment A.
Notwithstanding anything in this Agreement to the contrary, MD shall have the
right at any time to mortgage, pledge, or encumber the oil and gas properties
and interests of MD under or subject to this Agreement to secure any debts or
obligations of MD or its Affiliates (whether or not such debts or obligations
are related to the Program). If MD receives a bona fide offer from an unrelated
third party to purchase an interest in any Lease in which the Partnership has
interests pursuant to this Agreement, MD shall request the offeror to make a
similar offer available to the Partnership.
Section 12. Term and Amendment of Agreement.
(a) This Agreement shall terminate upon the occurrence of any of the
following: (i) the dissolution of the Partnership, or (ii) upon the election of
MD after the cessation of substantially all drilling activities of the Program,
provided, in the case of clause (ii), that MD shall have given at least 120
days' notice to the Investor Partners of the Partnership prior to such
termination. Upon the occurrence of any of the foregoing events, the provisions
of paragraph 9 of Attachment A shall be applicable and the Participants shall be
subject to the terms of the Operating Agreement or such other operating
agreements as may then be in effect.
(b) This Agreement and Attachment A may only be amended, modified or
changed by a writing duly executed by MD, and the Partnership; provided that, to
the extent required under the terms of the Partnership Agreement, the
Partnership shall execute or have executed on its behalf such a writing only if
the amendment, modification, or change shall have been approved or consented to
by a Majority in Interest of the Investor Partners thereof, to the extent
required by the Partnership Agreement, and, provided further, the consent of the
Partnership shall not be required if MD determines that the amendment,
modification, or change is necessary or advisable to ensure that the Program
Agreement conforms with any changes in or modifications to the Code or does not
adversely affect in a material manner the Investor Partners of the Partnership.
Section 13. Insurance.
The Program Manager or Affiliates thereof shall carry for the benefit
of the Participants insurance coverage in such amounts, with provisions for such
deductible amounts and for such purposes as are customarily carried by the
Program Manager or such Affiliates in its operations. To the extent practical,
all of the Participants shall be added as additional co-insureds under such
coverage. The Program Manager shall notify the Participants of any adverse
material change in the insurance coverage of the Program as soon as possible
after learning of such change. If possible, such notice shall be given 30 days
in advance of the change in insurance coverage. In the event that the insurance
coverage carried for the benefit of the Participants is materially reduced, the
Program, as soon as reasonably possible to do so, will halt all drilling
activity until such time as comparable replacement insurance coverage is
obtained.
B-11
Section 14. Partnership Agreement.
In the event of conflict between the provisions of this Agreement and
the provisions of the Partnership Agreement, the provisions of the Partnership
Agreement shall control unless otherwise expressly provided herein. This
Agreement is subject to the provisions of the Partnership Agreement in all
respects and all matters provided for herein shall also be governed by the
provisions of the Partnership Agreement.
Section 15. Entire Agreement.
This Agreement, together with Attachment A and Attachment B attached
hereto, constitutes the entire agreement among the parties hereto with respect
to the subject matter hereof, and supersedes all previous oral and written and
all contemporaneous oral negotiations, commitments, writings and understandings.
Section 16. Headings.
The headings of the various sections, subsections, and other
subdivisions of this Agreement have been inserted for convenient reference only
and shall not be construed to enlarge, diminish, or otherwise change the express
provisions hereof.
Section 17. Governing Law.
This Agreement shall be governed by and construed in accordance with
the laws of the State of Texas, except that any laws of such state regarding
choice or conflicts of law shall not be applied if the result would be the
application of a procedural or substantive law of another state or other
jurisdiction.
Section 18. Attachments.
Attachment A and Attachment B to this Agreement is attached hereto.
Such Attachments are incorporated herein by reference and made a part hereof for
all purposes, and references to this Agreement shall also include such
Attachments unless the context in which such references are used shall otherwise
require.
Section 19. Counterparts.
This Agreement may be executed in several counterparts, each of which
shall be deemed an original, and all of which together shall constitute one and
the same instrument.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
MEWBOURNE OIL COMPANY
By:
-------------------------------------------------
Title:
-----------------------------------------------
MEWBOURNE DEVELOPMENT CORPORATION
By:
-------------------------------------------------
Title:
-----------------------------------------------
MEWBOURNE ENERGY PARTNERS -A, L.P.
By: MEWBOURNE DEVELOPMENT CORPORATION,
its Managing General Partner
By:
-----------------------------------------
Title:
--------------------------------------
B-13
EXHIBIT C
SPECIAL SUBSCRIPTION INSTRUCTIONS
MEWBOURNE ENERGY 02-03 DRILLING PROGRAMS
[THIS PAGE INTENTIONALLY LEFT BLANK]
SPECIAL SUBSCRIPTION INSTRUCTIONS
Mewbourne Energy 02-03 Drilling Programs
Checks for Interests should he made payable to "Regions Bank-Tyler,
Escrow Agent for Mewbourne" and should be given to the subscriber's broker for
submission to the Escrow Agent. The minimum subscription is $10,000 (ten
Interests); additional purchases above such minimum may be made in increments of
$1,000 (one Interest). In the event that a subscriber purchases Interests in a
particular Partnership on more than one occasion during an offering period, the
minimum purchase on each occasion is ten Interests. THE FOLLOWING SPECIAL
SUBSCRIPTION INSTRUCTIONS ARE IN ADDITION TO THE INSTRUCTIONS SET FORTH IN THE
SUBSCRIPTION AGREEMENT ATTACHED AS EXHIBIT D TO THE PROSPECTUS.
TRANSFER OF INTERESTS:
o If a resident of MISSOURI, I am aware that the Commissioner of
Securities of Missouri classifies the securities (the
Interests) as being ineligible for any transactional exemption
under the Missouri Uniform Securities Act (Section 409.402(b),
RsMo. 1969). Therefore, unless the securities are again
registered under such Act, the offer for sale or resale
thereof in the State of Missouri may be subject to the
sanctions of the Act.
SUBSCRIBERS OF INTERESTS:
o If a resident of MICHIGAN, in addition to the requirement set
forth below, I hereby represent that the investment in the
Partnerships does not exceed ten percent of my individual or
joint net worth (exclusive of home, home furnishings and
automobiles).
o If a resident of NEW HAMPSHIRE, I hereby represent that I have
(a) an individual net worth of at least $250,000 (exclusive of
home, home furnishings, and automobiles), or (b) an individual
net worth of at least $125,000 (exclusive of home, home
furnishings, and automobiles) and $50,000 of taxable income.
o If a resident of TENNESSEE, I hereby represent that I have (a)
an individual net worth of at least $250,000 (exclusive of
home, home furnishings and automobiles) and had during the
last tax year and estimate that I will have during the current
tax year, a gross income of at least $65,000, or (b) a net
worth of at least $500,000 (exclusive of home, home
furnishings and automobiles).
SUBSCRIBERS OF LIMITED PARTNER INTERESTS:
o If a resident of ARIZONA and investing as a Limited Partner of
the Partnership, I have either: (a) a net worth of at least
$225,000 (exclusive of home, furnishings and automobiles) or
(b) have a net worth of at least $75,000 and an annual gross
income of at least $75,000 (exclusive of home, furnishings and
automobiles). I hereby represent that the investment in the
Partnerships does not represent more than ten percent of my
net worth, less the value of my other investments in limited
partnership interests.
SUBSCRIBERS OF GENERAL PARTNER INTERESTS:
o If a resident of ARIZONA, IDAHO, IOWA, KANSAS, MAINE,
MASSACHUSETTS, MICHIGAN, MISSISSIPPI, MISSOURI, NEW MEXICO,
NORTH CAROLINA, OHIO, OKLAHOMA, OREGON, PENNSYLVANIA, RHODE
ISLAND, SOUTH CAROLINA, SOUTH DAKOTA, TENNESSEE, TEXAS, UTAH,
VERMONT, VIRGINIA, WASHINGTON OR WEST VIRGINIA, and investing
as a General Partner of the Partnership, I have either (a) a
minimum net worth of $225,000 without regard to the investment
in a Partnership (exclusive of home, home furnishings and
automobiles) and as to the residents of IDAHO, IOWA, MAINE,
C-1
MASSACHUSETTS, NEW MEXICO, NORTH CAROLINA, OHIO, OKLAHOMA,
PENNSYLVANIA, RHODE ISLAND, SOUTH CAROLINA, TENNESSEE, TEXAS,
UTAH, VERMONT, VIRGINIA, WASHINGTON AND WEST VIRGINIA a
minimum annual gross income of $100,000 for the current year
and for the two previous years and as to residents of ARIZONA,
KANSAS, MICHIGAN, MISSISSIPPI, MISSOURI, OREGON AND SOUTH
DAKOTA income of $60,000 or more for the previous year and the
expectation of an annual taxable income of $60,000 or more for
the current year and for the next succeeding year); or (b) a
minimum net worth in excess of $1,000,000, inclusive of home,
home furnishings and automobiles; or (c) a minimum net worth
of $500,000 (exclusive of home, home furnishings and
automobiles) or (d) a minimum annual gross income of $200,000
in the current year and the two previous years.
ATTENTION PENNSYLVANIA RESIDENTS
o Because the minimum closing amount is less than $2,000,000,
you are cautioned to carefully evaluate the Partnership's
ability to fully accomplish its stated objectives and to
inquire as to the current dollar volume of program
subscriptions.
ATTENTION CALIFORNIA INVESTORS
o Subscriptions for Limited Partner Interests: If a resident of
CALIFORNIA and subscribing for Limited Partner Interests, I
have either (a) a net worth of at least $250,000 or more
(exclusive of home, home furnishings and automobiles) and had
during the last tax year or estimates that he/she will have
during the current tax year, a gross annual income of $65,000
or more, or (b) a net worth of $500,000 or more (exclusive of
home, home furnishings and automobiles).
o Subscriptions for General Partner Interests: If a resident of
CALIFORNIA and subscribing for General Partner Interests, I
have either (a) a net worth of at least $250,000 or more
(exclusive of home, home furnishings and automobiles) and had
during the last tax year, or estimates that he/she will have
during the current tax year, a gross annual income of $120,000
or more, or (b) a net worth of $500,000 or more (exclusive of
home, home furnishings and automobiles), or (c) a net worth of
$1,000,000 or more (inclusive of home, home furnishings and
automobiles), or (d) had during the last tax year, or
estimates that he/she will have during the current tax year, a
gross annual income of $200,000 or more.
o As a condition of qualification of the Interests for sale in
the State of CALIFORNIA, each California subscriber, through
the execution of the Subscription Agreement, acknowledges
his/her understanding that the California Department of
Corporations has adopted certain regulations and guidelines
which apply to oil and gas interests to the public in the
State of California and that the offering may not comply with
all of the rules set forth in Title 10 of the California
Administrative Code, including rules pertaining to
compensation, democracy rights and reports. Even in light of
such non-compliance, I affirmatively state that I still want
to invest in the Partnership.
o Assignability or transfer of Interests must be limited so that
no assignee or assignor, transferee or transferor may hold
less than $5,000 in Interests.
o A RESIDENT OF CALIFORNIA SHOULD BE AWARE THAT IT IS UNLAWFUL
TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY
INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR,
WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF
CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED
IN THE COMMISSIONER'S RULES. CERTIFICATES REPRESENTING
INTERESTS IN THE MEWBOURNE DEVELOPMENT 01-02 DRILLING PROGRAM
WILL BEAR A LEGEND STATING THIS RESTRICTION ON TRANSFER.
C-2
As a condition of qualification of the Interests for sale in the State
of CALIFORNIA, the following rule is hereby delivered to each California
purchase.
California Administrative Code, Title 10, CH. 3. Rule 260.141.11.
Restriction on transfer. (a) The issuer of any security upon which a restriction
on transfer has been imposed pursuant to Sections 260.102.6, 260.141.10, and
260.534 shall cause a copy of this section to be delivered to each issuee or
transferee of such security at the time the certificate evidencing the security
is delivered to the issuee or transferee.
(b) It is unlawful for the holder of any such security to consummate a
sale or transfer of such security, or any interest therein, without the prior
written consent of the Commissioner (until this condition is removed pursuant to
Section 260.141.12 of these rules), except:
(1) to the issuer;
(2) pursuant to the order or process of any court;
(3) to any person described in subdivision (i) of Section 25102 of the
Code or Section 260.105.14 of these rules;
(4) to the transferor's ancestors, descendants or spouse, or any
custodian or trustee for the account of the transferor or the transferor's
ancestors, descendants, or spouse; or to a transferee by a trustee or custodian
for the account of the transferee or the transferee's ancestors, descendants or
spouse;
(5) to the holders of securities of the same class of the same issuer;
(6) by way of gift or donation inter vivos or on death;
(7) by or through a broker-dealer licensed under the Code (either
acting as such or as a finder) to a resident of a foreign state, territory or
country who is neither domiciled in this state to the knowledge of the
broker-dealer, nor actually present in this state if the sale of such securities
is not in violation of any securities law of the foreign state, territory or
country concerned;
(8) to a broker-dealer licensed under the Code in a principal
transaction, or as an underwriter or member of an underwriting syndicate or
selling group;
(9) if the interest sold or transferred is a pledge or other lien given
by the purchaser to the seller upon a sale of the security for which the
Commissioner's written consent is obtained or under this rule not required;
(10) by way of a sale qualified under Section 25111, 25112, 25113 or
25121 of the Code, of the securities to be transferred, provided that no order
under Section 25140 or subdivision (a) of Section 25143 is in effect with
respect to such qualification:
(11) by a corporation to a wholly-owned subsidiary of such corporation,
or by a wholly-owned subsidiary of a corporation to such corporation;
(12) by way of an exchange qualified under Section 25111,25112 or 25113
of the Code, provided that no order under Section 25140 or subdivision (a) of
Section 25143 is in effect with respect to such qualification;
(13) between residents of foreign states, territories or countries who
are neither domiciled nor actually present in this state;
(14) to the State Controller pursuant to the Unclaimed Property Law or
to the administrator of the unclaimed property law of another state;
C-3
(15) by the State Controller pursuant to the Unclaimed Property Law or
by the administrator of the unclaimed property law of another state if, in
either such case, such person (i) discloses to potential purchasers at the sale
that transfer of the securities is restricted under this rule, (ii) delivers to
each purchaser a copy of this rule, and (iii) advises the Commissioner of the
name of each purchaser;
(16) by a trustee to a successor trustee when such transfer does not
involve a change in the beneficial ownership of the securities; or
(17) by way of an offer and sale of outstanding securities in an issuer
transaction that is subject to the qualification requirement of Section 25110 of
the Code but exempt from that qualification requirement by subdivision (f) of
Section 25102;
provided that any such transfer is on the condition that any certificate
evidencing the security issued to such transferee shall contain the legend
required by this section.
(c) The certificates representing all such securities subject to such a
restriction on transfer, whether upon initial issuance or upon any transfer
thereof, shall bear on their face a legend, prominently stamped or printed
thereon in capital letters of not less than 10-point size, reading as follows:
"IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS
SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION
THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF
CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE
COMMISSIONER'S RULES."
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EXHIBIT D
SUBSCRIPTION AGREEMENT
MEWBOURNE ENERGY 02-03 DRILLING PROGRAMS
SUBSCRIPTION AGREEMENT
Mewbourne Energy 02-03 Drilling Programs
The undersigned hereby subscribes for, and if accepted by Mewbourne
Development Corporation (the "Managing Partner"), in its capacity as managing
general partner of the limited partnership indicated below (the "Partnership"),
agrees to purchase that certain dollar amount indicated below of Interests at
$1,000 per Interest. Enclosed please find my check in the amount of
$________________ made payable to "Regions Bank-Tyler, Escrow Agent for
Mewbourne." Defined terms used and not defined herein shall have the meaning
assigned to such terms in the Agreement of Partnership for the Partnership (the
"Agreement of Partnership"). With respect to this purchase, being aware that a
broker may sell to me only if I qualify according to the express standards
stated herein in the Special Subscription Instructions attached as Exhibit C to
the Prospectus and in the Prospectus, I hereby:
INITIAL
_____ (a) Acknowledge that I have received a copy of the
Prospectus for the Partnership.
_____ (b) Represent that I have either (a) a minimum annual
gross income of $60,000 and a minimum net worth of $60,000
(exclusive of home, home furnishings and automobiles; or (b) a
minimum net worth of $225,000 (exclusive of home, home
furnishings and automobiles).
_____ (c) If a resident of ARIZONA, CALIFORNIA, IDAHO,
IOWA, KANSAS, MAINE, MASSACHUSETTS, MICHIGAN, MISSISSIPPI,
MISSOURI, NEW HAMPSHIRE, NEW MEXICO, NORTH CAROLINA, OHIO,
OKLAHOMA, OREGON, PENNSYLVANIA, RHODE ISLAND, SOUTH CAROLINA,
SOUTH DAKOTA, TENNESSEE, TEXAS, UTAH, VERMONT, VIRGINIA,
WASHINGTON OR WEST VIRGINIA, represent that I am aware of and
satisfy the additional suitability and other requirements
stated in Exhibit C to the Prospectus.
_____ (d) Represent that I am an "Eligible Citizen" as
defined in the Prospectus.
_____ (e) Represent that (i) if an individual, I am over 21
years of age, (ii) if an association, all of the members are
of such age, (iii) if a corporation, it is authorized and
otherwise duly qualified to hold an interest in the
Partnership and to hold Leases and interests therein and is
(or at the request of the Managing Partner will promptly
become) qualified to do business in each jurisdiction in which
the business or activities of the Partnership necessitate such
qualification, and (iv) if a fiduciary, I would qualify under
clauses (i), (ii) or (iii) of this Section (e) and am acting
for a person who would so qualify except that such person is
under 21 years of age.
_____ (f) Except as set forth in (g) below, represent that
I am purchasing Interests for my own account and will be sole
party in interest with respect to the acquired Interests and
will have all legal, beneficial and equitable rights in such
Interests.
_____ (g) If a fiduciary, represent that (i) I am
purchasing for a person or entity having the appropriate
income and/or net worth and is an "Eligible Citizen" as
specified in (b) through (f) above, (ii) if I am the donor of
the funds for investment in the Partnership, I have the
appropriate income and/or net worth specified in this
Subscription Agreement, and (iii) if either the beneficiary of
the fiduciary account is, or I am, a resident of NORTH
CAROLINA, the suitability standards set forth in this
Subscription Agreement are met by me or the fiduciary account
or by the donor who directly or indirectly supplies the funds
for the investment in the Interests.
_____ (h) Certify that the number shown as my Social
Security or Taxpayer Identification Number on the signature
page is correct and that I am not subject to backup
withholding under the Code.
_____ (i) Represent that I have the right, power and
authority to enter into this Subscription Agreement, the
Agreement of Partnership, to become an Investor Partner and to
perform my obligations thereunder.
1
_____ (j) Agree that my completion and execution of this
Subscription Agreement also constitutes my execution of the
Agreement of Partnership and the Certificate of Limited
Partnership of the Partnership, and if this Subscription is
accepted by the Managing Partner in its sole discretion, I
will become a Limited Partner or General Partner in the
Partnership and will be bound by the terms and provisions of
the Agreement of Partnership of the Partnership.
_____ (k) Agree that the Managing Partner in its sole and
absolute discretion shall have the right not to form the
Partnership and to terminate the offering of Interests therein
at any time and to reject this subscription.
_____ (l) Make the Power of Attorney set forth in Section
10.2 of the Agreement of Partnership of the Partnership.
_____ (m) Unless it is indicated on the next page that I am
a foreign person or foreign entity, (i) certify that, if the
subscriber is an individual, the subscriber is not a
nonresident alien for the purposes of United States federal
income taxation or, if the subscriber is a corporation,
partnership, trust, or estate, the subscriber is not a foreign
corporation, foreign partnership, foreign trust, or foreign
estate (as those terms are defined in the Code and regulations
promulgated thereunder), (ii) declare under penalties of
perjury that the foregoing certification and the name,
identifying number, home address (in the case of an
individual) or office address (in the case of an entity), and
place of incorporation (in the case of a corporation) of the
subscriber is to the best of my knowledge and belief true,
correct, and complete, and (iii) agree to inform the Managing
Partner if the subscriber becomes a nonresident alien or a
foreign person at any time during the three year period
immediately following the date of this Subscription Agreement.
_____ (n) Agree not to file the statement described in
Section 6224(c)(3)(B) of the Internal Revenue Code prohibiting
the Managing Partner, as the tax matters partner for the
Partnership, from entering into a settlement on his behalf
with respect to partnership items (as such term is defined in
Code Section 6231(a)(3)) of the Partnership.
_____ (o) Agree that the Managing Partner is authorized to
file a copy of this Subscription Agreement (or pertinent
portions hereof) with the Internal Revenue Service pursuant to
Section 6224(b) of the Code if necessary to perfect my waiver
of rights under this Subscription Agreement.
_____ (p) Agree that the foregoing representations,
warranties and agreements shall remain true and accurate
during the term of the Partnership, and I will neither take
action nor permit action to be taken which would cause any of
them to become untrue or inaccurate. In the event that I
become aware that any such representation, warranty or
agreement has become untrue or inaccurate at any time, I shall
immediately notify the Managing Partner and provide the
Managing Partner with such other information and statements
and grant to the Managing Partner such power of attorney as
the Managing Partner may request.
_____ (q) Acknowledge that there is no market for resale of
the Interests subscribed hereby, nor is a market expected to
develop, and the investment subscribed hereby is not liquid.
THE UNDERSIGNED MUST INITIAL EACH OF THE ABOVE REPRESENTATIONS IN THE
SPACE PROVIDED.
NOTHING HEREIN SHALL BE DEEMED A WAIVER OF ANY RIGHTS OF ACTION WHICH I
MAY HAVE UNDER ANY APPLICABLE FEDERAL OR STATE SECURITIES LAW.
NOTICES TO SUBSCRIBER
(1) The purchase of Interests as a General Partner involves a
risk of unlimited liability to the extent that the Partnership's
liabilities exceed its insurance proceeds, the Partnership's assets,
and indemnification by the Managing Partner, as described in "Risk
Factors" in the Prospectus.
2
(2) The NASD requires the Soliciting Dealer or registered
representative to inform potential investors of all pertinent facts
relating to the liquidity and marketability of the Interests,
including the following: (i) the risks involved in the offering,
including the speculative nature of the investment and the speculative
nature of drilling for oil and gas; (ii) the financial hazards
involved in the offering, including the risk of losing my entire
investment; (iii) the lack of liquidity of this investment; (iv) the
restrictions of transferability of the Interests; and (v) the tax
consequences of the investment.
Subscriptions shall be accepted or rejected by the Managing Partner
within 30 days of their receipt; if rejected, all funds shall be returned to the
subscriber immediately. Any amendment to this Subscription Agreement shall be
made only upon execution of a written consent by the subscriber, the Managing
Partner, and the Partnership. This Subscription Agreement shall be governed and
enforced in accordance with the laws of the State of Texas. The representations,
warranties, and covenants contained herein will inure to the benefit of, and be
binding upon the subscriber, the Managing Partner, the Partnership, and the
subscriber's and their respective successors, heirs, representatives, and
assigns.
3
SEND SUBSCRIPTION AND CHECK TO:
REGIONS BANK-TYLER, ESCROW AGENT
TRUST DEPARTMENT
100 EAST FERGUSON STREET
TYLER, TEXAS 75702
(903) 535-4200
4
TO BE COMPLETED BY APPLICANT(S)
The undersigned subscribes to the Partnership indicated below in the
amount indicated below. The minimum subscription per Partnership is $10,000 (ten
Interests), with additional amounts available in $1,000 increments (one
Interest).
<Table>
SUBSCRIPTION: $__________________________ PARTNERSHIP: Mewbourne Energy Partners ____-A, L.P.
Type of Interests [ ] General Partner IF NO SELECTION IS MADE, THE PARTNERSHIP CANNOT ACCEPT YOUR
Purchased: Interests SUBSCRIPTION AND WILL HAVE TO RETURN THIS SUBSCRIPTION
AGREEMENT AND YOUR MONEY TO YOU.
[ ] Limited Partner
Interests
Check one:
Individual Partnership Other (________________) please specify
- --- --- ---
Community Property Corporation
- --- --- ----------------------
Tenants in Common (Place of Incorporation)
- ---
Joint tenants with right of
- --- survivorship Foreign person or entity
---
</Table>
- --------------------------------------------------------------------------------
Print Name(s) in which Interests should be registered
- --------------------------------------------------------------------------------
Print Name(s) in which Interests should be registered
- --------------------------------------------------------------------------------
Mailing Address
- ---------------------------- ----------- -----------------------------------
City State Investor's State of Residence
- ---------------------------- ------------------- --------------------------
Zip Code SS#/Tax ID# Phone No.
- ----------------------------------------------
Account Number (if applicable)
CUSTODIAN OR CHECKS PAYABLE TO OTHERS (OPTIONAL)
Checks will be payable to the registration name and address shown above, unless
otherwise specified below.
- --------------------------------------------------------------------------------
Person/Entity
- --------------------------------------------------------------------------------
For the Benefit of
- --------------------------------------------------------------------------------
Account No.
- --------------------------------------------------------------------------------
Mailing Address for Distribution Checks
- --------------------------------------------------------------------------------
City State Zip Code Tax ID#
SIGNATURE AND POWER OF ATTORNEY
I hereby appoint Mewbourne Development Corporation, with full power of
substitution, my true and lawful attorney to execute, file, swear to and record
any Certificate(s) of Limited Partnership or amendments thereto (including but
not limited to any amendments filed for the purpose of the admission of any
substituted Partners) or cancellation thereof, including any other instruments
which may be required by law in any jurisdiction to permit qualification of the
Partnership as a limited partnership or for any other purpose necessary to
implement the Agreement of Partnership, and as more fully described in Article X
of the Agreement of Partnership.
I AM AWARE OF, AGREE AND SATISFY THE REPRESENTATIONS, AGREEMENTS AND
SUITABILITY REQUIREMENTS IN THIS SUBSCRIPTION AGREEMENT AND IN THE SPECIAL
SUBSCRIPTION INSTRUCTIONS ATTACHED AS EXHIBIT C TO THE PROSPECTUS.
<Table>
- ------------------------------------------------------ ------------------------------------------------------
Signature of Applicant or Signature of Joint Applicant or
Authorized Representative* Authorized Representative*
Date: Date:
------------------------------------------------- -------------------------------------------------
</Table>
* An "Authorized Representative" may not execute this subscription agreement for
individual investors residing in the following jurisdictions: MICHIGAN, NORTH
CAROLINA, OHIO, PENNSYLVANIA, AND TENNESSEE.
5
SUBSCRIBERS ARE URGED TO CAREFULLY READ THE REPRESENTATIONS, AGREEMENTS AND
SUITABILITY REQUIREMENTS SET FORTH HEREIN AND IN EXHIBIT D TO THE PROSPECTUS
BEFORE EXECUTING THIS AGREEMENT. A SUBSCRIBER MUST INITIAL IN THE SPACE PROVIDED
EACH OF THE REPRESENTATIONS MADE BY THE SUBSCRIBER HEREIN.
FOR SOLICITING DEALER USE ONLY
- --------------------------------------------------------------------------------
Firm
- ------------------------------------------------- -------------------------
Branch Office Address Phone No.
- ---------------------------------- ----------- ---------------
City State Zip Code
- -------------------------------------------------
Representative's Number
- -------------------------------------------------
Signature of Registered Representative
<Table>
- ------------------------------------------------------ ------------------------------------------------------
Print Name of Registered Representative Authorized Signature for Branch Manager+
</Table>
+By signing on this line I hereby represent that I have discharged my
affirmative obligations under Sections 3 and 4 of Rule 2810 of the NASD Rules of
Fair Practice and that I have reasonable grounds to believe, on the basis of
information obtained from the applicant concerning his/her investment
objectives, other investments, financial situation and needs, and any other
information known by the member, that: (i) the applicant is or will be in a
financial position appropriate to enable him to realize to a significant extent
the benefits described in the Prospectus, including the tax benefits; (ii) the
applicant has a fair market net worth sufficient to sustain the risks inherent
in the Limited Partnership, including loss of the investment and lack of
liquidity; (iii) an investment in the Partnership is otherwise suitable for the
applicant; and (iv) the applicant, along with one or more representatives,
advisors or agents has the knowledge and experience in financial matters to be
capable of evaluating the merits and risks of the offering. If this purchase is
being executed in a discretionary account, the member has received prior written
approval of the purchase by the customer. The member has informed the applicant
of all pertinent facts relating to the liquidity and marketability of the
Interests in the Partnership during the term of the investment, of the risks of
unlimited liability regarding an investment as a General Partner, and of the
passive loss limitations for tax purposes of an investment as a Limited Partner.
FOR MEWBOURNE DEVELOPMENT CORPORATION USE ONLY
MEWBOURNE DEVELOPMENT CORPORATION
Managing General Partner
ACCEPTED: By:
---------------------------------
Title:
---------------------------------
Date:
---------------------------------
6
================================================================================
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED.THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO BUY ANY
OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION.
--------------
<Table>
<Caption>
TABLE OF CONTENTS
Page
----
SUMMARY OF OFFERING ...................................... 1
RISK FACTORS ............................................. 5
APPLICATION OF PROCEEDS .................................. 16
PARTICIPATION IN COSTS AND REVENUES ...................... 18
COMPENSATION AND REIMBURSEMENT ........................... 20
ESTIMATED DRILLING PROGRAM EXPENSES ...................... 22
DEFINITIONS .............................................. 23
TERMS OF THE OFFERING .................................... 27
ADDITIONAL FINANCING ..................................... 34
PLAN OF DISTRIBUTION ..................................... 35
INVESTMENT OBJECTIVES .................................... 36
PROPOSED ACTIVITIES ...................................... 36
MANAGEMENT ............................................... 46
OWNERSHIP STRUCTURE OF MEWBOURNE COMPANIES ............... 47
CONFLICTS OF INTEREST .................................... 52
PRIOR ACTIVITIES ......................................... 58
TAX ASPECTS .............................................. 70
COMPETITION, MARKETS AND REGULATION ...................... 88
LIABILITY OF GENERAL AND LIMITED PARTNERS ................ 90
SUMMARY OF PARTNERSHIP AGREEMENT AND DRILLING PROGRAM
AGREEMENT ................................................ 91
LEGAL OPINIONS ........................................... 100
EXPERTS .................................................. 100
WHERE YOU CAN FIND MORE INFORMATION ...................... 101
INDEX TO FINANCIAL STATEMENTS ............................ 102
</Table>
Exhibit A: Form of Agreement of Partnership
Exhibit B: Form of Drilling Program Agreement
Exhibit C: Form of Special Subscription Instructions
Exhibit D: Form of Subscription Agreement
--------------
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS, AS AMENDED OR
SUPPLEMENTED, ALL DEALERS EFFECTING TRANSACTIONS IN THESE SECURITIES, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
================================================================================
MEWBOURNE
ENERGY PARTNERS 02-03
DRILLING PROGRAMS
(PER PARTNERSHIP MINIMUM OFFERING AMOUNT)
1,000 LIMITED PARTNER INTERESTS
AT $1,000 PER INTEREST
MINIMUM PURCHASE OF
TEN LIMITED PARTNER INTERESTS
1,000 GENERAL PARTNER INTERESTS
AT $1,000 PER INTEREST
MINIMUM PURCHASE OF
FIVE GENERAL PARTNER INTERESTS
--------------
PROSPECTUS
--------------
, 2003
----------
================================================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
All capitalized terms used and not defined in Part II of this
Registration Statement shall have the meanings assigned to them in the
prospectus which forms a part of this Registration Statement or the exhibits
thereto.
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below is an itemization of the estimated costs which will be
incurred in connection with the sale of the securities registered hereby if an
aggregate of $36,000,000 of Limited Partner Interests and General Partner
Interests are sold.
<Table>
<Caption>
Costs of Offering:
- -----------------
Securities Act of 1933 Registration Fee ................................... $ 0
National Association of Securities Dealers, Inc. Filing Fee ............... 4,100
Blue Sky Qualification Fees and Expenses .................................. 75,000*
Printing .................................................................. 150,000*
Legal Fees and Expenses ................................................... 200,000*
Accounting Fees and Expenses .............................................. 25,000*
Expenses of Mewbourne Development Corporation Incurred in Connection
With the Distribution ................................................. 500,000*
Miscellaneous ............................................................. 100,000*
Total ..................................................................... $1,054,100
</Table>
- ----------
* Estimated
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 5.4 of the partnership agreement provide that neither Mewbourne
Development Corporation nor any of its affiliate shall have any liability to a
partnership or to any partner thereof for any loss suffered by the partnership
that arises out of any action or inaction performed or omitted by Mewbourne
Development Corporation or such affiliate, unless the managing partner in good
faith has determined that such course of conduct or omission was not intended to
further the best interest of the partnership or that such course of conduct
constituted negligence or misconduct on the part of Mewbourne Development
Corporation or such affiliate. Section 6(f) of the drilling program agreements
provides parallel protection from liability to Mewbourne Oil Company, in its
individual capacity as the program manager, and affiliates of the program
manager.
Section 5.5 of the partnership agreements and Section 6(f) of the
drilling program agreements provides, subject to various conditions, for
indemnification of Mewbourne Development Corporation and its affiliates, and
each permit, subject to certain conditions, for insurance to be purchased and
maintained on behalf of Mewbourne Development Corporation and its affiliates
against any liabilities asserted against or expenses incurred by Mewbourne
Development Corporation and its affiliates in connection with activities of a
partnership or drilling program, as the case may be.
Section 17-108 of the Delaware Act provides that a Delaware limited
partnership may indemnify and hold harmless any partner or other person from and
against any and all claims and demands whatsoever.
Section 9 of the soliciting dealer agreements provide that the
partnerships and Mewbourne Development Corporation have agreed to indemnify the
soliciting dealers against certain liabilities, including certain liabilities
under the Securities Act of 1933.In addition, Mewbourne Development Corporation
may enter into similar agreements with certain soliciting dealers on behalf of
the partnerships under which Mewbourne Development
II-1
Corporation and the partnerships will indemnify those soliciting dealers against
certain liabilities, including certain liabilities under the Securities Act of
1933.
As permitted by Section 102(b)(7) of the Delaware General Corporation
Law, Article 10 of each of Mewbourne Development Corporation's and Mewbourne Oil
Company's Certification of Incorporation contains a limitation of liability
provision under which a director will not be personally liable to Mewbourne
Development Corporation, Mewbourne Oil Company or their respective stockholders
for monetary damages resulting from breaches of his fiduciary duty of care as a
director, subject to certain limitations.
Article 7, Section 7 of each of Mewbourne Development Corporation's and
Mewbourne Oil Company's By-laws provides that Mewbourne Development Corporation
or Mewbourne Oil Company, as the case may be, shall indemnify its officer or
director to the fullest extent permitted under the Delaware General Corporation
Law. Section 145 thereof permits indemnification of an officer or director upon
a determination that such officer or director has met the applicable standard of
conduct. Under Section 145, such officer or director is required to have acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of Mewbourne Development Corporation and, with respect to any
criminal action, without reasonable cause to believe his conduct was unlawful.
Section 145 does not authorize indemnification, in actions brought by or in the
right of a corporation, against judgments, fines or amounts paid in settlement,
nor does it provide for indemnification of expenses incurred in the defense or
settlement of claims as to which a director or officer is adjudged to be liable
to Mewbourne Development Corporation or Mewbourne Oil Company, as the case may
be, unless specifically authorized by the Delaware Court of Chancery or the
court in which such action is brought.
The above discussion of the provisions of Section 5.5 of the
Partnership Agreement, Section 6(f) of the drilling program agreement, Section
17-108 of the Delaware Act, Sections 102(b)(7) and 145 of the Delaware General
Corporation Law, Article 10 of each of Mewbourne Development Corporation's and
Mewbourne Oil Company's Certificate of Incorporation, Article 7, Section 7 of
each of Mewbourne Development Corporation's and Mewbourne Oil Company's By-laws,
and the soliciting dealer agreements is not intended to be exhaustive and is
respectively qualified in its entirety by the applicable provisions of the
partnership agreements and drilling program agreements, the forms of which are
included as Exhibits A and B to the Prospectus forming a part of this
Registration Statement and are hereby incorporated herein by reference, the
Delaware Act and the Delaware General Corporation Law, Article 10 of each of
Mewbourne Development Corporation's and Mewbourne Oil Company's Certificate of
Incorporation , which are included as Exhibits 3.3 and 3.5, respectively, to
this Registration Statement and hereby incorporated herein by reference, Article
7, Section 7 of each of Mewbourne Development Corporation's and Mewbourne Oil
Company's By-laws, which are included as Exhibits 3.4 and 3.6, respectively, to
this Registration Statement and hereby are incorporated herein by reference, and
by the soliciting dealer agreements, the form of which is set forth as Exhibit
1.1 to the Registration Statement and is hereby incorporated herein by
reference.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In connection with the formation of a partnership, the organizational
partner of such partnership will contribute $100 to the partnership's capital.
Upon the initial admission of general and limited partners to that partnership,
the subscription of the organizational partner in the partnership will be
terminated and the $100 contribution will be returned to him. The partnerships
have not otherwise sold or issued within the past three years any securities
which were not registered under the Securities Act of 1933.
II-2
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<Table>
<Caption>
EXHIBIT
NUMBER EXHIBIT
1.1 -- Form of Soliciting Dealer Agreement to be entered into between
Mewbourne Development Corporation and the Soliciting Dealers. *
1.2 -- Form of Dealer Manager Agreement. *
3.1 -- Certificate of Limited Partnership of Mewbourne Energy Partners
02-A, L.P. *
3.2 -- Amendment to Certificate of Limited Partnership of Mewbourne Energy
Partners 02-A, L.P. *
3.3 -- Certificate of Limited Partnership of Mewbourne Energy Partners
03-A, L.P. *
3.4 -- Certificate of Incorporation of Mewbourne Development Corporation.
+
3.5 -- Bylaws of Mewbourne Development Corporation. +
3.6 -- Certificate of Incorporation of Mewbourne Oil Company. +
3.7 -- Bylaws of Mewbourne Oil Company. +
4.1 -- Form of Agreement of Partnership of Mewbourne Energy Partners-A,
L.P. (filed as Exhibit A to the Prospectus forming a part of this
Registration Statement) **
4.2 -- Form of Subscription Agreement (filed as Exhibit D to the
Prospectus forming a part of this Registration Statement). **
4.3 -- Form of Special Subscription Instructions (filed as Exhibit C to
the Prospectus forming a part of this Registration Statement). **
4.4 -- Form of Certificate of Limited Partner Interest. *
4.5 -- Form of Certificate of General Partner Interest. *
5.1 -- Opinion of Vinson & Elkins L.L.P., as to the legality of the
securities registered hereby. *
8.1 -- Opinion of Vinson & Elkins L.L.P., as to certain tax matters
arising in connection with the securities registered hereby. *
10.1 -- Form of Drilling Program Agreement among Mewbourne Development
Corporation, Mewbourne Oil Company and Mewbourne Energy Partners -
A, L.P. (filed as Exhibit B to the Prospectus forming a part of
this Registration Statement). **
10.2 -- Form of Escrow Agreement between Mewbourne Development Corporation
and Regions Bank. *
10.3 -- Tax Partnership Provisions. *
10.4 -- Form of Operating Agreement between Mewbourne Energy Partners-A,
L.P., Mewbourne Development Corporation and Mewbourne Oil Company.
*
23.1 -- Consent dated April 9, 2002 of PricewaterhouseCoopers LLP,
independent accountants.*
</Table>
II-3
23.1.1 -- Consent dated May 30, 2002 of PricewaterhouseCoopers LLP,
independent accountants. *
23.1.2 -- Consent dated March 7, 2003 of PricewaterhouseCoopers LLP,
independent accountants.*
23.1.3 -- Consent dated April 23, 2003 of PricewaterhouseCoopers LLP,
independent accountants.**
23.2 -- Consent of Vinson & Elkins L.L.P. (included as part of
Exhibit 23.4). *
23.3 -- Consent dated April 9, 2002 of Garb Grubbs Harris & Associates,
Inc., independent engineers. *
23.3.1 -- Consent dated May 30, 2002 of Garb Grubbs Harris & Associates,
Inc., independent engineers. *
23.3.2 -- Consent dated March 7, 2003 of Forrest A. Garb & Associates,
Inc., independent engineers. *
23.3.3 -- Consent dated April 23, 2003 of Forrest A. Garb & Associates, Inc.,
independent engineers.**
23.4 -- Consent of Vinson & Elkins L.L.P. *
23.5 -- Consent of Vinson & Elkins L.L.P. dated March 7, 2003. *
23.6 -- Consent of Vinson & Elkins L.L.P. dated April 23, 2003.**
24.1 -- Power of Attorney (included on the signature page to the
Registration Statement). *
- ----------
* Previously filed
** Filed herewith
+ Incorporated by reference from Mewbourne Energy Partners 97-A registration
statement on Form S-1, SEC File No. 353-22829
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes as follows:
(1) to file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement: (i) to include any
prospectus required by Section 10(a)(3) of the Securities Act; (ii) to reflect
in the prospectus any facts or events arising after the effective date of the
Registration Statement (or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement; and (iii) to include any
material information with respect to the plan of distribution not previously
disclosed in the Registration Statement or any material change to such
information in the Registration Statement; provided, however, that subparagraphs
(1)(i) and (1)(ii) above do not apply if the Registration Statement is on Form
S-3 or Form S-8, and the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed by the
Registrant pursuant to section 13 or section 15(d) of the Securities Exchange
Act of 1934 that are incorporated by reference in the Registration Statement.
(2) that, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) that all post-effective amendments will comply with the applicable
forms, rules and regulations of the Securities and Exchange Commission in effect
at the time such post-effective amendments are filed.
(4) to remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(5) to not identify to any third party any prospects that will be, or
are likely to be, purchased by a partnership with the proceeds from the sale of
the securities offered hereby or are representative of prospects which may be
purchased by the partnership with the proceeds from the sale of the securities
offered hereby, whether such third party is a soliciting dealer or other party
involved in making or directing investment decisions regarding the
II-4
purchase of the securities offered hereby, except to the extent such prospects
have been identified in the prospectus or an amendment thereto.
To the extent a review of prospects or lease inventory is permitted to
third parties:
(a) it will be incidental to a soliciting dealer's due
diligence examination;
(b) no reference to any specific prospect, unless such
prospect is described in the prospectus or an amendment to the
prospectus, will appear in any analysis or report on the securities
offered hereby prepared by such third party; and
(c) any third party, prior to receiving permission to examine
prospects, will agree to the above conditions, and the Registrant will
file a copy of such agreement(s) as an exhibit to the Registration
Statement.
No prospective investors or their representative will be permitted to
examine any prospects or inventory or data related thereto that are not
described or set forth in the prospectus or an amendment to the
prospectus.
(6) to provide to the partners of a partnership the financial
statements required by Form 10-K for the first full fiscal year of operations of
the partnership.
(7) to send to each purchaser of the securities offered hereby, on at
least an annual basis, a detailed statement of any transactions by the
Partnership to which that purchaser has been admitted as a partner with the
Managing Partner or its affiliates and fees, commissions, compensation, and
other benefits paid or accrued to the Managing Partner or its affiliates for the
fiscal year completed, showing the amount paid or accrued to each recipient and
the services performed.
(8) to file a sticker supplement pursuant to Rule 424(c) under the
Securities Act of 1933 during the distribution period for the partnerships
describing each property not identified in the Prospectus at such time as there
arises a reasonable probability that such property will be acquired by such
Partnership and to consolidate all such stickers into a post-effective amendment
filed at least once every three months, with the information contained in such
amendment provided simultaneously to any existing general and limited partners
of such partnership.Each sticker supplement should disclose all compensation and
fees received by the Managing Partner and its affiliates in connection with any
such acquisition.The post-effective amendment shall include audited financial
statements meeting the requirements of Rule 3-05 of Regulation S-X only for
properties acquired during such distribution period.
(9) to file, after the end of the end of the distribution period, a
current report on Form 8-K containing the financial statements and any
additional information required by Rule 3-05 of Regulation S-X as such is
required under Item 7 of Form 8-K, to reflect each commitment (i.e., the signing
of a binding purchase agreement) made after the end of the distribution period
involving the use of 10% or more (on a cumulative basis) of the net proceeds of
the offering and to provide the information contained in such report to the
limited partners at least once each quarter after the distribution period of the
offering has ended.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
Mewbourne Development Corporation pursuant to the foregoing provisions, or
otherwise, Mewbourne Development Corporation has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable.In the event that a claim for indemnification against
such liabilities (other than the payment by Mewbourne Development Corporation of
expenses incurred or paid by a director, officer or person controlling Mewbourne
Development Corporation in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, Mewbourne Development
Corporation will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Tyler,
State of Texas, on April 23, 2003.
MEWBOURNE ENERGY PARTNERS 02-03 DRILLING
PROGRAMS, consisting of Mewbourne Energy Partners
02-A, L.P., a Delaware limited partnership and
Mewbourne Energy Partners 03-A, L.P., a Delaware
limited partnership
By: MEWBOURNE DEVELOPMENT CORPORATION,
Managing Partner
By: /s/ Curtis W. Mewbourne
------------------------------
CURTIS W. MEWBOURNE,
President and Director
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<Table>
<Caption>
Signature Title Date
--------- ----- ----
President and Director
/s/ Curtis W. Mewbourne (Principal Executive Officer)
- ------------------------ April 23, 2003
CURTIS W. MEWBOURNE
Executive Vice President,
/s/ J. Roe Buckley Chief Financial Officer and
- ------------------------ Director (Principal Financial April 23, 2003
J. ROE BUCKLEY and Accounting Officer)
* Director
- ------------------------ April 23, 2003
DOROTHY M. CUENOD
* Director
- ------------------------ April 23, 2003
RUTH M. BUCKLEY
* Director
- ------------------------ April 23, 2003
JULIE M. GREENE
*By:/s/ J. Roe Buckley Attorney-in-Fact
- ------------------------ April 23, 2003
J. ROE BUCKLEY
</Table>
II-6
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NUMBER EXHIBIT
- ------ -------
1.1 -- Form of Soliciting Dealer Agreement to be entered into between Mewbourne Development
Corporation and the Soliciting Dealers. *
1.2 -- Form of Dealer Manager Agreement. *
3.1 -- Certificate of Limited Partnership of Mewbourne Energy Partners 02-A, L.P. *
3.2 -- Amendment to Certificate of Limited Partnership of Mewbourne Energy Partners 02-A, L.P. *
3.3 -- Certificate of Limited Partnership of Mewbourne Energy Partner 03-A, L.P. *
3.4 -- Certificate of Incorporation of Mewbourne Development Corporation. +
3.5 -- Bylaws of Mewbourne Development Corporation. +
3.6 -- Certificate of Incorporation of Mewbourne Oil Company. +
3.7 -- Bylaws of Mewbourne Oil Company. +
4.1 -- Form of Agreement of Partnership of Mewbourne Energy Partners-A, L.P. (filed as Exhibit A to
the Prospectus forming a part of this Registration Statement) **
4.2 -- Form of Subscription Agreement (filed as Exhibit D to the Prospectus forming a part of this
Registration Statement). **
4.3 -- Form of Special Subscription Instructions (filed as Exhibit C to the Prospectus forming a part
of this Registration Statement). **
4.4 -- Form of Certificate of Limited Partner Interest. *
4.5 -- Form of Certificate of General Partner Interest. *
5.1 -- Opinion of Vinson & Elkins L.L.P., as to the legality of the securities registered hereby. *
8.1 -- Opinion of Vinson & Elkins L.L.P., as to certain tax matters arising in connection with the
securities registered hereby. *
10.1 -- Form of Drilling Program Agreement among Mewbourne Development Corporation, Mewbourne Oil
Company and Mewbourne Energy Partners - A, L.P. (filed as Exhibit B to the Prospectus forming
a part of this Registration Statement). **
10.2 -- Form of Escrow Agreement between Mewbourne Development Corporation and Regions Bank. *
10.3 -- Tax Partnership Provisions. *
10.4 -- Form of Operating Agreement between Mewbourne Energy Partners-A, L.P., Mewbourne Development
Corporation and Mewbourne Oil Company. *
23.1 -- Consent dated April 9, 2002 of PricewaterhouseCoopers LLP, independent accountants.*
23.1.1 -- Consent dated May 30, 2002 of PricewaterhouseCoopers LLP, independent accountants. *
</Table>
<Table>
23.1.2 -- Consent dated March 7, 2003 of PricewaterhouseCoopers LLP, independent accountants.*
23.1.3 -- Consent dated April 23, 2003 of PricewaterhouseCoopers LLP, independent accountants.**
23.2 -- Consent of Vinson & Elkins L.L.P. (included as part of Exhibit 23.4). *
23.3 -- Consent dated April 9, 2002 of Garb Grubbs Harris & Associates, Inc., independent engineers. *
23.3.1 -- Consent dated May 30, 2002 of Garb Grubbs Harris & Associates, Inc., independent engineers. *
23.3.2 -- Consent dated March 7, 2003 of Forrest A. Garb & Associates, Inc., independent engineers.*
23.3.3 -- Consent dated April 23, 2003 of Forrest A. Garb & Associates, Inc., independent engineers. **
23.4 -- Consent of Vinson & Elkins L.L.P. *
23.5 -- Consent of Vinson & Elkins L.L.P. dated March 7, 2003. *
23.6 -- Consent of Vinson & Elkins L.L.P. dated April 23, 2003. **
24.1 -- Power of Attorney (included on the signature page to the Registration Statement). *
</Table>
- ----------
* Previously filed
** Filed herewith
+ Incorporated by reference from Mewbourne Energy Partners 97-A registration
statement on Form S-1, SEC File No. 353-22829