1
As filed with the Securities and Exchange Commission on June 11, 1997
Registration No. 333-22829
============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
Amendment No. 2
to
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
_________________________
MEWBOURNE ENERGY PARTNERS 97-A, L.P.
(Exact name of registrants)
DELAWARE 1311 75-2692499
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
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)
_________________________
Copy to:
CURTIS W. MEWBOURNE A. WINSTON OXLEY
MEWBOURNE DEVELOPMENT CORPORATION HAROLD HERMAN, II
3901 S. BROADWAY Vinson & Elkins L.L.P.
TYLER, TEXAS 75701 3700 Trammell Crow Center
(903) 561-2900 2001 Ross Avenue
(Name, address, including zip code, and telephone Dallas, Texas 75201
number, including area code, of agent for service) (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
=========================================================================================================================
AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF SECURITIES TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED (1) PER INTEREST (2) PRICE (1) FEE(3)
- -------------------------------------------------------------------------------------------------------------------------
Limited Partner Interests(3) 10,000 $1,000 $10,000,000 $ 606.06
- -------------------------------------------------------------------------------------------------------------------------
General Partner Interests 8,000 $1,000 $8,000,000 $2,424.25
- -------------------------------------------------------------------------------------------------------------------------
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,030.31
=========================================================================================================================
(1) This Registration Statement covers all Limited Partner Interests that may
be acquired by Limited Partners, all General Partner Interests that may be
acquired by General Partners and all 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 the Partnership, subscription
funds have been received and accepted by MD in an amount of $1,000,000 or
more and MD determines, in its sole discretion, to proceed with the funding
of the Partnership.
(2) Subscriptions will be accepted in the minimum amount of five Interests
($5,000), subject to certain state law requirements.
(3) Includes 8,000 Limited Partner Interests into which the General Partner
Interests are convertible upon the occurrence of certain events. The
registration statement fee for the 8,000 additional Limited Partner
Interests was previously paid in connection with the registration of the
General Partner Interests.
_______________________________
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.
===============================================================================
2
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.
P R O S P E C T U S SUBJECT TO COMPLETION, DATED JUNE 11, 1997
MEWBOURNE ENERGY
97 DRILLING PROGRAM
(PARTNERSHIP MINIMUM OFFERING AMOUNT)
$1,000,000 (1,000 GENERAL AND/OR LIMITED PARTNER
INTERESTS AT $1,000 PER INTEREST)
Minimum Purchase: 5 Interests ($5,000)
Mewbourne Development Corporation ("MD") is offering to qualified
investors during 1997 an aggregate of up to 2,000 ($2,000,000) limited partner
interests ("Limited Partner Interests") and up to 8,000 ($8,000,000) general
partner interests ("General Partner Interests") (Limited Partner Interests and
General Partner Interests are collectively referred to as "Interests") in
Mewbourne Energy Partners 97-A, L.P., a Delaware limited partnership (the
"Partnership"), formed by MD. The minimum offering amount for the Partnership
is 1,000 Interests ($1,000,000) with the maximum offering amount being 10,000
Interests ($10,000,000). Investors whose subscriptions are accepted by MD will
be admitted, based on their election, as General Partners or Limited Partners
in the Partnership. The Partnership will participate, together with MD and its
Affiliate, Mewbourne Oil Company ("MOC"), in a drilling program (the "Drilling
Program"), the primary objective of which will be to establish oil and gas
reserves by drilling wells in the Permian Basin (located in West Texas and
Southeastern New Mexico) and the Anadarko Basin (located in Western Oklahoma
and the Texas Panhandle). See "Proposed Activities."
The Partnership will not be funded with less than $1,000,000 in
Capital Contributions from Investor Partners. If, at the end of the
subscription period for Interests in the Partnership, subscription funds of
less than $1,000,000 have been received by MD, such funds will be promptly
returned to subscribers. It is the Managing Partner's current intention that
the Managing Partner and/or an Affiliate thereof will subscribe for such number
of Interests as may be necessary for the Partnership to receive the minimum
subscription amount of 1,000 Interests ($1,000,000). The number of Interests in
the Partnership that may be purchased by the Managing Partner and/or
Affiliates thereof is not subject to any specific maximum limitations but
depends upon the number of subscriptions for Interests received and accepted
from non-Affiliates.
THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" on Page 16. Significant risks 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 Investors who purchase General Partner Interests may be subject to
unlimited liability for the Partnership's obligations.
o Total reliance is on the Managing Partner for management and control
of the Partnership.
o No Prospects for drilling have yet been selected and therefore no
investor will have an opportunity to evaluate any of the Prospects
before investing in the Partnership.
o The number of Program 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 Program Wells and
Prospects will be limited.
o It is the Managing Partner's current intention that the Managing
Partner and/or an Affiliate thereof will purchase Interests in the
Partnership in which Interests are being offered, if necessary, to
assure that the minimum aggregate subscription amount for the
Partnership is reached. Subject to certain limitations, Interests
owned by the Managing Partner or an Affiliate thereof will have voting
rights under the Partnership Agreements, and therefore, has the effect
of diluting the voting power of the Investor Partners in the
Partnership.
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 Investor Partners.
(continued on next page)
______________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
RITIES AND EXCHANGE COMMISSION OR STATE SECURITIES ADMINISTRATORS NOR HAS
COMMISSION OR ANY SUCH ADMINISTRATOR PASSED UPON THE ACCURACY OR ADEQUACY
HIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
______________________
THE DATE OF THIS PROSPECTUS IS _______________, 1997.
3
(continued from previous page)
o The Partnership is subject to various conflicts of interest which are
inherent in its relationship with the Managing Partner and its
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 MD and its affiliates will be entitled to receive certain fees in
connection with services rendered to the Partnership and will receive
reimbursement for certain fees and expenses, which amounts may be
substantial.
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 Investor Partners.
The fiduciary standards in the Partnership Agreement could be less
advantageous to the Investor Partners and more advantageous to the
Managing Partner than the corresponding fiduciary standards otherwise
applicable under Delaware law, specifically:
-- the Partnership may indemnify and hold harmless the Managing
Partner and its Affiliates;
-- the Managing Partner is required to devote only so much of its
time as is necessary to manage the affairs of the Partnership;
-- the Managing Partner and its Affiliates may conduct business with
the Partnership in a capacity other than as a Sponsor;
-- in certain circumstances, 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;
-- the Managing Partner may manage multiple programs simultaneously;
and
o Investment is illiquid--investors may not be able to sell their
Interests because there will be no market for the Interests.
o Revenues from the Partnership are directly related to oil and natural
gas prices which cannot be predicted.
o Investment is suitable only for investors having substantial financial
resources and who desire a long-term investment.
o Significant tax considerations are involved in an investment,
including;
-- possible modification or elimination of tax benefits;
-- possible loss of partnership classification;
-- Limited Partners must have substantial current taxable income from
passive trade or business activities to benefit from tax losses
arising from the Partnership; and
-- possible recognition of taxable income by an investor with no
corresponding cash distribution by the Partnership.
100% Proceeds to the
8.5% Underwriting Partnership Available
Price to Discounts for Partnership
Public and Commissions Operations(1)
Per Interest . . . . . . . $1,000 $85 $1,000
Total Minimum (2) . . . . . $1,000,000 $85,000 $1,000,000
Total Maximum (3) . . . . . $10,000,000 $850,000 $10,000,000
(1) The Managing Partner, or an Affiliate thereof, shall advance on behalf
of the Partnership the amount of all Organization and Offering
Expenses, Sales Commissions and Due Diligence Fees attributable to the
Partnership. The Partnership shall reimburse the Managing Partner the
amount of such advanced Organization and Offering Expenses, Sales
Commissions and Due Diligence Fees, plus interest on the unreimbursed
amount at a per annum rate of interest equal to the Base Rate
calculated commencing as of the date that the offering of Interests in
the Partnership closes, from funds which would otherwise be available
for distribution to the Partners in the Partnership. The advancement
of Organization and Offering Expenses, Sales Commissions and Due
Diligence Fees to the Partnership and the Partnership's reimbursement
obligation shall be without recourse to the Investor Partners and
shall solely be an obligation of the Partnership. Such reimbursement
shall not be made from Capital Contributions of the Investor Partners
and the Managing Partner or Affiliate thereof making the advance shall
bear the risk that the Partnership will have sufficient funds to
ultimately reimburse such
4
(continued from previous page)
advancement. Of the aggregate proceeds available for Partnership
operations, and of each individual $1,000 Interest, approximately 15%
to 25% will be expended for Lease Acquisition Costs of Prospects and
approximately 75% to 85% will be expended for drilling and well
completion costs. These percentages are estimates only, and no
assurance can be given that such percentages will be actually realized
or that variations in the percentages will not be significant to the
Partnership. See "Application of Proceeds."
(2) No subscriber will be admitted as an Investor Partner in the
Partnership unless, at the end of the subscription period for
Interests in the Partnership, subscription funds have been received
and accepted by MD in an amount of $1,000,000 or more and MD
determines, in its sole discretion, to proceed with the funding of the
Partnership. If, at the end of the subscription period for Interests
in the Partnership, subscription funds of less than $1,000,000 have
been received by MD, such funds will be promptly returned to
subscribers. There is no assurance that the Partnership will be
funded. Accordingly, the minimum for the total offering is
$1,000,000.
(3) The maximum offering amount for the Partnership is $10,000,000.
MD has engaged its Affiliate, Mewbourne Securities, 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. Such members
of the National Association of Securities Dealers, Inc. have entered into
soliciting dealer agreements and will solicit subscriptions for Interests on a
"best efforts" basis (that is, the Soliciting Dealers are not obligated to
purchase any Interests not purchased by investors). In addition, Mewbourne
Securities may act as a Soliciting Dealer for the Partnership. Sales
Commissions and Due Diligence Fees in an aggregate amount equal to 8.5% of the
sales price of Interests will be paid to Soliciting Dealers, except that no
Sales Commissions or Due Diligence Fees will be paid with respect to sales of
Interests to (a) officers, directors, or employees of MD or Affiliates thereof,
(b) officers, directors, employees, or registered representatives of a
Soliciting Dealer, or (c) an Affiliate of the Managing Partner. See "Plan of
Distribution."
The subscription period for Interests in Mewbourne Energy Partners
97-A, L.P. will commence on the date of this Prospectus and terminate on
October 31, 1997, unless MD in its sole discretion accelerates or delays the
offering termination date, provided that MD's ability to delay the offering
termination date is subject to its obligation to return the purchase price for
any Interests not invested in the Partnership within any period required by
state securities law and in no event will such termination be delayed beyond
December 31, 1997.
Subscription funds will be deposited in an escrow account at
NationsBank Texas, N.A., Tyler, Texas, or another federally insured institution
designated by MD; provided that upon receipt and clearance of aggregate
subscription funds of $1,000,000 or more from subscribers that MD deems
suitable to be Investor Partners in the Partnership, MD may cause those
subscription funds to be withdrawn from the escrow account and to be deposited
in an account established for the Partnership. A subscriber whose funds are
deposited in the escrow account 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
Investor Partners in the Partnership, interest earned on those funds from the
date those funds cleared the institution at which that account is maintained
and are invested to the date on which subscribers are admitted as Investor
Partners in the Partnership. 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 the Partnership.
As soon as is permitted under the Exchange Act of 1934 (the "Exchange
Act"), the Partnership intends to terminate its reporting obligations under
Section 15(d) of the Act. Section 15(d) generally requires an entity to file
quarterly reports for the first three quarters of its fiscal year and an annual
report. The Partnership will furnish to its Partners an annual report containing
audited financial statements and a report thereon by its independent certified
public accountants and a semiannual report containing unaudited financial
information for the first six months of each calendar year. The Partnership
also intends to furnish to its Partners tax information by March 15 of each
year. See "Summary of Partnership Agreement - Reports to Partners."
MD and its Affiliates will receive Management Fees, reimbursement of
Administrative Costs, reimbursement of Organization and Offering Expenses,
reimbursement of Sales Commissions and Due Diligence Fees paid by MD and
certain other compensation from the Partnership and the related Program. See
"Compensation" and "Participation in
5
(continued from previous page)
Costs and Revenues." See "Participation in Costs and Revenues" for a detailed
discussion of the allocation of costs and revenues among the Investor Partners
and MD.
FOR CONNECTICUT RESIDENTS
INVESTMENT IN THE SECURITIES DESCRIBED HEREIN INVOLVES A HIGH DEGREE OF RISK,
AND ONLY THOSE PERSONS WHO ARE ABLE TO BEAR THE FINANCIAL RISKS SHOULD CONSIDER
PURCHASING SECURITIES.
FOR NEW JERSEY RESIDENTS
FOR NEW YORK RESIDENTS
NEITHER THE ATTORNEY GENERAL OF THE STATE OF NEW YORK NOR THE ATTORNEY GENERAL
OF THE STATE OF NEW JERSEY NOR THE BUREAU OF SECURITIES OF THE STATE OF NEW
JERSEY HAS PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING. ANY
REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
6
TABLE OF CONTENTS
Page
SUMMARY OF OFFERING . . . . . . . . . . . . . . . . 1
The Partnership . . . . . . . . . . . . . . . 1
Investment Objectives . . . . . . . . . . . . 1
Proposed Activities . . . . . . . . . . . . . 2
Risk Factors . . . . . . . . . . . . . . . . . 3
Special Risks of the Partnership . . . . . 3
Risks Pertaining to Oil and Gas
Investments . . . . . . . . . . . . . 4
Tax Risks . . . . . . . . . . . . . . . . 4
Conflicts of Interest . . . . . . . . . . . . 5
Application of Proceeds . . . . . . . . . . . 5
Participation in Costs and Revenues . . . . . 7
Investment as a Limited Partner or General
Partner . . . . . . . . . . . . . . . . . 8
Liability of General Partners . . . . . . 9
Liability of Limited Partners . . . . . . 9
Tax Aspects . . . . . . . . . . . . . . . . 10
Compensation and Reimbursement of Managing
Partner . . . . . . . . . . . . . . . . 10
Management Fee . . . . . . . . . . . . . 11
Administrative Costs . . . . . . . . . . 12
Operator's and Other Compensation . . . 12
Sales Commissions . . . . . . . . . . . 12
Partnership and Program Interest . . . . 13
Rights and Powers of Investor Partners . . . 13
Prior Activities . . . . . . . . . . . . . . 13
Terms of Offering . . . . . . . . . . . . . 14
Subscription for Interests . . . . . . . 14
Suitability Standards . . . . . . . . . 14
How to Subscribe . . . . . . . . . . . . 15
Distribution . . . . . . . . . . . . . . 15
RISK FACTORS . . . . . . . . . . . . . . . . . . 16
Particular Risks Relating to the Interests . 16
Liability of Limited Partners . . . . . 16
Liability of General Partners . . . . . 16
Liability of Joint Working Interest
Owners . . . . . . . . . . . . . . 16
Possibility of Reduction or
Unavailability of Insurance . . . . 16
Sole Reliance on MD for Management . . . 17
Prospects Not Yet Identified or
Selected; No Opportunity to
Evaluate
Prospects . . . . . . . . . . . . . 17
Concentration of Investment Risks . . . 17
Ownership of Interests by Affiliates of
MD . . . . . . . . . . . . . . . . 17
Additional Financing . . . . . . . . . . 17
Uncertainty of Cash Distributions . . . 18
Conflicts of Interest 18
Compensation of Managing Partner and
Affiliates 19
Inside Board of Directors and Other
Family Relationships . . . . . . . 19
Limitations on the Fiduciary Obligations
of the Managing Partner and the
Managing Partner's Responsibility
to Determine the Application of the
Limitations . . . . . . . . . . . . 19
Joint Activities With Others . . . . . . 19
Lack of Liquidity . . . . . . . . . . . 20
Indemnification of MD and Affiliates
Thereof . . . . . . . . . . . . . . 20
Limited Ability to Remove Managing
Partner and Difficulty in Finding a
Successor Management Partner . . . 20
Withdrawal of Partners . . . . . . . . . 20
Dissolution of the Partnership and
Termination of the Drilling Program 21
Ability of the Managing Partner to Cause
Dissolution of the Partnership and
the Drilling Program . . . . . . . 21
Unauthorized Acts of General Partners
Could Be Binding Against the
Partnership . . . . . . . . . . . . 21
General Risks Relating to Oil and Natural
Gas Operations . . . . . . . . . . . . . 21
Speculative Nature of Oil and Gas
Activities . . . . . . . . . . . . 21
The Partnership and the General Partners
Could be Liable for Environmental
Hazards . . . . . . . . . . . . . . 22
Dependence on Future Prices, Supply and
Demand for Oil and Gas . . . . . . 22
Natural Gas Market . . . . . . . . . . . 22
Loss of Partnership Property . . . . . . 22
Competition . . . . . . . . . . . . . . 23
Government Regulation . . . . . . . . . 23
Risks Relating to Limited Partnerships
Generally . . . . . . . . . . . . . . . 23
Lack of Liquidity . . . . . . . . . . . 23
Lack of Substantial Voting Rights . . . 23
Lack of Appraisal Rights . . . . . . . . 23
Tax Risks . . . . . . . . . . . . . . . . . 24
General . . . . . . . . . . . . . . . . 24
Partnership Classification for Tax
Purposes; No IRS Ruling Sought . . 24
Allocations . . . . . . . . . . . . . . 24
(i)
7
Page
----
Passive Activity Limitations . . . . . . 24
Certain Expenditures Not Deductible for
Tax Purposes . . . . . . . . . . . 25
Considerations for Tax-Exempt Investors 25
Tax Shelter Registration . . . . . . . . 25
Current Tax Deductions . . . . . . . . . 25
Conversion of General Partner Interests 26
Tax Liabilities in Excess of Cash
Distributions . . . . . . . . . . . 26
Risks of Borrowings . . . . . . . . . . 26
Percentage Depletion . . . . . . . . . . 26
Farmouts and Backin Interests . . . . . 27
Recapture . . . . . . . . . . . . . . . 27
Audits . . . . . . . . . . . . . . . . . 27
Changes in Federal Income Tax Laws . . . 27
Significance of Tax Aspects . . . . . . 27
DEFINITIONS . . . . . . . . . . . . . . . . . . . 27
TERMS OF THE OFFERING . . . . . . . . . . . . . . 35
General . . . . . . . . . . . . . . . . . . 35
Subscription Refunds . . . . . . . . . . . . 36
Subscription Period . . . . . . . . . . . . 36
Suitability Standards . . . . . . . . . . . 36
General . . . . . . . . . . . . . . . . 36
Minimum Suitability Standards . . . . . 37
Additional Suitability Standards . . . . 37
Additional Requirements . . . . . . . . 38
Subscription Procedure . . . . . . . . . . . 38
Conversion of General Partner Interests . . 40
Right of Presentment . . . . . . . . . . . . 40
ADDITIONAL FINANCING . . . . . . . . . . . . . . 42
General. . . . . . . . . . . . . . . . . . . 42
Limitation on Borrowings. . . . . . . . . . 42
PLAN OF DISTRIBUTION . . . . . . . . . . . . . . 42
INVESTMENT OBJECTIVES . . . . . . . . . . . . . . 43
PROPOSED ACTIVITIES . . . . . . . . . . . . . . . 44
Development Policy . . . . . . . . . . . . . 44
Area of Geographic Concentration . . . . . . 45
Prospect Evaluation . . . . . . . . . . . . 45
Cost Estimates . . . . . . . . . . . . . . . 46
Acquisition of Leases . . . . . . . . . . . 46
Transactions with Affiliates . . . . . . . . 46
Sale of Leases to the Partnership . . . 46
Purchase of Leases from the Partnership 47
Participation by Mr. Mewbourne 48
Farmouts . . . . . . . . . . . . . . . . . . 48
Operations . . . . . . . . . . . . . . . . . 48
Title to Partnership Properties . . . . . . 49
Insurance . . . . . . . . . . . . . . . . . 50
Due Diligence Review . . . . . . . . . . . . 51
The Managing Partner's Policy Regarding
Roll-Up Transactions . . . . . . . . . . 51
Partnership Distributions . . . . . . . . . 52
APPLICATION OF PROCEEDS . . . . . . . . . . . . . 53
PARTICIPATION IN COSTS AND REVENUES . . . . . . . 54
Costs and Revenues . . . . . . . . . . . . . 54
Distributions . . . . . . . . . . . . . . . 56
Capital Accounts . . . . . . . . . . . . . . 56
Allocations of Federal Income Tax Items . . 56
Proportionate Interests of Partners . . . . 57
COMPENSATION AND REIMBURSEMENT . . . . . . . . . 57
Management Fee . . . . . . . . . . . . . . . 58
Partnership and Program Interest . . . . . . 59
Lease and Equipment Purchases from Mewbourne 59
Administrative Costs . . . . . . . . . . . . 59
ESTIMATED DRILLING PROGRAM EXPENSES . . . . . . . 60
Prior Partnerships . . . . . . . . . . . . . 60
Contracts with Mewbourne and Affiliates
Thereof . . . . . . . . . . . . . . . . 61
Compensation as Operator . . . . . . . . . . 61
Past Compensation . . . . . . . . . . . . . 61
MANAGEMENT . . . . . . . . . . . . . . . . . . . 62
OWNERSHIP STRUCTURE OF MEWBOURNE COMPANIES . . . 63
Officers, Directors and Key Employees of MD
and MOC . . . . . . . . . . . . . . . . 64
Key Employees . . . . . . . . . . . . . . . 65
Compensation . . . . . . . . . . . . . . . . 66
Executive Officer . . . . . . . . . . . . . 66
Cash Compensation to Executive Officer . 66
Executive Officer Compensation Pursuant
to Plans . . . . . . . . . . . . . 66
Non-Cash Compensation of Executive
Officer . . . . . . . . . . . . . . 67
Certain Transactions . . . . . . . . . . . . 67
Participation in Drilling Program
Activities . . . . . . . . . . . . 67
CONFLICTS OF INTEREST . . . . . . . . . . . . . . 67
Fiduciary Responsibility of the Managing
Partner . . . . . . . . . . . . . . . . 68
(ii)
8
Page
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Limitations on the Fiduciary Obligations
of the Managing Partner and the
Managing Partner's Responsibility
to Determine the Application of the
Limitations. . . . . . . . . . . . 68
Farmouts . . . . . . . . . . . . . . . . . . 69
Purchase of Leases from the Partnership . . 70
Sale of Leases to the Partnership . . . . . 70
Adjacent Acreage . . . . . . . . . . . . . . 71
Other Activities . . . . . . . . . . . . . . 71
Contracts with Mewbourne and Affiliates . . 72
MOC as Operator . . . . . . . . . . . . . . 72
Ownership of Interests by MD or any
Affiliates . . . . . . . . . . . . . . . 72
PRIOR ACTIVITIES . . . . . . . . . . . . . . . . 73
Prior Partnerships . . . . . . . . . . . . . 73
Previous Drilling Activities . . . . . . . . 74
Payout and Net Cash Tables . . . . . . . . . 75
Tax Deductions and Tax Credits . . . . . . . 77
Reserves and Future Net Revenues of Prior
Programs . . . . . . . . . . . . . . . . 79
TAX ASPECTS . . . . . . . . . . . . . . . . . . . 81
Opinion of Counsel . . . . . . . . . . . . . 81
Partnership Taxation . . . . . . . . . . . . 83
General . . . . . . . . . . . . . . . . 83
Partnership Classification . . . . . . . 83
Taxation of Partners . . . . . . . . . . 84
Allocations . . . . . . . . . . . . . . 85
Elections and Returns . . . . . . . . . 87
Determinations of Partnership Items at
Partnership Level . . . . . . . . . 87
Organization and Offering Expenses,
Sales Commissions and Due Diligence
Fees . . . . . . . . . . . . . . . 87
Management Fee . . . . . . . . . . . . . 87
Administrative Costs . . . . . . . . . . 88
Transferor -- Transferee Prorations . . 88
Conversion of General Partner Interests 88
Special Features of Oil and Gas Taxation . . 89
Lease Acquisition Costs . . . . . . . . 89
Geophysical Costs . . . . . . . . . . . 89
Operating and Administrative Costs . . . 89
Intangible Drilling and Development
Costs . . . . . . . . . . . . . . . 89
Depreciation . . . . . . . . . . . . . . 90
Depletion . . . . . . . . . . . . . . . 90
Passive Activity Loss Limitations . . . 91
Limitations on Interest Deductions . . . 92
For Profit Limitation . . . . . . . . . 93
Basis and At Risk Limitations . . . . . 93
Sale of Property . . . . . . . . . . . . 94
Termination of the Partnership . . . . . 94
Sale of Interests . . . . . . . . . . . 95
Farmouts and Backin Interests . . . . . 96
General Tax Provisions . . . . . . . . . . . 96
Other Tax Consequences . . . . . . . . . . . 96
Alternative Minimum Tax . . . . . . . . 96
Tax Shelter Registration . . . . . . . . 97
Compliance Provisions . . . . . . . . . 97
Consistency Requirements . . . . . . . . 97
Nominees . . . . . . . . . . . . . . . . 98
Social Security Benefits; Self-
Employment Tax . . . . . . . . . . 98
Investment by Tax-Exempt Entities . . . 98
State Law Tax Aspects . . . . . . . . . 99
Anticipated Federal Income Tax Deductions . 99
Individual Tax Advice Should be Sought . . . 99
COMPETITION, MARKETS AND REGULATION . . . . . . . 100
Competition . . . . . . . . . . . . . . . . 100
Markets For Sale Of Production . . . . . . . 100
Regulation Of Production . . . . . . . . . . 101
Natural Gas Prices . . . . . . . . . . . . . 101
Oil and Liquid Hydrocarbon Price Controls . 101
Possible Legislation . . . . . . . . . . . . 101
Regulation of the Environment . . . . . . . 101
LIABILITY OF INVESTOR PARTNERS . . . . . . . . . 102
General Partners . . . . . . . . . . . . . . 102
Limited Partners . . . . . . . . . . . . . . 103
SUMMARY OF PARTNERSHIP AGREEMENT AND PROGRAM
AGREEMENT . . . . . . . . . . . . . . . . . 104
Term . . . . . . . . . . . . . . . . . . . . 104
Rights and Powers of Partners . . . . . . . 104
Investor Partners . . . . . . . . . . . 104
Limited Partners . . . . . . . . . . . . 105
General Partners . . . . . . . . . . . . 105
Rights and Powers of the Managing Partner . 106
Indemnification of MD and Affiliates Thereof 106
Right of Presentment . . . . . . . . . . . . 107
Assignability of Interests . . . . . . . . . 107
Removal or Withdrawal . . . . . . . . . . . 108
Dissolution, Liquidation and Termination . . 108
Reconstitution of the Partnership . . . . . 110
Amendments . . . . . . . . . . . . . . . . . 110
Reports to Partners . . . . . . . . . . . . 111
(iii)
9
Page
----
Access to List of Investor Partners . . . . 111
Power of Attorney . . . . . . . . . . . . . 112
LEGAL OPINIONS . . . . . . . . . . . . . . . . . 112
EXPERTS . . . . . . . . . . . . . . . . . . . . . 112
ADDITIONAL INFORMATION . . . . . . . . . . . . . 112
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
(iv)
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11
SUMMARY OF OFFERING
This summary of offering is qualified in its entirety by the more
detailed information appearing throughout this Prospectus. For definitions of
certain terms used in this Prospectus, see "Definitions." FOR A DISCUSSION OF
CERTAIN MATTERS THAT SHOULD BE CONSIDERED IN EVALUATING AN INVESTMENT IN THE
INTERESTS, SEE "RISK FACTORS."
THE PARTNERSHIP
Mewbourne Development Corporation ("MD") is offering to qualified
investors an aggregate of up to 2,000 ($2,000,000) limited partner interests
("Limited Partner Interests") and 8,000 ($8,000,000) general partner interests
("General Partner Interests") (Limited Partner Interests and General Partner
Interests are collectively referred to as "Interests") in Mewbourne Energy
Partners 97-A, L.P., a limited partnership (the "Partnership") formed by MD
under the Delaware Act. The minimum offering amount for the Partnership is
1,000 Interests ($1,000,000) with the maximum offering amount being 10,000
Interests ($10,000,000). MD will act as the sole managing partner of the
Partnership (the "Managing Partner"). As initially formed, the Partnership has
a single limited partner who will make a capital contribution of $100, which
will be refunded to that limited partner when he withdraws from the Partnership
at the time the Investor Partners are admitted to the Partnership. The
Partnership will not commence operations or have any material assets or
liabilities prior to the termination of the subscription period for Interests
in the Partnership.
The subscription period for Interests in Mewbourne Energy Partners
97-A, L.P. will commence on the date of this Prospectus and terminate on
October 31, 1997, unless MD in its sole discretion accelerates or delays the
offering termination date, provided that MD's ability to delay the offering
termination date is subject to its obligation to return the purchase price for
any Interests not invested in the Partnership within any period required by
state securities law and in no event will such termination be delayed beyond
December 31, 1997.
The Partnership will not be funded with less than $1,000,000 in
Capital Contributions from Investor Partners. If, at the end of the
subscription period for Interests in the Partnership, subscription funds of
less than $1,000,000 have been received by MD, such funds will be promptly
returned to subscribers.
The Managing Partner and Affiliates thereof are eligible to subscribe
for Interests, provided that any Interests so purchased must be purchased for
investment purposes only and not for the purpose of resale or any further
public distribution. It is the Managing Partner's current intention that the
Managing Partner and/or an Affiliate thereof will subscribe for such number of
Interests as may be necessary for the Partnership to receive the minimum
subscription amount of 1,000 Interests ($1,000,000). The number of Interests
in the Partnership that may be purchased by the Managing Partner and/or
Affiliates thereof is not subject to any specific maximum limitations but
depends upon the number of subscriptions for Interests received and accepted
from non-Affiliates.
INVESTMENT OBJECTIVES
The Partnership will participate in a program consisting of the
acquisition, drilling and development of oil and gas Prospects (the "Drilling
Program") pursuant to a Program Agreement with MD and its Affiliate Mewbourne
Oil Company ("MOC"). The primary investment objective of the 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 certain tax benefits, consisting
principally of deductions for intangible drilling costs, depletion, and
depreciation. To the extent that the operations of the 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 Program Agreement provides that MOC, in its capacity as manager
of the Drilling Program (the "Program Manager"), will have the exclusive power
and authority to act on behalf of the 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 Program
Agreement. See "Management."
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The Drilling Program is intended to be a partnership for income tax
purposes only. See "Tax Aspects -- Partnership Taxation -- Partnership
Classification." For all other purposes, the Drilling Program is intended to
be an agreement among MOC in its capacity as Program Manager and MD and the
Partnership (the Partnership and MD being collectively referred to as the
"Participants") as co-owners or tenants-in-common of undivided interests in the
oil and gas properties subject to the Program Agreement. The Program Agreement
sets out the rights, duties, and obligations of MOC and the Participants in the
Drilling Program.
PROPOSED ACTIVITIES
The primary objective of the 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 participation in the Drilling Program
formed and managed by the Program Manager. Although subject to change based on
subsequent events and conditions, it is currently anticipated that the
Partnership will, through the Drilling Program, conduct oil and gas drilling
and development activities on Prospects in the Permian and Anadarko Basins,
none of which is yet identified. It is currently anticipated that the
Partnership's activities through the Drilling Program will primarily focus upon
activities relating to Development Wells rather than Exploratory Wells.
However, at the discretion of MD, up to 20% of the Partnership's Capital
Contributions may be expended in connection with activities relating to
Exploratory Wells. See "Proposed Activities." Under certain circumstances, MD
may determine that it is in the best interest of the Partnership to conduct
activities in other geographic areas.
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, MOC
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 32 years, MOC and its Affiliates have conducted
operations throughout the Permian Basin. MOC currently operates approximately
140 wells in the Permian Basin and MOC and its Affiliates have drilled
approximately 145 commercially productive oil and gas wells in the Permian
Basin. 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 the Partnership will, through the 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
MOC in this region of the Permian Basin are classified as gas wells but produce
both oil and gas. However, MOC 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.
Production in the Anadarko Basin ranges from several hundred feet to
over 26,000 feet in depth. Over the past 20 years, MOC and its Affiliates have
drilled approximately 325 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. MOC currently operates approximately
196 wells in the Anadarko Basin. It is anticipated that the Partnership will,
through the Drilling Program, conduct a portion of its drilling and development
activities along this area of Western Oklahoma and the Texas Panhandle. A
majority of the wells drilled by MOC over the past 20 years in this region of
the Anadarko Basin have been classified as gas wells but produce both oil and
gas. However, MOC and its Affiliates have drilled a number of wells in this
area which have been classified as oil wells.
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13
MOC and affiliates have drilled approximately 606 wells since 1965 and
completed approximately 470 commercially productive wells for an overall success
rate of 77% which includes the drilling of both Exploratory Wells and
Development Wells. However, over the 32 year history, the vast majority of wells
drilled have been Development Wells. With respect to the 10 partnerships
sponsored by Affiliates of the Managing Partner since 1992, such partnerships
have participated in a total of approximately 81 Development Wells and completed
approximately 72 commercially productive wells for an overall success rate of
89%. These historical results are not indicative of the results that may be
achieved by the Partnership 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.
RISK FACTORS
Investment in the Interests involves numerous risks, including the
risks of oil and gas drilling, the risks associated with investments in oil and
gas drilling programs, and significant tax considerations. See "Risk Factors"
and "Tax Aspects." Each prospective investor should carefully consider a
number of significant risk factors inherent in and affecting the business of
the Partnership, including the following:
Special Risks of the Partnership:
o The activities to be undertaken by the Partnership for the
development of oil and natural gas reserves involve the
possibility of a total loss of an investment in the Partnership.
o Investors who invest as General Partners in the Partnership will
have unlimited liability for all obligations and liabilities of
creditors and claimants arising from the conduct of operations
by the Partnership and if such liabilities exceed the
Partnership's assets and insurance and the assets of the
Managing Partner (which has agreed to indemnify the General
Partners), the General Partners could be liable for such excess.
o It is possible that some or all of the insurance coverage which
the Partnerships has available may become unavailable or
prohibitively expensive. In such event, the investors could be
subject to greater risk of loss of their investment since less
insurance would be available to protect from casualty losses.
o The Managing Partner will have the exclusive management and
control of all aspects of the business of the Partnership. No
investor will be permitted to take part in the management or in
the decision-making of the Partnership. Accordingly, the
investors will be entirely dependent upon the management skills
and expertise of the Managing Partner.
o No Prospects have been selected for acquisition by the
Partnership. Therefore, no investor will have an opportunity to
evaluate any of the Prospects before investing in the
Partnership.
o To the extent that less subscription proceeds are raised with
respect to the Partnership, the Partnership will be able to drill
fewer Program Wells, as a result of which there will be less
diversification of the investors' investment and less ability of
the Partnership to spread the risk of loss. Even if substantially
more than the minimum offering amount is raised, the Partnership
must rely on MD for diversification. The number of Program Wells
to be drilled cannot be estimated because Prospects have not been
selected and the amount of subscription proceeds available to the
Partnership is not determinable at this time.
o It is the current intention of the Managing Partner that the
Managing Partner and/or an Affiliate thereof will purchase
Interests in the Partnership, if necessary, to assure that the
minimum aggregate subscription amount for the Partnership is
reached. The number of Interests that may be purchased by the
Managing Partner and/or Affiliates thereof is not subject to any
specific maximum limitations but depends upon the number of
subscriptions for Interests received and accepted from
non-Affiliates. subject to certain limitations, Interests owned
by the Managing Partner or an Affiliate thereof will have voting
rights under the Partnership Agreement, and therefore, has the
effect of diluting the voting power of the Investor Partners in
the Partnership.
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 Investor
Partners.
o The Partnership is subject to various conflicts of interest which
are inherent in its relationship with the Managing Partner,
including: the Managing Partner currently manages other oil and
gas drilling programs; the Managing Partner decides which
Prospects the Partnership will acquire; and an Affiliate of the
Managing Partner will act as operator of the Partnership's
properties. 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 Managing Partner and its Affiliates will receive fees and
compensation throughout the life of the Partnership. Inherent in
the fee and compensation arrangements are the possibility of
conflicts between the best interests of the investors and the
best interests of the Managing Partner. The Managing Partner may
have incentives to act in its best interests rather than in the
best interest of the Investor Partners.
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 Investor Partners. The fiduciary standards in the
Partnership Agreement could be less advantageous to the
3
14
Investor Partners and more advantageous to the Managing Partner
than the corresponding fiduciary standards otherwise applicable
under Delaware law, specifically:
-- the Partnership may indemnify and hold harmless the
Managing Partner and its Affiliates;
-- the Managing Partner is required to devote only so
much of its time as is necessary to manage the
affairs of the Partnership;
-- the Managing Partner and its Affiliates may conduct
business with the Partnership in a capacity other
than as a Sponsor;
-- in certain circumstances, 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; and
-- the Managing Partner may manage multiple programs
simultaneously.
o Investors in the Partnership must assume the risks of an illiquid
investment. Investors may be unable to sell their Partnership
interests because there will be no market for the Interests.
Risks Pertaining to Oil and Gas Investments:
o Oil and gas drilling is a highly speculative activity. There is
a possibility that Program Wells drilled may not produce oil or
natural gas. Even Program Wells which are productive may not
produce oil or natural gas in sufficient quantities (or such
production may not be sold at sufficient prices) to return all
or a significant portion of the investment.
o Future oil and natural gas prices are unpredictable and can be
volatile. If oil or natural gas prices decline, the
Partnership's distributions, if any, to Investor Partners will be
adversely affected. The high and low monthly average price
recorded by MOC for gas produced and sold during 1996 was $3.54
per mmbtu and $1.59 mmbtu, respectively. The high and low average
monthly posted price for crude oil received by MOC during 1996
was $23.38 per barrel and $17.18 per barrel, respectively.
o Access to markets for oil and natural gas produced by Program
Wells may be restricted as a result of many factors, including
distances to existing pipelines, an oversupply of crude oil and
natural gas, changing demand from weather conditions, and
regulations set by federal and state governmental authorities,
thus impeding or delaying revenues to the Partnership.
Tax Risks:
o Investment as a General Partner may be less advisable for a
person whose current taxable income from sources other than
passive trade or business activities (e.g. salary, portfolio or
active business income) is not substantial or is not subject to
high marginal Federal income tax rates.
o Investment as a Limited Partner may be less advisable for a
person who does not have substantial current taxable income from
passive trade or business activities.
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15
o Federal income tax payable by an Investor Partner by reason of
his distributive share of Partnership income for any year may
exceed the cash distributed to such Investor Partner by the
Partnership.
CONFLICTS OF INTEREST
The Managing Partner is accountable to the Partnership as a fiduciary
and, as such, will attempt to resolve conflicts of interest equitably to the
extent possible. Conflicts of interest which exist or may occur include the
following:
o The Managing Partner currently manages oil and natural gas
drilling programs similar to the Partnership, and in the
future the Managing Partner is expected to sponsor and manage
additional oil and natural gas drilling programs similar to
the Partnership. As a result, the Managing Partner could have
a conflict of interest in allocating the time of its personnel
among the various partnerships or in deciding which
partnership will acquire a particular property.
o The Managing Partner and its Affiliates may sell Leases and
other property to the Partnership, and the Managing Partner
would be subject to a conflict of interest in determining the
price to be paid by the Partnership to the Managing Partner in
such a transaction.
o An Affiliate of the Managing Partner is expected to act as the
operator for most, if not all, of the Partnership's wells,
pursuant to the Operating Agreement, the terms of which have
not been negotiated by non-Affiliated persons.
Although the conflicts of interest summarized above are the principal conflicts
of interest anticipated, other conflicts of interest could also develop. See
"Conflicts of Interest."
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 Investor Partners. As a result of
these provisions in the Partnership Agreement, the Investor Partners may find
it more difficult to hold the Managing Partner responsible for not acting in
the best interests of the Partnership and its Investor Partners than if the
fiduciary standards of the otherwise applicable Delaware law governed the
situation. See "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."
APPLICATION OF PROCEEDS
Interests in the Partnership may be sold in an aggregate amount from
$1,000,000 to $10,000,000. There is no deduction from the sales proceeds for
Organization and Offering Expenses, Sales Commissions, and Due Diligence Fees
and, therefore, all of such sales proceeds will be available to the Partnership
for the Partnership's operations; provided, however, that the Partnership shall
have a reimbursement obligation, which shall be without recourse to the
Investor Partners, in respect of any amounts advanced by the Managing Partner,
or any Affiliate thereof, in respect of Organization and Offering Expenses,
Sales Commissions and Due Diligence Fees. For purposes of the Partnership's
reimbursement obligation, the Organization and Offering Expenses for the
Partnership shall be an amount equal to 1% of the Capital Contributions
initially made by Investor Partners to the Partnership in exchange for their
respective Interests. The Managing Partner believes that the actual
Organization and Offering Expenses incurred in connection with the Partnership
will exceed 1% of the maximum Capital Contributions that may be received by the
Partnership. Any Organization and Offering Expenses in excess of such 1% shall
be borne by the Managing Partner and shall not be reimbursed by the
Partnership. See "Application of Proceeds" and "Participation in Costs and
Revenues."
MD estimates that of the total funds available to the Partnership for
the acquisition of interests in Prospects and the drilling and completion of
wells thereon, and of each individual $1,000 Interest, approximately 15% to 25%
will be expended for Lease Acquisition Costs of Prospects and approximately 75%
to 85% will be expended for drilling and well completion costs. These
percentages are estimates only, and no assurance can be given that such
percentages will be actually realized or that variations in the percentages
will not be significant to the Partnership.
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16
The following table shows the calculation of the maximum and minimum
amounts which will be available for Drilling Program operations:
MAXIMUM MINIMUM
CAPITAL CAPITAL
------- -------
Capital Contributions of Investor Partners . . . $10,000,000 $1,000,000
Managing Partner's Capital Contribution(1) . . . 101,010 10,101
Initial Partnership Capital and Total Partnership
Funds Available for Drilling Program Operations . 10,101,010(2) 1,010,101(2)
Plus:
Contributions of MD as a Participant in the
Drilling Program . . . . . . . . . . . . . . . . 208,269(3) 20,827
TOTAL FUNDS AVAILABLE FOR DRILLING PROGRAM
OPERATIONS . . . . . . . . . . . . . . . . . . . $10,309,279 $1,030,928
(1) Represents the minimum contribution required of the Managing Partner
under the terms of the Partnership Agreement. The Managing Partner
will contribute to the capital of the Partnership upon the admission
of its Investor Partners cash in an amount equal to 1.010101% of the
Capital Contributions of the Investor Partners and subsequently will
contribute such additional amounts in cash as may be necessary to pay
the costs and expenses allocated to the Managing Partner under the
terms of the Partnership Agreement to the extent revenues allocated to
the Managing Partner are not available for the payment of such costs
and expenses.
(2) The Managing Partner, or an Affiliate thereof, shall advance on behalf
of the Partnership the amount of all Organization and Offering
Expenses, Sales Commissions and Due Diligence Fees attributable to the
Partnership. For purposes of the Partnership's reimbursement
obligation, the Organization and Offering Expenses for the Partnership
shall be an amount equal to 1% of the Capital Contributions initially
made by Investor Partners to the Partnership in exchange for their
respective Interests and such reimbursable Organization and Offering
Expenses range from a low of $10,000 (in the case of the Partnership
having the minimum capital of $1,000,000) to a high of $100,000 (in
the case of the Partnership having the maximum capital of
$10,000,000). The amount of reimbursable Sales Commissions and Due
Diligence Fees for the Partnership range from a low of $85,000 (in the
case of the Partnership having the minimum capital of $1,000,000) to a
high of $850,000 (in the case of the Partnership having the maximum
capital of $10,000,000). The Partnership shall reimburse the Managing
Partner the amount of such advanced Organization and Offering
Expenses, Sales Commissions and Due Diligence Fees, plus interest on
the unreimbursed amount at a per annum rate of interest equal to the
Base Rate calculated commencing as of the date that the offering of
Interests in the Partnership closes, only from funds which would
otherwise be available for distribution to the Partners in the
Partnership. Such reimbursement shall not be made from Capital
Contributions of the Investor Partners. See "Participation in Costs
and Revenues."
(3) Represents the amount of Lease Acquisition Costs and Drilling and
Completion Costs allocated to MD as a Participant under the terms of a
Program Agreement (not including any such costs which would be
allocated to MD under the terms of the Partnership Agreement).
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PARTICIPATION IN COSTS AND REVENUES
The combination of the allocation provisions contained in the
Partnership Agreement and the related Program Agreement results in aggregate
allocations of revenues and costs, and income and gain relating thereto, to the
Investor Partners in the Partnership and to MD on a consolidated basis as set
forth in the table below:
INVESTOR
PARTNERS(1) MD
----------- --
Participation in Revenues:
-------------------------
Revenues from operations(2) . . . . . . . . . . . . . . . . . . . . . . . 87% 13%
Participation in Costs:
----------------------
Reimbursement Obligation for Advanced Organization and Offering Expenses,
excluding Sales Commissions and Due Diligence Fees(3) . . . . . . . 99% 1%
Reimbursement Obligation for Advanced Sales Commissions and Due Diligence
Fees(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99% 1%
Management Fee(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99% 1%
Operating Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87% 13%
Administrative Costs(5) . . . . . . . . . . . . . . . . . . . . . . . . . 87% 13%
Reporting and Legal Expenses . . . . . . . . . . . . . . . . . . . . . . 87% 13%
Lease Acquisition Costs . . . . . . . . . . . . . . . . . . . . . . . . . 97% 3%
Drilling and Completion Costs . . . . . . . . . . . . . . . . . . . . . . 97% 3%
All other Direct Costs(6) . . . . . . . . . . . . . . . . . . . . . . . . 87% 13%
(1) The allocations in the table result generally from the combined effect
of the allocation provisions in the Partnership Agreement and the
Program Agreement. For example, under the Program Agreement, Lease
Acquisition Costs are allocated 97.979798% to the Partnership and
2.020202% to MD. The 97.979798% portion of these costs allocated to
the Partnership, when passed through to the Partnership, is further
allocated 99% to the Investor Partners and 1% to the Managing Partner.
In this manner the Investor Partners are allocated 97% of such costs
and MD is allocated 3% of such costs.
(2) The following revenues are allocated differently: Interest earned on
Capital Contributions, proceeds from disposition of depreciable
property and proceeds from disposition of depletable oil and gas
properties. See "Participation in Costs and Revenues."
(3) The Managing Partner, or an Affiliate thereof, shall advance on behalf
of the Partnership the amount of all Organization and Offering
Expenses, Sales Commissions and Due Diligence Fees attributable to the
Partnership. The Partnership shall reimburse the Managing Partner the
amount of such advanced Organization and Offering Expenses, Sales
Commissions and Due Diligence Fees, plus interest on the unreimbursed
amount at a per annum rate of interest equal to the Base Rate
calculated commencing as of the date that the offering of Interests in
the Partnership closes, only from funds which would otherwise be
available for distribution to the Partners in the Partnership. For
purposes of the Partnership's reimbursement obligation, the
Organization and Offering Expenses, Sales Commissions and Due
Diligence Fees for the Partnership shall not exceed an amount equal to
1%, 8% and .5% respectively, of the Capital Contributions initially
made by Investor Partners to the Partnership in exchange for their
respective interests. Such reimbursement shall not be made from
Capital Contributions of the Investor Partners. The timing and amount
of the reimbursement payments shall be determined in the discretion of
the Managing Partner; provided that the total amount of all
reimbursement payments made by the Partnership during a particular
Partnership Year of the Partnership shall not exceed an amount
sufficient to amortize the original principal amount of such
advancement plus accrued interest on the outstanding principal amount
thereof in five equal annual installment payments assuming that each
such installment would be due on the anniversary date of the date that
Investor Partners were first admitted to the Partnership; provided
further that to the extent that the Partnership has insufficient
distributable funds during a particular Partnership Year to fully
amortize the reimbursement obligation payable during such Partnership
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Year, then the amount of such unpaid reimbursement obligation shall be
carried forward and payable in the next succeeding Partnership Year.
The advancement of Organization and Offering Expenses, Sales
Commissions and Due Diligence Fees to the Partnership and such
Partnership's reimbursement obligation shall be without recourse to
the Investor Partners and shall solely be an obligation of the
Partnership. Such reimbursement shall not be made from Capital
Contributions of the Investor Partners and the Managing Partner or
Affiliate thereof making the advance shall bear the risk that the
Partnership will have sufficient funds to ultimately reimburse such
advancement.
(4) In consideration for services to be rendered by the Managing Partner
in managing the business of the Partnership, the Partnership during
each of the initial five Partnership Years of the Partnership shall
pay to the Managing Partner a Management Fee in an amount equal to
1.1% of all Capital Contributions to the Partnership initially made by
the Investor Partners in exchange for their respective Interests in
the Partnership as set forth in the Subscription Agreements. The
Management Fee payable during a particular Partnership Year shall not
be deducted from the Capital Contributions of the Investor Partners,
but shall be paid by the Partnership in monthly or other periodic
installments from funds which would otherwise be available for
distribution to the Partners in the Partnership during such
Partnership Year, and in such amounts as may be determined in the
discretion of the Managing Partner. To the extent that the
Partnership has insufficient distributable funds during a particular
Partnership Year (after the payment of the reimbursement of advanced
Organization and Offering Expenses, Sales Commissions and Due
Diligence Fees) to fully pay the amount of the Management Fee payable
during such Partnership Year, then the amount of such unpaid
Management Fee shall be carried forward and payable in the next
succeeding Partnership Year.
(5) Administrative Costs incurred by MOC or an Affiliate thereof in
managing and conducting the business and affairs of the Partnership
and its Drilling Program will be allocated 87% to the Investor
Partners and 13% to MD. The amount of Administrative Costs that are
reimbursed by the Partnership shall be 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. Regardless of the
actual amount of Administrative Costs incurred by the Managing Partner
or the Program Manager in connection with the affairs of the
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 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 MOC.
(6) All other Direct Costs will be allocated 87% to the Investor Partners
and 13% to MD.
See "Participation in Costs and Revenues" for a description of the
allocation of all costs and revenues among the Investor Partners and MD.
INVESTMENT AS A LIMITED PARTNER OR GENERAL PARTNER
Investors have the option to invest in the Partnership as a Limited
Partner or General Partner. Although the allocations of costs and revenues
relating to the Partnership's drilling activities to an investor will be the
same regardless of whether that investor elects to become a Limited Partner or
a General Partner of the Partnership, an investor who elects to become a
General Partner may experience economic and tax consequences different from
those he would experience if he were to elect to become a Limited Partner due
to differences in the legal obligations and tax treatment of General Partners
and Limited Partners. See "-- Liability of Limited Partners" and "-- Liability
of General Partners" immediately below. 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. MD
generally will receive the same tax benefits and assume the same obligations as
the General Partners.
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Liability of General Partners. By law, each General Partner is
jointly and severally liable for the obligations of the Partnership.
Furthermore, because the Partnership will own a Working Interest in Leases in
which the Participants (and likely others) own Working Interests, the
Partnership, and therefore its General Partners, could be liable for the
obligations of all such joint Working Interest owners. However, MD will
indemnify each General Partner from any liability in excess of such General
Partner's share of the Partnership's undistributed assets. See "Risk Factors
- -- Particular Risks Relating to the Interests -- Liability of Joint Working
Interest Owners." MD will also take, or cause its Affiliates to take, the
following steps to reduce the risk that the obligation of a General Partner
could exceed the amount of his Capital Contribution to the Partnership:
(a) MOC will maintain insurance coverage in an aggregate
amount equal to approximately $50,000,000 which will be obtained
against third party liabilities which may arise due to drilling
activities and against losses of equipment owned by the Partnership or
MOC and its other Affiliates. See "Proposed Activities -- Insurance"
for a more detailed description of the insurance policies maintained
by MOC.
(b) It is anticipated that drilling activities of the
Partnership will be conducted in the medium depths (i.e. 3,000 to
13,000 feet) of the Northwest Channel and the shelf of the Delaware
and Midland Basins geological sub-regions of the Permian Basin and the
shelf of the Anadarko Basin where the probability of encountering
severely over-pressured formations and other hazards associated with
drilling activities is less likely. MOC and its Affiliates have
drilled approximately 606 wells in the 32 years since 1965, and,
except for one well drilled in 1982 as to which a downhole blowout
occurred (resulting in claims of approximately $923,202 which were
fully insured subject to the applicable deductible), MOC and its
Affiliates have not experienced any material explosion, fire or
similar hazard with respect to any of these wells.
(c) Mewbourne's staff has extensive experience in
estimating drilling costs, which will minimize the possibility of cost
overruns. See "Proposed Activities -- Cost Estimates." Furthermore,
prior to commencing drilling activities for the Drilling Program, MOC
intends to enter into drilling contracts with non- Affiliates fixing
the footage drilling rates, and in certain circumstances the
stimulation costs to be incurred by the Drilling Program. In
addition, after approximately 90% of the Partnership's funds have been
expended, drilling of Program Wells by the Partnership will be
conducted on a sequential basis (i.e., not more than one drilling
operation will be conducted contemporaneously), to further reduce the
likelihood of aggregate cost overruns. In order to better control
cost and assure the Drilling Program of the availability of services,
it is possible that the Program Manager will enter into prepaid
drilling contracts with non-Affiliates where it is feasible for the
Drilling Program to do so.
(d) Following completion of substantially all of the
Partnership's drilling activities (which MD anticipates will occur
within approximately 8 to 12 months after the funding of the
Partnership), MD intends to convert the General Partner Interests in
the Partnership held by General Partners into Limited Partner
Interests. While those General Partners will continue to have the
liability of general partners for occurrences prior to the conversion,
they generally will have the lesser liability of limited partners
under Delaware law with respect to obligations and liabilities
relative to activities after the conversion.
Liability of Limited Partners. Assuming that a Limited Partner does
not take part in the control of the business of the Partnership, his liability
under the Delaware Act will be limited, subject to certain possible exceptions,
generally to the amount of capital he has contributed to the Partnership. Under
the laws of the states where MD anticipates the Partnership will conduct
substantially all of its business, the liability of Limited Partners will be
governed by the Delaware Act. See "Liability of Investor Partner--Limited
Partners" and "Risk Factors -- Particular Risks Relating to the Interests --
Liability of Limited Partners."
The Partnership Agreement does not authorize additional assessments,
either mandatory or voluntary, of any Investor Partner.
See "Liability of Investor Partners -- General Partners" for a more detailed
discussion of the liabilities assumed by General Partners and the
risk-minimizing procedures to be implemented by MD.
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TAX ASPECTS
MD has received an opinion of counsel addressing the material federal
income tax consequences of an investment in Interests. See "Tax Aspects --
Opinion of Counsel." Such opinion of counsel includes an opinion to the effect
that the Partnership and Program will each be treated as a partnership for
federal income tax purposes, and that the passive activity loss limitations of
Section 469 of the Code should not apply to General Partners (prior to any
conversion of the General Partner Interests to Limited Partner Interests) to
the extent that the Partnership drills or operates wells pursuant to Working
Interests. As a result, each General Partner should be entitled to deduct
currently his share of intangible drilling and development costs and other
expenses allocable to the drilling or operation of wells without regard to the
passive activity loss limitations (but subject to certain basis and "at risk"
limitations); such deductions or losses can be used to offset salary,
portfolio, or active business income. A Limited Partner in the Partnership,
however, will be subject to the passive activity loss limitations and,
consequently, will be entitled to deduct his share of Partnership deductions or
losses only against his share of Partnership income or income from other
"passive activities"; such deductions or losses cannot be used to offset
salary, portfolio, or active business income until the Limited Partner disposes
of his entire interest in the Partnership. See "Tax Aspects -- Special
Features of Oil and Gas Taxation -- Passive Activity Loss Limitations" and "--
Basis and At Risk Limitations."
MD expects that an amount equal to approximately 65% to 75% of an
Investor Partner's Capital Contribution to the Partnership will be deductible
for federal income tax purposes either in the tax year in which such Capital
Contribution is made or in the subsequent tax year, subject to application of
the passive activity loss limitations with respect to Limited Partners (and
certain basis and "at risk" limitations). The percentage of Capital
Contributions of a Limited Partner who is subject to the passive activity loss
limitations that will be deductible in those years will depend largely upon
that Limited Partner's tax situation independent of his investment in
Interests, such as that Limited Partner's net income (if any) from other
passive activities, and is thus impossible to estimate. THE ABOVE ESTIMATE IS
BASED UPON CERTAIN ASSUMPTIONS CONCERNING THE ANTICIPATED OFFERING TERMINATION
DATE FOR THE PARTNERSHIP, MD'S PREVIOUS EXPERIENCE CONCERNING THE COST OF
DRILLING AND COMPLETING WELLS AND CURRENT FEDERAL INCOME TAX LAW. ACCORDINGLY,
THERE CAN BE NO ASSURANCE THAT THE ESTIMATED PERCENTAGES OF INVESTOR PARTNERS'
CAPITAL CONTRIBUTIONS WILL ACTUALLY BE DEDUCTIBLE FOR FEDERAL INCOME TAX
PURPOSES IN ANY YEAR. See "Tax Aspects -- Anticipated Federal Income Tax
Deductions" for a complete discussion of the assumptions on which the above
estimates are based.
COMPENSATION AND REIMBURSEMENT OF MANAGING PARTNER
The terms of the Partnership Agreement were not negotiated at arm's
length. Pursuant to the Partnership Agreement, MD will receive certain fees and
reimbursement of expenses as the Managing Partner, and pursuant to the Program
Agreement, MOC will receive certain fees and reimbursements of expenses as the
Program Manager and as operator, which may be deemed to be compensation. The
reimbursements of fees and expenses pursuant to the Partnership Agreement and
Program Agreement may be substantial. None of the compensation to be received by
MD, in its capacity as Managing Partner, or MOC, in its capacity as Program
Manager or as operator, were derived as a result of arm's length negotiations.
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The following is a tabular presentation of the items of compensation
and reimbursement which may be received by MD and its Affiliates from the
Partnership:
Form of Compensation/
Reimbursement Amount
------------- ------
Compensation - Management Fee Indeterminate - annual compensation during each of the
initial five Partnership Years of the Partnership and
based upon 1.1% of the Capital Contributions by Investor
Partners to the Partnership and which shall be paid in
periodic installments from funds which would otherwise
be available for distribution to the Partners of the
Partnership.
Reimbursement - Organization and Offering Expense, Sales The Partnership shall be obligated to reimburse the
Commissions and Due Diligence Fees amount of Organization and Offering Expenses, Sales
Commissions and Due Diligence Fees advanced by MD or an
Affiliate of MD (which shall not exceed 9.5% of the
Capital Contributions of the Investor Partners to such
Partnership) from funds which would otherwise be
available for distribution to the Partners. See
"Participation in Costs and Revenues."
Compensation - Organization and Offering Expenses, Sales In addition to the reimbursement of Organization and
Commissions and Due Diligence Fees Offering Expenses, Sales Commissions and Due Diligence
Fees described above, MD or its Affiliate, as
applicable, shall earn interest on the unreimbursed
amount of Organization and Offering Expenses, Sales
Commissions and Due Diligence Fees at a per annum rate
of interest equal to the Base Rate from funds which
would otherwise be available for distribution to the
Partners.
Reimbursement - Administrative Costs Indeterminate - reimbursement based upon allocation made
in accordance with generally accepted accounting
principles - generally amount of reimbursement for a
particular calendar year may not exceed greater of (X)
3.5% of the Partnership's gross revenues or (Y) $50,000
plus .25% of Capital Contributions.
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 Program Indeterminate - based upon difference between MD's share
Participation of Partnership and Drilling Program revenues and MD's
share of Partnership and Drilling Program costs.
Compensation - Lending of funds to the 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 other Indeterminate - based upon competitive prices.
services
Management Fee. In consideration for services to be rendered by the
Managing Partner in managing the business of the Partnership, the Partnership
during each of the initial five Partnership Years shall pay to the Managing
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Partner a Management Fee in an amount equal to 1.1% of all Capital
Contributions to the Partnership initially made by the Investor Partners in
exchange for their respective Interests in the Partnership as set forth in the
Subscription Agreements. The Management Fee payable during a particular
Partnership Year shall not be deducted from the Capital Contributions of the
Investor Partners, but shall be paid by the Partnership in monthly or other
periodic installments from funds which would otherwise be available for
distribution to the Partners in the Partnership during such Partnership Year,
and in such amounts as may be determined in the discretion of the Managing
Partner. To the extent that the Partnership has insufficient distributable
funds during a particular Partnership Year (after the payment of the
reimbursement of advanced Organization and Offering Expenses, Sales Commissions
and Due Diligence Fees) to fully pay the amount of the Management Fee payable
during such Partnership Year, then the amount of such unpaid Management Fee
shall be carried forward and payable in the next succeeding Partnership Year.
Administrative Costs. MD, as Managing Partner of the Partnership, and
MOC, as Program Manager of the 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 the
Partnership's interest in the Drilling Program or of the Partnership, as
applicable. The amount of Administrative Costs that are reimbursed by the
Partnership shall be allocated to the Partnership 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. Regardless of the actual
amount of Administrative Costs incurred by the Managing Partner or the Program
Manager in connection with the affairs of the 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
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 MOC.
Administrative Costs incurred by MOC or an Affiliate thereof in
managing and conducting the business and affairs of the Partnership and the
Drilling Program will be allocated 87% to the Investor Partners and 13% to MD.
MD anticipates that the amount of Administrative Costs for the
Partnership for 1997 will range between $20,000 to $40,000. These expenses are
only estimates and they may vary due to the amount of capital raised, the date
the Partnership is funded, the costs actually incurred in the operation of the
Partnership and the Program, and inflationary trends. Such amount includes
Administrative Costs that MD or Affiliates thereof have incurred or which it is
estimated they will incur on behalf of the Partnership (including those
relating to the Partnership's interest in the 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 87% to the Investor
Partners in the Partnership and 13% to MD. Reporting and Legal Expenses are
estimated to be $15,000 for the Partnership for the first year following the
year in which Investor Partners are first admitted to the Partnership.
Operator's and Other Compensation. MOC will act as operator with
respect to certain Program Wells and will be entitled to receive compensation
and reimbursement in its capacity as operator. MOC will be entitled to be
reimbursed for such services in an amount equal to all charges (including
certain overhead charges) that constitute direct and indirect charges under the
Operating Agreement or other applicable operating agreement, including an
initial fixed rate per-well per-month charge of $780 for each producing well
and $7,420 for each drilling well. In addition, Mewbourne may receive interest
on any funds loaned by it to the Partnership.
Sales Commissions. Mewbourne Securities, an Affiliate of MD, is a
broker-dealer which may act as a Soliciting Dealer for the Partnership. To the
extent that Mewbourne Securities acts as a Soliciting Dealer it will be
entitled to receive a Sales Commission and Due Diligence Fee with respect to
each Interest sold by it equal to 8.5% of the sales price or $85.00 per
Interest. It is anticipated that the number of Interests sold by Mewbourne
Securities will not be
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material and that the amount of Sales Commission and Due Diligence Fee, if any,
received by Mewbourne Securities will not be material.
Partnership and Program Interest. MD's interests in Partnership and
Drilling Program properties and the revenues therefrom may also be considered
to be compensation to MD to the extent such interests exceed the percentage of
total Partnership and Drilling Program costs paid by MD. See "Participation in
Costs and Revenues" and "Compensation and Reimbursement."
RIGHTS AND POWERS OF INVESTOR PARTNERS
The management and control of the Partnership is vested in the
Managing Partner, and the Investor Partners will have no right to take part
therein. However, pursuant to the terms of the Partnership Agreement, a
Majority in Interest of the Investor Partners of the Partnership may (a) amend
the Partnership Agreement (provided that no such amendment may, without the
consent of each Partner adversely affected by such amendment, increase the
duties or liabilities of any Partner or increase or decrease the interest of
any Partner in the distributions or allocations of the Partnership or the
required Capital Contributions to the Partnership or adversely affect the
classification of the Partnership as a partnership for federal income tax
purposes), (b) dissolve the Partnership, (c) remove the Managing Partner from
the Partnership and elect a new Managing Partner, (d) elect a new Managing
Partner and continue the Partnership upon the withdrawal from the Partnership
of the Managing Partner, (e) approve or disapprove the sale of all or
substantially all of the assets of the Partnership, and (f) cancel Partnership
contracts for services with the Managing Partner or its Affiliates without
penalty upon 60 days' notice.
Although the Managing Partner has no current intention of causing the
Partnership to engage in a Roll-Up transaction, the Partnership Agreement
provides Investor Partners with certain rights in the event the Partnership
does engage in such a transaction at some indeterminate time in the future. In
the event of a Roll-Up transaction involving the Partnership, the Managing
Partner is required to submit a proposal, which must include an appraisal of
the Partnership's assets by an Independent Expert, to the Investor Partners.
Any Investor Partner who votes "no" in connection with such proposal must be
offered the choice of (a) accepting the securities of the Roll-Up Entity (that
is, the entity resulting from the proposed Roll-Up transaction), or (b) either
(i) remaining an Investor Partner in the Partnership and preserving his or her
interest therein on the same terms and conditions as existed previously or (ii)
receiving cash in an amount equal to his or her pro-rata share of the appraised
value of the net assets of the Partnership. Any Roll-Up transaction involving
the Partnership requires the approval of a Super Majority in Interests of the
Investor Partners. The term "Roll-Up transaction" does not include 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 on the voting rights, the term of existence of the
Partnership, Sponsor compensation or the Partnership's investment objectives.
See "Proposed Activities -- The Managing Partner's Policy Regarding Roll-Up
Transactions."
PRIOR ACTIVITIES
During the period 1977-1980, Affiliates of MD sponsored a series of
five private limited partnerships. The structure and the activities of these
limited partnerships are substantially different from those of an Investor
Partner investing in the Partnership. In addition, MD sponsored a private
partnership, Mewbourne Development Partners 1992 GP, which was formed and
funded on December 31, 1992. The total amount of capital contributions to the
92 partnership was $1,160,000. In 1993, 1994, 1995 and 1996 MD sponsored eight
public limited partnerships, the structure and activities of which are similar
to those of the Partnership described herein. The aggregate amount of capital
contributions to these eight public limited 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. and Mewbourne Energy Partners 96-A,
L.P. was $13,417,000. In 1994, MD also sponsored one private limited
partnership. The amount of capital contributions to the 1994 private
partnership, Mewbourne Energy Partners 1994 Private L.P., was $1,470,000.
Except for the 92 and 94 private partnerships and the eight public
partnerships, neither MD nor any of its Affiliates have sponsored any private
or public partnerships within the past ten years. See "Prior Activities."
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TERMS OF OFFERING
Subscription for Interests. The minimum subscription of Interests in
the Partnership is five Interests or an aggregate purchase price of $5,000.
Investors in the Partnership may subscribe for additional Interests in the
Partnership in whole Interest ($1,000) increments. Investor Partners will not
be admitted to the Partnership unless, at the end of the subscription period,
subscriptions have been received and accepted for the Partnership in an amount
aggregating at least $1,000,000 and certain other conditions have been
satisfied. Upon the receipt and acceptance of subscriptions in an amount
aggregating at least $1,000,000, and the satisfaction of all other conditions,
Investor Partners will be admitted to the Partnership. If, at the end of the
subscription period for Interests in the Partnership subscription funds of less
than $1,000,000 have been received by MD, such funds will be promptly returned
to subscribers. It is the Managing Partner's current intention that the
Managing Partner and/or an Affiliate thereof will subscribe for such number of
Interests as may be necessary for the Partnership in which Interests are being
offered to receive the minimum subscription amount of 1,000 Interests
($1,000,000).
The entire purchase price for Interests must be paid in cash at the
time of subscription.
Subscription funds will be deposited in an escrow account at
NationsBank Texas, N.A., Tyler, Texas, or another federally insured institution
designated by MD; provided that upon receipt and clearance of aggregate
subscription funds of $1,000,000 or more from subscribers that MD deems
suitable to be Investor Partners in the Partnership, MD may cause those
subscription funds to be withdrawn from the escrow account and to be deposited
in an account established for the Partnership and all subscribers whose
subscriptions have been accepted shall be admitted as an Investor Partner in
the Partnership within 15 days after such deposit. Thereafter, subscription
funds will be deposited in the Partnership account with each subscriber whose
subscription has been accepted being admitted as an Investor Partner in the
Partnership no later than the last day of the calendar month in which such
subscription was accepted. Until subscribers are admitted as Investor Partners
in the 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. 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 which such subscriber was admitted to the Partnership as an Investor
Partner. The Managing Partner, or an Affiliate thereof, shall advance on
behalf of the Partnership the amount of all Organization and Offering Expenses,
Sales Commissions and Due Diligence Fees attributable to the Partnership. The
Partnership shall reimburse the Managing Partner the amount of such advanced
Organization and Offering Expenses, Sales Commissions and Due Diligence Fees,
plus interest on the unreimbursed amount at a per annum rate of interest equal
to the Base Rate calculated commencing as of the date that the offering of
Interests in the Partnership closes, only from funds which would otherwise be
available for distribution to the Partners in the Partnership. Such
reimbursement shall not be made from Capital Contributions of the Investor
Partners. See "Terms of the Offering -- Subscription Procedure." All
subscription funds, together with any interest earned thereon, will be
immediately returned to each subscriber that is not admitted as an Investor
Partner to the Partnership.
The Managing Partner and Affiliates thereof are eligible to subscribe
for Interests, provided that any Interests so purchased must be purchased for
investment purposes only and not for the purpose of resale or any further public
distribution. The number of Interests in the Partnership that may be purchased
by the Managing Partner and/or Affiliates thereof is not subject to any specific
maximum limitations but depends upon the number of subscriptions for Interests
received and accepted from non-Affiliates. Subject to certain limitations,
Interests purchased by the Managing Partner or its Affiliates will have voting
rights under the Partnership Agreement. See "Risk Factors -- Particular Risks
Relating to the Interests -- Ownership of Interests by Affiliates of MD."
Suitability Standards. Investment in the 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 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 the Partnership, and
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the satisfaction of such requirements by a prospective investor does not
necessarily mean that an investment in the Partnership is a suitable investment
for that investor.
Each subscriber for Interests must, at a minimum, represent in writing
that he/she has (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). Investors who are residents of certain states are subject to
higher and/or alternative suitability requirements. See "Terms of the Offering
- -- Suitability Standards" and the Subscription Agreement.
It is anticipated that the Partnership will acquire interests in
federal oil and gas leases, and thus, subscriptions for Interests will only be
accepted from persons who are "Eligible Citizens." 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/she is an Eligible Citizen.
Additional representations and warranties required of Investor
Partners are set forth in the Special Subscription Instructions and the
Subscription Agreement attached as Exhibits C and D, respectively, to this
Prospectus.
Investors may include IRAs, Keogh Plans, qualified employee benefit
plans, and other tax-exempt entities. These investors should, however,
carefully review with their tax advisors the discussions under the caption "Tax
Aspects -- General Tax Provisions -- Investment by Tax-Exempt Entities," which
indicates, among other things, that substantially all of the income from the
Partnership's operations will constitute "unrelated business taxable income"
for tax purposes and may give rise to tax liability to that investor.
How to Subscribe. An eligible investor may subscribe for Interests in
the Partnership prior to the end of the subscription period for those Interests
by properly completing, executing, and delivering to his Soliciting Dealer (a)
a Subscription Agreement, and (b) a check payable to the order of "NationsBank,
Escrow Agent for Mewbourne 97 Drilling Program" in an amount equal to the
purchase price for the number of Interests to be purchased by that investor.
The execution of a Subscription Agreement by a subscriber constitutes a binding
offer to purchase Interests in the Partnership. Once an investor subscribes
for Interests, that investor will not be able to revoke his subscription.
Distribution. MD has engaged its Affiliate, Mewbourne Securities, 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.
The Interests will be distributed by the Soliciting Dealers on a "best efforts"
basis (that is, the Soliciting Dealers are not obligated to purchase any
Interests not purchased by investors). The Soliciting Dealers will receive
Sales Commissions and Due Diligence Fees in an aggregate amount of up to 8.5%
of the sales price of Interests sold, except that no Sales Commission and Due
Diligence Fees will be paid with respect to sales of Interests to (a) officers,
directors or employees of MD or Affiliates thereof, (b) officers, directors,
employees, or registered representatives of a Soliciting Dealer, or (c)
Affiliates of the Managing Partner. The total commissions and fees paid to a
particular Soliciting Dealer may be comprised of (i) a Sales Commission in an
amount of up to 8% of the sales price of Interests in the Partnership sold by
such Soliciting Dealer and (ii) a Due Diligence Fee in an amount of up to .5%
of the sales price of Interests in the Partnership sold by such Soliciting
Dealer; provided that the aggregate commissions and fees paid to a Soliciting
Dealer under clauses (i) and (ii) above shall not exceed 8.5% of the sales
price of Interests in the Partnership sold by such Soliciting Dealer. See
"Plan of Distribution."
THE FOREGOING IS A VERY BRIEF, INCOMPLETE SUMMARY OF CERTAIN MATTERS
RELATING TO THE OFFERING OF INTERESTS. SUCH SUMMARY MUST BE CONSIDERED
TOGETHER WITH INDEPENDENT ADVICE AND A CAREFUL READING AND EXAMINATION OF THIS
ENTIRE PROSPECTUS AND THE ATTACHED EXHIBITS.
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RISK FACTORS
Prospective investors should recognize that oil and gas drilling and
exploration is a high risk venture. Investment in the Partnership is
recommended only to persons who are prepared to assume the substantial risks
discussed below and elsewhere in this Prospectus. The nature of such risks
requires persons who purchase Interests to be in a position (a) to hold such
investment for a substantial number of years and (b) to absorb the possible
loss of such investment.
PARTICULAR RISKS RELATING TO THE INTERESTS
Liability of Limited Partners. The Partnership will be governed by
the Delaware Act under which, as a general rule, a Limited Partner's liability
for the obligations of the 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 the 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 the Partnership, such Limited Partner could become liable for
Partnership debts and obligations. See "Liability of Investor Partners --
Limited Partners."
Liability of General Partners. Under Delaware law, each General
Partner in the Partnership will be jointly and severally liable for the
liabilities and recourse obligations of the Partnership. Furthermore, because
the 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 its General Partners, could be liable for the
obligations of all of such joint Working Interest owners. Pursuant to the
Partnership Agreement, MD shall 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 undistributed assets. However, a General Partner still could
be subject to such liability if MD should become bankrupt or for any other
reason is unable to meet its financial commitment to indemnify the General
Partners. This liability could result in the necessity for a General Partner
to make additional payments to the Partnership. The possible amount of such a
liability cannot be predicted. See "Proposed Activities -- Insurance" and
"Liability of Investor Partners -- General Partners."
Liability of Joint Working Interest Owners. Pursuant to the Program
Agreement, each Participant, including the Partnership, will hold its interest
in Leases in its own name and will be a joint Working Interest owner with the
other Participant and also with third parties. It has not been clearly
established under the laws of certain of the jurisdictions where a portion of
the Drilling Programs' properties will be located whether joint Working
Interest owners have several liability or joint and several liability with
respect to obligations relating to the Working Interest. The operating
agreements relating to Drilling Program Leases will specify that the
liabilities of joint Working Interest owners will be several, though it cannot
be assured that such a provision would be enforceable against a third party.
If the Participants and other Working Interest owners are determined to have
joint and several liability, the General Partners could be responsible for the
obligations relating to the entire Working Interest.
Possibility of Reduction or Unavailability of Insurance. It is
possible that some or all of the insurance coverage which the Partnership has
available may become unavailable or prohibitively expensive. If MOC 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 the Partnership, the
offering of Interests in the Partnership shall cease, and subscribers for
Interests in the Partnership in which Investor Partners have not been admitted
shall receive a refund of their subscription funds. The Managing Partner will
also promptly notify those Investor Partners of any material reduction in the
insurance coverage of the Drilling Programs and the Partnership. Such notice
shall be given as soon as possible after learning of such change and if
possible at least 30 days in advance of the change in insurance coverage. In
addition, if the Drilling Program or the Partnership (after the admission of
Investor Partners) has its insurance coverage materially reduced for any
reason, the Partnership will halt all drilling activity until such time as
comparable replacement coverage is obtained. All Investor Partners could be
subject to greater risk of loss of their investment since less insurance would
be available to protect them from casualty losses. See "Proposed Activities--
Insurance."
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Sole Reliance on MD for Management. Under the Partnership Agreement,
MD is designated as the Managing Partner of the Partnership and is given the
exclusive authority to manage and operate the Partnership's business.
Accordingly, Investor Partners must rely solely on the Managing Partner to make
all decisions on behalf of the Partnership, as the Investor Partners will have
no role in the management of the business of the Partnership. The
Partnership's success will depend, in part, upon the management provided by the
Managing Partner, the ability of the Managing Partner and the Program Manager
to select and acquire Leases on which Program Wells capable of producing oil
and natural gas in commercial quantities may be drilled, to find
revenue-producing properties, and to market oil and natural gas produced from
Program Wells. The Managing Partner is required to devote only such time as is
reasonably needed to the operations of the Partnership.
Prospects Not Yet Identified or Selected; No Opportunity to Evaluate
Prospects. Although MD or its Affiliate maintain an inventory of leasehold
acreage covering numerous Prospects, MD has not, as of the date of this
Prospectus, selected or agreed to transfer from such owned inventory any
particular Leases to the Participants. The Program Manager will select all
Leases to be acquired or drilled by the Participants, and prospective investors
will not have an opportunity to review those Leases before investing in the
Partnership or to participate in the selection of Leases after an investment is
made. However, MD may during the course of this offering select, and cause
this Prospectus to be amended or supplemented to describe, certain Designated
Prospects for acquisition by Participants in the Drilling Program. Investors
subscribing for Interests prior to any such amendment or supplement will not be
permitted to withdraw their subscriptions as a result of the selection of any
Designated Prospect and may not receive notification of the selection of any
Designated Prospect prior to funding of the Partnership in which they have
invested. See "Proposed Activities -- Acquisition of Leases."
Concentration of Investment Risks. The Partnership could be formed
with as little as $1,000,000 in Capital Contributions from its Investor
Partners. To the extent that the funds available to the Partnership are
limited, its ability to spread risks over a large number of Program Wells and
Prospects will be reduced. The number of Program Wells which can be drilled
based on the minimum investment amount cannot be determined because Prospects
have not been selected. Even if the Drilling Program is formed with
substantially more than the minimum required capital, the Investor Partners must
rely on MD to diversify the drilling activities of the Participants. See "Terms
of the Offering -- General" and "Proposed Activities -- Area of Geographic
Concentration."
Ownership of Interests by Affiliates of MD. The Managing Partner and
its Affiliates are eligible to subscribe for Interests, provided that any
Interests so purchased must be purchased for investment purposes only and not
for the purpose of resale or any further public distribution. It is the
Managing Partner's current intention that the Managing Partner and/or an
Affiliate thereof will subscribe for such number of Interests as may be
necessary for the Partnership in which Interests are being offered to receive
the minimum subscription number of 1,000 Interests ($1,000,000). The number of
Interests in the Partnership that may be purchased by the Managing Partner
and/or Affiliates thereof is not subject to any specific maximum limitations
but depends upon the number of subscriptions for Interests received and
accepted from non-Affiliates. Thus, there are no limitations upon the number
of Interests that may be purchased by the Managing Partner or its Affiliates.
Interests owned by the MD or its Affiliates will have voting rights under the
Partnership 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 the Managing Partner or its Affiliates which in the
aggregate represent more than 20% of the total Interests held by Investor
Partners in the Partnership shall not have any voting rights under the
Partnership 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.
Notwithstanding the voting limitations imposed upon Interests owned by the
Managing Partner or its Affiliates, to the extent that Interests in the
Partnership are acquired by the Managing Partner or its Affiliates, such
ownership of Interests has the effect of diluting the voting power of the other
Investor Partners in the Partnership.
Additional Financing. MD anticipates that the net proceeds from the
sale of Interests in the Partnership will be sufficient to finance the
Partnership's share of the Drilling Program's costs of acquiring interests in
the Prospects, drilling and completing initial oil and gas wells, 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 (including the
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acquisition of additional Leases and the drilling, completing and equipping of
additional wells to further develop Drilling Program Prospects) through
Partnership borrowings, utilization of Partnership revenues obtained from
production or other methods of financing. See "Additional Financing." The
Partnership Agreement provides that outstanding Partnership borrowings may not
at any time exceed 20% of the aggregate Capital Contributions of the Investor
Partners. Furthermore, the 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 Affiliated Programs); this could result in the Drilling Program
giving up a substantial interest in any oil and gas revenues so developed. See
"Proposed Activities -- Development Policy" and "-- Farmouts."
Uncertainty of Cash Distributions. No distributions will be made from
the Partnership to the Investor Partners of the Partnership until the
Partnership has funds which the Managing Partner determines are not needed for
the operation of the Partnership and the Drilling Program. Accordingly, there
is no assurance that any distributions from the Partnership will be made to its
Investor Partners. In addition, a portion of the Partnership's revenues
otherwise distributable to its Investor Partners will be subject to the payment
of the Management Fee by the Partnership to the Managing Partner and to the
reimbursement of the Organization and Offering Expenses, Sales Commissions and
Due Diligence Fees advanced by the Managing Partner. Distributions will depend
primarily on the 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 Investor Partners in the year earned, even if
cash is not distributed. See "Tax Aspects -- Partnership Taxation -- General."
Conflicts of Interest. The Investor Partners will not be involved in
the day-to-day operations of the Partnership. Accordingly, the Investor
Partners must rely on the Managing Partner's judgment in such matters. Inherent
with the exercise of its judgment, the Managing Partner will be faced with
conflicts of interest, including:
o The participation of MD in the Drilling Program in its
individual capacity, the effect of which is that an action
taken by the Partnership may be more beneficial to MD than the
Partnership.
o The participation by MD and its Affiliates in oil and gas
activities on behalf of other programs sponsored or to be
sponsored by them or for their account, the effect of which is
that the Managing Partner owes a duty of good faith to each of
the partnerships which it manages and actions taken with
regard to other partnerships may not be advantageous to the
Partnership.
o The provision by MD or Affiliates thereof of services to the
Partnership, for which the Managing Partner or its Affiliates
will be compensated (at rates competitive with the rates
charged by unaffiliated persons for similar services).
o The ownership of Interests in the Partnership by MD or its
Affiliates may have the effect of diluting the voting power of
the other Investor Partners in the Partnership.
o The sale of Prospects by MOC to the Partnership the effect of
which is that the Managing Partner could benefit by assigning
or not assigning particular Prospects to the Partnership and
by retaining some Prospects.
o Certain of the Leases to be acquired by the Partnership may be
adjacent to acreage or Leases which are held or will be held
by MD or its Affiliates. 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 MD
or its Affiliates in evaluating their nearby acreage at no
cost to them. Accordingly, a conflict of interest will exist
between the interest of the Partnership and the interest of MD
or its Affiliates in selecting the location and type of
operations which the Drilling Program will conduct on Drilling
Program Leases.
MD and its Affiliates 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. There can be no assurances that transactions
between the Partnership and its Affiliates will be on terms as favorable as
could have been negotiated with unaffiliated third parties. See "Proposed
Activities -- Transactions with Affiliates." However, prospective investors
should be aware that MD and its Affiliates have not formally adopted any
procedures or criteria to avoid or to resolve any conflicts of interest that may
arise between MD and its Affiliates and the Partnership. Potential investors
are urged to review the discussion under "Conflicts of Interest" for a more
complete description of possible conflicts of interests.
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Compensation of Managing Partner and Affiliates. Pursuant to the
Partnership Agreement, MD will receive certain fees and reimbursement of
expenses as the Managing Partner, and pursuant to the Program Agreement, MOC
will receive certain fees and reimbursement of expenses as the Program Manager
and as operator, which may be deemed to be compensation. The reimbursements
pursuant to the Partnership Agreement and the Program Agreement may be
substantial. None of the compensation to be received by MD, in its capacity as
Managing Partner, or MOC, in its capacity as Program Manager or as operator,
were derived as a result of arm's length negotiations. See "Compensation and
Reimbursement -- Management Fee," "Definitions -- Base Rate" and "Proposed
Activities -- Operations."
Inside Board of Directors and Other Family Relationships. Curtis W.
Mewbourne serves as the President and Chairman of the Board of each of MD and
MOC. Dorothy Cuenod, Ruth Buckley and Julie Greene, each a daughter of Curtis
Mewbourne, each serve as both an officer and director of each of MD and MOC.
J. Roe Buckley, Ruth Buckley's husband, serves as an officer of each of MD and
MOC. Michael F. Shepard, Secretary and General Counsel, is the only officer of
MD not related to the other officers of MD. Joseph F. Odom, Vice President of
Administration and Personnel, is the only officer of MOC not related to the
other officers of MOC. Neither MD nor MOC has a director who is not either a
full time employee or a family relationship of Mr. Mewbourne. Therefore, the
activities of neither MD nor MOC should be considered as being subject to the
review and scrutiny of an independent Board of Directors. See "Ownership
Structure of Mewbourne Companies -- Officers, Directors and Key Employees of MD
and MOC."
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 certain provisions which
modify what would otherwise be the applicable Delaware law relating to the
fiduciary standards of the Managing Partner to the Investor Partners. The
fiduciary standards in the Partnership Agreement could be less advantageous to
the Investor Partners and more advantageous to the Managing Partner than the
corresponding fiduciary standards otherwise applicable under Delaware law,
specifically:
o the 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 the Partnership in a capacity other than as a Sponsor;
o in certain circumstances, 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 if they have determined 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 the Managing Partner may manage multiple programs
simultaneously.
In addition, the Partnership Agreement limits the liability of the Managing
Partner or its Affiliates to the Partnership or to Investor Partners for acts
or omissions if the Managing Partner determines 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 the Partnership and that such conduct or omission did not
constitute negligence or misconduct.
The purchase of Interests 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 Investor Partners may find
it more difficult to hold the Managing Partner responsible for not acting in
the best interests of the Partnership and its Investor Partners than if the
fiduciary standards of the otherwise applicable Delaware law governed the
situation. See "Conflicts of Interests -- Fiduciary Responsibility of the
Managing Partner."
Joint Activities With Others. It is anticipated that the Participants
in the Drilling Program (including the Partnership) will not own the full
Working Interest in most Prospects to be explored and developed pursuant to the
Drilling Program Agreement. It is likely that a third party or parties (which
parties could be either unrelated or Affiliates of MD, including Mr. Mewbourne)
will own a partial Working Interest in a Prospect to be developed pursuant to
the Program Agreement. While MOC, on behalf of the 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, the
Partnership could be held liable for the joint
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activity obligations of such other Working Interest owners, and this liability
could in turn result in individual liability for the General Partners in the
Partnership. See "-- Particular Risks Relating to the Interests -- Liability
of Joint Working Interest Owners" and "Liability of Investor Partners --
General Partners."
Lack of Liquidity. It is anticipated that there will not be any
market for resale of the Interests offered hereby. Although the Partnership
Agreement permits the assignment of Interests by Investor Partners, transfers
of Interests are subject to certain restrictions (e.g., an assignee thereof may
not become a substituted Investor Partner without the consent of the Managing
Partner) and satisfaction of certain other conditions. See "Summary of
Partnership Agreement and Program Agreement -- Assignability of Interests" for
a description of these restrictions. Accordingly, purchasers of Interests
should be prepared to bear the investment risks attendant upon their investment
for an indefinite period of time. In addition, the transfer restrictions
contained in the Partnership Agreement 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.
Investor Partners will not have the right to withdraw any capital from
the Partnership or to receive the return of all or any portion of their Capital
Contributions (except out of distributions of operating revenues or upon a sale
or other disposition of the Partnership's property or the dissolution and
liquidation of the Partnership). See "Summary of Partnership Agreement and
Program Agreement -- Dissolution, Liquidation and Termination." Although
Investor Partners may under certain circumstances require the Managing Partner,
or an Affiliate thereof designated by the Managing Partner, to purchase their
Interest or a portion thereof, this obligation is limited and does not assure
the liquidity of an Investor Partner's investment. See "Terms of the Offering
- -- Right of Presentment."
Indemnification of MD and Affiliates Thereof. The Partnership
Agreement provides, subject to certain conditions, for indemnification of MD,
Affiliates thereof and the officers and directors of such persons against
claims arising from certain conduct on behalf of the Partnership or the
Drilling Program. In addition, the Program Agreement provides, subject to
certain conditions, for indemnification of MOC, Affiliates thereof, and the
officers and directors of such persons against claims arising from certain
conduct on behalf of the 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, the Managing
Partner will decide whether or not indemnification is appropriate under the
Partnership Agreement or Program Agreement, and in such situations the Investor
Partners must rely upon the integrity of the Managing Partner to cause the
Partnership to indemnify the Managing Partner and its Affiliates only when such
indemnification is justified under the Partnership Agreement or Program
Agreement. Investor Partners should also bear in mind that in any situation
involving indemnification, Partnership funds could be applied to an
indemnification of the Managing Partner and its Affiliates rather than to make
distributions to the Investor Partners. See "Summary of Partnership Agreement
and Program Agreement -- Indemnification of MD and Affiliates Thereof."
Limited Ability to Remove Managing Partner and Difficulty in Finding a
Successor Management Partner. A Majority in Interest of the Investor Partners
of the Partnership will have the right to remove MD from its position as the
Managing Partner, and, the right to remove MOC from its position as the Program
Manager. The Investor 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 the Partnership.
See "Summary of Partnership Agreement and Program Agreement -- Rights and
Powers of Partners." In the event the Program Manager is removed, the
Partnership must elect a successor to the removed Program Manager. There is a
risk that the Investor Partners could not find a new Managing Partner or
Program Manager if MD or MOC were to be removed from such positions.
Withdrawal of Partners. Pursuant to the Partnership Agreement, each
General Partner and the Managing Partner will agree that he will not
voluntarily withdraw from the Partnership (but, in the case of the Managing
Partner, only prior to the later to occur of (i) completion of the
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. 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. It is expected that such expenses may be
substantial and
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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 an Investor Partner under the Partnership Agreement.
See "-- Reconstitution of the Partnership" below.
Dissolution of the Partnership and Termination of the Drilling
Program. The Partnership will be dissolved and terminated upon the occurrence
of any of the events listed under "Summary of Partnership Agreement and Program
Agreement -- Dissolution, Liquidation and Termination." These events include
(a) the expiration of the Partnership's term or (b) the vote or consent in
writing at any time by a Majority in Interest of the Investor Partners.
However, the Partnership could be dissolved and both it and the Drilling
Program terminated as a result of events which do not include the passage of
time or the consent of the Investor Partners, such as the bankruptcy,
insolvency, dissolution, or withdrawal of the Managing Partner. The Investor
Partners have certain rights to reconstitute the Partnership under such
circumstances and thereby avoid termination of the Partnership, although there
is no certainty that the Investor Partners could find a new Managing Partner to
replace the Managing Partner in such circumstances. MD currently has no
intention to withdraw as the Managing Partner of the Partnership. See "Summary
of Partnership Agreement and Program Agreement -- Dissolution, Liquidation and
Termination."
Ability of the Managing Partner to Cause Dissolution of the
Partnership and the Drilling Program. The Partnership Agreement and applicable
law provide that the withdrawal of the Managing Partner from the Partnership
(directly or as a result of bankruptcy, dissolution or similar event) will
cause dissolution of the Partnership. MD has undertaken not to withdraw as the
Managing Partner of the Partnership prior to the later to occur of (i)
completion of the 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, but MD has the power under applicable law to
withdraw from the Partnership in violation of the Partnership Agreement.
However, MD currently does not intend to withdraw from the Partnership. The
Partners of the Partnership are given the right under the Partnership Agreement
to reconstitute the Partnership upon the withdrawal of the Managing Partner
which causes a dissolution of the Partnership, but there is an additional risk
in such event that the Partners of the 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 the Partnership by his acts, MD believes
that the Managing Partner will have such exclusive control over the conduct of
the business of the Partnership that it is unlikely that a third party, in the
absence of bad faith, would deal with a General Partner in connection with the
Partnership's business. The participation by a General Partner in the
management and control of the 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 the 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 the Partnership
and could adversely impact the Partnership.
GENERAL RISKS RELATING TO OIL AND NATURAL GAS OPERATIONS
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.
Pursuant to the Program Agreement, the activities of the Partnership will focus
upon the acquisition of 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 the discretion of the
Managing Partner, up to 20% of the 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. There is no
assurance 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 the
Partnership. During the drilling and completion of wells, the 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 the Partnership will maintain the insurance coverage
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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. See "-- Particular Risks Relating to the Interests --
Liability of Partners" below and "Liability of Investor Partners."
The Partnership 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 it is anticipated that customary insurance
will be obtained, the Partnership may be subject to liability for pollution and
other damages due to hazards which cannot be insured against or will not be
insured against due to prohibitive premium costs or for other reasons.
Liabilities to third parties or governmental entities for pollution could
reduce funds available for distributions and for drilling Development Wells,
result in the loss of Partnership property, or result in the personal liability
of the General Partners if the liability exceeded insurance proceeds, the
Partnership's assets, and the Managing Partner's ability to indemnify such
General Partners.
Dependence on Future Prices, Supply and Demand for Oil and Gas. The
revenues generated from the activities of the Partnership 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 MOC during 1996 was $23.38 per barrel and $17.18 per barrel 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.
There is a current worldwide oversupply of oil, which has resulted in
a significant downward pressure on oil prices. Early in 1986, Saudi Arabia and
certain other members of the Organization of Petroleum Exporting Countries
("OPEC") dramatically increased their production of oil. This increase in
production caused an immediate significant decline in the price of oil in the
world market.
The United States average daily production of oil declined from 9.0
million barrels in 1985 to approximately 6.5 million barrels in 1996. 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 which was 845 rigs as of the end of 1996. 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 1996, imports averaged approximately 52.5% of
the United States' consumption.
Natural Gas Market. 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, for the first time in many years, the
United States natural gas market is operating in a free market environment in
which the contract between the seller and buyer determines the price of natural
gas. Natural 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
high and low monthly average price received by MOC for gas produced and sold
during 1996 was $3.54 per mmbtu and $1.59 per mmbtu, respectively.
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. See "Competition, Markets, and Regulation.
Loss of Partnership Property. In certain cases a portion of the
interest to be acquired by the Drilling Program will consist of a contractual
ownership interest arising under an operating agreement or a statutory pooling.
Such contractual ownership interest is commonly referred to in the oil & gas
industry as a "non-consent interest." In most
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cases, such non-consent interest will revert back to the original owner upon
the recoupment by the Drilling Program of a penalty amount from the production
attributable to the non-consent interest. After such reversion, the Drilling
Program will have no more ownership rights with respect to the reverted
interest. The penalty amount is typically a multiple of the amount of costs
and expenses reasonably incurred in developing and operating the non-consent
interest and usually provides that the Drilling Program will be entitled to
recoup at least 300% of such costs and expenses before such reversion.
Competition. The Partnership will be competing with a number of other
potential purchasers of Prospects, many of which have greater financial
resources available to them. When drilling is completed on a Prospect, the
Partnership may encounter substantial competition in selling its production.
See "Dependence on Future Prices, Supply and Demand for Oil and Gas" above.
Government Regulation. The oil and gas business is subject to
extensive governmental regulation under which, among other things, rates of
production from Program Wells may be regulated. Governmental regulation also
may affect the market for the Partnership's production. Governmental
regulations relating to environmental matters could also affect the
Partnership's operations. The nature and extent of various regulations, the
nature of other political developments and their overall effect upon the
Partnership and the Drilling Program are not predictable. See "Competition,
Markets and Regulation."
RISKS RELATING TO LIMITED PARTNERSHIPS GENERALLY
The Partnership is structured as a limited partnership. While certain
advantages of the limited partnership structure are described elsewhere in this
Prospectus, there are also a number of ways in which the limited partnership
form of organization can be disadvantageous to an investor when compared with a
publicly-traded corporation form of organization. The following are the
principal disadvantages of the limited partnership form of organization
utilized by the Partnership.
Lack of Liquidity. In order to avoid being treated as a corporation
under Section 7704 of the Code, the Partnership must not be classified as a
publicly traded partnership. See "Tax Aspects -- Partnership Taxation --
Partnership Classification." Under Section 708 of the Code, the Partnership
will terminate for federal income tax purposes if partnership interests
representing a 50% or more interest in the capital or profits of the
Partnership are sold or exchanged within any consecutive 12-month period. In
order to prevent such a termination and protect the interests of
non-transferring Investor Partners, the Managing Partner has retained the right
to disallow transfers of Interests. Accordingly, an investment in the
Partnership has been structured as an illiquid investment. However, this lack
of liquidity can be disadvantageous to an investor who may wish to dispose of
his or her interest in the Partnership.
Lack of Substantial Voting Rights. In order to preserve the limited
liability of the Limited Partners of the Partnership, the Limited Partners may
not take part in the control of the business of the Partnership. Although
those investors who elect to invest as General Partners will not initially be
Limited Partners of the Partnership, it is presumed 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
control of the Partnership, limited partnerships, such as the Partnership, do
not generally hold annual meetings such as those at which stockholders may
express their views and confront management directly. Because of the Investor
Partners' lack of substantial voting rights, the control of business of the
Partnership is vested exclusively in the Managing Partner, and the Investor
Partners must rely on the Managing Partner to fulfill its fiduciary duties to
the Investor Partners and to maximize the Partnership's economic performance.
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 Investor Partners with certain
appraisal rights in the case of mergers and certain similar events (see
"Proposed Activities -- The Managing Partner's Policy Regarding Roll-Up
Transactions"), an Investor Partner may not have
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appraisal rights in as many situations as would some corporate stockholders,
and there is no extensive judicial case law interpreting and upholding the
appraisal rights of limited partners.
TAX RISKS
General. MD has not requested, and will not request, a ruling from
the IRS regarding the tax consequences of investing in Interests. Based on
certain representations, assumptions, and qualifications counsel to MD 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 an Investor Partner who is a United States
citizen and 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. 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 Investor Partners,
the Partnership and the Drilling Program must be classified as partnerships for
federal income tax purposes. If the Partnership or the Drilling Program were
taxed as corporations 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 certain representations, assumptions, and qualifications, counsel to MD is
of the opinion that, at the time of formation, each of the Partnership and the
Drilling Program will be treated as a partnership for federal income tax
purposes and that the Partnership will not be treated as a corporation pursuant
to the "publicly traded partnership" rules of Section 7704 of the Code. There
can be no assurance, however, that future legislative, judicial or
administrative action will not affect the classification of the Partnership or
the Drilling Program for federal income tax purposes. See "Tax Aspects --
Partnership Taxation -- Partnership Classification."
Allocations. The Partnership Agreement and the Program Agreement
contain provisions allocating federal income tax consequences of the Drilling
Program's activities among the Investor Partners and MD. See "Participation in
Costs and Revenues." If such allocation provisions were not recognized for
federal income tax purposes, (a) a portion of the federal income tax deductions
allocated to and claimed by the Investor Partners, including deductions for
intangible drilling and development costs, could be reallocated to MD,
notwithstanding the fact that such Investor Partners had been charged with the
expenditures giving rise to such deductions, and (b) a portion of the taxable
income allocated to MD could be taxed to the Investor Partners, notwithstanding
the fact that the revenues giving rise to such taxable income had been credited
to MD. Based on certain representations, assumptions and qualifications,
counsel to MD is of the opinion that, except as noted below, the allocation of
income, gains, losses, and deductions between the Investor Partners and MD
under the Partnership Agreement and between the Partnership and MD under the
Program Agreement will be recognized for federal income tax purposes. Such
opinion is not binding on the IRS, however, and there can be no assurance that
the IRS will not challenge such allocations. See "Tax Aspects -- Partnership
Taxation -- Allocations."
Passive Activity Limitations. A Limited Partner's interest in the
Partnership will be treated as a "passive activity," and any tax losses derived
by a Limited Partner from the 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
pursuant to 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 certain representations, assumptions, and qualifications
counsel to MD is of the opinion that the passive activity loss limitations of
Section 469 of the Code should not apply to General Partners in the Partnership
(prior to any conversion of a General Partner Interest to a Limited Partner
Interest) to the extent that the Partnership drills or operates wells pursuant
to 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
pursuant to Working Interests without regard to the passive activity loss
limitations (but subject to certain basis and "at risk" limitations). The
exception for Working
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Interests would not be applicable to any operations of the Partnership other
than the drilling and operation of wells pursuant to Working Interests.
Therefore, if the 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 the Partnership as a "publicly traded partnership"
for purposes of applying the passive activity loss limitations would even more
severely restrict or eliminate a Limited Partners ability to use any
Partnership losses to offset income from other sources. Based on certain
representations, assumptions, and qualifications counsel to MD is of the
opinion that the 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. Such opinion is not binding on the IRS,
however, and there is no assurance that the IRS will not assert that the
Partnership is a publicly traded partnership for purposes of applying the
passive activity loss limitations. See "Tax Aspects -- Special Features of Oil
& Gas Taxation -- Passive Activity Loss Limitations."
Certain Expenditures Not Deductible for Tax Purposes. A portion of
the Partnership's revenues will be used for the payment of the Management Fee
and other costs, such as Lease Acquisition Costs, which may not be currently
deductible for federal income tax purposes in whole or in part. The Management
Fee may be deducted only to the extent it constitutes an ordinary and necessary
business expense which is reasonable in amount. Lease Acquisition Costs must
be capitalized and may be deducted only through depletion deductions or upon
abandonment of the Lease to which such costs relate. See "Tax Aspects --
Partnership Taxation -- Organization and Offering Expenses," "Tax Aspects --
Partnership Taxation -- Management Fee," "Tax Aspects -- Special Features of
Oil and Gas Taxation -- Lease Acquisition Costs" and "Tax Aspects -- Special
Features of Oil and Gas Taxation -- Geophysical Costs."
Considerations for Tax-Exempt Investors. Certain entities otherwise
generally exempt from federal income tax, such as IRAs, Keogh Plans, qualified
employee benefit plans, and charitable organizations, are taxed on "unrelated
business taxable income" ("UBTI") in excess of $1,000 in any particular year.
Substantially all the income from the Partnership's operations will constitute
UBTI and may give rise to tax liability to an otherwise tax-exempt investor.
Such investor may be required to file a tax return even if the investor does
not realize net taxable income from the Partnership or taxable income exceeding
$1,000 in a year. Although the UBTI rules generally permit a tax-exempt
investor to offset any loss from the Partnership against income from another
unrelated trade or business and to use any unused losses in other years
(subject to the general net operating loss carryback and carryforward rules),
the IRS takes the position that tax-exempt entities are subject to the passive
activity limitations. Thus, a tax-exempt investor who is a Limited Partner
could use any loss from the Partnership to offset only passive income from the
Partnership and passive income from other unrelated trades or businesses.
Tax-exempt investors also should consider whether investment in the
Partnership, especially as a General Partner, is consistent with their exempt
status. See "Tax Aspects -- Special Features of Oil & Gas Taxation -- Passive
Activity Loss Limitations" and "Tax Aspects -- General Tax Provisions --
Investment by Tax-Exempt Entities."
Tax Shelter Registration. Although an investment in the Partnership
may generate certain tax benefits, the 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, the Managing Partner will apply to the IRS for a "tax shelter"
registration number with respect to the Partnership. The Managing Partner will
furnish the registration number to each Investor Partner, who 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. The Managing
Partner also must maintain and make available to the IRS on request a list of
the Investor Partners in the Partnership. See "Tax Aspects -- General Tax
Provisions -- Tax Shelter Registration."
Current Tax Deductions. The Managing Partner will use reasonable
efforts to expend or contract for the expenditure of the Capital Contributions
of the Partnership in the year such contributions are received. Some of the
expenses may be incurred, however, prior to the actual drilling of the oil and
gas wells. No assurance can be given that any expenses 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, the Partnership might not
expend or contract for the expenditure of a substantial portion of
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its Capital Contribution in the year in which Investor Partners are admitted to
the Partnership, in which event no substantial tax deductions would be
available therefrom in that year. See "Tax Aspects -- Special Features of Oil
and Gas Taxation -- Intangible Drilling and Development Costs" and "Tax Aspects
- -- Anticipated Federal Income Tax Deductions."
Conversion of General Partner Interests. MD anticipates that the
General Partner Interests in the Partnership will be converted to Limited
Partner Interests following the completion of the Partnership's drilling
activities (which MD anticipates will occur within approximately 8 to 12 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 the 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 an Investor Partner's
particular circumstances. If the Managing Partner determines that the
conversion of the General Partner Interests in the 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 elect not to convert those Interests. Accordingly, there can be no
assurance that any General Partner Interest will be converted to Limited
Partner Interest or when any such conversion will occur. See "Terms of the
Offering -- Conversion of General Partner Interest" and "Tax Aspects --
Partnership Taxation -- Conversion of General Partner Interests" and "Tax
Aspects -- Special Features of Oil and Gas Taxation -- Passive Activity Loss
Limitations."
Tax Liabilities in Excess of Cash Distributions. An Investor 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 be deductible for federal income
tax purposes. The receipt of cash distributions by the Investors Partners may
be delayed due to certain factors, such as the use of revenues to finance
permitted activities. To the extent that the Investor Partners are credited
with net income from the Partnership, an income tax liability will be incurred
even though the Investor Partners may not yet have received any cash
distributions from the Partnership. The timing and amount of cash
distributions will be determined by the Managing Partner in its complete
discretion. Each Investor Partner will be required to report his or her share
of any Partnership income on his or her federal, state and local tax returns
and will be responsible for the payment of taxes attributable to such income.
In any year, an Investor Partner's resulting tax liability may exceed the
amount of cash distributed to him or her by the Partnership. See "Tax Aspects
- -- Partnership Taxation -- General."
Risks of Borrowings. The Managing Partner or an Affiliate thereof
shall advance on behalf of the Partnership the amount of all Organization and
Offering Expenses, Sales Commission and Due Diligence Fees attributable to the
Partnership. The maximum aggregate amount of such advance is an amount equal
to 9.5% of the Capital Contributions of the Investor Partners to the
Partnership. The Partnership shall be obligated to reimburse the amount of
such advanced Organization and Offering Expenses, Sales Commissions and Due
Diligence Fees, plus interest on the unreimbursed amount at a per annum rate of
interest equal to the Base Rate calculated commencing as of the date that the
offering of Interests in the Partnership closes, only from funds which would
otherwise be available for distribution to the Partners. See "Participation in
Costs and Revenues." Other than the reimbursement obligation for such advanced
Organization and Offering Expenses, Sales Commissions and Due Diligence Fees,
no additional borrowings by the Partnership are presently contemplated.
However, the Managing Partner is authorized to cause the Partnership to obtain
additional loans from banks or other financial sources, or from the Managing
Partner or its Affiliates, provided that the total amount of such loans
(including the reimbursement obligation for advanced Sales Commissions and Due
Diligence Fees) may not in the aggregate exceed 20% of the Capital
Contributions to the Partnership. An Investor Partner's share of revenue
applied to the repayment of loans (including the reimbursement obligation for
advance Organization and Offering Expenses, Sales Commissions and Due Diligence
Fees) will be included in his taxable income. Although such income may be
offset in part by deductions for depletion, cost recovery and depreciation
deductions and Intangible Drilling and Development Costs, such loans could
cause an Investor Partner to become subject to an income tax liability in
excess of the amount of cash distributions received by such Investor Partner
from the Partnership.
Percentage Depletion. 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. See "Tax Aspects -- Special Features of Oil and Gas Taxation --
Depletion."
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Farmouts and Backin Interests. If the Partnership acquires interests
in Leases pursuant to the terms of a farmout agreement, the value of such
interests may have to be reported as taxable income. In addition, the
Partnership may not be entitled to deduct all intangible drilling and
development costs paid by it with respect to Leases burdened by a backin
Working Interest (i.e., a right held by another party to become a Working
Interest owner in the Lease on payout of the initial well on the Lease) unless
certain requirements are met. See "Tax Aspects -- Special Features of Oil and
Gas Taxation -- Farmouts and Backin Interests."
Recapture. Certain deductions for intangible drilling and development
costs, depletion, and depreciation must be recaptured as ordinary income on
disposition of property by the Partnership or on disposition of Interests by an
Investor Partner. See "Tax Aspects -- Special Features of Oil and Gas Taxation
- -- Intangible Drilling and Development Costs," "-- Depletion" and "--
Depreciation."
Audits. An IRS audit of the tax returns of the Drilling Program or
the Partnership may occur, in which case an audit of individual Investor
Partners' tax returns also may result. If such audits occur, tax adjustments
may be made, including adjustments to items on Investor Partners' 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 all Investor Partners, even though an individual Investor Partner
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 Partnership
and the Investor Partners. Moreover, judicial decisions, regulations or
administrative pronouncements could unfavorably affect the tax consequences of
an investment in the Partnership.
Significance of Tax Aspects. The Interests are being offered to
parties who may avail themselves of the benefits presently allowed oil and gas
activities under federal income tax laws. There is no assurance that money
invested in the Partnership will be recovered, that any Capital Contributions
to the Partnership will be expended and result in any tax deductions in the
year such contributions are received by the Partnership, that federal income
tax laws or the present interpretation thereof will not be changed or that any
position taken by the Partnership or the Drilling Program on its federal income
tax returns will not be challenged by the IRS. In addition, certain federal
income tax provisions may limit deductions, trigger or increase an Investor
Partner's liability for the alternative minimum tax on certain tax preference
items, increase tax liability on the disposition of Interests, or otherwise
increase the federal income tax liability of an Investor Partner.
Notwithstanding enactment of additional legislation or interpretations of
legislation which might require different treatment from the discussion under
"Tax Aspects," the Partnership is authorized to expend the proceeds from the
sale of Interests and to conduct its business and operations as described
herein, and 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 any prospective investor obtain professional guidance from his
tax advisor in evaluating the tax risks involved in investing in the
Partnership.
DEFINITIONS
The following are definitions of certain terms used in this
Prospectus. In order to fully understand the terms of this offering, a
prospective investor should read these definitions carefully.
"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.
"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)
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any company for which any such officer, director, or partner acts in any such
capacity. For purposes of this Prospectus, 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.
"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 NationsBank Texas, N.A., Dallas, 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.
"Designated Prospect" shall mean one or more Prospects, if any,
described in an amendment or supplement to this Prospectus, in which MD intends
to purchase an interest on behalf of the Drilling Program.
"Development Well" shall mean a well drilled within the proved area of
an oil or gas reservoir to the depth of a stratigraphic Horizon known to be
productive, including, without limitation, a well drilled as an additional well
to the same reservoir as another producing well on a Lease, drilled to the same
reservoir which previously contained a producing well, drilled on an offset
Lease to the same reservoir or drilled on acreage reasonably certain, based on
accepted geological, geophysical, and engineering studies and data, to be
geologically contiguous with such reservoir.
"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
"Conflicts of Interest -- Contracts with Mewbourne and Affiliates."
"Drilling and Completion Costs" shall mean all actual or necessary
costs directly incurred in drilling, testing, completing, and equipping a
Program Well, including without limitation costs incurred for surveying,
staking, surface damages, clearing, dredging, drilling, coring, logging, and
evaluating such Program Well, costs of conductor, intermediate and protective
casing and cement and cementing services, costs of connecting a Program Well to
a pipeline, and costs for plugging and abandoning, if necessary, such Program
Well prior to the commencement of production from such Program Well, the costs
of reworking any completed Program Well to secure new production (but not costs
incurred to conduct reworking operations on a Program Well at the Horizon to
which it was completed in order to restore or increase production, including
without limitation, costs of cleaning out such a Program Well, which costs
shall be
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considered Operating Costs), the costs of deepening (other than to a minor
depth below the present bottom of a Program Well to increase production, which
costs shall be considered Operating Costs) or plugging back any completed
Program Well, the costs of implementation of any enhanced recovery operations
(i.e., the application of fluid injection or other improved recovery
techniques) on any Program Well and the costs incurred for labor, fuel,
transportation, supplies, utility charges, and compensation to well operators,
consultants and others and insurance in connection with the foregoing. The
term "Drilling and Completion Costs" shall include Capital Expenditures and
Non-capital Expenditures, but such term shall not include any (a) Lease
Acquisition Costs, (b) Operating Costs, or (c) Administrative Costs.
"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 the Participants under or subject to the Program
Agreement.
"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 (a) officers, directors or employees of MD and
Affiliates thereof, (b) officers, directors, employees, or registered
representatives of a Soliciting Dealer, or (c) an Affiliate of the Managing
Partner.
"Eligible Citizen" shall mean 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, such definition includes a person who (a) is
a citizen of the United States, (b) is not a minor (unless a legal guardian or
trustee holds the interest on the minor's behalf), (c) is in compliance with
federal acreage limitations, and (d) is not participating in any agreement,
scheme, plan, or arrangement related to simultaneous oil and gas leasing that
would otherwise be prohibited. 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,
except that, 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 such a
corporation. In addition, an Eligible Citizen may not hold, own, or control,
directly or indirectly, interests in Federal oil and natural gas leases
(including options for such leases or interests therein) on lands subject to
the United States Mineral Lease Act of 1920, as amended, in excess of the
limits established by the Leasing Act (i.e., (a) 246,080 acres, of which no
more than 200,000 may be under option, in any one state other than Alaska and
(b) 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. There can be no
assurance, however, that the federal government will continue any of the
eligibility rules described herein.
"Exploratory Well" shall mean a well drilled to find commercially
productive hydrocarbons in an unproven area, to find a new commercially
productive Horizon in a field previously found to be productive of hydrocarbons
at another Horizon, or to significantly extend a known Prospect.
A "farmout" shall mean an agreement whereby the owner of the Lease
agrees to assign his interest in all or a portion of the Lease 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 (other than the Managing
Partner in its capacity as such) who elects, on his Subscription Agreement, to
become a General Partner in the Partnership and who executes or adopts the
Partnership Agreement or a counterpart thereof 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 of the Partnership
Agreement. General Partner shall not include the Managing Partner, except to
the extent that the Managing Partner owns General Partner Interests.
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"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, and who, from time
to time, may be specifically engaged for rendering such an evaluation.
"Initial Partnership Capital" shall mean for the Partnership the sum
of the Capital Contribution of all Investor Partners made by such Investor
Partners in exchange for their Interests as set forth in the Subscription
Agreements executed by the Investor Partners and the initial Capital
Contribution to the Partnership of the Managing Partner required to be made
pursuant to Section 3.2 of the Partnership Agreement.
"Interest" shall mean an Investor Partner's unit of interest in the
Partnership representing a $1,000 Capital Contribution.
"IRS" shall mean the Internal Revenue Service.
"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 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
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
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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 the
Partnership Agreement or a counterpart thereof 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 of the Partnership
Agreement. Limited Partner shall not include 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 the determination thereof, exceed 50% of the total Interests held
by Investor Partners who are eligible to participate in such agreement or vote.
"Management Fee" shall mean the fee to be paid by the Partnership to
the Managing Partner in consideration of its services to be rendered in
managing the business of the Partnership during each of the initial five
Partnership Years of the Partnership in an amount equal to 1.1% of all Capital
Contributions to the Partnership initially made by the Investor Partners in
exchange for their respective Interests in the Partnership as set forth in the
Subscription Agreements. The Management Fee shall not be deducted from the
Capital Contributions of the Investor Partners, but shall be paid by the
Partnership in monthly or other periodic installments from funds which would
otherwise be available for distribution to the Partners in the Partnership, and
in such amounts as may be determined in the discretion of the Managing Partner.
To the extent that the Partnership has insufficient distributable funds during
a particular Partnership Year (after the payment of the reimbursement of
advanced Organization and Offering Expenses, Sales Commissions and Due
Diligence Fees) to fully pay the amount of the Management Fee payable during
such Partnership Year, then the amount of such unpaid Management Fee shall be
carried forward and payable in the next succeeding Partnership Year.
"Managing Partner" shall mean Mewbourne Development Corporation, a
Delaware corporation, and any person who becomes a substituted managing partner
of the Partnership, in accordance with the terms of the Partnership Agreement.
"Mewbourne" shall mean MD and MOC.
"Mewbourne Holdings" shall mean Mewbourne Holdings, Inc., a Texas
corporation.
"Mewbourne Securities" shall mean Mewbourne Securities, Inc., a Texas
corporation.
"MD" shall mean Mewbourne Development Corporation, a Delaware
corporation.
"MOC" shall mean Mewbourne Oil Company, a Delaware corporation.
"Mr. Mewbourne" shall mean Curtis W. Mewbourne.
"Non-Capital Expenditures" shall mean those expenditures associated
with property acquisition and the drilling and completion of oil and gas wells
that under present law are generally accepted as fully deductible currently for
federal income tax purposes.
"OPEC" shall mean the Organization of Petroleum Exporting Countries.
"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.
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"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.
"Organization and Offering Expenses" shall mean all costs and expenses
incurred by MD and its Affiliates thereof in connection with the organization
of the Partnership and the 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, including without limitation, fees paid to
persons performing due diligence examinations or otherwise acting in relation
to the Partnership or MD with respect to the offering and sale of the Interests
and all expenses reasonable for MD and Affiliates thereof incurred in assisting
with the distribution of the Interests or such due diligence, but such term
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.
"Organizational Partner" shall mean Mr. Mewbourne.
"Overriding Royalty Interest" shall mean an interest in the oil and
gas produced pursuant to a specified Lease or Lease, or the proceeds from the
sale thereof, carved out of the Working Interest, to be received free and clear
of all cost of development, operation, or maintenance.
"Participants" shall mean MD and the Partnership, and a "Participant"
shall mean such Participants individually.
"Partners" shall mean the Investor Partners and the Managing Partner.
"Partnership" shall mean Mewbourne Energy Partners 97-A, L.P. formed
by MD and the Organizational Partner as provided in this Prospectus.
"Partnership Agreement" shall mean the Agreement of Partnership by and
among the Managing Partner and the Investor Partners of the Partnership, the
form of which is attached hereto as Exhibit A, as amended from time to time.
"Partnership Year" shall mean a period of one year with the first
Partnership Year commencing as of the date that 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.
A "person" shall mean 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 borrowed funds (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 Drilling Program Agreement by and
among the Participants for the Drilling Program, the form of which is attached
hereto as Exhibit B, as amended from time to time.
"Program Manager" shall mean MOC and any person who becomes the
successor Program Manager in accordance with the terms of the Program
Agreement.
"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
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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 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.
"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
includes:
(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 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 of the Partnership Agreement.
"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.
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"Right of Presentment" shall mean the right of Investor Partners to
request the Managing Partner to purchase for cash any or 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 the 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:
(1) voting rights;
(2) the term of existence of the Partnership;
(3) Sponsor compensation; or
(4) 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.
"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 (a) officers, directors or employees of MD
and Affiliates thereof, (b) officers, directors, employees, or registered
representatives of a Soliciting Dealer, or (c) an Affiliate of the Managing
Partner.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Sharing Ratio" shall mean for any Investor Partner in the Partnership
the proportion obtained by dividing (i) the amount of such Investor Partner's
Capital Contribution to the Partnership by (ii) the sum of all Capital
Contributions paid by Investor Partners to the Partnership; provided that in
the event of an assignment (voluntarily, by operation of law or the Partnership
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, 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.
"Simulated Basis" shall have the meaning ascribed to such term in
Section 7.1(c) of the Partnership Agreement.
"Simulated Depletion" shall have the meaning ascribed to such term in
Section 7.1(c) of the Partnership Agreement.
"Simulated Gain" shall have the meaning ascribed to such term in
Section 7.1(c) of the Partnership Agreement.
"Simulated Loss" shall have the meaning ascribed to such term in
Section 7.1(c) of the Partnership Agreement.
"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 the Interests.
"Special Subscription Instructions" shall mean, with respect to an
Investor Partner, the special subscription instructions that contain
representations, warranties, covenants, and agreements of such Investor
Partner, the form of which is attached hereto as Exhibit 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
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who controls 25% or more of the exploratory, developmental, or producing
activities of the Partnership or any segment thereof, 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. Whenever
the context requires, the term Sponsor shall be deemed to include its
Affiliates.
"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 in the
Partnership to which he is admitted as an Investor Partner that contains
certain representations, warranties, covenants, and agreements of such Investor
Partner, the form of which is attached hereto as Exhibit D.
"Subscription Documents" shall mean the Subscription Agreement and the
related questionnaires, Special Subscription Instructions, applications,
agreements, and other materials and documents furnished with this Prospectus.
"Super Majority In Interest" shall mean, with respect to any agreement
or vote of Investor Partners, Investor Partners whose combine 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 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.
TERMS OF THE OFFERING
GENERAL
MD is offering to qualified investors during 1997 an aggregate of up
to 2,000 ($2,000,000) Limited Partner Interests and up to 8,000 ($8,000,000)
General Partner Interests in the Partnership. The minimum offering amount for
the Partnership is 1,000 Interests ($1,000,000) with the maximum offering
amount being 10,000 Interests ($10,000,000). As initially formed, the
Partnership in addition to the Managing Partner, will have a single
Organizational Partner who will make a capital contribution of $100, which will
be refunded when the Organizational Partner withdraws from the Partnership at
the time the Investor Partners are admitted to the Partnership. The
Partnership will not commence operations prior to the termination of the
subscription period for Interests. The Partnership will participate, together
with MD and its Affiliates, in the Drilling Program. Pursuant to the Program
Agreement, the activities of the Partnership will focus upon the acquisition of
Leases, the drilling of Development Wells and development of Prospects and the
production and operation of the resulting properties.
The minimum subscription in the Partnership is five Interests
($5,000). The entire purchase price for each Interest must be paid in cash at
the time of subscription.
The execution of a Subscription Agreement by a subscriber or his
authorized representative constitutes a binding offer to buy Interests in the
Partnership and an agreement to hold the offer open until the subscription is
accepted or rejected by the Managing Partner. Once an investor subscribes for
Interests, he will not have any revocation rights. 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 thereof 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
certain documents and instruments. See "Summary of Partnership Agreement and
Program Agreement -- Power of Attorney."
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The Managing Partners and Affiliates thereof are eligible to subscribe
for Interests, provided that any Interests so purchased must be purchased for
investment purposes only and not for the purpose of resale or any further
public distribution. It is the Managing Partner's current intention that the
Managing Partner and/or an Affiliate thereof will subscribe for such number of
Interests as may be necessary for the Partnership to receive the minimum
subscription amount of 1,000 Interests ($1,000,000). The number of Interests
in the Partnership that may be purchased by the Managing Partner and/or
Affiliates thereof is not subject to any specific maximum limitations but
depends upon the number of subscriptions for Interests received and accepted
from non-Affiliates. There are no limitations upon the number of Interests
that may be purchased by the Managing Partner or its Affiliates and subject to
certain limitations, Interests purchased by the Managing Partner or its
Affiliates will have voting rights under the Partnership Agreement. See "Risk
Factors -- Particular Risks Relating to the Interests -- Ownership of Interests
by Affiliates of MD."
SUBSCRIPTION REFUNDS
If, within 12 months after the admission of the Investor Partners to
the Partnership, the Partnership has not expended or committed for expenditure
an amount equal to the total Capital Contributions of the Partnership's
Investor Partners, the Managing Partner shall distribute, as a return of
capital, to the Investor Partners on a pro rata basis the amount of such
unexpended and uncommitted Partnership funds, 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. 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 the Partnership will commence
on the date of this Prospectus and terminate on October 31, 1997, unless MD in
its sole discretion accelerates or delays the offering termination date,
provided that MD's ability to delay the offering termination date is subject to
its obligation to return the purchase price for any Interests not invested in
the Partnership within any period required by state securities law and in no
event will such termination be delayed beyond December 31, 1997.
The Partnership shall not be funded with less than $1,000,000 in
Capital Contributions from Investor Partners. If, at the end of the
subscription period for Interests in the Partnership, subscription funds of
less than $1,000,000 have been received by MD, such funds will be promptly
returned to subscribers.
SUITABILITY STANDARDS
General.
Investment in the 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 the Partnership, and the satisfaction of such
requirements by a prospective investor does not necessarily mean that an
investment in the 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 the Partnership are an appropriate
investment for an investor in light of the suitability standards set forth
herein and that an investment in Interests is consistent with such investor's
investment objectives and financial situation. In addition, such persons will
make every reasonable effort to assure that (a) such subscriber is or will be
in an appropriate financial position which will enable him/her to realize to a
significant extent the benefits described in this Prospectus, including the tax
benefits, (b) the subscriber has a fair market net worth sufficient to sustain
the risks inherent in an investment in the Partnership,
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including loss of investment and lack of liquidity, (c) an investment in the
Partnership is otherwise suitable for such subscriber, and (d) 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. Such information will be maintained by the Managing Partner
and the applicable Soliciting Dealer for at least 6 years.
Minimum Suitability Standards
Each subscriber for Interests must represent in writing that he/she
has (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).
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 Investor 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, INDIANA, MICHIGAN, MISSOURI, NORTH CAROLINA, OHIO,
PENNSYLVANIA, SOUTH CAROLINA, TENNESSEE, TEXAS, UTAH, VIRGINIA, AND WEST
VIRGINIA, RESIDENTS. A resident of the States of ARIZONA, INDIANA, MICHIGAN,
MISSOURI, NORTH CAROLINA, OHIO, PENNSYLVANIA, SOUTH CAROLINA, TENNESSEE, TEXAS,
UTAH, VIRGINIA, AND WEST VIRGINIA, and who are subscribers for General Partner
Interests must represent in writing that he/she has (a) minimum net worth of
$225,000 without regard to the investment in the Partnership (exclusive of
home, home furnishings and automobiles) and a minimum annual gross income of
$100,000 for the current year and for the two previous years ($60,000 or more
for the previous year and expects to have an annual gross income of $60,000 or
more for the current year and for the succeeding year for Arizona and Missouri
residents); 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.
For ARIZONA Residents. A resident of the State of ARIZONA who
subscribes for Limited Partner Interests must (a) have a net worth of not less
than $225,000 (exclusive of home, home furnishings and automobiles) or (b) have
an annual gross income of not less than $75,000 and a net worth of not less
than $75,000 (exclusive of home, home furnishings, and automobiles). The
subscriber must represent in writing that the investment in the 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 (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); and a resident of the State of CALIFORNIA
who subscribes for General Partner Interests must represent in writing that
he/she has (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.
For MICHIGAN and OHIO Residents. A resident of MICHIGAN OR OHIO must
represent that the investment in the Partnership does not exceed ten percent of
the subscriber's individual or joint net worth (exclusive of home, home
furnishings, and automobiles).
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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 (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 estimates
that he/she 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).
Additional Requirements.
IN THE CASE OF SALES TO IRAS, KEOGH PLANS, AND CERTAIN EMPLOYEE
BENEFIT PLANS, THE SUITABILITY STANDARDS MAY BE MET BY THE ACCOUNT OR BY EACH
BENEFICIARY OF THE ACCOUNT, OR WHERE THE FIDUCIARY IS THE DONOR OF THE FUNDS
FOR INVESTMENT IN THE PARTNERSHIP, THE SUITABILITY STANDARDS MAY BE MET BY THE
FIDUCIARY. IN THE CASE OF SALES TO A FIDUCIARY ACCOUNT HAVING A RESIDENT OF
THE STATE OF ARIZONA, THE SUITABILITY REQUIREMENTS SHALL BE MET BY THE
BENEFICIARY, FIDUCIARY ACCOUNT, OR BY THE DONOR OR GRANTOR WHO DIRECTLY OR
INDIRECTLY SUPPLIES THE FUNDS FOR THE INVESTMENT IN INTERESTS IF THE DONOR OR
GRANTOR IS THE FIDUCIARY, AND IN THE STATE OF NORTH CAROLINA, THE SUITABILITY
REQUIREMENTS SHALL BE MET BY THE FIDUCIARY OR THE FIDUCIARY ACCOUNT OR BY THE
DONOR WHO DIRECTLY OR INDIRECTLY SUPPLIES THE FUNDS FOR THE INVESTMENT IN THE
PARTNERSHIP. THESE SUBSCRIBERS SHOULD ALSO CAREFULLY REVIEW THE DISCUSSION
UNDER "TAX ASPECTS -- GENERAL TAX PROVISIONS -- INVESTMENT BY TAX-EXEMPT
ENTITIES," WHICH INDICATES, AMONG OTHER THINGS, THAT SUBSTANTIALLY ALL OF THE
INCOME FROM THE PARTNERSHIP'S OPERATIONS WILL CONSTITUTE "UNRELATED BUSINESS
TAXABLE INCOME" FOR TAX PURPOSES AND MAY GIVE RISE TO TAX LIABILITY TO THE
INVESTOR.
Transferees of Interests seeking to become substitute Investor
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 certain 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.
For CALIFORNIA Residents. Assignability or transfer of an Interest
must be limited so that no assignee or assignor, transferee or transferor may
hold less than $5,000 in Interests. See the Special Subscription Instructions
for restrictions that limit the transferability of Interests.
For NORTH CAROLINA Residents. The minimum subscription in the
Partnership is five Interests ($5,000). 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 $5,000.
It is anticipated that the 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.
SUBSCRIPTION PROCEDURE
An eligible subscriber may subscribe for Interests in the 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:
(a) A Subscription Agreement; and
(b) A check payable to the order of "NationsBank, Escrow
Agent for Mewbourne 97 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 MD at any time prior to the admission of Investor Partners to
the Partnership or MD elects not to admit Investor Partners to the Partnership,
fully paid subscriptions in proper form will be deemed accepted, subject to
reduction in accordance with the Subscription
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Agreement. By its terms, the Subscription Agreement constitutes a binding
agreement of the subscriber. Subject to the right of MD to reject
subscriptions, each subscriber will become an Investor Partner in the
Partnership at the time he is admitted to the Partnership. Investor Partners
will be admitted to the Partnership contemporaneously with the release of the
funds from the escrow account, and thereafter Investor Partners will be
admitted to the Partnership not later than the last day of the calendar month
in which their subscriptions were accepted by MD. Subscriptions will be
accepted or rejected by MD 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 Investor
Partners are not admitted to the Partnership on or before the expiration of the
subscription period for Interests in the Partnership, all subscription funds
relating to the 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
NationsBank Texas, N.A., Tyler, Texas, or another federally insured institution
designated by MD; provided that upon receipt and clearance of aggregate
subscription funds of $1,000,000 or more from subscribers that MD deems
suitable to be Investor Partners in the Partnership, MD may, upon written
request, cause those subscription funds to be withdrawn from the escrow account
and to be deposited in an account established for the Partnership and all
subscribers whose subscriptions have been accepted shall be admitted as an
Investor Partner in the Partnership within 15 days after such deposit.
Thereafter, subscription funds will be deposited in the Partnership account
with each subscriber whose subscription has been accepted being admitted as an
Investor Partner in the Partnership no later than the last day of the calendar
month in which such subscription was accepted. Until subscribers are admitted
as Investor Partners in the 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, or 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 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 the
Partnership.
After the subscription period for the Partnership has expired, no
additional Interests in the Partnership will be offered or sold. Notice of the
admission of Investor Partners to the Partnership and the percentage of
ownership of each Investor Partner therein will be furnished to each Investor
Partner following their admission to the Partnership.
No Organization and Offering Expenses, Sales Commissions or Due
Diligence Fees will be paid from subscription funds of the Investor Partners.
The Managing Partner, or an Affiliate thereof, shall advance on behalf of the
Partnership the amount of all Organization and Offering Expenses, Sales
Commissions and Due Diligence Fees attributable to the Partnership. Pursuant
to the soliciting dealer agreements between MD and the Soliciting Dealers, the
advancement of Sales Commissions and Due Diligence Fees may occur prior to the
time that $1,000,000 or more of subscription funds have been received and
cleared from subscribers that MD deems suitable to Investor Partners in the
Partnership. The Partnership shall reimburse the Managing Partner the amount
of such advanced Organization and Offering Expenses, Sales Commissions and Due
Diligence Fees, plus interest on the unreimbursed amount at a per annum rate of
interest equal to the Base Rate calculated commencing as of the date that the
offering of Interests in the Partnership closes, only from funds which would
otherwise be available for distribution to the Partners in the Partnership.
Such reimbursement shall not be made from Capital Contributions of the Investor
Partners.
Pending their use in Partnership activities, MD 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
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investments. Any interest earned on Capital Contributions from Investor
Partners will be allocated solely to the Investor Partners, and will be
distributed to the Investor Partners periodically. See "Participation in Costs
and Revenues." Funds of the Partnership will not for any purpose be commingled
with funds of the Managing Partner or an Affiliate thereof or any other entity.
NO SUBSCRIPTION AGREEMENT WILL BE ACCEPTED UNTIL AT LEAST 5 BUSINESS
DAYS HAVE ELAPSED FROM THE DATE THAT THE SUBSCRIBER RECEIVED A COPY OF THIS
PROSPECTUS.
CONVERSION OF GENERAL PARTNER INTERESTS
MD anticipates that the General Partner Interest in the Partnership
held by a General Partner (a "Converted Partner") will be converted to a
Limited Partner Interest in the Partnership following the completion of the
Partnership's drilling activities (which MD anticipates will occur within
approximately 8 to 12 months after the funding of the 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 Partnership obligations. See "Liability of Investor 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 the 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 Partnership; 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 the Partnership may request in writing that
the Managing Partner purchase for cash any or all of that Investor Partner's
Interests on the terms and subject to the limitations set forth below (the
"Right of Presentment"). The Managing Partner may cause an Affiliate thereof to
fulfill its obligation hereunder to purchase all or a portion of such Interests.
Investor Partners in the Partnership may make such requests in each of the years
2001 through 2006. 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 - Partnership Taxation." If the
obligation of the Managing Partner or its purchaser designee to purchase
Interests from Investor 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 of the
Partnership in any single calendar year is limited to no more than 5% of the
total number of Interests of the 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 Mewbourne
or an Affiliate serves as Sponsor shall not exceed $500,000. Additionally, if
subsequent to the Valuation Date, 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, then the Managing Partner
may in its sole and absolute discretion refuse to purchase any Interests in the
Partnership.
During the first calendar quarter of each of the years during which
the Right of Presentment exists, each Investor Partner in the Partnership may
request in writing that the Managing Partner purchase all or less than all of
his Interests. Prior to May 1 of each such year, the Managing Partner will
notify each requesting Investor Partner in the manner prescribed by Section
11.1 of the Partnership Agreement of the amount that the Managing Partner
or its purchaser designee will pay to purchase each Interest and those Investor
Partners shall have twenty (20) days from the receipt of such notice in which
to elect whether to present their Interests for purchase. If a
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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 the Partnership will be the pro rata share represented by his
Interests of 99% of the sum of (a) 65% of the unescalated value of future net
revenues attributable to Proved Developed Producing Reserves of the
Partnership, and (b) 50% of the unescalated value of future net revenues
attributable to Proved Developed Non-Producing Reserves of the 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
the Partnership's debts, expenses, and obligations of all kinds incurred and
then allocable to those Interests. The purchase price will be determined as of
December 31 of the year immediately preceding the year in which the right of
presentation is being exercised (the "Valuation Date"). Any cash distributions
to an Investor Partner after the Valuation Date 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, the Partnership will cause an Independent Expert to estimate
annually the future net revenues attributable to the Partners' interests in the
Partnership's Proved Reserves on an unescalated basis based upon pricing for
oil and gas being received by the Partnership as of the Valuation Date. Such
future net revenues attributable to Proved Reserves (a) 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 (b) will then be discounted to
present value at a rate equal to the prime rate of interest on the Valuation
Date charged by NationsBank Texas, N.A., Dallas, Texas, plus 2%. 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 pursuant to the Right of
Presentment. If the Managing General Partner assigns or transfers its interest
in the 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 Partner who sells an Interest pursuant to 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 therefrom 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 pursuant to 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."
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ADDITIONAL FINANCING
General. The actual costs of the proposed drilling activities of the
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 the Drilling Program may be required to complete such
drilling activities, to further develop Drilling Program Leases and to pay for
certain other Drilling Program operations including the acquisition of
additional Leases. The Partnership Agreement does not provide for any
additional assessments, either mandatory or voluntary of any Investor Partners.
Thus, it is anticipated that the 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 the
Partnership might have to forego further drilling activities or development of
Drilling Program Leases. Also, the terms of certain Leases may bind the
Participants to a specified drilling schedule and the inability of the
Partnership to fund on a timely basis its portion of the cost of such
additional specified drilling could result in the forfeiture of the
Partnership's interest in such 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 MD including Affiliated
Programs, under which circumstances the 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 the Partnership and to mortgage
or pledge the Partnership's property (including production therefrom) as
security therefor and to engage in any other method of financing customary in
the oil and gas industry. The sum of outstanding borrowings by the Partnership
(which includes the Partnership's reimbursement obligation for advanced
Organization and Offering Expenses, Sales Commissions and Due Diligence Fees)
may not at any time exceed 20% of the aggregate Capital Contributions of the
its Investor Partners. The Partnership Agreement permits borrowing to finance
the acquisition of new Leases in new or existing Prospects and for other
Partnership operations, including without limitation drilling and completion
activities. The Partnership may borrow funds only if the lender agrees that it
will have no recourse against the individual Investor Partners. Borrowings may
be secured by the Partnership's assets or income and may be made with or
without recourse to the Managing Partner. MD contemplates, however, that any
borrowing by the Partnership will be incurred without recourse to the Managing
Partner and will be secured by the Partnership's property. MD does not
presently intend to guarantee nonrecourse loans by third parties to the
Partnership. The 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 thereof or that financing can be obtained at satisfactory interest
rates or terms. Partnership borrowings will be repaid from Partnership
revenues allocable to the Partners, thereby reducing the amounts available for
distribution to them and creating the 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."
The Partnership Agreement further authorizes the Managing Partner and
Affiliates thereof to make loans to the Partnership for purposes permitted by
the Partnership Agreement. Interest charged by the Managing Partner or any
Affiliate thereof on advances made by the Managing Partner or such Affiliate to
the Partnership will be at a rate not in excess of the lesser of the effective
rate then being paid by the Managing Partner or such 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 thereof may
not receive points or other financing charges or fees on advances made by it to
the Partnership. In addition, the Partnership may not make loans to the
Managing Partner or any Affiliate thereof. The Managing Partner may pledge its
interest in Partnership revenues but may not pledge Partnership assets for its
own benefit. MD, however, may pledge its directly owned interest in Drilling
Program properties at any time and may sell its interests in Drilling Program
properties pursuant to the Program Agreement after the cessation of
substantially all drilling activities of the Drilling Program.
PLAN OF DISTRIBUTION
Subscription for Interests will be solicited on a "minimum/maximum
best efforts" basis (that is the Soliciting Dealers are not obligated to
purchase any Interests not purchased by investors) by Soliciting Dealers that
are members
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of the National Association of Securities Dealers, Inc. Mewbourne Securities,
an Affiliate of MD, is a broker-dealer which may act as a Soliciting Dealer for
the Partnership. 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.
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 (a) officers, directors,
or employees of MD or its Affiliates, (b) officers, directors, employees, or
registered representatives of a Soliciting Dealer, or (c) an Affiliate of the
Managing Partner. The total commission and fees paid to a particular
Soliciting Dealer may be comprised of (i) a Sales Commission in an amount up to
8% of the sales price of Interests in the Partnership sold by such Soliciting
Dealer, and (ii) a Due Diligence Fee in an amount of up to .5% of the sales
price of Interests sold by such Soliciting Dealer; provided that the aggregate
commission and fees paid to a Soliciting Dealer under clauses (i) and (ii)
shall not exceed 8.5% of the sales price of Interests in the Partnership sold
by such Soliciting Dealer. The Managing Partner, or an Affiliate thereof,
shall advance on behalf of the Partnership the amount of all Sales Commissions
and Due Diligence Fees attributable to the Partnership. The Partnership shall
reimburse the Managing Partner the amount of such advanced Sales Commissions
and Due Diligence Fees, plus interest on the unreimbursed amount at a per annum
rate of interest equal to the Base Rate calculated commencing as of the date
that the offering of Interests in the Partnership closes, from funds which
would otherwise be available for distribution to the Partners in the
Partnership. Such reimbursement shall not be made from Capital Contributions
of the Investor Partners.
MD has engaged its Affiliate, Mewbourne Securities, 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 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. MD and the Partnership
have agreed to indemnify the Soliciting Dealers including Mewbourne Securities,
under certain circumstances, against certain civil liabilities, including
liabilities arising under such Act.
In offering the Interests, in addition to this Prospectus, MD 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, certain 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 MD for use in connection with this
offering.
INVESTMENT OBJECTIVES
The Partnership will participate in the Drilling Program, to be
managed by MOC in its capacity as Program Manager, consisting of the
acquisition and development of Prospects. The primary investment objective of
the 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 certain tax
benefits, consisting principally of deductions for intangible drilling costs,
depletion, and depreciation. To the extent that the operations of the
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 "Proposed Activities" and "Tax Aspects."
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PROPOSED ACTIVITIES
Pursuant to the Program Agreement, the activities of the Partnership
will focus upon the acquisition of Leases, the drilling of Development Wells,
development of Prospects, 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 the 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. MD will act as the
Managing Partner of the Partnership. See "Summary of Partnership Agreement and
Program Agreement -- Rights and Powers of the Managing Partner." MOC will act,
in its individual capacity, as the Program Manager of the Drilling Program and
as operator under the Operating Agreement.
Mewbourne intends to cause the Partnership 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 the
Partnership. Among these reasons are that the Partnership has yet to acquire
Working Interests or other rights to any particular Leases and it will do so
only after the prospective offering of Interests therein is completed.
Further, the amount of capital that will be raised by the Partnership as a
result of this offering has not yet been determined. The result of the initial
drilling activities conducted by the Partnership also may have a significant
effect on the number and location of subsequent wells. Decisions as to the
management, business, and affairs of the Partnership will be made by the
Managing Partner based upon its judgment at the time as to the best interests
of the Partnership. Set forth below is a summary of some of the basic policies
and objectives that MD expects to follow in making such decisions.
DEVELOPMENT POLICY
Pursuant to the Program Agreement, the activities of the Partnership
will focus upon the acquisition of Leases, the drilling of Development Wells,
development of Prospects, 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 the 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. The number and type
of wells to be drilled by the 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.
Decisions as to the number and location of the Prospects in which the
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 Program Manager
on behalf of the Drilling Program.
MD will designate in writing the area comprising a Prospect in which
the Partnership is to acquire an interest pursuant to the related 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 MD 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, MD, acting in good faith, shall be permitted to limit or
reduce the area of a Prospect to the extent permitted by the definition of the
term "Prospect." See "Definitions."
Mewbourne intends to cause the 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. The number of subscriptions received
and accepted from investors will necessarily affect the number of Prospects in
which the Partnership can participate.
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AREA OF GEOGRAPHIC CONCENTRATION
MD anticipates that all of the 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 MD determines that it
is in the best interest of the Drilling Program to conduct additional drilling
activities in other onshore geographic areas of the United States, the Drilling
Program and the Partnership may expend available funds in such areas. At the
present time, the Partnership is 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 the
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, MD
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 32 years, MOC and its Affiliates have conducted
operations throughout the Permian Basin. MOC currently operates approximately
133 wells in the Permian Basin and MOC and its Affiliates have drilled
approximately 145 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 Partnership 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
the Partnership will, through the 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 MOC in this region of the Permian Basin
are classified as gas wells but produce both oil and gas. However, MOC 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.
Production in the Anadarko Basin ranges from several hundred feet to
over 26,000 feet in depth. Over the past 20 years, MOC and its Affiliates have
drilled approximately 325 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. MOC currently operates
approximately 196 wells in the Anadarko Basin. It is anticipated that the
Partnership will, through the Drilling Program, conduct a portion of its
drilling and development activities along the shelf area of Western Oklahoma
and the Texas Panhandle. A majority of the wells drilled by MOC over the past
20 years in this region of the Anadarko Basin have been classified as gas wells
but produce both oil and gas. However, MOC and its Affiliates have drilled a
number of wells in this area which have been classified as oil wells.
PROSPECT EVALUATION
MOC currently employs 15 engineers, 4 geologists and 7 landmen which
are available to assist in Prospect origination for each Drilling Program. It
is anticipated that MOC will conduct substantially all Prospect origination for
the Drilling Program. Prospect origination is the process of formulating a
geological or geophysical concept and negotiating for the acquisition of a
sufficient acreage interest in the area to warrant drilling and testing.
Before selecting a Prospect for the Partnership, MOC 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.
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COST ESTIMATES
Prior to conducting drilling activities on behalf of the Partnership,
MD will estimate the costs to be incurred by the Partnership in drilling the
wells planned for the Partnership. Such estimates will be based upon MD's
historic experience and contracts to be entered into by MD or its Affiliates
and non-Affiliated drilling contractors fixing the footage drilling rates, and
in certain circumstances stimulation costs to be incurred by the Partnership.
ACQUISITION OF LEASES
The decision for the 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 Program Manager or independent
geologists or engineers. To assist in conducting and interpreting such
evaluations, MD or its Affiliates employ a staff of technical personnel. See
"Management."
TRANSACTIONS WITH AFFILIATES
Sale of Leases to the Partnership. All Leases to be acquired by the
Partnership will be selected by the Managing Partner from a variety of
Prospects, substantially all of which will be originated by MOC. 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 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:
(a) 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 reasonable grounds to believe that the
Lease Acquisition Costs is 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.
(b) 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 equally proportionate interest in all
other Leases that it owns in the same Prospect.
(c) If at any time within a period of five years from the
Partnership's funding, 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 (i) 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 (ii) 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.
(d) If the area constituting the 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 under
this heading in the Prospectus, if the activities of the Partnership
were material in establishing the existence of Proved Undeveloped
Reserves which are attributable to such Lease.
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(e) A sale, transfer, or conveyance 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 revenues does not exceed the amount proportionate to its retained
Working Interest. Neither the Managing Partner, nor any Affiliate
thereof may retain any overriding royalty interest or other burden on
an interest conveyed to the Partnership.
(f) For the purposes of the preceding four paragraphs,
the term "Affiliate" does not include an Affiliated Drilling 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.
(g) 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 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.
Purchase of Leases from the Partnership. Neither the Managing Partner
nor any Affiliate thereof, including Affiliated Programs, may purchase or
acquire any Lease from the Partnership, directly or indirectly, except pursuant
to transactions that are fair and reasonable to the Partnership and then
subject to the following conditions:
(a) 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.
(b) A sale, transfer, or conveyance of a developed Lease
(i.e. a Lease 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
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.
(c) 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 the Partnership," 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 interest of the Partnership, the transfer may be
made at the Lease Acquisition Costs.
(d) 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 the Partnership," 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 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.
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Participation by Mr. Mewbourne. Mr. Mewbourne has historically
invested directly in the drilling and development activities of MOC and its
Affiliates during the past 32 years. In addition he has been an investor in
the joint ventures and drilling agreements through which other investors
participated in various MOC 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 intends to invest alongside the Partnership in the
activities of the 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 interests in the Leases, the amount of
capital available to the Partnership from subscriptions, the timing of the
drilling activities, and other such matters.
FARMOUTS
The Partnership will acquire only those 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 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 the
Partnership has insufficient funds to bear development costs accompanying a
Lease or where the development costs or attendant risks are substantial. The
Managing Partner may arrange for the development or disposition of the
Partnership's 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 (a) the Partnership lacks
sufficient funds to drill on the Leases and cannot obtain suitable alternative
financing for such drilling, (b) the Leases have been downgraded by events
occurring subsequent to their acquisition by the Partnership so that the
drilling of the Leases would no longer be desirable to the Partnership, (c)
drilling on the Leases would result in an excessive concentration of the
Partnership's funds in one location creating, in the opinion of the Managing
Partner, undue risk to the Partnership, or (d) the best interests of the
Partnership would be served by the farmout. The Partnership may also farmin
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. MD will not farmout a Lease for the primary purpose of avoiding
payment of its costs related to drilling such Lease or Prospect.
Any farmouts between the Partnership and MD or an Affiliate thereof
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 the Partnership and MD or an Affiliate thereof unless the Managing
Partner, exercising the standard of a prudent operator, shall determine that
the farmout is in the best interests of the Partnership and the Investor
Partners. The Partnership's authority to enter into farmouts with MD or an
Affiliate thereof is subject to the same restrictions as its authority to
purchase property from or sell property to MD 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
thereof to or from the Drilling Program will involve conflicts of interest, as
MD may benefit from cost savings and reduction of risk, and in the event of a
farmout or farmin to or from an Affiliated Program, MD will represent both
programs involved in the transaction. See "Conflicts of Interest."
For a discussion of certain 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 the Drilling Program will be conducted by MOC in
its capacity as the Program Manager (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) and all management functions of
the Partnership will be conducted by MD
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in its capacity as Managing Partner. MOC will perform all operating services
relating to Program Wells, and MOC 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 MOC 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. Mewbourne and Affiliates thereof currently employ approximately
85 persons on a full time basis, many of whom will be engaged in some aspect of
the Drilling Program's activities. In addition to its own employees, Mewbourne
may utilize the services of consultants for well drilling and completion
activities, production accounting and other activities. MD currently employs 4
persons, all of whom are members of MOC's executive management group.
Under the Program Agreement, MOC has agreed to act as operator with
respect to drilling and production operations conducted on each Program Well,
except in those instances in which (a) the 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, (b) the requisite number of
third parties being joint Working Interest owners in such well decline to
approve MOC as operator, or (c) MOC determines in good faith that it is not in
the best interests of the Participants and of MOC for it to act as operator. In
any case in which MOC or an Affiliate thereof acts as operator for the Drilling
Program's properties or provides other services or materials to the Drilling
Program, it will do so only pursuant to a written agreement and only on terms
and conditions comparable to those entered into by non-Affiliated parties in
the same area. Any such operating agreement will precisely describe the
services to be rendered and all compensation to be paid and will require the
Partnership and its Partners to pay only that portion of the fees allocable to
their Working Interest. Fees received by MOC or an Affiliate thereof under any
such operating agreement may constitute additional compensation. See
"Compensation and Reimbursement."
With respect to each Program Well for which MOC is to serve as
operator, all operations relating to such Program Well, including without
limitation, all costs and expenditures of drilling, testing, completing,
equipping, and operating such Program Well shall be conducted pursuant to an
operating agreement between MOC as operator, and the Participants as
non-operator, with such operating agreement to be substantially in the form and
substance as the Operating Agreement attached hereto as Attachment B to the
Program Agreement. 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 being joint working
owners in such Program Well, nevertheless, the Operating Agreement between MOC
and the Participants shall govern operations as between them. However, 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, except that the Operating Agreement may not be
amended in any manner that the Managing Partner determines will adversely
affect the Partnership or the Investor Partners in any material respect. 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 in the Program Agreement or in
the Operating Agreement between MOC and the Participants.
TITLE TO PARTNERSHIP PROPERTIES
Program Wells will be drilled on 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 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. In addition, a drilling title opinion is generally secured before
commencement of drilling operations. Title to the Partnership's properties
will be held temporarily in the name of MOC in the capacity of nominee, with
record title being transferred to the Partnership following commencement of
production from a Program Well. In certain circumstances the Partnership will
not receive record title. These circumstances include without limitation (a)
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) or (b) in the case of a federal, state, or other
Lease, where an approval to the transfer is required (in which event the
Program Manager will take steps to obtain approval of appropriate
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authorities to the assignment to the Participants as promptly as possible).
All records of the Partnership, the Drilling Program, and MOC will indicate
that any such Lease is so held.
INSURANCE
MD expects to conduct the business of the Partnership and to cause MOC
to conduct the business of the 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 the Partnership. See "Liability of
Investor Partners -- General Partners" for a discussion of the potential
liability of General Partners. It is anticipated that drilling activities of
the Partnership will be conducted in the medium depths (i.e. 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. MOC and its Affiliates have drilled
approximately 606 wells in the 32 years since 1965, and except for one well
drilled in 1982 as to which a downhole blowout occurred (resulting in claims of
approximately $923,202 which were fully insured subject to the applicable
deductible), MOC and its Affiliates have not experienced any material
explosion, fire, or similar hazard with respect to any of these wells. MOC and
its Affiliates will maintain extensive insurance coverage to protect, to the
extent practicable, the Partnership from losses that could arise in connection
with program activities, including legal and contractual liability to third
parties.
MOC 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, MOC and its Affiliates will not be required
to retain operator's extra expense and care, custody and control insurance
coverage for any Participant after the Drilling Program has completed its
drilling activities.
A brief discussion of the insurance policies that MOC and its
Affiliates have obtained on behalf of themselves and the Participants
(collectively, the "Insured") is set forth below. Each of those policies is
subject to certain terms, conditions, exclusions, and limitations that may
preclude the Partnership from recovering damages, expenses, and liabilities
suffered by the Partnership, including typically, damages and liabilities
arising from or caused by (a) the violation of any federal, state, or local
statute, ordinance, or regulation, (b) fines, penalties, and punitive and
exemplary damages, (c) war and terrorist acts, (d) normal operation including
wear and tear, (e) faulty design, and (f) infidelity of employees. Certain
other exclusions that are customary in the insurance and oil and gas industries
may also apply, including in certain cases exclusions relating to pollution and
environmental damages. MOC believes that from time to time the terms,
conditions, exclusions, and limitations described in this section of the
Prospectus will prevent the 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 the Partnership may not recover any
portion of such damages, expenses, and liabilities.
If MOC 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 the Partnership, the offering of Interests in the Partnership shall cease,
and subscribers for Interests who have not been admitted as Investor Partners
in the Partnership shall receive a refund of their subscription funds. The
Managing Partner will notify Investor Partners of any material reduction in the
insurance coverage of the Drilling Program and Partnership. Such notice shall
be given thirty days in advance of the change in insurance coverage. In
addition, if the Drilling Program or the Partnership has its insurance coverage
materially reduced for any reason, the Partnership will halt all drilling
activity until such time as comparable replacement coverage is obtained.
MOC 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 MOC,
its Affiliates and its employees and agents in the conduct of the business of
MOC and its Affiliates. The coverage amount under each of these policies is
limited to $1,000,000 per occurrence. In addition, MOC and its Affiliates
maintain a comprehensive energy package (the "Package") and an excess liability
policy that together provide an additional coverage amount of $50,000,000 per
occurrence. The Package and excess liability policy are in effect and are
renewed annually, but may be cancelled by the insurance underwriters upon a
minimum of 60 days written notice.
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The physical damage section of the 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 certain other personal
property) for which the insured has liability or is legally liable, subject to
a maximum deductible of $5,000 per occurrence ($25,000 in the case of
earthquake).
The operators extra expense/seepage and pollution section of the
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 (a) 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,
(c) 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, (d) 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 (e) 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 (e.g. libel, slander, defamation, invasion of privacy) caused by or
arising out of an occurrence happening anywhere in the world. 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 certain waste substances or the
transportation of certain waste substances.
DUE DILIGENCE REVIEW
Prior to entering into an agreement contemplating the sale of
Interests, personnel or agents of the Soliciting Dealers may upon request
review representative oil and gas properties which have been designated by or
held in the inventory of MOC or Affiliates thereof. There can be no assurance
that the oil and gas properties which are reviewed will be selected for
inclusion in the Drilling Program. Accordingly, Soliciting Dealers will be
required to sign an agreement not to discuss any of the oil and gas properties
in connection with the sale of Interests or otherwise to indicate any facts
concerning such properties except those discussed in this Prospectus or any
supplement or amendment hereto. Except as stated in this Prospectus or any
supplement or amendment hereto, no representations may be made in any oral or
written communication characterizing any oil and gas properties now in
inventory, nor should any decision to subscribe for Interests be made on the
basis of any representations concerning such oil and gas properties.
THE MANAGING PARTNER'S POLICY REGARDING ROLL-UP TRANSACTIONS
Although the Managing Partner has no intention of causing the
Partnership to engage in a Roll-Up transaction, it is possible at some
indeterminate time in the future that the Partnership will become so involved.
A Roll-Up means a transaction involving the acquisition, merger, conversion, or
consolidation, either directly or indirectly, of the 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 the Partnership if, as the consequence of the
transaction, there will be no significant adverse change in any of the
following (a) voting rights, (b) the term of existence of the entity (formerly
the Partnership), (c) compensation to the Managing Partner and its Affiliates,
or (d) 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 Investor Partners described below
would not be available to the Investor 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 Investor Partners.
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The Partnership Agreement provides various policies in the event that
a Roll-Up should occur in the future. These policies include:
(a) 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 Investor Partners in
connection with a proposed Roll-Up.
(b) Any Investor Partner who votes "no" on the Roll-Up
proposal would be offered a choice of:
(i) accepting the securities of the Roll-Up
Entity offered in the proposed Roll-Up; or
(ii) either (A) remaining a 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.
(c) The Partnership will not participate in a proposed
Roll-Up (i) which would result in the diminishment of the Investor
Partners' voting rights set forth in Sections 6.4 and 6.5 of the
Partnership Agreement under the Roll-Up Entity's organizational
documents, (ii) 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), (iii) 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, (iv) in which the Participants' rights of access to
the records of the Roll-Up Entity would be less than those provided in
Section 7.1(a) and (b) of the Partnership Agreement, or (v) in which
any of the costs of the transaction would be borne by the Partnership
if the proposed Roll-Up were not approved by the Investor Partners.
(d) Any Roll-Up transaction involving the Partnership
requires the approval of a Super Majority in Interests.
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 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 (i) not consummate the proposed Roll-Up if any Investor
Partner votes "no" or (ii) offer the Investor Partners option (b)(ii)(B) above,
rather than option (b)(ii)(A) above, as to the particular proposed Roll-Up.
(Note that the Managing Partner would be required to offer option (b)(i) and
either option (b)(ii)(A) or option (b)(ii)(B), but not both option (b)(ii)(A)
and option (b)(ii)(B)).
Investor Partners should understand that the selection of a cash
payment in an amount equal to an Investor Partner's pro-rata share of the
appraised value of the net assets of the Partnership may not fully compensate
such Investor Partner for the investment package selected by such Investor
Partner when such Investor Partner acquired his Interests in the Partnership.
PARTNERSHIP DISTRIBUTIONS
That portion of the Partnership's revenues, if any, which in the sole
judgment of the Managing Partner are not required to meet the obligations of
the Partnership, including but not limited to, the obligation of the
Partnership to reimburse the Managing Partner and its Affiliates for certain
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. In addition, a portion of
the Partnership's funds otherwise distributable to each Investor Partner will
be subject to the reimbursement of advanced Sales Commissions and Due Diligence
Fees and to the payment of the Management Fee by the Partnership to the
Managing Partner. See "Compensation and Reimbursement." Such reimbursements
and payments by the 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
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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.
APPLICATION OF PROCEEDS
Interests in the Partnership may be sold in an aggregate amount from
$1,000,000 to $10,000,000. Investor Partners will be admitted to the
Partnership only if the Partnership receives aggregate Capital Contributions of
at least $1,000,000. All of the Capital Contributions of the Partnership will
be available for use in the acquisition of interests in Prospects and the
drilling and completion of oil and gas wells thereon.
As set forth above, the Partnership may receive Capital Contributions
by the Investor Partners ranging from a minimum of $1,000,000 to a maximum of
$10,000,000. Regardless of the amount of Capital Contributions received, the
Partnership will have sufficient capital to engage in the proposed activities
as set forth under "Proposed Activities." However, to the extent that the
Partnership receives the minimum Capital Contributions, the ability of the
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 the Partnership will depend upon the amount of Capital Contributions
received, 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.
The 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."
MD estimates that of the total funds available to the Partnership for
the acquisition of interests in Prospects and the drilling and completion of
wells thereon, and of each individual $1,000 Interest, approximately 15% to 25%
will be expended for Lease Acquisition Costs of Prospects and approximately 75%
to 85% will be expended for drilling and well completion costs. These
percentages are estimates only, and no assurance can be given that such
percentages will be actually realized or that variations in the percentages
will not be significant to the Partnership.
The following table shows the calculation of the maximum and minimum
amounts which will be available for Drilling Program operations:
MAXIMUM CAPITAL MINIMUM CAPITAL
--------------- ---------------
Capital Contributions of Investor Partners . . . . $10,000,000 $1,000,000
Managing Partner's Capital Contribution(1) . . . . 101,010 10,101
Initial Partnership Capital and Total Partnership
Funds Available for Drilling Program Operations . . 10,101,010(2) 1,010,101(2)
Plus:
Contributions of MD as a Participant in the
Drilling Program(3) . . . . . . . . . . . . . . . . 208,269 20,827
TOTAL FUNDS AVAILABLE FOR DRILLING PROGRAM
OPERATIONS . . . . . . . . . . . . . . . . . . . . $10,309,279 $1,030,928
- --------------------
(1) Represents the minimum contribution required of the Managing Partner
under the terms of the Partnership Agreement. The Managing Partner
will contribute to the capital of the Partnership upon the admission of
its Investor Partners cash in an amount equal to 1.010101% of the
Capital Contributions of the Investor Partners and subsequently will
contribute such additional amounts in cash as may be necessary to pay
the costs and
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expenses allocated to the Managing Partner under the terms of the
applicable Partnership Agreement to the extent revenues allocated to
the Managing Partner are not available for the payment of such costs
and expenses.
(2) The Managing Partner, or an Affiliate thereof, shall advance on behalf
of the Partnership the amount of all Organization and Offering
Expenses, Sales Commissions and Due Diligence Fees attributable to the
Partnership. For purposes of the Partnership's reimbursement
obligation, the Organization and Offering Expenses for the Partnership
shall be an amount equal to 1% of the Capital Contributions initially
made by Investor Partners to the Partnership in exchange for their
respective Interests and such reimbursable Organization and Offering
Expenses range from a low of $10,000 (in the case of the Partnership
having the minimum capital of $1,00,000) to a high of $100,000 (in the
case of the Partnership having the maximum capital of $10,000,000).
The amount of reimbursable Sales Commissions and Due Diligence Fees for
the Partnership range from a low of $85,000 (in the case of the
Partnership having the minimum Capital of $1,000,000) to a high of
$850,000 (in the case of the Partnership having the maximum capital of
$10,000,000). The Partnership shall reimburse the Managing Partner the
amount of such advanced Organization and Offering Expenses, Sales
Commissions and Due Diligence Fees, plus interest on the unreimbursed
amount at a per annum rate of interest equal to the Base Rate
calculated commencing as of the date that the offering of Interests in
the Partnership closes, only from funds which would otherwise be
available for distribution to the Partners in the Partnership. Such
reimbursement shall not be made from Capital Contributions of the
Investor Partners. See "Participation in Costs and Revenues."
(3) Represents the amount of Lease Acquisition Costs and Drilling and
Completion Costs allocated to MD as a Participant under the terms of
the Program Agreement (not including any such costs which will be
allocated to MD under the terms of the Partnership Agreement).
PARTICIPATION IN COSTS AND REVENUES
COSTS AND REVENUES
The combination of the allocation provisions contained in the
Partnership Agreement and the related Program Agreement results in aggregate
allocations of revenues and costs, and income and gain relating thereto, to the
Investor Partners in the Partnership and to MD on a consolidated basis as set
forth in the table below:
INVESTOR
PARTNERS(1) MD
----------- --
Participation in Revenues:
-------------------------
Interest earned on Capital Contributions of Investor Partners(2) . . . . . 100% --
Proceeds from disposition of depreciable property and depletable oil
and gas property(3) . . . . . . . . . . . . . . . . . . . . . . . . . 87% 13%
All other revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87% 13%
Participation in Costs:
----------------------
Reimbursement Obligation for Advanced Organization and Offering Expenses,
excluding Sales Commissions and Due Diligence Fees(4) . . . . . . . . 99% 1%
Reimbursement Obligation for Advanced Sales Commissions and Due Diligence
Fees(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99% 1%
Management Fee(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99% 1%
Operating Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87% 13%
Administrative Costs(6) . . . . . . . . . . . . . . . . . . . . . . . . . . 87% 13%
Reporting and Legal Expenses . . . . . . . . . . . . . . . . . . . . . . . 87% 13%
Lease Acquisition Costs . . . . . . . . . . . . . . . . . . . . . . . . . . 97% 3%
Drilling and Completion Costs . . . . . . . . . . . . . . . . . . . . . . . 97% 3%
All other Direct Costs(7) . . . . . . . . . . . . . . . . . . . . . . . . . 87% 13%
- ------------------
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(1) The allocations in the table result generally from the combined effect
of the allocation provisions in the Partnership Agreement and the
Program Agreements. For example, under the Program Agreement, Lease
Acquisition Costs are allocated 97.979798% to the Partnership and
2.020202% to MD. The 97.979798% portion of these costs allocated to
the Partnership, when passed through to the Partnership, is further
allocated 99% to the Investor Partners and 1% to the Managing Partner.
In this manner the Investor Partners are allocated 97% of such costs
and MD is allocated 3% of such costs.
(2) Interest earned on the Managing Partner's required Capital Contribution
to the Partnership will be allocated 100% to the Managing Partner.
(3) Proceeds from the sale of an oil and gas property (or depreciable
property) to the extent of the 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 Investor
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.
(4) The Managing Partner, or an Affiliate thereof, shall advance on behalf
of the Partnership the amount of all Organization and Offering
Expenses, Sales Commissions and Due Diligence Fees attributable to such
Partnership. The Partnership shall reimburse the Managing Partner the
amount of such advanced Organization and Offering Expenses, Sales
Commissions and Due Diligence Fees, plus interest on the unreimbursed
amount at a per annum rate of interest equal to the Base Rate
calculated commencing as of the date that the offering of Interests in
the Partnership closes, only from funds which would otherwise be
available for distribution to the Partners in the Partnership. For
purposes of the Partnership's reimbursement obligation, the
Organization and Offering Expenses, Sales Commissions and Due Diligence
Fees for the Partnership shall not exceed an amount equal to 1%, 8% and
.5% respectively, of the Capital Contributions initially made by
Investor Partners to the Partnership in exchange for their respective
Interests. Such reimbursement shall not be made from Capital
Contributions of the Investor Partners. The timing and amount of the
reimbursement payments shall be determined in the discretion of the
Managing Partner; provided that the total amount of all reimbursement
payments made by the Partnership during a particular Partnership Year
shall not exceed an amount sufficient to amortize the original
principal amount of such advancement plus accrued interest on the
outstanding principal amount thereof in five equal annual installment
payments assuming that each such installment would be due on the
anniversary date of the date that Investor Partners were first admitted
to the Partnership; provided further that to the extent that the
Partnership has insufficient distributable funds during a particular
Partnership Year to fully amortize the reimbursement obligation payable
during such Partnership Year, then the amount of such unpaid
reimbursement obligation shall be carried forward and payable in the
next succeeding Partnership Year. The advancement of Organization and
Offering Expenses, Sales Commissions and Due Diligence Fees to the
Partnership and such Partnership's reimbursement obligation shall be
without recourse to the Investor Partners and shall solely be an
obligation of the Partnership. Such reimbursement shall not be made
from Capital Contributions of the Investor Partners and the Managing
Partner or Affiliate thereof making the advance shall bear the risk
that the Partnership will have sufficient funds to ultimately reimburse
such advancement.
(5) In consideration for services to be rendered by the Managing Partner in
managing the business of the Partnership, the Partnership during each
of the initial five Partnership Years of the Partnership shall pay to
the Managing Partner a Management Fee in an amount equal to 1.1% of all
Capital Contributions to the Partnership initially made by the Investor
Partners in exchange for their respective Interests in the Partnership
as set forth in the Subscription Agreements. The Management Fee
payable during the Partnership Year shall not be deducted from the
Capital Contributions of the Investor Partners, but shall be paid by
the Partnership in monthly or other periodic installments from funds
which would otherwise be available for distribution to the Partners in
the Partnership during the Partnership Year, and in such amounts as may
be determined in the discretion of the Managing Partner. To the extent
that the Partnership has insufficient distributable funds during a
particular Partnership Year (after the payment of the reimbursement of
advanced Organization and Offering Expenses, Sales Commissions and Due
Diligence Fees) to fully pay the amount of the Management Fee payable
during
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such Partnership Year, then the amount of such unpaid Management Fee
shall be carried forward and payable in the next succeeding Partnership
Year.
(6) Administrative Costs incurred by MOC or an Affiliate thereof in
managing and conducting the business and affairs of the Partnership and
its Drilling Program will be allocated 87% to the Investor Partners and
13% to MD. The amount of Administrative Costs that are reimbursed by
the Partnership shall be allocated to the Partnership and the 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. Regardless of the actual amount
of Administrative Costs incurred by the Managing Partner or the Program
Manager in connection with the affairs of the 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 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 MOC.
(7) All other Direct Costs will be allocated 87% to the Investor Partners
and 13% to MD.
DISTRIBUTIONS
That portion of the Partnership's revenues, if any, which in the sole
judgment of the Managing Partner are not required to meet the obligations of
the Partnership including, but not limited to, the obligations of the
Partnership to reimburse the Managing Partner and its Affiliates for certain
Administrative Costs and advances in respect of Sales Commissions and Due
Diligence Fees, 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. In addition, a portion of the Partnership's
funds otherwise distributable to each Investor Partner will be subject to the
payment of the Management Fee by the Partnership to the Managing Partner. See
"Compensation and Reimbursement." Such reimbursements and payments by the
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.
CAPITAL ACCOUNTS
A capital account will be maintained by the Partnership for each
Partner and by the Drilling Program for each Participant in the manner
described in "Tax Aspects -- Partnership Taxation -- Allocations."
ALLOCATIONS OF FEDERAL INCOME TAX ITEMS
Except as discussed above, all items of income, gain, loss, deduction
and credit of the Partnership will be allocated for federal income tax purposes
and charged or credited under the Partnership Agreement 1% to the Managing
Partner and 99% to the Investor Partners. All recapture of federal income tax
deductions and credits resulting from the sale or other disposition of
Partnership assets will be allocated to 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 Program Agreement in accordance with the
allocation of costs, revenues, and expenses described above.
Notwithstanding the foregoing, the Partnership Agreement provides that
if during any fiscal year of the Partnership, the allocation of any loss or
deduction (net of any income or gain) to a Partner (the "Deficit Partner")
would cause his capital account balance (as adjusted in accordance with
applicable Treasury Regulations for certain distributions and deductions
reasonably expected in subsequent years) to be less than zero as of the end of
such fiscal
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year (or would increase the amount by which such adjusted balance was less than
zero at the beginning of such taxable year), only the amount of such loss or
deduction that reduces the balance to zero shall be allocated to such Deficit
Partner and the remaining loss or deduction shall be allocated to the Partners
having positive capital account balances, as so adjusted. After any such
allocation, the Partnership income or gain (or amount realized in excess of
Simulated Basis) 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,
notwithstanding the foregoing allocations, if at the end of any fiscal year of
the Partnership the capital account balance (as adjusted in accordance with
applicable Treasury Regulations for certain distributions and deductions
reasonably expected in subsequent years) of any Partner is less than zero (the
"Negative Partner"), taking into account the allocations described immediately
above, Partnership income or gain (or amount realized in excess of Simulated
Basis) otherwise allocable for such fiscal year to the Partners having positive
capital account balances (or if there is none, Partnership income, gain, or
amount realized in the succeeding fiscal year or years) shall be allocated to
the Negative Partner in an amount necessary to cause such capital account
balance to equal zero. After any such allocation, the Partnership gain (or
amount realized in excess of Simulated Basis) 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, gain or amount
realized 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 Investor
Partners in the Partnership will be made in accordance with the proportion that
the Sharing Ratio of each Investor Partner in the Partnership bears to the
aggregate Sharing Ratios of all Investor Partners in the Partnership. An
Investor Partner's Sharing Ratio is equal to the amount determined by dividing
that Investor Partner's Capital Contribution in the Partnership by the
aggregate Capital Contributions of all Investor Partners in the 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 Partnership.
COMPENSATION AND REIMBURSEMENT
Mewbourne and Affiliates thereof will receive certain benefits, both
directly and indirectly, from MD's position as Managing Partner of the
Partnership and MOC's position as Program Manager of the Drilling Program,
which benefits may be considered to be compensation to Mewbourne and Affiliates
thereof. Such benefits consist of the following:
Form of Compensation/
Reimbursement Amount
------------- ------
Compensation - Management Fee Indeterminate - annual compensation during each of the
initial five years of the Partnership and based upon 1.1%
of the Capital Contribution by Investor Partners to the
Partnership and which shall be paid in periodic
installments from funds which would otherwise be available
for distribution to the Partners of the Partnership.
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Form of Compensation/
Reimbursement Amount
------------- ------
Reimbursement - Organization and Offering Expenses, The Partnership shall be obligated to reimburse the amount
Sales Commissions and Due Diligence Fees of Organization and Offering Expenses, Sales Commissions
and Due Diligence Fees advanced by MD or an Affiliate of
MD (which shall not exceed 9.5% of the Capital Contributions
of the Investor Partners to such Partnership) from funds which
would otherwise be available for distribution to the Partners.
See "Participation in Costs and Revenues."
Compensation - Organization and Offering Expenses, Sales In addition to the reimbursement of Organization and
Commissions and Due Diligence Fees Offering Expenses, Sales Commissions and Due Diligence
Fees described above, MD or its Affiliate, as applicable,
shall earn interest on the unreimbursed amount of
Organization and Offering Expenses, Sales Commissions and
Due Diligence Fees at a per annum rate of interest equal
to the Base Rate from funds which would otherwise be
available for distribution to the Partners.
Reimbursement - Administrative Costs Indeterminate - reimbursement based upon allocation made
in accordance with generally accepted accounting
principles - generally amount of reimbursement for a
particular calendar year may not exceed greater of (X)
3.5% of the Partnership's gross revenues or (Y) $50,000
plus .25% of Capital Contributions.
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 Program Indeterminate - based upon difference between MD's share
Participation of Partnership and Drilling Program revenues and MD's
share of Partnership and Drilling Program costs.
Compensation - Lending of funds to the 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 other Indeterminate - based upon competitive prices.
services
MANAGEMENT FEE
In consideration for services to be rendered by the Managing Partner in
managing the business of the Partnership, the Partnership during each of the
initial five Partnership Years of the Partnership shall pay to the Managing
Partner a Management Fee in an amount equal to 1.1% of all Capital
Contributions to the Partnership initially made by the Investor Partners in
exchange for their respective Interests in the Partnership as set forth in the
Subscription Agreements. The Management Fee payable during a particular
Partnership Year shall not be deducted from the Capital Contributions of the
Investor Partners, but shall be paid by the Partnership in monthly or other
periodic installments from funds which would otherwise be available for
distribution to the Partners in the Partnership during such Partnership Year,
and in such amounts as may be determined in the discretion of the Managing
Partner. To the extent that the Partnership has insufficient distributable
funds during a particular Partnership Year (after the payment of the
reimbursement of advanced Organization and Offering Expenses, Sales Commissions
and Due Diligence Fees) to fully pay the amount of the Management Fee payable
during such Partnership Year, then the amount of such unpaid Management Fee
shall be carried forward and payable in the next succeeding Partnership Year.
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PARTNERSHIP AND PROGRAM INTEREST
Under the terms of the Program Agreement and the Partnership Agreement,
MD will be allocated percentages of the Lease Acquisition Costs and Drilling
and Completion Costs with respect to Prospects which are lower than the
percentages of revenues to be received by MD. Such costs shall be allocated
97% to the Investor Partners and 3% to MD, and all revenues from Drilling
Program operations (other than from disposition of depletable or depreciable
property) generally shall be allocated 87% to the Investor Partners and 13% to
MD.
LEASE AND EQUIPMENT PURCHASES FROM MEWBOURNE
As provided in the Program Agreement, the Partnership may acquire from
MOC or Affiliates thereof an interest in certain Prospects. The price to be
paid to MOC or Affiliates thereof by the Partnership for a Lease will be based
on the amount of Lease Acquisition Costs incurred by MOC or Affiliates thereof
with respect to such Lease (or, in certain cases, the fair market value of such
Lease) prior to its assignment to the Partnership. In addition, the
Partnership may buy or lease supplies and equipment from MOC or Affiliates
thereof for compensation, prices or rentals that are no less favorable to the
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."
ADMINISTRATIVE COSTS
MD, as Managing Partner of the Partnership, and MOC, as Program Manager
of the 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 the Partnership's interest in
the Drilling Program or of the Partnership, as applicable. The amount of
Administrative Costs that are reimbursed by the Partnership shall be allocated
to the Partnership and the 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. Regardless of the actual
amount of Administrative Costs incurred by the Managing Partner or Program
Manager in connection with the affairs of the 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
Investor Partners to such 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 MOC.
Administrative Costs incurred by MOC or an Affiliate thereof in
managing and conducting the business and affairs of the Partnership and the
Drilling Program will be allocated 87% to the Investor Partners and 13% to MD.
MD anticipates that the amount of Administrative Costs allocated to the
Partnership in 1997 will range between $20,000 to $40,000. These expenses are
only estimates and they may vary due to the amount of capital raised, the date
the Partnership is funded, the costs actually incurred in the operation of the
Partnership and the Program, and inflationary trends. Such amount includes
Administrative Costs that MD or Affiliates thereof have incurred or which it is
estimated they will incur on behalf of the Partnership (including those
relating to the Partnership's interest in the 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 87% to the Investor
Partners in the Partnership and 13% to MD. Reporting and Legal Expenses are
estimated to be $15,000 for the Partnership for the first year following the
year in which Investor Partners are first admitted to the Partnership.
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ESTIMATED DRILLING PROGRAM EXPENSES
MD estimates that certain Direct Costs which are in the nature of
Reporting and Legal Expenses and Administrative Costs allocable to the
Partnership for the first twelve months of operation will be approximately
$66,000. MD estimates that the components of such allocable amounts will be as
follows:
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
Certain Direct Costs:
External Legal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,000
Audit Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,000
Independent Engineering Reports(1) . . . . . . . . . . . . . . . . . . . 5,000
TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $66,000
(1) Depending upon the timing of the funding and operation of the Partnership
the engineering costs may not be incurred in the first twelve months.
The expenses shown above are estimates only and may vary due to the amount of
capital raised, the date the Partnership is funded, the costs actually incurred
in the operation of the Partnership and the Drilling Program, and inflationary
trends.
PRIOR PARTNERSHIPS
In the past 5 years, MD has sponsored 10 partnerships. The total
amount of Administrative Costs incurred by those partnerships through December
31, 1996, and the percentage of subscriptions raised in each respective
partnership reflected thereby as compared to other costs incurred by each such
partnership, is presented in the following table.
Other Costs(1) Administrative Costs
------------------------- --------------------------
Percentage of Percentage of
Partnership(3) Amount Subscription Amount Subscriptions
--------------------------------------------------- ---------- ------------- ---------- -------------
Mewbourne Development Partners 92 GP $1,141,491 98.40% $32,886 2.84%
Mewbourne Development Partners 93-A LP 1,303,793 94.34% 21,708 1.57%
Mewbourne Development Partners 93-B LP 1,260,781 97.06% 25,520 1.90%
Mewbourne Development Partners 94-A LP 1,147,044 96.07% 22,413 1.88%
Mewbourne Development Partners 94-B LP 1,062,502 105.20% 24,435 2.42%
Mewbourne Development Partners 94-C LP 1,065,917 103.47% 23,064 2.24%
Mewbourne Energy Partners 1994 Private LP 1,511,158 102.80% 981 (2)
Mewbourne Energy Partners 95-A, L.P. 1,613,350 99.65% 30,898 1.91%
Mewbourne Energy Partners 95-B, L.P. 1,907,407 94.85% 5,239 0.26%
Mewbourne Energy Partners 96-A, L.P. 2,060,768 53.22% 0 0
- ----------------------
(1) Includes Leasehold Acquisition Costs, Drilling and Completion Costs,
and Direct Costs.
(2) Represents less than .01%.
(3) All partnerships are currently operating.
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CONTRACTS WITH MEWBOURNE AND AFFILIATES THEREOF
Mewbourne does not own any drilling rigs or service companies, and
except for the providing of gas compressors from an Affiliate of MD, MD
currently does not anticipate that it or its Affiliates will enter into
contracts with the Partnership for the rendering of services or the sale or
lease of supplies and equipment other than the Operating Agreement discussed
below. Nevertheless, MD and Affiliates thereof are permitted under the terms
of the Partnership Agreement to enter into contracts with the 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 MD or Affiliates thereof as
discussed in "Conflicts of Interest -- Contracts with Mewbourne and
Affiliates."
COMPENSATION AS OPERATOR
Except for certain instances described in the Program Agreement, MOC
has agreed to act as operator with respect to drilling and production
operations to be conducted on Program Wells. MOC 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 an
Operating Agreement or other applicable operating agreement, including, for
each Program Well, an initial fixed rate overhead charge for each 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 MOC or Affiliates thereof to the
Partnership under an Operating Agreement or other applicable operating
agreement for the use of MOC's or such Affiliate's personnel, properties, and
equipment, as well as the pricing of materials purchased by the Partnership
from MOC or such Affiliates or by MOC or such Affiliates from the Partnership,
will be subject to certain limitations imposed in the Partnership Agreement.
MOC's fees for services as an operator are calculated in accordance with the
guidelines set by the Council of Petroleum Accountants Societies of North
America. "Proposed Activities -- Operations" and "Conflicts of Interest." In
no event shall the consideration received for operator services duplicate any
other consideration or reimbursements received pursuant to the Program
Agreement.
PAST COMPENSATION
In connection with a series of five private limited partnerships
sponsored by an Affiliate of MD during 1977- 1980 and two private limited
partnerships and a series of eight public limited partnerships sponsored by MD
since December 1992, such partnerships have made the following payments to MD
and its Affiliates.
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PAYMENTS MADE TO MD AND AFFILIATES
December 31, 1995
Nonrecurring
Management
and Administrative
Organization Lease Operating Cost
Partnership Fee Acquisition(1) Equipment Fees Reimbursement
========================================================================================================================
Mewbourne Oil, Ltd. 1977(2) . . . . . . . . . . $35,000 $300,689 $ 795,925 $1,226,840 $ 753,129
Mewbourne Oil, Ltd. 1978A(4). . . . . . . . . . 54,450 639,122 2,241,711 3,772,909 1,834,852
Mewbourne Oil, Ltd. 1978B(3) . . . . . . . . . 47,216 332,025 1,584,709 2,608,629 1,250,786
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(4) . . . . 13,663 264,229 204,849 50,930 32,886
Mewbourne Development Partners 93-A, L.P.(4). . 13,682 106,510 283,410 98,435 21,708
Mewbourne Development Partners 93-B, L.P.(4). . 12,860 159,862 258,377 92,015 25,520
Mewbourne Development Partners 94-A, L.P.(4) . 11,820 211,002 204,278 67,294 22,413
Mewbourne Development Partners 94-B, L.P.(4) . 9,999 85,524 214,804 72,634 24,435
Mewbourne Development Partners 94-C, L.P.(4) . 10,300 95,054 210,644 66,803 23,064
Mewbourne Energy Partners 1994 Private L.P.(4) 0 221,296 185,088 53,854 981
Mewbourne Energy Partners 95-A, L.P.(4). . . . 0 375,541 287,517 68,127 30,898
Mewbourne Energy Partners 95-B, L.P.(4). . . . 0 512,952 182,904 52,897 5,239
Mewbourne Energy Partners 96-A, L.P.(4). . . . 0 629,944 82,324 28,604 0
_______________________________
(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.
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.
MD will serve as the Managing Partner of the Partnership and in such capacity
will have the sole power and authority to act on behalf of the Partnership with
respect to the management, control, and administration of the properties,
business, and affairs of the Partnership. MD 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 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. MOC
provides management and technical services and serves as operator for ventures
of Mewbourne Holdings, Inc., MD and Mr. Mewbourne. In this connection, MOC
develops oil and gas prospects, acquires leasehold interests, and serves as the
operator in the drilling, completion, and production of oil and gas wells. MOC
will also serve as the Program Manager and conduct the administration of the
business, and affairs of the Drilling Program. MOC maintains offices in Tyler,
Perryton and Midland, Texas; Hobbs, New Mexico; and Oklahoma City and Woodward,
Oklahoma. The general offices are located at 3901 South Broadway, Tyler, Texas
75701. MOC employs approximately 85 persons including 15 engineers, 4
geologists, 7 landmen, 9 accountants, and 10 other degreed administrative
professionals.
Mewbourne Holdings, Inc., a Texas corporation, was founded by Mr.
Mewbourne in 1965. Mewbourne Holdings is a privately owned corporation which
serves as the parent company for both MD, MOC, and their Affiliates.
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OWNERSHIP STRUCTURE OF MEWBOURNE COMPANIES
Corporate Structure
Mewbourne Holdings, Inc.----------------
| |
Mewbourne |
Financial |
Corporation Mewbourne
| Development
| Corporation,
| Managing General
Mewbourne Oil Partner
Company, |
|
Operator/Program Mgr. Mewbourne
| Energy ------ INVESTORS
| Partners 97-A
| |
Curtis W. | |
Mewbourne ------- | |
or Affiliates | | |
|--Program Wells ----------------------
Mewbourne |
Operated Joint |
Ventures -------
or Partnerships
Both MD and MOC are directly or indirectly wholly owned subsidiaries
of Mewbourne Holdings. The following table provides information as to the
beneficial ownership of Mewbourne Holdings, as of December 31, 1996, by each
person who, to their knowledge, beneficially owned 5% or more of their
respective outstanding capital stock.
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 $.10 par value 33.33%
Trust No. 1
Dorothy Elizabeth Mewbourne and Julie Common stock 700 shares 2.6666%
Mewbourne, Trustees of the Ruth Anne $.10 par value 33.33%
Mewbourne Trust No. 1
Dorothy Elizabeth Mewbourne and Ruth Anne Common Stock 700 shares 2.6666%
Mewbourne, Trustees of the Julie Mewbourne $.10 par value 33.33%
Trust No. 1
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OFFICERS, DIRECTORS AND KEY EMPLOYEES OF MD AND MOC
Set forth below are the names, ages and positions of the officers, directors
and key employees of MD and MOC. 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 MD
Name Position
Curtis W. Mewbourne President and Director
J. Roe Buckley Treasurer, Chief Financial Officer and Secretary
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
Officers and Directors of MOC
Name Position
Curtis W. Mewbourne President and Director
Joseph F. Odom Vice President of Administration and Personnel
J. Roe Buckley Treasurer, Chief Financial Officer and Secretary
Dorothy M. Cuenod Assistant Secretary and Director
Ruth M. Buckley Assistant Secretary and Director
Julie M. Greene Assistant Secretary and Director
Curtis W. Mewbourne, age 61, formed Mewbourne Holdings in 1965 and
serves as Chairman of the Board and President of Mewbourne Holdings, MOC and
MD. He has operated as an independent oil and gas producer for the past 32
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 58, joined MOC as Manager, Administration and
Personnel of MOC in November, 1981, and was elected Vice President of
Administration and Personnel in March, 1993. Prior to joining MOC, 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.
J. Roe Buckley, age 35, joined Mewbourne Holdings in July, 1990 and
serves as Treasurer and Chief Financial Officer of both MD and MOC. 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 51, joined MOC in 1986 and serves as Secretary
and General Counsel of MD. 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.
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Dorothy Mewbourne Cuenod, age 37, 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 MD and MOC. 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 35, 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 MD and MOC. 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 33, 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 MD and MOC. 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.
Key Employees
J. Allen Brinson - Mr. Brinson, age 46, Administrative Land Manager and
Assistant Secretary, has been with MOC 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.
B. Alan Clark - Mr. Clark, age 44, Controller and Drilling Program
Administrator, joined MOC May, 1979. Prior to joining MOC, 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 MOC prior to his current position. Mr.
Clark received a Bachelor of Business Administration in Accounting from the
University of Texas at Arlington.
W. Ronald Howell - Mr. Howell, age 44, District Superintendent-Woodward,
Oklahoma District, joined MOC 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 41, Manager-Oil and Gas Marketing,
joined MOC 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 37, Manager-Economics and
Evaluation, joined MOC 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.
Tony D. Phillips - Mr. Phillips, age 39, District Exploration Manager,
joined MOC 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.
Erik L.Hoover - Mr. Hoover, age 31, District Superintendent-Hobbs, New
Mexico District, joined MOC in January, 1989 following his graduation from
Texas A&M University where he received a Bachelor of Science in Petroleum
Engineering. Mr. Hoover served in various engineering roles throughout MOC
prior to his current position.
Brent R. Thurman - Mr. Thurman, age 37, District
Superintendent-Perryton , Texas District, joined MOC 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.
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Kenneth S. Waits - Mr. Waits, age 36, Manager of Exploration, has been
with MOC 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 currently manages exploration
efforts in New Mexico, West Texas, Western Oklahoma and the Texas Panhandle.
He has also served as Exploration Manager for Western Oklahoma. Previously, he
held positions in Operations and in Reservoir/Evaluations.
Monty L. Whetstone - Mr. Whetstone, age 36, Manager of Production,
joined MOC 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.
E. Joseph Wright - Mr. Wright, age 37, Manager of Investor Services,
has been with MOC since August, 1982, when he completed his studies at Texas
A&M University where he received a Bachelor of Science in Petroleum
Engineering. Prior to his current position, Mr. Wright served in operations
and reservoir/evaluation engineering positions.
Ralph P. Moore - Mr. Moore, age 46, District Exploration Manager,
joined MOC in August, 1993 as a prospect geologist. After graduating from
Stephen F. Austin State University in 1972 with a Bachelor of Science in
Geology, Mr. Moore served in various positions in the oil and gas industry.
Prior to joining MOC, Mr. Moore served as Regional Exploration Manager for
Pacific Enterprises Oil Company.
COMPENSATION
None of the officers or directors of MD or MOC will receive
remuneration directly from the Partnership or the Drilling Program, but will
continue to be compensated by their present employers. The Partnership and the
Drilling Program will reimburse MD, MOC, and Affiliates thereof for certain
costs of overhead falling within the definition of Administrative Costs,
including without limitation, salaries of the officers and employees of MD and
MOC; provided that no portion of the salaries of the directors or of the
executive officer of MOC or MD may be reimbursed as Administrative Costs.
EXECUTIVE OFFICER
Mr. Mewbourne directly controls and directs all key policy decisions of
the management group of MOC and MD and is the only executive officer of both
MOC and MD.
Cash Compensation to Executive Officer. The cash compensation paid by
MD and MOC for services rendered during the year ended December 31, 1996 to Mr.
Mewbourne was $110,400. As of the date of this Prospectus, members of the
respective boards of directors of MD and MOC do not receive any special
compensation for serving as director.
Executive Officer Compensation Pursuant to Plans. MOC maintains the
Employees' Pension Plan and Trust ("Plan") as a qualified defined benefits Plan
for all full time employees with five years of service. The Plan 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.
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The following table sets forth the Plan benefits at various years of service
and salary levels.
===============================================================================================
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
===============================================================================================
(1) Assumes a Lifetime Only Benefit (benefits cease upon employees death).
Under the Plan, Mr. Mewbourne would have a lifetime benefit of $4,600 per month
based on his current base salary of $110,400 and assuming he works until age 65
at which time he would have 36 years of employment.
Mewbourne Holdings maintains an incentive compensation plan for key
personnel, which is funded by overriding royalty interests burdening Prospects
developed by Mewbourne Holdings and its Affiliates. Payments to employees are
discretionary and are made net of expenses. Gross royalties to the plan were
approximately $662,033 for the fiscal year ended June 30, 1996. The interests
in Leases to be acquired by the Partnership will not be burdened by plan
royalties and the Partnership 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 MD and MOC, 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. MD and MOC
are unable without unreasonable effort to determine the extent of such
non-reimbursed, non-job related use, but believes that during the year ended
December 31, 1996 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 has
historically invested directly in the exploration and development activities of
MOC during the past 32 years. In addition he has been an investor in the joint
ventures and drilling agreements through which other investors participated in
various MOC 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 intends to invest directly and indirectly alongside the
Partnership in the activities of the 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 interests in the
Leases, the amount of capital available to the 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 oil and natural gas drilling programs similar to the
Partnership.
o The Managing Partner will decide which Prospects the Partnership will
acquire.
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o The Program Manager will act as the operator for Program Wells,
pursuant to the Operating Agreement, the terms of which have not been
negotiated by non-Affiliated Persons.
o The Managing Partner and its Affiliates will sell Leases and other
property to the Partnership.
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 certain limitations, Interests purchased by an Affiliate
will have voting rights under the Partnership Agreement.
FIDUCIARY RESPONSIBILITY OF THE MANAGING PARTNER
The contemplated activities of the Partnership will involve decisions
by MD, on behalf of the Partnership, and MOC, on behalf of the Drilling Program
and transactions between the Partnership, the Drilling Program, MD, or
Affiliates thereof. Because of the common control of the Partnership, the
Drilling Program, MD, MOC, and certain Affiliates thereof, any such decisions
or transactions will lack the benefits of arm's-length bargaining and will
necessarily involve conflicts of interest. MD is accountable to the
Partnership as a fiduciary and is required to act in good faith in the best
interests of the Partnership at all times. Mewbourne 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 the
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 Partnership is 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
Investor Partners a duty of good faith, fairness, and loyalty. In this regard,
the Managing Partner is required to supervise and direct the activities of the
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 the Partnership and the Investor Partners.
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 certain provisions which
modify what would otherwise be the applicable Delaware law relating to the
fiduciary standards of the Managing Partner to the Investor Partners. The
fiduciary standards in the Partnership Agreement could be less advantageous to
the Investor Partners and more advantageous to the Managing Partner than the
corresponding fiduciary standards otherwise applicable under Delaware law,
specifically:
o the 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
the Partnership in a capacity other than as a Sponsor;
o in certain circumstances, 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; 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
thereof for any act or omission within the scope of authority conferred upon
them under the Partnership Agreement or Program Agreement if the Managing
Partner has determined in good faith, as
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of the time of the conduct or omission, that such conduct or omission was in
the best interest of the 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 Investor
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 Investor Partners may find it more difficult to hold the
Managing Partner responsible for acting in the best interests of the
Partnership and its Investor Partners than if the fiduciary standards of the
otherwise applicable Delaware law governed the situation.
The Partnership Agreement and Program Agreement provide for
indemnification of MD and Affiliates thereof and their respective officers and
directors against claims arising from certain conduct or omission on behalf of
the Partnership or the Drilling Program. Such indemnification will be
available if the Managing Partner determines 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 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 Investor Partners must rely upon the integrity of the
Managing Partner in making such determination.
Where the question has arisen, courts have held that a limited partner
may institute legal action on behalf of himself and all other similarly
situated limited partners (a class action) to recover damages for a breach by a
general partner of his fiduciary duty, or on behalf of the partnership (a
partnership derivative action) to recover damages from third parties. In
addition, limited 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,
limited 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 limited partner bringing such action. In the
event of a lawsuit for a breach of its fiduciary duty to the Partnership and/or
the Investor 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, including statute of limitations, estoppel,
laches, and doctrines such as the "clean hands" doctrine.
In certain instances, MD and MOC will be held to a prudent operator
standard pursuant to the Partnership Agreement and the Program Agreement. 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 will be significantly
less restrictive than a fiduciary duty standard, a standard that would
otherwise be imposed upon MD as a fiduciary. Conduct under the prudent
operator standard may not necessarily be the most advantageous to the
Partnership and under such standard it would be more difficult to hold MD
responsible for acts or omissions than if the fiduciary duty standard were
otherwise applicable.
FARMOUTS
Any farmout or similar agreement pertaining to the Partnership's Leases
must comply with the rules, restrictions, and guidelines described in this
Prospectus and Section 5.10 of the Partnership Agreement, and will be subject
to the following conditions (a) the Managing partner, exercising the standard
of a prudent operator, must determine that the farmout or similar agreement is
in the best interests of the Partnership, (b) 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 (c) if the assignee under the farmout is the Managing Partner
or an Affiliate thereof 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 such Affiliate may benefit from cost
savings and reduction of risk, and in the event of a farmout to an Affiliate,
the Managing Partner or an Affiliate thereof will represent both the
Partnership and the Affiliate. For a discussion of the prudent operator
standard of conduct, see "Conflicts of Interest -- Fiduciary Responsibility of
the Managing Partner."
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None of the Partnership's Leases will be farmed out unless the Managing
Partner, exercising the standard of a prudent operator, determines that (a) the
Partnership lacks sufficient funds to drill on such Lease and cannot obtain
suitable alternative financing for such drilling, (b) the value of such Lease
has been reduced by events occurring or information disclosed to such Managing
Partner after assignment of such Lease to the Partnership so that drilling
would no longer be desirable for the Partnership, (c) drilling on the 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 (d) the
best interests of the Partnership would be served by the farmout. The
Partnership will acquire only those 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 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 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 the Partnership" and "Purchase of Leases from the Partnership."
PURCHASE OF LEASES FROM THE PARTNERSHIP
Neither the Managing Partner nor any Affiliate thereof, including an
Affiliated Program, may purchase or acquire any Lease from the Partnership,
directly or indirectly, except pursuant to transactions that are fair and
reasonable to the Partnership and then subject to the following conditions (a)
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 Affiliate thereof, other than an
Affiliated Program, must be made at the higher of the Lease Acquisition Costs
or fair market value, (b) a sale, transfer or conveyance of a developed Lease
(i.e. a Lease having Proved Developed Reserves attributable to it) from the
Partnership to the Managing Partner or Affiliate thereof, 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, (c) except in connection with
farmouts or joint ventures made in compliance with Section 5.11 of 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 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 interest of the
Partnership, the transfer may be made at the Lease Acquisition Costs, and (d)
except in connection with farmouts made in compliance with the restrictions
described in Section 5.11 of the Partnership Agreement, 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 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 as
required by this paragraph 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.
SALE OF LEASES TO THE PARTNERSHIP
MD has discretion in selecting Leases to be acquired by the Partnership
from MOC, Affiliates thereof, or third parties and the location and type of
operations that the Partnership will conduct on such Leases. Certain of such
Leases may be part of MOC's existing inventory. The Managing Partner or any
Affiliate thereof is authorized to transfer Leases and other property to the
Partnership if the restrictions set forth below are met. If such restrictions
are met, the Managing Partner or any Affiliate thereof may sell, transfer, or
convey Leases to the Partnership from its then-existing inventory. In
determining which oil and natural gas Leases the Partnership should acquire, if
the Managing Partner has such Lease 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 own inventory or from third party
sellers. In addition to the substantial restrictions imposed upon the price
which may be changed in such a transaction (See "Proposed Activities --
Transactions with Affiliates -- Sales of Leases to the Partnership"), Section
5.11 of the Partnership Agreement requires a determination of "fair market
value" by an Independent Expert. The Partnership Agreement provides that the
Managing Partner or any Affiliate thereof, including, an Affiliated Program, is
not permitted to sell, transfer, or convey Leases to the Partnership, directly
or indirectly, except pursuant to transactions which are fair and reasonable to
the Partnership and then subject to the
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restrictions which are described in this Prospectus under the heading "Proposed
Activities -- Transactions with Affiliates -- Sale of Leases to the
Partnership."
ADJACENT ACREAGE
It is anticipated that MOC will sell to or otherwise acquire on behalf
of the Partnership certain Leases owned by MOC or an Affiliate thereof. The
ownership by MOC or its Affiliates of interests in Leases covering a particular
Prospect is subject to the restrictions set forth in "Proposed Activities --
Transactions with Affiliates." Subject to such restrictions, certain of such
Leases may nevertheless be adjacent to acreage which is held or will be held by
MOC or Affiliates thereof. The Drilling Program will not drill any well for
the purpose of proving or disproving the existence of oil or gas on any such
adjacent acreage. Nevertheless, such drilling activities may incidentally
develop information valuable to MOC or Affiliates thereof in evaluating their
nearby acreage at no cost to them. MOC or Affiliates thereof also may retain
an ownership interest in a Lease sold by MOC or Affiliates thereof to the
Drilling Program and the use of Drilling Program funds to drill a well on such
Lease will reduce the cost and risk to MOC or Affiliates thereof of drilling on
such Lease. Accordingly, a conflict of interest will exist between the
interest of the Partnership and the interest of MOC in selecting the location
and type of operations which the Drilling Program will conduct on Drilling
Program Leases where MOC or Affiliates thereof own 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 Partnership 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 the Partnership and the Investor
Partners by specifically modifying the duties otherwise owed under Delaware
law. The Partnership Agreement specifically permits MD and Affiliates thereof
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 Partnership; provided, however, except as otherwise set forth in Section
5.11 of 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 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. MD 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 Partnership 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, MD or its Affiliates may
sponsor additional drilling partnerships and other oil and gas partnerships in
the future. Therefore, MD will be acting on behalf of the Partnership as
Managing Partner, on behalf of existing partnerships, and on behalf of other
partnerships and joint ventures which MD or its Affiliates may sponsor in the
future. As a result of these activities of MD and Affiliates thereof,
circumstances may arise where the interest of MD or of such Affiliates in such
independent ventures will conflict with those of the Investor 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 the Partnership, MD and other prior or future oil and gas partnerships in
which MD or an Affiliate thereof has an interest will have an opportunity to
acquire the same Leases. In such situations, it may be expedient for MD to
favor one partnership or venture over another. It is possible that MD or
Affiliates thereof will be in the process of acquiring Leases for inclusion in
other drilling partnerships at the same time that they are acquiring Leases for
inclusion in the Drilling Program.
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CONTRACTS WITH MEWBOURNE AND AFFILIATES
MD and its Affiliates do not own any drilling rigs or service
companies, and except for the providing of gas compressors from an Affiliate of
MD and for the Operating Agreement, MD currently does not anticipate that it
will enter into contracts and agreements with the Partnership for the rendering
of services or the sale and lease of supplies and equipment. However, the
Partnership Agreement specifically permits the Partnership and MD to enter into
agreements for such purposes and for the lending of money to the Partnership.
Neither MD nor any Affiliate of MD will enter into any agreement with the
Partnership to provide services, supplies and equipment unless (a) MD 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 programs in which MD or
such Affiliate has an interest, (b) the compensation, price, or rental therefor
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 MD 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 MD
or such Affiliate or the competitive rate which could be obtained in the area.
Any loan of money to the Partnership by MD or an Affiliate thereof may not bear
interest in excess of the lesser of the rate MD 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 the Partnership and MD or any Affiliate thereof may be
terminated upon the vote or written consent of a Majority in Interest of the
Investor 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 Investor Partners. In addition, 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.
MOC AS OPERATOR
Under the terms of each Program Agreement, MOC has agreed to serve as
operator of Program Wells. Each Program Agreement specifically provides that
any operating agreement pertaining to MOC'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 the Drilling Program's Prospects
there will be no independent oversight with respect to the competitiveness of
the operating agreements entered into with MOC. See "Proposed Activities --
Operations" and "Compensation and Reimbursement -- Compensation as Operator."
OWNERSHIP OF INTERESTS BY MD OR ANY AFFILIATES
The Managing Partner and its Affiliates are eligible to subscribe for
Interests, provided that any Interests so purchased must be purchased for
investment purposes only and not for the purpose of resale or any further
public distribution. It is the Managing Partner's current intention that the
Managing Partner and/or an Affiliate thereof will subscribe for such number of
Interests as may be necessary for the Partnership in which Interests are being
offered to receive the minimum subscription amount of 1,000 Interests
($1,000,000). The number of Interests in the Partnership that may be purchased
by the Managing Partner and/or Affiliates thereof is not subject to any
specific maximum limitations but depends upon the number of subscriptions for
Interests received and accepted from non-Affiliates. There are no limitations
upon the number of Interests that may be purchased by an Affiliate and any
Interests purchased by the Managing Partner or its Affiliates will have voting
rights under the Partnership 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 the Managing Partner or its Affiliates which
in the aggregate represent more than 20% of the total Interests held by
Investor Partners in the Partnership shall not have any voting rights under the
Partnership Agreement and shall not be counted for voting purposes. In
addition, during the time period that MD or an Affiliate thereof is serving as
the Managing Partner of the Partnership, 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
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removal of the Managing Partner or any transaction between the Partnership and
the Managing Partner or its Affiliates. Notwithstanding the voting limitation
imposed upon Interests owned by the Managing Partner or its Affiliates, to the
extent that Interests in the Partnership are acquired by the Managing Partner
or its Affiliates, such ownership Interests has the effect of diluting the
voting power of the other Investor Partners in the Partnership. The exercise
of the voting rights of any Interests owned by the Managing Partner or its
Affiliates could give rise to a conflict of interest between MD and
non-Affiliated Investor Partners.
PRIOR ACTIVITIES
PRIOR PARTNERSHIPS
MOC 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 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 the Partnership.
During the period 1977-1980, Affiliates of MD sponsored a series of
five private limited partnerships. MD has also sponsored eight 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. and two private partnerships, Mewbourne
Development Partners 1992 GP and Mewbourne Energy Partners 1994 Private L.P.
Except for the above described partnerships, neither MD 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.
The following table is presented to indicate certain sale distribution
characteristics concerning certain of the partnerships described above.
PRIOR PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS
EXPERIENCE IN RAISING FUNDS
Date of First Contributions
Revenue Number of Price Per From
Partnership Funding Date Distribution Units Sold Unit Investors(4)
========================================================================================================================
Mewbourne Oil, Ltd. 1977(1) . . . . . . . . . . . . 08/25/77 06/27/78(2)(3) 193.0 $10,000 $2,891,000
Mewbourne Oil, Ltd. 1978A(9). . . . . . . . . . . . 05/04/78 02/24/84(2)(3) 288.0 10,000 3,456,000
Mewbourne Oil, Ltd. 1978B (8) . . . . . . . . . . . 12/06/78 12/31/80(2)(3) 286.5 10,000 3,581,250
Mewbourne Oil, Ltd. 1979(1) . . . . . . . . . . . . 07/10/79 12/08/80(2)(3) 312.5 10,000 3,906,250
Mewbourne Oil, Ltd. 1980(5)(1) . . . . . . . . . . 05/22/80 -- (2)(3) 147.0 10,000 1,837,500
Mewbourne Development Partners 92 GP(9) . . . . . . 12/31/92 05/18/93(3) 116.0 10,000 1,160,000
Mewbourne Development Partners 93-A, L.P.(9). . . . 10/11/93 02/21/94 1,382 1,000(6) 1,382,000
Mewbourne Development Partners 93-B, L.P.(9). . . . 12/31/93 04/25/94 1,299 1,000(6) 1,299,000
Mewbourne Development Partners 94-A, L.P.(9). . . . 06/30/94 10/24/94 1,194 1,000(6) 1,194,000
Mewbourne Development Partners 94-B, L.P.(9). . . . 11/04/94 03/21/95 1,100 1,000(6) 1,010,000
Mewbourne Development Partners 94-C, L.P.(9). . . . 12/30/94 04/28/95 1,030 1,000(6) 1,030,000
Mewbourne Energy Partners 1994 Private L.P.(9). . . 12/30/94 04/28/95 73.5 20,000 1,470,000
Mewbourne Energy Partners 95-A, L.P.(9) . . . . . . 10/11/95 02/19/96 1,619 1,000(6) 1,619,000
Mewbourne Energy Partners 95-B, L.P.(9) . . . . . . 12/29/95 N/A 2,011 1,000(6)
Mewbourne Energy Partners 96-A, L.P.(7)(9). . . . . 11/07/96 N/A 3,872 1,000(6) 3,872,000
(1) This partnership was terminated on November 30, 1994.
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(2) Cash Distributions reflect the policy to retain initial revenues to
reinvest in additional wells. Retention of such 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 partnership
retained $1,836,329 of distributable operating cash flow to reinvest
in additional drilling and $5,391,821 of distributable operating cash
flow was used to repay certain borrowings of the partnership. The
1978B partnership retained $3,580,177 of distributable operating cash
flow to reinvest in additional drilling and $30,072 of distributable
operating cash flow was used to repay certain borrowings of the
partnership. The 1979 partnership retained $2,326,134 of
distributable operating cash flow to reinvest in additional drilling
and $125,133 of distributable operating cash flow was used to repay
certain borrowings of the partnership. The 1980 partnership retained
$223,343 of distributable operating cash flow to reinvest in
additional drilling and $732,939 of distributable operating cash flow
was used to repay certain borrowings of the partnership. The 92 GP
partnership retained $44,166 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
MD and its Affiliates in each of public programs previously sponsored
by MD. 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 funded on November 7, 1996, and is currently
engaged in drilling and completion activities.
(8) This partnership was terminated September 1, 1996.
(9) This partnership is currently operating.
PREVIOUS DRILLING ACTIVITIES
The following table reflects the previous drilling activity of the
partnerships described above.
PRIOR PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS
DRILLING RESULTS
Inception Through December 31, 1996
Gross(1) Net(2)
-------------------------- -------------------------------------
Percent
Partnership Completed Dry Completed Dry Completed
====================================================================================================================
Mewbourne Oil Ltd., 1977A(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(7) 6 4 0.73 0.56 56%
Mewbourne Development Partners 93-A,
L.P.(7) . . . . . . . . . . . . . . . . 9 0 2.59 0 100%
Mewbourne Development Partners 93-B,
L.P.(7) . . . . . . . . . . . . . . . . 13 0 2.00 0 100%
Mewbourne Development Partners 94-A,
L.P.(7) . . . . . . . . . . . . . . . . 7 1 1.05 0.14 88%
Mewbourne Development Partners 94-B,
L.P.(7) . . . . . . . . . . . . . . . . 5 0 1.28 0 100%
Mewbourne Development Partners 94-C,
L.P.(7) . . . . . . . . . . . . . . . . 4 0 1.30 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) 9 3 2.03 .74 73%
Mewbourne Energy Partners 96-A,
L.P.(5)(7) . . . . . . . . . . . . . . 7 0 2.57 0 100%
--- -- ---- --- ---
Total . . . . . . . . . . . . . . 72 9 19.49 1.77 91%
=== == ===== ==== ====
- --------------------
(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) This partnership was funded on November 7, 1996, and as of the
specified date was engaged in drilling and completion activities.
(6) This partnership was terminated September 1, 1996.
(7) This partnership is currently operating.
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PAYOUT AND NET CASH TABLES
The following tables provide information concerning the operating
results of the partnerships described above.
PRIOR PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS
INVESTORS' PAYOUT TABLE
December 31, 1996
Total Expenditures Revenues Before
Investors' Funds Including Operating Deducting 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 18,771,502 20,651,626
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(9) . . 1,049,800 1,507,591 916,248
Mewbourne Development Partners 93-A, L.P.(9) 1,250,848 1,654,382 624,710
Mewbourne Development Partners 93-B, L.P.(9) 1,175,725 1,627,919 723,601
Mewbourne Development Partners 94-A, L.P.(9) 1,080,690 1,484,625 685,472
Mewbourne Development Partners 94-B, L.P.(9) 914,151 1,401,744 754,562
Mewbourne Development Partners 94-C, L.P.(9) 932,253 1,391,972 701,337
Mewbourne Energy Partners 1994 Private
L.P.(9) . . . . . . . . . . . . . . . . . . 1,470,000 1,585,483 383,620
Mewbourne Energy Partners 95-A, L.P.(9) . . 1,619,000 1,807,433 936,667
Mewbourne Energy Partners 95-B, L.P.(9) . . 2,011,000 1,969,057 162,704
Mewbourne Energy Partners 96-A, L.P.(7)(9). 3,872,000 2,060,753 0
- --------------------
(1) Total subscriptions less organization, promotion, and 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
Investor 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) This partnership was funded on November 7, 1996, and as of the
specified date was engaged in drilling and completion activities.
(8) This partnership was terminated on September 1, 1996.
(9) This partnership is currently operating.
PRIOR PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS
INVESTORS' NET CASH TABLE
December 31, 1996
Total Total Revenues
Expenditures Net After Deducting
Investors' Funds of Operating Operating Cash
Partnership Invested (1) Costs (2) Costs (3) Distributions(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 11,539,988 13,420,112 6,401,320(7)
Mewbourne Oil, Ltd. 1978B(5)(10) . . . . . . 3,247,534 7,687,559 8,420,042 4,968,626(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(11). . . 1,049,800 1,346,124 754,781 573,210
Mewbourne Development Partners 93-A, L.P.(11) 1,250,848 1,504,539 474,867 368,280
Mewbourne Development Partners 93-B, L.P.(11) 1,175,715 1,454,586 550,268 412,830
Mewbourne Development Partners 94-A, L.P.(11) 1,080,690 1,324,140 524,987 412,830
Mewbourne Development Partners 94-B, L.P.(11) 914,151 1,217,783 570,601 360,360
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Total Total Revenues
Expenditures Net After Deducting
Investors' Funds of Operating Operating Cash
Partnership Invested (1) Costs (2) Costs (3) Distributions(4)
======================================================================================================================
Mewbourne Development Partners 94-C, L.P.(11) 932,253 1,222,418 531,783 336,600
Mewbourne Energy Partners 1994
PrivateL.P.(11) . . . . . . . . . . . . . . . 1,470,000 1,512,139 310,276 269,280
Mewbourne Energy Partners 95-A, L.P.(11). . . 1,619,000 1,666,523 795,755 704,880
Mewbourne Energy Partners 95-B, L.P.(11). . . 2,011,000 1,912,646 106,293 92,070
Mewbourne Energy Partners 96-A, L.P.(9)(11) . 3,872,000 2,060,753 0 0
(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
Investor 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 partnership
retained $1,836,329 of distributable operating cash flow to reinvest
in additional drilling and $5,391,821 of distributable operating cash
flow was used to repay certain borrowings of the partnership. The
1978B partnership retained $3,580,177 of distributable operating cash
flow to reinvest in additional drilling and $30,072 of distributable
operating cash flow was used to repay certain borrowings of the
partnership. The 1979 partnership retained $2,326,134 of
distributable operating cash flow to reinvest in additional drilling
and $125,133 of distributable operating cash flow was used to repay
certain borrowings of the partnership. The 1980 partnership retained
$223,343 of distributable operating cash flow to reinvest in
additional drilling and $732,939 of distributable operating cash flow
was used to repay certain borrowings of the partnership. The 92 GP
partnership retained $44,166 of distributable operating cash flow to
complete drilling operations.
(8) The activities of this partnership consisted solely of exploratory
drilling.
(9) This partnership was funded on November 7, 1996, and as of the
specified date was engaged in drilling and completion activities.
(10) This partnership was funded terminated on September 1, 1996.
(11) This partnership is currently operating.
PRIOR PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS
MANAGING PARTNER'S PAYOUT TABLE
December 31, 1996
Total Expenditures Revenues Before
Including Operating Deducting Operating
Partnership Costs (1) Costs (2)
====================================================================================================================
Mewbourne Oil, Ltd. 1977(3)(4) . . . . . . . . . . . . . . . . $1,658,587 $2,293,090
Mewbourne Oil, Ltd. 1978A(3)(8) . . . . . . . . . . . . . . . . 5,655,004 7,206,284
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(8) . . . . . . . . . . . . 178,725 229,062
Mewbourne Development Partners 93-A, L.P.(8). . . . . . . . . . 203,008 156,177
Mewbourne Development Partners 93-B, L.P.(8). . . . . . . . . . 204,801 180,900
Mewbourne Development Partners 94-A, L.P.(8). . . . . . . . . . 186,214 171,368
Mewbourne Development Partners 94-B, L.P.(8). . . . . . . . . . 181,511 188,641
Mewbourne Development Partners 94-C, L.P.(8). . . . . . . . . . 178,193 175,334
Mewbourne Energy Partners 1994 Private L.P.(8). . . . . . . . . 38,026 95,905
Mewbourne Energy Partners 95-A, L.P.(8) . . . . . . . . . . . . 79,809 234,167
Mewbourne Energy Partners 95-B, L.P.(8) . . . . . . . . . . . . 69,275 40,676
Mewbourne Energy Partners 96-A, L.P.(6)(8). . . . . . . . . . . 63,912 0
(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
Investor Partners in the Partnership.
(4) This partnership was terminated on November 30, 1994.
(5) The activities of this partnership consisted solely of exploratory
drilling.
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(6) This partnership was funded on November 7,1996, and as of the
specified date was engaged in drilling and completion activities.
(7) This partnership was terminated on September 1, 1996.
(8) This partnership is currently operating.
PRIOR PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS
MANAGING PARTNER'S NET CASH TABLE
December 31 1996
Total Expenditures Total Revenues After
Net of Operating Deducting Operating
Partnership Costs (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) . . . . . . . . 3,120,858 4,672,138 2,887,544
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(9) . . . . 138,761 189,098 143,302
Mewbourne Development Partners 93-A, L.P.(9) . . 165,548 118,717 92,070
Mewbourne Development Partners 93-B, L.P.(9) . . 161,471 137,570 103,207
Mewbourne Development Partners 94-A, L.P.(9) . . 146,085 131,239 103,207
Mewbourne Development Partners 94-B, L.P.(9) . . 135,519 142,649 90,090
Mewbourne Development Partners 94-C, L.P.(9) . . 135,809 132,944 84,150
Mewbourne Energy Partners 1994 Private L.P.(9) . 19,690 77,569 67,320
Mewbourne Energy Partners 95-A, L.P.(9) . . . . 58,752 213,110 105,327
Mewbourne Energy Partners 95-B, L.P.(9) . . . . 60,842 32,243 13,758
Mewbourne Energy Partners 96-A, L.P.(7)(9) . . . 63,912 0 0
- ------------------------
(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
Investor 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) This partnership was funded on November 7, 1996, and as of the
specified date was engaged in drilling and completion activities.
(8) This partnership was terminated on September 1, 1996.
(9) This partnership is currently operating.
TAX DEDUCTIONS AND TAX CREDITS
The following tables reflect the investors' share of the above
described partnership's 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 the Partnership. It is suggested that prospective subscribers
consult with their tax advisors concerning their specific tax circumstances and
the tax benefits available to them individually, which may materially vary in
various circumstances.
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PRIOR PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS
CUMULATIVE TAX BENEFITS TO INVESTORS
PER $10,000 INVESTMENT
December 31, 1996
First Year Aggregate First Year
Tax Deductions Tax Cumulative Tax Benefits
Deductions Thereafter (1) Benefits Through December 31,
Partnership (1) (2) 1996 (2)
==================================================================================================================
Mewbourne Oil, Ltd. 1977(3) . . . . . . . . . . $ 2,902 $3,326 $2,031 $4,336
Mewbourne Oil, Ltd. 1978A(7) . . . . . . . . . 5,709 14,213 3,996 11,918
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(7) . . . . 1,964 5,269 609 2,696
Mewbourne Development Partners 93-A, L.P.(7). . 4,228 2,214 1,674 2,551
Mewbourne Development Partners 93-B, L.P.(7). . 2,321 4,324 919 2,632
Mewbourne Development Partners 94-A, L.P.(7). . 6,065 967 2,402 2,785
Mewbourne Development Partners 94-B, L.P.(7). . 5,523 1,838 2,187 2,915
Mewbourne Development Partners 94-C, L.P.(7). . 4,955 2,241 1,962 2,849
Mewbourne Energy Partners 1994 Private L.P.(7). 5,057 2,817 2,003 3,118
Mewbourne Energy Partners 95-A, L.P.(7) . . . . 5,239 583 2,075 2,306
Mewbourne Energy Partners 95-B, L.P.(7) . . . . 3,716 3,391 1,472 2,815
Mewbourne Energy Partners 96-A, L.P.(5)(7). . . 3,479 0 1,378 1,378
(1) Tax deductions include Non-Capital Expenditures.
(2) Tax benefits are tax deductions multiplied by the respective year's
maximum tax rate.
(3) This partnership was terminated on November 30, 1994.
(4) The activities of this partnership consisted solely of exploratory
drilling.
(5) This partnership was funded on November 7, 1996, and as of the
specified date was engaged in drilling and completion activities.
(6) This partnership was terminated on September 1, 1996.
(7) This partnership is currently operating.
PRIOR PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS
CASH DISTRIBUTIONS AND TAX BENEFITS
AS A PERCENT OF TOTAL SUBSCRIPTIONS
December 31, 1996
(Investors' share only)
Cash
Partnership Distributions (1) Tax Benefits (2) Total Return (3)
==================================================================================================================
Mewbourne Oil, Ltd. 1977(4)(5) . . . . . . . . 111.5%(6) 43.3% 154.9%
Mewbourne Oil, Ltd. 1978A(4)(10). . . . . . . . 185.2%(6) 119.4% 305.0%
Mewbourne Oil, Ltd. 1978B(4)(9) . . . . . . . . 135.8%(6) 82.9% 218.7%
Mewbourne Oil, Ltd. 1979(4)(5) . . . . . . . . 304%(6) 67.5% 371.5%
Mewbourne Oil, Ltd. 1980(4)(5)(7) . . . . . . . 0.0%(6) 58.9% 58.9%
Mewbourne Development Partners 92 GP(10). . . . 49.4% 27.0% 76.4%
Mewbourne Development Partners 93-A, L.P.(10) . 26.7% 25.5% 52.2%
Mewbourne Development Partners 93-B, L.P.(10) . 31.8% 26.3% 58.1%
Mewbourne Development Partners 94-A, L.P.(10) . 34.6% 27.9% 62.4%
Mewbourne Partners 94-B, L.P.(10) . . . . . . . 35.7% 29.2% 64.8%
Mewbourne Development Partners 94-C, L.P.(10) . 32.7% 28.5% 61.2%
Mewbourne Energy Partners 1994 Private L.P.(10) 18.3% 31.2% 49.5%
Mewbourne Energy Partners 95-A, L.P.(8)(10) . . 43.5% 23.1% 61.6%
Mewbourne Energy Partners 95-B, L.P.(9)(10) . . 4.6% 28.2% 32.7%
Mewbourne Energy Partners 96-A, L.P.(10). . . . 0.0% 13.8% 13.8%
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- -----------------
(1) Total cash distributions divided by total subscriptions.
(2) Total tax benefits divided by total subscriptions. 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
Investor 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 partnership
retained $1,836,329 of distributable operating cash flow to reinvest
in additional drilling and $5,391,821 of distributable operating cash
flow was used to repay certain borrowings of the partnership. The
1978B partnership retained $3,580,177 of distributable operating cash
flow to reinvest in additional drilling and $30,072 of distributable
operating cash flow was used to repay certain borrowings of the
partnership. The 1979 partnership retained $2,326,134 of
distributable operating cash flow to reinvest in additional drilling
and $125,133 of distributable operating cash flow was used to repay
certain borrowings of the partnership. The 1980 partnership retained
$223,343 of distributable operating cash flow to reinvest in
additional drilling and $732,939 of distributable operating cash flow
was used to repay certain borrowings of the partnership. The 92 GP
partnership retained $44,166 of distributable operating cash flow to
complete drilling operations.
(7) The activities of this partnership consisted solely of exploratory
drilling.
(8) This partnership was funded on November 7, 1996, and as of the
specified date was engaged in drilling and completion activities.
(9) This partnership was terminated on September 1, 1996.
(10) This partnership is currently operating.
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 PARTNERSHIP. IN PARTICULAR, THE
FIVE PRIVATE LIMITED PARTNERSHIPS WERE STRUCTURED TO INCLUDE ONE OR MORE OF THE
FOLLOWING ATTRIBUTES (A) ADDITIONAL ASSESSMENTS WERE REQUIRED FROM THE
INVESTORS AS CONTRASTED TO THE CURRENT OFFERING WHICH DOES NOT ALLOW FOR ANY
ADDITIONAL ASSESSMENTS, (B) SIGNIFICANT INDEBTEDNESS WAS INCURRED AS CONTRASTED
TO THE CURRENT OFFERING WHICH CONTEMPLATES ONLY LIMITED BORROWINGS AND IN
LIMITED CIRCUMSTANCES, (C) EXCESS INCOME WAS REINVESTED INTO ADDITIONAL
DRILLING ACTIVITIES AS CONTRASTED TO THE PROPOSED OFFERING WHICH DOES NOT
CONTEMPLATE SIGNIFICANT REINVESTMENT OF EXCESS INCOME, (D) 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 ONLY DEVELOPMENT WELLS,
OR (E) 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 THE PARTNERSHIP AND ARE NOT INDICATIVE OF
THE RESULTS THAT MAY BE ACHIEVED BY THE PARTNERSHIP.
RESERVES AND FUTURE NET REVENUES OF PRIOR PROGRAMS
The following table summarizes as of December 31, 1996, the estimates
of the Proved Developed Producing and Proved Developed Non-Producing Reserves
of Mewbourne Development Partners 92 GP, 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. 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 December 31,
1996, by Forrest A. Garb & Associates, Inc., the partnerships' Independent
Expert. Current reserve information is not maintained by MD or its Affiliates
for the five private limited partnerships sponsored during the years 1977
through 1980 and therefore the reserves of such partnerships is not included in
the following table. Likewise, insufficient reserve information currently
exists for Mewbourne Energy Partners 96-A, L.P. (which is currently engaged in
drilling and completion activities) for the reserves of such 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 THE PARTNERSHIP
OR QUANTITIES OF OIL AND GAS WHICH MAY BE DERIVED FROM WELLS TO BE DRILLED BY
THE 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.
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PRIOR PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS
Proved Reserves and Future Net Revenues
as of December 31, 1996
- -----------------------------------------------------------------------------------------------------------------------
Present
Estimated Value
Net Oil Net Gas Future Discounted
Category of Reserves Reserves Net at 10% Per
Partnership Proved Reserves (BBLS) (MCF) Revenues Annum
----------- --------------- -------- --------- -------- ----------
Proved
MDP 92 GP (1) . . . . . . . . . . . . . . . . . Developed 1,484 160,646 527,025 418,449
Proved
MDP 93-A (1) . . . . . . . . . . . . . . . . . Developed 4,827 573,203 1,195,057 765,316
Proved
MDP 93-B (1) . . . . . . . . . . . . . . . . . Developed 15,791 574,053 1,714,352 1,104,162
Proved
MDP 94-A (1) . . . . . . . . . . . . . . . . . Developed 26,819 472,694 2,000,194 1,296,560
Proved
MDP 94-B (1) . . . . . . . . . . . . . . . . . Developed 48,693 530,788 2,211,042 1,472,803
Proved
MDP 94-C (1) . . . . . . . . . . . . . . . . . Developed 47,362 605,287 2,485,080 1,595,235
Proved
MEP 94 Private (1) . . . . . . . . . . . . . . Developed 9,426 863,852 1,939,607 1,271,655
Proved
MEP 95-A (2) . . . . . . . . . . . . . . . . . Developed 33,178 1,237,808 4,294,229 3,155,267
Proved
MEP 95-B (2) . . . . . . . . . . . . . . . . . Developed 12,904 742,809 2,426,130 1,473,204
Proved
MEP 95-B (2) . . . . . . . . . . . . . . . . . UnDeveloped (3) 2,196 371,985 1,151,688 670,980
Total Proved
MEP95-B (2) . . . . . . . . . . . . . . . . . . (4) 15,100 1,114,794 3,577,818 2,144,184
- ----------------------
(1) Includes the partnership's 80.808081% ownership interest and MD's
19.191919% ownership interest arising under Drilling Program Agreement
between MD and such partnership.
(2) Includes the partnership's 87.878788% ownership interest and MD's
12.121212% ownership interest arising under the Drilling Program
Agreement between MD and such partnership.
(3) Includes the reserve estimates for the #1 Virginia which was drilled
after January 1, 1997. The well is currently producing oil and
natural gas.
(4) Total Proved Reserves is the sum of Proved Developed Reserves and
Proved Undeveloped Reserves.
Reserve estimates and future net cash flow attributable thereto were
prepared using an unescalated price for oil and gas. The price used was the
price being received as of December 31, 1996 which on a weighted average basis
was $24.52 per barrel of oil and $3.96 per mcf of gas. In arriving at
estimated future net revenues, lease operating (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. The above estimates of
reserves and future net revenues do not include any estimate for Proved
Undeveloped Reserves.
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
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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 certain 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 the Partnership
or of the contemplated operations of the Partnership and the Drilling Program.
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 U.S. citizens, such as
partnerships, corporations, trusts, estates, or tax-exempt entities (including
a pension, profit-sharing, or stock bonus plan, Keogh plan, IRA, or other
qualified employee benefit plan, or ERISA plan) may have federal income tax
consequences substantially different from those discussed below. A particular
investor may be subject to certain 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 herein. 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 Code, existing Treasury Regulations,
published interpretations of the Code and such regulations by the IRS and
existing court decisions, any of which could be changed 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 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 MD, 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:
(a) At the time of its formation, the Partnership and the
Drilling Program will be classified as a partnership for federal
income tax purposes.
(b) The Partnership will not be classified as a
corporation pursuant to the "publicly traded partnership" rules of
Section 7704 of the Code.
(c) Except as noted below, the allocation of income,
gains, losses, and deductions between the General and Limited Partners
and MD under the Partnership Agreement, and between the Partnership
and MD as Participants and MOC as Program Manager under the Program
Agreement, will be respected for federal income tax purposes.
(d) The passive activity loss limitations of Section 469
of the Code will not apply to a General Partner in the Partnership
(prior to any conversion of his General Partner Interest in the
Partnership to a Limited Partner Interest) to the extent that the
Partnership drills or operates wells pursuant to Working Interests.
(e) The 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.
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92
(f) 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 to the extent that such reduction
exceeds the adjusted tax basis of such Partner's Interest.
For the reasons hereinafter described, counsel is unable to render an
opinion with respect to the following specific federal income tax issues: (a)
the validity of any special allocation of an item that is dependent on a
Partner's or Participant's basis in an oil and gas property (see "--
Partnership Taxation -- Allocations"), (b) the amount, if any, of the
Organization and Offering Expenses that will be deductible or amortizable (see
"-- Partnership Taxation -- Organization and Offering Expenses Sales
Commissions and Due Diligence Fees"), (c) the amount, if any, of the Management
Fee and initial Administrative Costs that will be deductible or amortizable
(see "-- Partnership Taxation -- Management Fee," "--Partnership Taxation --
Administrative Costs"), (d) the deductibility in a given year of any intangible
drilling and development 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 and Development Costs"), (e) the availability
or extent of percentage depletion deductions to the Partners (see "-- Special
Features of Oil and Gas Taxation -- Depletion"), (f) compliance of the
allocations under the Partnership Agreement and the Program Agreement with
Section 704(c) of the Code in the event that property is contributed or deemed
contributed to the Partnership or the Drilling Program (see "-- Partnership
Taxation -- Allocations"), and (g) whether Interests will be considered
"publicly offered securities" for purposes of ERISA (see "-- General Tax
Provisions -- Investment by Tax-Exempt Entities").
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 thereof 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 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 certain representations made by MD, 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 the
Partnership, and no assurance can be given that the opinions expressed by
counsel 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 the Partnership or the
actual amount of an Investor Partner's share of allowable deductions or losses
from the activities of the 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 THE PARTNERSHIP.
EXCEPT AS EXPRESSLY PROVIDED OTHERWISE, THE FOLLOWING DISCUSSION
RELATES TO THE PARTNERSHIP AND THE DRILLING PROGRAM SEPARATELY.
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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 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. The Partnership will invest in the
Drilling Program which will be a joint operation of the Partnership, MD, and
MOC. 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 the Delaware Act. Certain
expected tax consequences resulting from an investment in Interests are
dependent upon the classification of the Partnership and the Drilling Programs
as partnerships for federal income tax purposes. The expenditures made and
income received by the Drilling Program will, if the Drilling Program is a
partnership for tax purposes, flow through to the related Partnership and, if
the Partnership is a partnership for 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, the Partnership and the Drilling
Program 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.
On December 17, 1996 final Treasury Regulations were issued under
Section 7701 of the Code which provide that a business entity other than a
"corporation" may elect whether to be treated as a partnership or an
association 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 Partnership and the Drilling
Program. Under the default rule in the Treasury Regulations, a partnership
formed under a state statute, such as the Partnership, and a joint venture,
such as the Drilling Program, are treated as partnerships for federal income
tax purposes, unless such entities affirmatively elect to be treated as
associations taxable as corporations. The Partnership and the Drilling Program
will not elect to be treated as associations taxable as corporations for
federal income tax purposes.
Counsel to MD is of the opinion that, at the time of formation, each
of the Partnership and the Drilling Program will be treated as a partnership
for federal income tax purposes. Such opinion is based on the following
representations made by MD:
(a) The Partnership will be organized and operated in
accordance with all applicable state statutes and the Partnership
Agreement and the Drilling Program will be organized and operated in
accordance with the Program Agreement.
(b) No Participant in the Drilling Program will elect to
be excluded from the provisions of Subchapter K of Chapter 1 of
Subtitle A of the Code.
(c) The Partnership and the Drilling Program will not
elect to be treated as corporations under the Section 7701 Treasury
Regulations.
No assurance can be given that the Partnership or the 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.
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The classification of the Partnership or the Drilling Program as an
association taxable as a corporation for federal income tax purposes would have
a material adverse effect on the Investor Partners. If the 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 the Drilling Program to the Partnership
would be treated as taxable dividends to the extent of current and accumulated
earnings and profits of the Drilling Program. If the Partnership were
determined to be taxable as a corporation, its income, deductions, and credits
would be reported by the Partnership and not by its Investor Partners, the
Partnership would be taxed directly on any net income and distributions to its
Investor 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 the Partnership would be adversely
affected or eliminated if either the Partnership or the Drilling Program were
treated as a corporation.
Section 7704 of the 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 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 MD is of the
opinion that the Partnership will not be taxable as a corporation pursuant to
the "publicly traded partnership" rules of Section 7704 of the Code. Such
opinion is based on the following representations made by MD:
(a) At least 90% of the gross income of the 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.
(b) MD does not plan to list Interests with or trade
Interests on an established securities exchange or to itself make a
secondary market in Interests.
(c) The sum of the percentage interests in the capital or
profits of the Partnership sold or otherwise disposed of (including
redemptions or repurchases) during any taxable year will not exceed 2%
of the total interests in the Partnership's capital or profits.
(d) MD is not aware of any current public or secondary
market (or substantial equivalent thereof) for Interests and does not
anticipate that any such market will develop.
(e) MD 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 the Partnership is a "publicly traded partnership"
subject to treatment as a corporation pursuant to Section 7704 of the Code.
THE FOLLOWING DISCUSSION IS PREDICATED ON THE ASSUMPTION THAT THE
PARTNERSHIP AND THE DRILLING PROGRAM 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 the 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 the Partnership uses revenues to repay Partnership
borrowings or to pay nondeductible expenditures.
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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 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 and development 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 Partnership and the Drilling Program will use the calendar year
and the accrual method of accounting for federal income tax purposes. The IRS,
however, could require the Partnership or the 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. The manner in which the Partnership Agreement allocates
among the Partners items of cost and revenue and items of income, gain, loss,
deduction, and credit is discussed under "Participation in Costs and Revenues."
As there reflected, all items of income, gain, loss, deduction, and credit are
allocated 99% to the Investor Partners and 1% to the Managing Partner, with the
exception of (a) any amortization deductions for organization expenses will be
allocated 100% to the Managing Partner, (b) interest income earned on the
Capital Contributions of the Investor Partners, which will be allocated 100% to
the Investor Partners, (c) interest income earned on the Capital Contribution
of the Managing Partner, which will be allocated 100% to the Managing Partner,
and (d) costs incurred by the Partnership in connection with the performance of
any special services requested by an Investor Partner and any tax deductions
relating thereto, which will be allocated 100% to the Investor Partner
requesting such services.
The Partnership and the Drilling Program will maintain a capital
account for each Partner or Participant 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 the 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
unrealized gain or loss in properties to be distributed in kind, to receive
assets equal 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 the Partnership. As
discussed under "Participation in Costs and Revenues," the Partnership
Agreement provides for certain modifications in the allocations described above
if necessary to prevent or eliminate any deficit capital account balance for
any Partner (taking into account certain reasonably expected deductions and
distributions in subsequent years).
The manner in which the Program Agreement allocates among the
Participants thereto 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 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 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
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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 (a) the allocations of items of income, gain,
loss, and deduction under the Partnership Agreement and the Program Agreement
are reflected in the Partners' and Participants' capital accounts, (b) those
capital accounts will be recognized upon liquidation of the Partnership, (c)
the 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, and (d) the Partnership Agreement
contains a "qualified income offset" provision, such allocations should have
economic effect under Section 704(b).
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 Program Agreement should be considered to be
substantial under Section 704(b) and regulations promulgated thereunder.
Counsel to MD is of the opinion that, except as discussed in the
previous paragraph and below, the allocation of income, gains, losses, and
deductions between the Investor Partners and MD under the Partnership Agreement
and between the Partnership and MD under the Program Agreement will be
recognized for federal income tax purposes.
Under Section 704(c), 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 the Partnership by a Partner or to the Drilling Program
by a Participant. Accordingly, counsel to MD has expressed no opinion as to
whether the allocation provisions of the Partnership Agreement and the Program
Agreement will be in compliance with Section 704(c) in the event that property
is contributed or deemed contributed to the Partnership or the Drilling
Program.
The basis of oil and gas properties owned by a partnership must be
allocated to the partners in accordance with their interests in the capital or
income of the partnership. Such basis must be allocated in accordance with the
partners' interests in the capital of the partnership if their interests in
partnership income vary over the life of the partnership for any reason other
than the admission of a new partner, as they do in the Drilling Program. The
terms "capital" and "income" are not defined in the statute or in the
regulations. The regulations under Section 704 indicate that if all
partnership allocations of income, gain, loss, and deduction (or items thereof)
have substantial economic effect, an allocation of the adjusted basis of an oil
or gas property among the partners which is not otherwise governed by
principles concerning valuations or revaluations of partnership property will
be deemed made in accordance with the partners' interests in partnership
capital or income and will accordingly be recognized, provided such allocation
does not give rise to depletion adjustments to capital accounts which do not
have substantial economic effect. Under the Partnership Agreement, the
Partnership's adjusted basis in each depletable property will be allocated 1%
to the Managing Partner and 99% to the Investor Partners. Under the Program
Agreement, basis in oil and gas properties acquired with capital contributions
of the Participants will be allocated in accordance with each Participant's
contribution to the adjusted basis of such properties. Such allocations appear
reasonable and in compliance with the regulations under Section 704. In view
of the absence of judicial authority interpreting the statutory requirements,
however, counsel to MD is unable to express an opinion as to the validity of
any special allocation of an item which is dependent upon a Partner's or
Participant's basis in an oil and gas property.
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Elections and Returns. The Partnership and the Drilling Program will
be subject to the partnership provisions of the Code and to similar provisions
of any applicable state income tax laws. The Partnership and the Drilling
Program will adopt the accrual method of accounting and calendar years as their
taxable years 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 Investor
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 therein,
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 Investor 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 Investor Partners. All Investor Partners in the
Partnership, including those not entitled to notice, may be bound by a
settlement reached by the Partnership's "tax matters partner," which will be
MD. If a proposed tax deficiency is contested in any court by any Investor
Partner of the Partnership or by the Managing Partner, all Investor Partners of
the Partnership may be deemed parties to such litigation and bound by the
result reached therein.
Organization and Offering Expenses, Sales Commissions and Due
Diligence Fees. Amounts advanced by the Managing Partner on behalf of the
Partnership for the payment of Organization and Offering Expenses, Sales
Commissions and Due Diligence Fees should be treated as a loan to the
Partnership for federal income tax purposes. Because the Managing Partner
bears the economic risk of loss with respect to the loan, any basis associated
with such loan will be allocated to the Managing Partner under Treasury
Regulation Section 1.752-2. The repayment of such loan from Partnership
revenues will cause the Investors to recognize taxable income without a
corresponding cash distribution. The Organization and Offering Expenses, Sales
Commissions and Due Diligence Fees incurred in connection with the syndication
and organization of the Partnership must be capitalized by the Partnership.
Syndication costs are not amortizable or otherwise deductible; however, the
cost of organizing the Partnership may, at the election of the Partnership, be
amortized for a period of not less than 60 months. The Partnership intends to
elect to amortize their organization expenses over a 60 month period. The
Treasury Regulations under Section 709 provide that non-amortizable syndication
costs include brokerage fees, registration fees, legal fees of the underwriter
or placement agent and the issuer for securities advice and for advice
pertaining to the adequacy of tax disclosures in the prospectus for securities
law purposes, printing costs, and other items. It is possible that the IRS may
attempt to recharacterize any costs treated as organization costs as
non-amortizable syndication costs. Due to the factual nature of this issue,
counsel has not rendered an opinion with respect to the classification of such
amounts.
Management Fee. Payments to a partner for services determined without
regard to the income of the partnership such as management fees are deductible
by the partnership only if they constitute ordinary and necessary business
expenses which are reasonable in amount. The Partnership will be unable to
deduct such expenses until "economic performance" has occurred with respect
thereto (generally, when the services are performed). In consideration for
services to be rendered by the Managing Partner in managing the business of the
Partnership during each of the initial five years, the Partnership shall pay to
the Managing Partner a Management Fee in an aggregate amount equal to 1.1% of
all Capital Contributions to the Partnership initially made by the Investor
Partners in exchange for their respective Interests in the Partnership as set
forth in the Subscription Agreements, which Management Fee will be paid from
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Partnership revenues. To the extent the Management Fee payable by the
Partnership is determined to be a reimbursement for any nondeductible
organizational expenses or syndication fees, then such portion of the
Management Fee will not be currently deductible and may be deducted, if at all,
only upon liquidation of the Partnership. The allocation of the Management Fee
between deductible expenses and other costs which must be capitalized or
amortized is inherently factual. It cannot be known at present what portion of
the Management Fee will qualify as an ordinary and necessary business expense
which is reasonable in amount or over what period of time it will be
deductible. Therefore, counsel to MD is unable to render any opinion as to the
amount, if any, of the Management Fee that will be deductible or amortizable.
There can be no assurance that the IRS will not take the position that the
Management Fee is nondeductible, in whole or in part, or that any such position
will not be sustained in litigation.
Administrative Costs. MD intends to take the position that
Administrative Costs reimbursed to MD or MOC by the 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 MD is unable to render any opinion as to the amount, if any, of the
Administrative Cost reimbursement that will be deductible or amortizable.
Transferor -- Transferee Prorations. In the event of an assignment by
an Investor Partner of his Interest in the Partnership, allocations for the
year of the assignment between the assignor and assignee of deductions, credits
and income of the Partnership will be based on the number of days of the year
during which each such Investor Partner owned such interest.
Conversion of General Partner Interests. As discussed under "Terms of
the Offering -- Conversion of General Partner Interests," the General Partner
Interests in the 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 Participant
will not recognize any gain or loss because of a conversion of a General
Partner Interest in the Partnership into a Limited Partner Interest in the
Partnership, unless the 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 does not result in a deemed sale or exchange of the converted
interests and therefore does not constitute a constructive termination.
Assuming this ruling is not revoked or modified, constructive termination of
the Partnership or the Drilling Program is unlikely by reason of the conversion
of the Interests held by General Partners to Limited Partner Interests.
If a constructive termination of the Partnership or the Drilling
Program occurred, the Partnership's or the Drilling Program's assets would be
deemed distributed to the Partners or the Participants in proportion to their
interests in the Partnership or the Drilling Program and, immediately
thereafter, contributed by the Partners or the Participants to a new
partnership. 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 reallocation of basis in depreciable assets to
nondepreciable assets, 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."
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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
Partnership and the Drilling Program.
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 acquired or retained
on the basis of data from such exploration. Otherwise, such costs may be
deducted as ordinary expenses.
Operating and Administrative Costs. Amounts paid for operating a
producing well are deductible as ordinary business expenses, as are
Administrative Costs.
Intangible Drilling and Development Costs. Owners of Working
Interests in oil and gas properties may elect to deduct intangible drilling and
development 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 Partnership and the
Drilling Program will elect to deduct all intangible drilling and development
costs. Assuming proper elections, each Investor Partner will be entitled to
deduct his distributive share of the intangible drilling and development costs
incurred by or allocable to the 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 and development costs allocable to the 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 the Partnership may be expended through
the Drilling Program in one year as required under drilling contracts for
services to be performed in the following year. The Partnership may deduct
such expenses in the year incurred only if "economic performance" with respect
thereto occurs in such year or, subject to certain 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 entities such as the 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, Investor 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 the Partnership in the year incurred is an
inherently factual determination predicated largely on future events.
Accordingly, Counsel to MD is unable to express any opinion as to the
deductibility in a given year of any intangible drilling and development costs
incurred in a year prior to the drilling of the wells to which such costs
relate. If Investor Partners are admitted to the 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 the Partnership that would otherwise
be realized in 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 and development 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 and development costs and may
amortize
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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 the 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. Each Investor Partner will be entitled to his distributive
share of the Partnership's depreciation deductions, subject to the general
restrictions discussed herein.
Depletion. Except as discussed below, an Investor Partner may deduct
a depletion allowance for the greater of cost or percentage depletion with
respect to each oil and gas property of the Partnership. Investor Partners
must compute their own depletion allowance and maintain records of the adjusted
basis of property for depletion and other purposes. While the Partnership will
furnish its Investor Partners with information relating to this computation,
these requirements may impose an administrative burden on an Investor Partner.
Cost depletion is calculated by dividing the adjusted basis of a
property by the total number of units of oil or gas expected to be recoverable
therefrom and then multiplying the quotient by the number of units of oil or
gas recovered from such property and sold during the year. Cost depletion, in
the aggregate, cannot exceed the adjusted basis of the property. For a
discussion of the determination of a General Partner's share of depletable
basis, see "-- Partnership Taxation -- Allocations" above.
Under percentage depletion, the owner of an economic interest in an
oil or gas property, or a partner in a partnership (such as the Partnership and
the Drilling Program) which holds such an economic interest, may deduct 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 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. 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 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 certain controlled or
related persons and family members in proportion to the respective production
by such persons during the period in question.
The percentage depletion deduction available to independent producers
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
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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 MD
is unable to express any opinion as to the availability or extent of percentage
depletion deductions to the Investor 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 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.
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 payment
treated as loans for federal income tax purposes and interest from the
investment of the 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 certain 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 the Partnership sells
an oil or gas property to an unrelated party or abandons it, each Limited
Partner in the Partnership will then be able to deduct any suspended passive
activity losses attributable to that property. If the Partnership disposes of
only part of its interest in a property, however, Limited Partners will only be
able to offset 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 the Partnership.
A taxpayer's interest in an oil or gas well drilled or operated
pursuant to 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 MD is of the opinion that the
passive activity loss limitations will not apply to General Partners in the
Partnership (prior to any conversion of their General Partner Interests to
Limited Partner Interests) to the extent that the Partnership drills or
operates wells pursuant to 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 pursuant to Working Interests without regard to the
passive activity loss limitations (but subject to the basis and at risk
limitations
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discussed above). 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. This rule also applies 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 the Partnership other
than the drilling and operation of wells pursuant to Working Interests.
Therefore, if the Partnership acquires an interest or participates in other
activities, such activities will be treated as passive activities to the
General Partners of the 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 the 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 not be treated as a
passive activity during the drilling activities. 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 the 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 conversion are
considered passive activity deductions, even if the converted partners have net
income for the taxable year. If the General Partner Interests in the
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 Investor Partners holding those Interests. If the
conversion occurs at the beginning of a taxable year, any net losses of the
converted partners 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 the
Partnership, certain 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 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 MD concerning the anticipated lack of public trading or public markets for
the Interests, counsel to MD 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
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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 a specific expenditure. 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.
It is unclear at present whether, after any conversion of the General
Partner Interests in the 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 MD 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 the 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 the 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,
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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 certain 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 in 1988 (and any subsequent taxable year 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 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 the 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 pursuant to the Partnership
Agreement and the 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 assumed
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 and development 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 the Partnership. When the Partnership is terminated,
each Investor Partner in the 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. Investor
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 the 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 received only money, unrealized receivables, and
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inventory. In such a case, the Investor Partner could recognize loss to the
extent that the basis of his Interests exceeded 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 certain ordinary income items
(including potential recapture of intangible drilling and development 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 to the other assets in proportion to the
basis of those assets in the Partnership's hands. The holding period of the
property generally will include the period during which the Partnership held
the property.
Sale of Interests. When an Investor Partner sells an Interest
(including pursuant to 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
certain ordinary income items (including potential recapture of intangible
drilling and development 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
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). See "Tax Aspects -- Special Features of Oil & Gas Taxation --
Passive Activity Loss Limitations."
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 Code, the partnership's basis in its
assets is adjusted generally 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, MD does not currently intend to make this election on behalf of the
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 the 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.
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Section 1060 of the 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. A manner in which the Partnership
(through the Drilling Program) may acquire oil and gas leaseholds is discussed
above under "Proposed Activities -- Farmouts." Some farmouts may be
characterized for tax purposes as partnerships entered into by the 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 thereof) may be disallowed under Section 704 of the 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 and development costs paid in excess of its fractional
share of the Working Interest acquired pursuant to 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
the Partnership would be adversely affect, or eliminated See -- "Partnership
Taxation -- Partnership Classification." One type of farmout in which the
Drilling Program might be involved is a transaction in which, in exchange for
the drilling of a well on a particular drill site, a third 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.
MD 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
the Drilling Program and the Partnership if and when the Drilling Program
enters into such Farmouts, since the Drilling Program may recognize gain or
loss upon the transfer 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 certain 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 certain 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 Code using the 150 percent
declining balance method with respect to tangible personal property and the
straight-line method with respect to real property.
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.
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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-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 Partnership. The Managing Partner will apply for
and obtain a tax shelter registration number with respect to the Partnership.
The registration number of the Partnership will be furnished to its Investor
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 certain other information). The
Managing Partner also must maintain lists of investors in the Partnership 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.
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 certain 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) the principal purpose of which is the
avoidance or evasion of federal income tax. An entity will not be considered
to have a principal purpose of avoidance or evasion of federal income tax
merely because it affords itself of percentage depletion allowances, intangible
drilling and development cost deductions, or certain other deductions. MD does
not believe that tax avoidance is the principal purpose of the Partnership and
does not anticipate that these provisions would apply to any understatement
attributable to the disallowance of the Partnership item. Investors are
cautioned, however, to consult their tax advisors with respect to the possible
application of the substantial understatement penalty.
Consistency Requirements. Investor 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."
Investment by Tax-Exempt Entities. Net income derived from the
conduct of a trade or business regularly carried on by many tax-exempt
entities, including charitable or other exempt organizations, pension,
profit-sharing or stock bonus plans, Keogh plans, IRAs, and certain other
employee benefit plans, may constitute unrelated business taxable income
("UBTI") on which federal income tax is imposed. UBTI in excess of $1,000 of a
tax-exempt entity which is a corporation is generally taxed at marginal
corporate rates. Where the tax-exempt entity is a trust, UBTI in excess of
$1,000 is taxed at marginal trust rates. Ownership of a working or operating
interest in oil or gas properties has been held to constitute income derived
from the conduct of a trade or business, even where an unrelated third party is
hired to operate the property and ownership is in the form of a partnership.
To the extent the Partnership borrows funds to acquire or improve a property or
a tax-exempt entity borrows funds to acquire Interests, a portion of the income
from such "debt financed property" may be UBTI even if otherwise excludable.
For these reasons, substantially all the income of the Partnership will
constitute UBTI.
An otherwise tax-exempt Investor Partner may be required to file a tax
return even if such investor does not realize net taxable income from the
Partnership exceeding $1,000. Although the UBTI rules generally permit a
tax-exempt investor to offset any loss from the Partnership against income from
another unrelated trade or business and to use any unused losses in other years
subject to the general net operating loss carryback and carryforward rules, the
IRS takes the position that tax-exempt entities are subject to the passive
activity limitations. Thus, a tax-exempt investor who becomes a Limited
Partner could offset any loss from the Partnership only against passive income
from other unrelated trades or businesses. Tax-exempt investors also should
consider whether investment in the Partnership, especially as a General
Partner, is consistent with their exempt status. See "-- Special Features of
Oil and Gas Taxation -- Passive Activity Loss Limitations."
Fiduciaries of pension, profit sharing or stock bonus plans, Keogh
plans, IRAs, other qualified employee benefit plans, and other plans or
arrangements subject to ERISA, or to Section 4975 of the Code, must determine
whether an investment in Interests will satisfy certain standards, including,
among other things, (a) the exclusive purpose rule of Section 404(a)(1)(A) of
ERISA, (b) the prudence requirements of Section 404(a)(1)(B) of ERISA, (c) the
diversification requirements of Section 404(a)(1)(C) of ERISA, and (d) the
requirement of Section 404(a)(1)(D) of ERISA that the investment be in
accordance with the governing instrument of the plan or arrangement.
A fiduciary of an employee benefit plan or other arrangement is
prohibited from engaging in certain transactions involving "plan assets" with
parties which are "parties in interest" under ERISA or "disqualified persons"
under the Code. The United States Department of Labor has issued final
regulations defining "plan assets" for these purposes. Under certain
circumstances, the final regulations treat a portion of the underlying assets
of an entity in which such a plan or arrangement invests as assets of the plan
or arrangement. These regulations could apply to the Partnership, unless the
Partnership satisfies one of the exceptions set forth therein. It is
anticipated that the Partnership will qualify for the "publicly offered
security" exception and that the underlying assets of the Partnership should
not be considered "plan assets" for purposes of these regulations. Such issue
involves questions of fact, however, and counsel to MD is thus
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unable to render any opinion as to whether Interests will be considered
"publicly offered securities" for purposes of ERISA. Each prospective investor
which is or may be subject to ERISA or to Section 4975 of the Code should
consult with its advisors concerning the effect of its ownership or Interests
under these rules.
Investors and fiduciaries of IRAs also should note that an investment
in the Partnership will not alone create an IRA for any individual.
State Law Tax Aspects. The Partnership, through the 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 Partnership's
activities will be in Texas, which imposes a franchise tax on corporations
"doing business" in that state. Corporate General Partners not otherwise
considered to be doing business in Texas which invest through the Partnership
may be deemed to be doing business in Texas for purposes of this tax.
To the extent the 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
MD expects that approximately 65% to 75% of an Investor Partner's
Capital Contribution to the 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 MD's
assumptions concerning the offering termination dates for the Partnership and
MD'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 the 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 the 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 Drilling Program will encounter strong competition from
independent operators and major oil companies in acquiring Leases suitable for
development by the Drilling Program. Many of the companies so engaged have
financial resources and staffs considerably larger than those available to the
Drilling Program. There are likewise numerous companies and individuals
engaged in the organization and conduct of drilling programs, and there is a
high degree of competition among such companies in the offering of their
programs.
MARKETS FOR SALE OF PRODUCTION
The ability of the 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. At the present
time worldwide oil production capacity and gas production capacity in certain
areas of the United States exceed demand. This has resulted in a substantial
decline in the price of oil and natural gas in the United States. Although
future levels of production by members of OPEC or the degree to which oil
prices will be affected thereby cannot be predicted, it is possible that prices
for any oil and gas produced from a Program Well will be lower than those
currently available. There is no assurance that the 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 for the first time in many years, 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.
Recent trends indicate 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 6.5 million barrels in 1996. 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 845 rigs as of the end of 1995. 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.
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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 1996 imports averaged approximately 52.5% of
the United States' consumption.
In view of the many uncertainties affecting the supply and demand for
oil, gas, and refined petroleum products, MD 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 the Partnership.
REGULATION OF PRODUCTION
The production of oil and gas found by the Drilling Program, if any,
will be subject to United States federal and state laws and regulations (and
orders of regulatory bodies pursuant thereto) 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 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 the
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 the 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 the 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.
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 the 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 the 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. Certain of these costs may ultimately be borne by the 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
Partnership's and the Drilling Program's operations may be subject.
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LIABILITY OF INVESTOR PARTNERS
GENERAL PARTNERS
By law, each General Partner in the Partnership is jointly and
severally liable for the liabilities and recourse obligations of the
Partnership. Accordingly, a single General Partner legally could be held
responsible for the liabilities and obligations of the entire Partnership.
Furthermore, under certain circumstances, joint Working Interest owners may be
jointly and severally liable for obligations arising in connection with the
development and operation of the Lease in which they jointly own an interest.
See "Risk Factors -- Particular Risks Relating to the Interests -- Liability of
Joint Working Interest Owners." Because the Partnership will own a Working
Interest in Leases in which the Participants (and likely others) own Working
Interests, the Partnership, and therefore the General Partners of the
Partnership, could be liable for obligations of all such joint Working Interest
owners.
Pursuant to the terms of the Partnership Agreement, the General
Partners and the Managing Partner of the 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 the Partnership's liabilities and
obligations, and will be entitled to contribution from other General Partners
and the Managing Partner of the Partnership if he incurs liability in excess of
his pro rata share. Furthermore, MD will indemnify each General Partner of the
Partnership. MD 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
the Partnership's obligations, and a General Partner still could be subject to
liability in excess of the amount of his Capital Contribution if MD 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.
MD will conduct the operations of the Partnership in a manner designed
to reduce the risk that a General Partner could be required to make such
additional payments. The actions to be taken by MD and Affiliates thereof
include:
(a) Insurance. MOC will maintain insurance coverage
obtained in an amount equal to approximately $50,000,000 against
third-party liabilities which may arise due to drilling activities and
against losses of equipment owned by the Partnership, MD, and
Affiliates thereof. See "Proposed Activities -- Insurance" for a
detailed description of the insurance policies maintained by MOC.
(b) Drilling Activities. It is anticipated that the
drilling activities of the Partnership will be conducted primarily in
the shelf and the slope areas of the Permian Basin (located in West
Texas and Southeastern New Mexico and the Anadarko Basin (located in
Western Oklahoma and the Texas Panhandle) where the probability of
encountering severely over-pressured formations and other hazards
associated with drilling activities is relatively less likely. MOC
and its Affiliates have drilled over 606 wells in the 32 years since
1965, and except for one well drilled in 1982 as to which a downhole
blowout occurred (resulting in claims of approximately $923,202 which
were fully insured subject to the applicable deductible), MOC and its
Affiliates have not experienced any material explosion, fire or
similar hazard with respect to any of these wells.
(c) Prevention of Cost Overruns. MOC has extensive
experience in estimating drilling costs to minimize the possibility
that cost overruns will occur while the Partnership is engaged in
drilling activities. In addition, after approximately 90% of the
Partnership's funds available for drilling activities have been
expended, Mewbourne will cause additional wells to be drilled on a
sequential basis (i.e., not more than one drilling operation will be
conducted contemporaneously), to further reduce the likelihood of a
cost overrun.
(d) Conversion of Interest. MD anticipates that each
General Partner in the Partnership will be converted to a Limited
Partner in the Partnership following completion of the Partnership's
drilling activities (which MD anticipates will occur within 8 to 12
months after the funding of the Partnership). The Partnership
Agreement provides that such conversion may be delayed if the Managing
Partner determines that conversion
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at that time would not be in the best interests of the General
Partners; provided that if the Managing Partner determines that such
conversion would not be in the best interests of the General Partners,
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.
Once conversion has taken place, the Converted Partners of the
Partnership will continue to have the responsibilities of General
Partners of the Partnership with respect to liabilities and
obligations incurred prior to the effective date of the conversion.
However, Converted Partners generally will have the lesser liability
of limited partners under Delaware law with respect to obligations and
liabilities arising after the conversion. The greatest possibility
that a General Partner might become liable for obligations in excess
of his Capital Contribution to the Partnership will occur during the
time when the Partnership is engaged in drilling activities. It is
anticipated that all such drilling activities will be conducted and
completed prior to conversion of the General Partners to Limited
Partners.
(e) Non-Recourse Debt. Pursuant to the Partnership
Agreement, the Partnership will be permitted to incur debt only if the
lender agrees that it will not have recourse against the individual
General Partners of the Partnership. Accordingly, no General Partner
could be required to contribute funds to the Partnership in the case
of a default under such loan arrangement. A lender under such
arrangement, however, would most likely have the right to foreclose
against the properties of the Partnership, so that the General
Partners in the Partnership could lose the value of their investment
in the Partnership. Furthermore, such restrictions will not protect a
General Partner from liability for trade debt, contractual obligations
other than loans or third-party liabilities.
LIMITED PARTNERS
Under the Delaware Act, 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. The Delaware Act 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 the Partnership's business and that he otherwise
acts in conformity with the provisions of the Partnership Agreement, his
liability under the Delaware Act will be limited, subject to certain possible
exceptions, generally to the amount of capital he has contributed to the
Partnership. Under the Delaware Act (i) a Limited Partner is obligated to the
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 in certain circumstances 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 the Delaware Act, a Limited Partner may not receive a
distribution from the 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 the Delaware Act, an assignee who
becomes a substituted Limited Partner of the 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 Partnership will conduct
substantially all of its business in the states of Texas, Oklahoma, and New
Mexico, where the Partnership will register to do business as a foreign limited
partnership. The Partnership may also be deemed to be conducting business in
various states, other than Texas, Oklahoma, 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 the 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 pursuant to the Partnership Agreement,
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constitute "control" of the Partnership's business for the purposes of the
statutes of any relevant jurisdiction, a Limited Partner might be held
personally liable for the 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 Partnership and the Drilling Program
will operate in such a manner as its Managing Partner deems reasonable,
necessary and appropriate to preserve the limited liability of Limited
Partners.
SUMMARY OF PARTNERSHIP AGREEMENT AND PROGRAM AGREEMENT
The following is a summary of certain provisions of the Partnership
Agreement and the Program Agreement. 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 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 Program Agreement.
TERM
The Partnership is organized under the Delaware Act. The Drilling
Program will be a partnership for income tax purposes only and, for all other
purposes, is intended to be an agreement among MOC, as Program Manager, and MD
and the Partnership as joint owners or tenants-in-common of undivided interests
in the Drilling Program's oil and gas properties. The Partnership and the
Drilling Program will continue until terminated as provided for in the
Partnership Agreement and the Program Agreement. See "-- Dissolution,
Liquidation and Termination" below.
RIGHTS AND POWERS OF PARTNERS
Investor Partners. Pursuant to the terms of the Partnership
Agreement, Investor Partners will have the following rights and powers with
respect to the Partnership:
(a) to share all charges, credits, and distributions in
accordance with the Partnership Agreement and share all charges,
credits, and distributions of the 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 in the Delaware Act;
(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 Investor Partners;
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(f) to terminate any contract between the Partnership and
MD or any Affiliate thereof (by a vote or written consent of a
Majority in Interest of the Investor 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
Investor Partners (except in connection with a Roll-Up transaction
which requires the affirmative vote of a Super Majority in Interest of
the Investor Partners);
(h) to dissolve the Partnership at any time upon the
election of a Majority in Interest of the Investor Partners;
(i) to permit the assignment by the Partnership or MD of
their obligations under the Program Agreement (if such permission is
required under the Program Agreement) by the affirmative vote of a
Majority in Interest of the Investor Partners;
(j) to agree to the termination or amendment (except for
certain conformatory amendments and amendments necessary to conform to
the Code or that do not adversely affect the Investor Partners) of the
Program Agreement or the waiver of any rights of the Partnership under
the Program Agreement by the affirmative vote of a Majority in
Interest of the Investor 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 Program Manager and substitute a
successor to act in such capacity by the affirmative vote of a
Majority in Interest of the Investor Partners; and
(l) to propose and vote on certain matters affecting the
Partnership as provided in the Partnership Agreement.
Limited Partners. Limited Partners of the Partnership will take no
part in the control of the business or affairs of the Partnership or the
Drilling Program and will have no voice in the management or operations of the
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 Investor Partners -- Limited
Partners." Notwithstanding the foregoing, Limited Partners shall:
(a) have the rights described in paragraphs (a) through
(l) under the caption "Investor Partners" above; and
(b) 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 the Delaware Act 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 Partnership.
In addition, the General Partners will covenant not to exercise the following
rights granted to them under the Delaware Act:
(a) the right to withdraw from the Partnership;
(b) the right to act as agent of the Partnership or to
execute documents on behalf of the Partnership; and
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(c) the right to act (other than together with other
General Partners constituting a Majority in Interest of the Investor
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 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 the Partnership
Agreement. The Sharing Ratios will be recalculated among the Investor Partners
without regard to the withdrawing General Partner's Capital Contribution. See
"-- Reconstitution of the Partnership" below.
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 the
Partnership. The Managing Partner has the authority to enter into a Program
Agreement on behalf of the Partnership. Under the Program Agreement, MOC as
Program Manager will have the power and authority to act on behalf of the
Partnership with respect to the management, control, and administration of the
business and affairs of the Drilling Program and the properties subject to the
Program Agreement.
Under the Partnership Agreement, 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 the 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 MD AND AFFILIATES THEREOF
Generally, the Managing Partner must act in good faith and for the
benefit of the Partnership in handling Partnership affairs. See, however,
"Conflicts of Interest." The Partnership Agreements provide, however, that
neither the Managing Partner nor any of its Affiliates shall be liable to the
Partnership or the Investor 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. Investors who have questions concerning the duties
and liabilities of the Managing Partner should consult their own counsel. The
Program Manager and its Affiliates, under the Program Agreement, have similar
liability.
The Partnership Agreement also provides that the Managing Partner and
Affiliates thereof shall be indemnified by the 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 the Partnership or the 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. The 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
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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 Program Manager has similar rights with respect to
insurance, and the Program Manager and its Affiliates are entitled to similar
indemnification under the Program Agreement.
The Partnership Agreement further limits 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 (a) 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, (b) 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 (c) 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 may be permitted to the Managing Partner by the Partnership
Agreement, the Partnership has been advised that in the opinion of the
Securities and Exchange Commission and certain state securities authorities
such indemnification is against public policy as expressed in the Securities
Act, and is therefore unenforceable.
RIGHT OF PRESENTMENT
Each Investor Partner in the Partnership may request that the Managing
Partner purchase for cash any or all of that Investor Partner's Interests
subject to certain limitations. The Managing Partner may cause an Affiliate
thereof to fulfill its obligation hereunder to purchase all or a portion of
such Interests. Investor Partners in the Partnership may make such requests in
each of the years 2001 through 2006. 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 the 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 Investor 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 the
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 thereof, 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 thereof, or a third person specified by the
Managing Partner. In addition, Investor Partners who are residents of either
the State of California, Iowa, or Minnesota 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 the Partnership, would
result in the Partnership being considered to have been terminated for purposes
of 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 an assignment,
or which, in the opinion of counsel to the Partnership, may not be effected
without registration under the Securities Act or would result in the violation
of any applicable state securities laws. The 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 (a) obtaining the consent of the assignor and the
Managing Partner to such
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substitution, (b) paying all costs and expenses incurred in connection with
such substitution, (c) making certain representations to the Managing Partner,
and (d) executing appropriate documents to evidence its agreement to be bound
by all of the terms and provisions of the applicable Partnership Agreement.
The 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, the 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 the
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 interest of the Managing Partner in the Partnership may not be
assigned except in certain 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 MD and
its Affiliates with respect to the Drilling Program under the 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 Investor Partners of the Partnership, subject to
certain limitations set forth in the Program Agreement, and MD 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 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
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 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. In addition, a Majority in Interest of the
Investor Partners shall have the right to remove MOC as the Program Manager.
In such event, MOC and its Affiliates shall have the right to offer to sell up
to 100% of their collective ownership interests in Leases subject to the
Program Agreement to the new Program Manager. The method of payment for the
removed Managing Partner's and MOC'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 the
Partnership and such withdrawal or retirement causes dissolution of the
Partnership, a Majority in Interest of the Investor 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 the Partnership prior to the later to occur of (i) the completion
of the 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.
DISSOLUTION, LIQUIDATION AND TERMINATION
The Partnership shall be dissolved upon:
(a) the occurrence of December 31, 2047;
(b) the vote or consent in writing of a Majority in
Interest of the Investor Partners at any time;
(c) the sale, disposition, or termination of all or
substantially all of the Leases then owned by the Partnership;
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(d) 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
Section 8.2(b) of the Partnership Agreement shall cause 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) the occurrence of any other event which, under
applicable law, causes the dissolution of the Partnership.
If dissolution of the 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 the 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 Investor
Partners.
After making a proper accounting and paying or making provision for
the payment of existing and contingent liabilities, the liquidator of the
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 pursuant to 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 the Partnership will not be
obligated to restore any negative balance in their capital accounts after the
liquidation of their interests in the Partnership. The distribution of cash or
properties to the Partners will constitute a complete distribution to the
Partners of their respective interests in the Partnership and its property.
In the event of a dissolution and liquidation of the Partnership
pursuant to 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 pursuant to a sale 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 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. The Managing
Partner shall have, with respect to its general partnership interest and its
Interests in the Partnership, the right to elect to receive a distribution in
kind of partnership oil and gas properties having a fair market value 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
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.
Upon dissolution of the Partnership, the Drilling Program will
terminate and will be liquidated as provided in the tax partnership provisions
attached as Attachment A to the Program Agreement.
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RECONSTITUTION OF THE PARTNERSHIP
In the event the Managing Partner of the 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 Investor 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 Investor
Partners in the 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 Investor
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 Investor 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.
The retiring Managing Partner shall have the right to elect to receive
a distribution in kind of an undivided interest in 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 positive balance in
the retiring Managing Partner's capital account to the positive balances of all
Partners.
Each General Partner of the Partnership will covenant not to cause a
dissolution of the 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
Investor 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 Investor Partners of the 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. Certain minor and
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conformatory amendments and amendments that do not adversely affect the
Investor Partners in any material respect may be made by the Managing Partner
without the consent of the Investor Partners.
REPORTS TO PARTNERS
The Managing Partner will furnish to the Investor Partners of the
Partnership certain 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 the Partnership's semi-annual reports will not be
audited. Semi-annually, all Investor Partners will also receive a summary
itemization of the transactions between the Managing Partner or any Affiliate
thereof 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, 1998, oil
and gas reserve estimates prepared by an independent petroleum engineer will
also be furnished to the Investor Partners. Annual reports will be provided to
the Investor 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
Investor Partners in the Partnership shall receive on a monthly basis while the
Partnership is participating in the drilling and completion activities of a
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 Investor 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 Investor Partners information regarding differences
between tax basis of accounting and the basis of generally accepted accounting
principles in accordance with generally accepted accounting principles. In
addition, the information specified by Form 10-Q (if such report is required to
be filed with the Securities and Exchange Commission) will be furnished to the
Investor Partners within 45 days after the close of each quarterly fiscal
period. Investor Partners in the 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 INVESTOR PARTNERS
An alphabetical list of the names, addresses and business telephone
numbers of the Investor Partners in the Partnership identified as General
Partners or Limited Partners along with the number of Interests held by each of
them (the "Investor List") will be maintained as a part of the books and
records of the Partnership and will be available for inspection by any Investor
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
therein. A copy of the Investor List for the Partnership will be mailed to any
Investor Partner in the Partnership requesting the Investor List within ten
(10) 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 Investor Partners' voting rights under the Partnership Agreement
and the exercise of Investor 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 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 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
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the Investor 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.
POWER OF ATTORNEY
In signing the Subscription Documents, each investor adopts the terms
and provisions of the Partnership Agreement for the Partnership to which such
investor is admitted, including certain representations and warranties
contained therein, 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 the 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 (a) to comply with the laws
of any state in which the Partnership does business, (b) 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 Investor
Partners, (c) to amend the Partnership Agreement to effect the conversion of
the General Partners to Limited Partners, (d) to conduct the business and
affairs of the Partnership, (e) to reflect the agreement of all of the Investor
Partners if the required Majority in Interest of the Investor Partners has
approved any action under the Partnership Agreement and amendments to the
Partnership Agreement to implement such action, and (f) 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 pursuant to Section 10.3 of the Partnership Agreement by an
Investor Partner's execution of the Subscription Agreement.
LEGAL OPINIONS
The validity of the Interests offered hereby and certain 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 balance sheet of Mewbourne Development Corporation as of June 30,
1996 and the balance sheet of Mewbourne Energy Partners 97-A, L.P. as of
February 18, 1997 included in this Registration Statement on Form S-1, have
been included herein in reliance on the reports of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
ADDITIONAL INFORMATION
A Registration Statement with respect to the Interests offered hereby
has been filed on behalf of the Partnership with the Securities and Exchange
Commission, Washington, D.C. 20549, under the Securities Act of 1933, as
amended. This Prospectus does not contain all of the information set forth in
the Registration Statement, certain portions of which have been omitted
pursuant to the rules and regulations of the Securities and Exchange
Commission. For further information, reference is made to such Registration
Statement and to the exhibits thereto, which are available for inspection
without charge at the public reference facilities maintained by the Commission
at 450 Fifth Street, N.W., Washington, D.C., 20549, 75 Park Place, New York,
New York 10007 and Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60604. The Registration Statement may also be obtained
from the Web site maintained by the Commission at http://www.sec.gov. Copies
of any materials filed as a part of the Registration Statement may be obtained
from the Public Reference Section of the Securities and Exchange Commission at
450 Fifth Street, N.W., Washington, D.C., 20549 by payment of the requisite fees
therefor. The delivery of this Prospectus at any time does not imply that the
information contained herein is correct as of any time subsequent to the date
hereof.
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INDEX TO FINANCIAL STATEMENTS
Financial Statement of Mewbourne Development Corporation:
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . F1-1
Balance Sheet as of June 30, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . F1-2
Notes to Financial Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F1-3
Unaudited Financial Statement of Mewbourne Development Corporation:
Unaudited Balance Sheet as of March 31, 1997 . . . . . . . . . . . . . . . . . . . . . F2-1
Notes to unaudited Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . F2-2
Financial Statement of Mewbourne Energy Partners 97-A, L.P.:
Report of Independent Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . F3-1
Balance Sheet as of February 18, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . F3-2
Notes to Financial Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F3-3
THE FOLLOWING FINANCIAL STATEMENTS INCLUDE THOSE OF THE MANAGING
PARTNER, MEWBOURNE DEVELOPMENT CORPORATION, IN WHICH THE INVESTOR PARTNERS WILL
ACQUIRE NO INTEREST.
124
MEWBOURNE DEVELOPMENT CORPORATION
BALANCE SHEET
WITH REPORT OF INDEPENDENT ACCOUNTANTS
AS OF JUNE 30, 1996
125
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Mewbourne Development Corporation:
We have audited the accompanying balance sheet of Mewbourne Development
Corporation as of June 30, 1996. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Mewbourne Development Corporation
as of June 30, 1996 in conformity with generally accepted accounting
principles.
/s/ COOPERS & LYBRAND, L.L.P.
Dallas, Texas
September 15, 1996
F1-1
126
MEWBOURNE DEVELOPMENT CORPORATION
BALANCE SHEET
JUNE 30, 1996
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . $2,409,759
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . 152,182
----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 2,561,941
Marketable securities available for sale . . . . . . . . . . . . . . . . . . 945,363
Investments in partnerships . . . . . . . . . . . . . . . . . . . . . . . . . 77,034
Oil and gas properties--full-cost method, net . . . . . . . . . . . . . . . . 2,223,046
----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,807,384
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, related party . . . . . . . . . . . . . . . . . . . . . $ 75,484
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,000
----------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . 120,484
----------
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 650,101
----------
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,741,284
Net unrealized gain on marketable securities available for sale . . . . . 104,253
----------
Total stockholder's equity . . . . . . . . . . . . . . . . . . . . . 5,036,799
----------
Total liabilities and stockholder's equity . . . . . . . . . . . $5,807,384
==========
The accompanying notes are an integral part of this statement.
F1-2
127
MEWBOURNE DEVELOPMENT CORPORATION
NOTES TO BALANCE SHEET
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. 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. Capitalized costs in unproved properties are
not amortized until proved reserves associated with the property can
be determined or until impairment occurs. If the results of an
assessment indicate that the properties are impaired, the amount of
the impairment is added to the capitalized costs of the proved
properties to be amortized.
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 current economic and operating
conditions, and the lower of cost or fair value of unproved
properties.
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.
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.
F1-3
128
MEWBOURNE DEVELOPMENT CORPORATION
NOTES TO BALANCE SHEET -- (CONTINUED)
INVESTMENTS IN PARTNERSHIPS
The Company is managing partner of several oil and gas partnerships
and owns a 1% interest in all revenues and expenses of each
partnership. The Company accounts for its investment in partnerships
using the equity method of accounting.
2. MARKETABLE SECURITIES:
The Company utilizes Statement and Financial Accounting Standards No.
115, Accounting for Certain Investments in Debt and Equity Securities,
to account for its marketable securities. All securities are
classified as available for sale as of June 30, 1996. Realized gains
and losses on sales of securities are determined utilizing the
specific identification method. Reconciliation of cost to market
value as of June 30, 1996 is as follows:
Gross Unrealized
---------------------- Market
Cost Gains Losses Value
------------ ------------ ------- -----------
U.S. Treasury Bonds $766,784 $160,951 $ -- $927,735
Equity securities 10,429 7,246 47 17,628
-------- -------- ----- --------
$777,213 $168,197 $ 47 $945,363
======== ======== ===== ========
As of June 30, 1996, the cost of U.S. Treasury Bonds includes $359,784
of accrued interest income. Included in the Company's securities
portfolio as of June 30, 1996 are debt securities with a market value
of $927,735 with scheduled maturities as follows:
6-10 years $ 550,620
More than 10 years 377,115
-------------
$ 927,735
=============
3. OIL AND GAS PROPERTIES:
Oil and gas properties consist of the following as of June 30, 1996:
Proved oil and gas properties $ 4,358,643
Accumulated depreciation, depletion and amortization (2,246,546)
------------
Net proved oil and gas properties $ 2,112,097
===========
4. 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
F1-4
129
MEWBOURNE DEVELOPMENT CORPORATION
NOTES TO BALANCE SHEET -- (CONTINUED)
payable or receivable is established with the Stockholder. As of June
30, 1996, federal income tax payable to the Stockholder was $0.
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 June 30, 1996, the deferred tax liability is comprised of the
following temporary differences:
Oil and gas properties $ 586,204
Unrealized gain on marketable securities 63,897
-------------
$ 650,101
=============
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. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amounts of cash, accounts receivable and accounts
payable, related party approximate fair value at June 30, 1996.
F1-5
130
MEWBOURNE DEVELOPMENT CORPORATION
NOTES TO BALANCE SHEET -- (CONTINUED)
7. SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED):
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 under existing economic and operating
conditions with no provision for price and cost escalation except by
contractual agreement. The Company emphasizes that reserve estimates
of new discoveries or undeveloped properties are more imprecise than
those of producing oil and gas properties. Accordingly, these
estimates are expected to change as future information becomes
available. All of the Company's reserves are located onshore in the
Continental United States.
As of June 30, 1996, the Company had proved oil reserves of 86,600
barrels and proved gas reserves of 1,870,800 thousand cubic feet
(mcf). Future net revenues and the present value of these reserves as
of June 30, 1996 are as follows:
Future cash inflows $ 5,857,434
Future production costs (2,447,547)
Future development costs (921)
Future income tax expense (487,016)
--------------
2,921,950
Discount at 10% (919,830)
--------------
Standard measure of discounted future net cash flows
from estimated production of proved oil and gas
reserves after income taxes $ 2,002,120
==============
F1-6
131
MEWBOURNE DEVELOPMENT CORPORATION
BALANCE SHEET (UNAUDITED)
AS OF MARCH 31, 1997
132
MEWBOURNE DEVELOPMENT CORPORATION
BALANCE SHEET
(Unaudited)
March 31, 1997
ASSETS
Current assets:
Cash and cash equivalents $2,760,463
Accounts receivable, related party 234,078
----------
Total current assets 2,994,541
Marketable securities available for sale 975,065
Investments in partnerships 107,211
Oil and gas properties--full-cost method, net 1,974,451
----------
Total assets $6,051,268
==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable, related party $122,021
Deferred income taxes 504,469
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 1,190,262
Retained earnings 4,145,191
Net unrealized gain on marketable securities
available for sale 88,325
----------
Total stockholder's equity 5,424,778
----------
Total liabilities and stockholder's equity $6,051,268
==========
The accompanying notes are an integral
part of this statement.
F2-1
133
MEWBOURNE DEVELOPMENT CORPORATION
NOTES TO UNAUDITED BALANCE SHEET
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. 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. Capitalized costs in unproved properties are
not amortized until proved reserves associated with the property can
be determined or until impairment occurs. If the results of an
assessment indicate that the properties are impaired, the amount of
the impairment is added to the capitalized costs of the proved
properties to be amortized.
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 current economic and operating
conditions and the lower of cost or fair value of unproved properties.
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.
Cash and Cash Equivalents
The Company considers all highly liquid investments, those with
original maturities of three months or less to be cash equivalents. A
substantial portion of the Company's cash and cash equivalents is
maintained in one financial institution.
F2-2
134
MEWBOURNE DEVELOPMENT CORPORATION
NOTES TO UNAUDITED BALANCE SHEET
Investments in Partnerships
The Company is Managing Partner of several oil and gas partnerships
and owns a 1% interest in all revenues and expenses of each
partnership. The Company accounts for its investment in the
partnerships using the equity method of accounting.
2. Marketable Securities:
The Company utilizes Statement of Financial Accounting Standards No.
115, Accounting for Certain Investments in Debt and Equity Securities,
to account for its marketable securities. All securities are
classified as available for sale as of March 31, 1997. Realized gains
and losses on sales of securities are determined utilizing the
specific identification method. Reconciliation of cost to market
value as of March 31, 1997 is as follows:
Gross Unrealized
----------------------------- Market
Cost Gains Losses Value
---------- ----------- ---------- -----------
U.S. Treasury Bonds $ 817,715 $ 137,120 $ -- $ 954,835
Equity securities 14,889 5,388 47 20,230
---------- ----------- ---------- -----------
$ 832,604 $ 142,508 $ 47 $ 975,065
========== ========== ========== ===========
The cost of U.S. Treasury Bonds includes $410,715 of accrued interest
income. All U.S. Treasury Bonds have maturity dates between ten to
twenty years.
3. Oil and Gas Properties:
Oil and gas properties consist of the following as of March 31, 1997.
Unproved oil and gas properties $ 71,264
Proved oil and gas properties 4,638,844
Accumulated depreciation, depletion
and amortization (2,837,334)
-----------------
Net oil and gas properties $ 1,872,774
=================
F2-3
135
MEWBOURNE DEVELOPMENT CORPORATION
NOTES TO UNAUDITED BALANCE SHEET
4. 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. As of March 31, 1997, no
current income tax was allocated to the Company.
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 March 31, 1997, the Company's deferred tax liability is
comprised of the following temporary differences:
Oil and gas properties $ 450,333
Unrealized gain on marketable securities 54,136
-----------------
$ 504,469
================
5. Related Party Transactions:
Under the terms of an operating agreement, certain services and
charges are billed by and paid to a wholly-owned subsidiary of the
Stockholder as operator of the oil and gas properties in which the
Company invests.
F2-4
136
MEWBOURNE DEVELOPMENT CORPORATION
NOTES TO UNAUDITED BALANCE SHEET
6. Supplemental Oil and Gas Information:
The estimates of proved oil and gas reserves utilized in the
preparation of the balance sheet 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 under existing economic and operating conditions
with no provision for price and cost escalation except by contractual
agreement. The Company emphasizes that reserve estimates of new
discoveries or undeveloped properties are more imprecise than those of
producing oil and gas properties. Accordingly, these estimates are
expected to change as future information becomes available. All of
the Company's reserves are located onshore in the Continental United
States.
As of March 31, 1997, the Company had proved oil reserves of 88,000
barrels and proved gas reserves of 2,115,000 thousand cubic feet.
Future net revenues and the present value of these reserves as of
March 31, 1997 are as follows:
Future cash inflows $ 5,654,183
Future production costs (2,865,349)
Future development costs (17,128)
Future income tax expense (461,092)
-----------------
2,310,614
Discount at 10% (713,939)
-----------------
Standard measure of discounted future net
cash flows from estimated production of proved
oil and gas reserves after income taxes $ 1,596,675
=================
F2-5
137
MEWBOURNE ENERGY PARTNERS 97-A, L.P.
BALANCE SHEET
WITH REPORT OF INDEPENDENT ACCOUNTANTS
AS OF FEBRUARY 18, 1997 (DATE OF INCEPTION)
138
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Mewbourne Development Corporation:
We have audited the accompanying balance sheet of Mewbourne Energy Partners
97-A, L.P. as of February 18, 1997 (date of inception). This financial
statement is the responsibility of management. Our responsibility is to
express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the 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. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Mewbourne Energy Partners 97-A,
L.P. as of February 18, 1997 (date of inception), in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND, L.L.P.
Dallas, Texas
February 18, 1997
F3-1
139
MEWBOURNE ENERGY PARTNERS 97-A, L.P.
BALANCE SHEET
FEBRUARY 18, 1997 (DATE OF INCEPTION)
ASSETS
Cash $100
----
Total assets $100
====
PARTNERS' CAPITAL
Partners' capital $100
----
Total partners' capital $100
====
The accompanying note is an integral part of this statement.
F3-2
140
MEWBOURNE ENERGY PARTNERS 97-A, L.P.
NOTE TO BALANCE SHEET
1. ORGANIZATION:
Mewbourne Energy Partners 97-A, L.P. (the "Partnership") was formed on
February 18, 1997. The Partnership, whose fiscal year end is December
31, was organized to offer partnership interests and to participate in
a program consisting of the acquisition, drilling and development of
oil and gas prospects. The offering of limited and general partner
interests has not begun; as such, the Partnership's operations have not
commenced. Accordingly, the Partnership has not realized any material
revenues nor has it incurred any material expenses since inception.
Mewbourne Development Corporation ("MDC") serves as managing partner.
In general, revenues and expenses attributable to the Partnership will
be allocated between the investor partners and managing partner, 99%
and 1%, respectively.
An amount equal to 9.5% of capital contributions to the Partnership
initially made by investor partners shall be paid to the managing
partner to reimburse sales commissions and organization and offering
expenses advanced by the managing partner on behalf of the
Partnership. In addition, the Partnership shall reimburse the
managing partner for interest on the unpaid balance of these sales
commissions and organization and offering expenses. In general,
during any particular calendar year the total amount of administrative
expenses allocated to the Partnership shall not exceed the greater of
(a) 3.5% of the Partnership's gross revenue 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 investor
partners. Furthermore, management fees in an amount equal to 1.1% of
the investor partners' capital contributions are to be paid to MDC
during each of the first five years of the Partnership's operations.
The fees payable in any year are, however, limited to the amount
available for distribution by the Partnership in that year. Any
unpaid fees are carried forward and become payable in the succeeding
year, subject to the foregoing limitation.
Concurrently with the admission of the investor partners to the
Partnership, the managing partner shall contribute to the Partnership
cash in an amount equal to 1.010101% of the capital contributions of
the investor partners.
F3-3
141
EXHIBIT A
AGREEMENT OF PARTNERSHIP
______________________________________
MEWBOURNE ENERGY PARTNERS 97-A, L.P.
______________________________________
February 18, 1997
142
AGREEMENT OF PARTNERSHIP
MEWBOURNE ENERGY PARTNERS 97-A, L.P.
TABLE OF CONTENTS
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 . . . . . . . . . . . . 1
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 . . . . . . . . . . . . . . . . . . . . . 2
SECTION 2.2 References and Titles . . . . . . . . . . . . . . . . . 9
ARTICLE III
CAPITALIZATION
SECTION 3.1 Capital Contributions of Investor Partners . . . . . . . 9
SECTION 3.2 Contributions of Managing Partner . . . . . . . . . . . 9
SECTION 3.3 Return of Contributions . . . . . . . . . . . . . . . . 9
SECTION 3.4 Additional Contributions . . . . . . . . . . . . . . . . 9
ARTICLE IV
ALLOCATIONS AND DISTRIBUTIONS
SECTION 4.1 Allocation Among Partners . . . . . . . . . . . . . . . 10
SECTION 4.2 Allocations . . . . . . . . . . . . . . . . . . . . . . 10
SECTION 4.3 Distributions . . . . . . . . . . . . . . . . . . . . . 11
SECTION 4.4 Allocations on Transfers . . . . . . . . . . . . . . . . 12
SECTION 4.5 Minimum Allocation to Managing Partner . . . . . . . . . 12
ARTICLE V
MANAGEMENT
SECTION 5.1 Power and Authority of Managing Partner . . . . . . . . 12
SECTION 5.2 Certain Restrictions on Managing Partner's Power and
Authority . . . . . . . . . . . . . . . . . . . . . . . 14
SECTION 5.3 Services of Managing Partner . . . . . . . . . . . . . . 16
SECTION 5.4 Liability of Managing Partner and Its Affiliates . . . . 16
SECTION 5.5 Indemnification of Managing Partner and Its Affiliates . 16
i
143
Page
----
SECTION 5.6 Organization and Offering Expenses and Sales Commissions
and Due Diligence Fees . . . . . . . . . . . . . . . . . 17
SECTION 5.7 Management Fee . . . . . . . . . . . . . . . . . . . . . 18
SECTION 5.8 Reporting and Legal Expenses . . . . . . . . . . . . . . 18
SECTION 5.9 Administrative Costs . . . . . . . . . . . . . . . . . . 18
SECTION 5.10 Restrictions on Certain Transactions . . . . . . . . . . 19
SECTION 5.11 Restriction on Voting Interests Held by Managing Partner 23
SECTION 5.12 Tax Elections . . . . . . . . . . . . . . . . . . . . . 23
SECTION 5.13 Tax Matters Partner . . . . . . . . . . . . . . . . . . 23
ARTICLE VI
RIGHTS AND OBLIGATIONS OF INVESTOR PARTNERS
SECTION 6.1 Rights of Investor Partners . . . . . . . . . . . . . . 24
SECTION 6.2 Access of Investor Partners to Geophysical Data . . . . 24
SECTION 6.3 Return of Capital Contribution . . . . . . . . . . . . . 24
SECTION 6.4 Meetings . . . . . . . . . . . . . . . . . . . . . . . . 24
SECTION 6.5 Voting Rights of Investor Partners . . . . . . . . . . . 24
SECTION 6.6 Conduct of Meeting . . . . . . . . . . . . . . . . . . . 24
SECTION 6.7 General Partners Not Agents . . . . . . . . . . . . . . 25
SECTION 6.8 Liabilities of Partners . . . . . . . . . . . . . . . . 25
ARTICLE VII
BOOKS, RECORDS, CAPITAL ACCOUNTS, REPORTS, AND BANK ACCOUNTS
SECTION 7.1 Books, Records, and Capital Accounts . . . . . . . . . . 25
SECTION 7.2 Reports . . . . . . . . . . . . . . . . . . . . . . . . 27
SECTION 7.3 Bank Accounts . . . . . . . . . . . . . . . . . . . . . 28
ARTICLE VIII
ASSIGNMENT AND PURCHASE OF INTERESTS;SUBSTITUTION
SECTION 8.1 Assignments by Investor Partners . . . . . . . . . . . . 29
SECTION 8.2 Assignment by Managing Partner . . . . . . . . . . . . . 30
SECTION 8.3 Right of Presentment . . . . . . . . . . . . . . . . . . 31
SECTION 8.4 Notices of and Limitations on Right of Presentment . . . 32
SECTION 8.5 Cessation of Right of Presentment . . . . . . . . . . . 33
SECTION 8.6 Removal of Managing Partner . . . . . . . . . . . . . . 33
ARTICLE IX
DISSOLUTION, RECONSTITUTION, LIQUIDATION, AND TERMINATION
SECTION 9.1 Dissolution . . . . . . . . . . . . . . . . . . . . . . 34
SECTION 9.2 Covenant Not to Withdraw . . . . . . . . . . . . . . . . 35
SECTION 9.3 Reconstitution . . . . . . . . . . . . . . . . . . . . . 35
SECTION 9.4 Liquidation and Termination . . . . . . . . . . . . . . 37
ii
144
Page
----
ARTICLE X
REPRESENTATIONS AND WARRANTIES OF THE MANAGING PARTNER AND POWER OF ATTORNEY
SECTION 10.1 Representations and Warranties of the Managing Partner 39
SECTION 10.2 Power of Attorney . . . . . . . . . . . . . . . . . . . 39
ARTICLE XI
MISCELLANEOUS
SECTION 11.1 Notices . . . . . . . . . . . . . . . . . . . . . . . . 40
SECTION 11.2 Amendment . . . . . . . . . . . . . . . . . . . . . . . 40
SECTION 11.3 Partition . . . . . . . . . . . . . . . . . . . . . . . 41
SECTION 11.4 Entire Agreement . . . . . . . . . . . . . . . . . . . 41
SECTION 11.5 Severability . . . . . . . . . . . . . . . . . . . . . 41
SECTION 11.6 No Waiver . . . . . . . . . . . . . . . . . . . . . . . 41
SECTION 11.7 Evidence of Interest . . . . . . . . . . . . . . . . . 41
SECTION 11.8 Applicable Law . . . . . . . . . . . . . . . . . . . . 41
SECTION 11.9 Successors and Assigns . . . . . . . . . . . . . . . . 41
SECTION 11.10 Counterparts . . . . . . . . . . . . . . . . . . . . . . 41
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AGREEMENT OF PARTNERSHIP
MEWBOURNE ENERGY PARTNERS 97-A, L.P.
THIS AGREEMENT OF PARTNERSHIP (herein called this "Agreement") dated
February 18, 1997, 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 97-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 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
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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 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.
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"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, 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 NationsBank Texas, N.A., Dallas, 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
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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.
"Due Diligence Fees" shall mean fees to be paid to the Soliciting
Dealers by the Managing Partner, which may be in an amount of up to .5% of the
sales price of Interests sold to persons other than (a) officers, directors, or
employees of MD and Affiliates thereof; (b) officers, directors, employees or
registered representatives of a Soliciting Dealer; or (c) an Affiliate of the
Managing Partner.
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,
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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, 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.
"Management Fee" shall have the meaning assigned to such term in Section
5.8.
"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.
"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.
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"Organization and Offering Expenses" shall mean all costs and expenses
incurred by MD and its Affiliates, and paid by MD, or an Affiliate thereof, in
connection with the organization of the Partnership and the Drilling Program
and the offer and sale of the Interests, including without limitation, fees
paid to persons performing due diligence examinations or otherwise acting in
relation to the Partnership or MD with respect to the offering and sale of the
Interests and all expenses reasonable for MD and Affiliates thereof incurred in
assisting with such offer and sale of the Interests or such due diligence, but
such term 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.
"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.
"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
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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 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 any or 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:
(1) voting rights;
(2) the term of existence of the Partnership;
(3) Sponsor compensation; or
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(4) 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.
"Sales Commissions" shall mean the sales commissions to be paid to the
Soliciting Dealers by the Managing Partner, which may be in an amount of up to
8% of the sales price for Interests sold to persons other than (a) officers,
directors, or employees of MD and Affiliates thereof, (b) officers, directors,
employees, or registered representatives of a Soliciting Dealer, or (c) an
Affiliate of the Managing Partner.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Sharing Ratio" shall mean for any Investor Partner the proportion
obtained by dividing (i) the amount of such Investor Partner's Capital
Contribution to the Partnership by (ii) the sum of all Capital Contributions
paid by the Investor 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.
"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).
"Soliciting Dealers" shall mean those persons who are authorized to act
as registered representatives by the National Association of Securities
Dealers, Inc. and that have contracted with MD as independent contractors to
offer and sell the Interests.
"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.
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"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.
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 NationsBank Texas, N.A., Dallas, Texas, 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. Concurrently with the
admission of the Investor Partners to the Partnership, the Managing Partner
shall contribute to the capital of the Partnership in cash an amount equal to
1.010101% of the Capital Contributions of the Investor Partners. 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.
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ARTICLE IV
ALLOCATIONS AND DISTRIBUTIONS
SECTION 4.1 Allocation Among Partners.
(a) Except as provided in Section 4.2 below, each Investor 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 Investor Partners hereunder in accordance with the
proportion that the Sharing Ratio of such Investor Partner bears to the
aggregate Sharing Ratios of all Investor Partners.
(b) The Managing Partner shall share Partnership items of costs,
expenditures, deductions (other than depletion), credits, income, revenue,
gain, loss, and distributions allocated, charged, or credited to the Managing
Partner hereunder.
SECTION 4.2 Allocations.
(a) Except as provided in subsections (b) through (g) 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 1% to the
Managing Partner and 99% to the Investor Partners.
(b) The Management Fee, and any amortization deductions relating
thereto, shall be allocated 1% to the Managing Partner and 99% to the Investor
Partners.
(c) 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.
(d) 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. All interest income directly or indirectly resulting from the
investment of the Managing Partner's capital contributions to the Partnership
pursuant to Section 3.2 following payment thereof to the Partnership shall be
allocated 100% to the Managing Partner.
(e) 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 1% to the Managing Partner and 99% to
the Investor Partners. 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).
(f) 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
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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 income or gain (or amount realized) so allocated equals the amount of loss
or deduction previously so allocated to such other Partner.
(g) 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:
(1) 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(g)(1),
then items of Partnership income or revenue shall be allocated, before any
other allocation is made pursuant to the succeeding 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).
(2) 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 succeeding 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(g)(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 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.
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(d) In the event an amount of Partnership funds equal to the total
Capital Contributions of the Investor 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 Investor Partners, proportionately in accordance with their
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.
SECTION 4.5 Minimum Allocation to Managing Partner. If at any time the
provisions of this Article 4 do not result in the Managing Partner being
allocated at least 1% of the Partnership's material items of income, gain,
deduction, loss, and credit for purposes of any applicable federal income tax
law, rule, or regulation, then this Section 4.5 shall become operative and
shall cause the Managing Partner to be allocated so much more of each of such
items as shall cause it to be allocated at all times during the existence of
the Partnership, exclusive of any allocations made to it as a result of its
ownership of Interests, 1% of all such material items. To the extent that
additional items of deduction or loss are hereby allocated to the Managing
Partner, the Managing Partner will contribute to the Partnership pursuant to
Section 3.2 additional amounts in cash as shall be sufficient to cause the
Managing Partner to bear the economic burden of such items.
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;
(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;
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(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;
(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
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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;
(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; and
(s) 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 5.10(j);
(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;
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(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, 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
(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.
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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 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.
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(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.
(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 Organization and Offering Expenses and Sales Commissions
and Due Diligence Fees. The Managing Partner shall advance on behalf of the
Partnership the amount of all Organization and Offering Expenses, Sales
Commissions and Due Diligence Fees attributable to the Partnership. The
Partnership shall reimburse the Managing Partner the amount of such advanced
Organization and Offering Expenses, Sales Commissions and Due Diligence Fees,
plus interest on the unreimbursed amount at a per annum rate of interest equal
to the Base Rate calculated commencing as of the date that Investor Partners
are first admitted to the Partnership only from funds which would otherwise be
available for distribution to the Partners. For purposes of the Partnership's
reimbursement obligation, the reimbursable Organization and Offering Expenses
for the Partnership shall be an amount equal to 1% of the Capital Contributions
initially made by Investor Partners to the Partnership in exchange for their
respective interests. Such reimbursement shall not be made from Capital
Contributions of the Investor Partners. The timing and amount of the
reimbursement payments shall be determined in the discretion of the Managing
Partner; provided that the total amount of all reimbursement payments made by a
Partnership during a particular Partnership Year shall not exceed an amount
sufficient to amortize the original principal amount of such advancement plus
accrued interest on the outstanding principal amount thereof in five equal
annual installment payments assuming that each such
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installment would be due on the last day of each Partnership Year; provided
further that to the extent that the Partnership has insufficient distributable
funds during a particular Partnership Year to fully amortize the reimbursement
obligations payable during such Partnership Year, then the amount of such
unpaid reimbursement obligation shall be carried forward and payable in the
next succeeding Partnership Year. The advancement of Organization and Offering
Expenses, Sales Commissions and Due Diligence Fees to the Partnership and the
Partnership's reimbursement obligation shall be without recourse to the
Investor Partners and shall solely be an obligation of the Partnership. Such
reimbursement shall not be made from Capital Contributions of the Investor
Partners and the Managing Partner shall bear the risk that the Partnership will
have sufficient funds to ultimately reimburse such advancement.
SECTION 5.7 Management Fee. In consideration for services to be
rendered by the Managing Partner in managing the business of the Partnership,
the Partnership during each of the initial five Partnership Years shall pay to
the Managing Partner a Management Fee in an amount equal to 1.1% of all Capital
Contributions initially made by the Investor Partners in exchange for their
respective Interests as set forth in the Subscription Agreements. The
Management Fee payable during a particular Partnership Year shall not be
deducted from the Capital Contributions of the Investor Partners, but shall be
paid by the Partnership in monthly or other periodic installments from funds
which would otherwise be available for distribution to the Partners, and in
such amounts as may be determined in the discretion of the Managing Partner.
To the extent that the Partnership has insufficient distributable funds during
a particular Partnership Year (after the payment of the reimbursement of
advanced Organization and Offering Expenses, Sales Commissions and Due
Diligence Fees), to fully pay the amount of the Management Fee payable during
such Partnership Year, then the amount of such unpaid Management Fee shall be
carried forward and payable in the next succeeding Partnership Year.
SECTION 5.8 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 5.9 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 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 (i) 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 (ii) 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.
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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 5.10 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 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
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purchase property from or sell property to the Managing Partner or an Affiliate
thereof as provided in Section 5.10(c) and Section 5.10(f), respectively.
(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 5.10(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 5.10(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.
(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.
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.
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.
(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
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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
5.10(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
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.
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(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 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.
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(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.
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 5.10 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 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 5.11 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 5.12 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 5.13 Tax Matters Partner. The Managing Partner shall be
designated the tax matters partner (in this Section 5.13 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
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participate in the audit. All expenses incurred by the TMP in its capacity as
such shall be 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 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
expressly provided in this Agreement, 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) and 9.3(a)) shall be duly and validly
made only if made by a Majority
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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.
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.
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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 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
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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 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:
(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,
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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 Partners, 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
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 15 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.
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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.
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
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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
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, the
granting or denying of which consent shall be in the Managing Partner's
sole and absolute discretion;
(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 records at least
once each calendar quarter to effect the
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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.
SECTION 8.3 Right of Presentment. During the first calendar quarter of
each of the years 2001 through 2006, an Investor Partner may request writing
that the Managing Partner repurchase all or less than all of his Interests (the
"Right of Presentment"); provided, however, the Right of Presentment may only
be exercised in whole Interests or in one-half Interest increments. 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) 99% of the sum of
(i) 65% of the unescalated 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
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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 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 the
prime rate of interest charged by NationsBank Texas, N.A., Dallas, Texas, plus
2%, at the Valuation Date;
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. An Investor Partner seeking
to sell fewer than all of his Interests in the Partnership shall retain a
minimum of one whole Interest in the Partnership (unless retention of fewer
Interests is consented to by the Managing Partner). Payment for Interests
presented for 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
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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 May 31 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 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
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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
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, 2047;
(b) the vote at a duly held meeting or consent in writing of a
Majority in Interest of the Investor Partners at any time;
(c) the sale, disposition, or termination of all or substantially all
of the Leases then owned by the Partnership;
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(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.
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.
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(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 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.
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(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 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
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:
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(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
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
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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:
(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
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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 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 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
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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.
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.
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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: /s/ John Roe Buckley
----------------------------------------
Its: Chief Financial Officer and Treasurer
ORGANIZATIONAL PARTNER
/s/ Curtis W. Mewbourne
---------------------------------------------
Curtis W. Mewbourne
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EXHIBIT B
DRILLING PROGRAM AGREEMENT
among
MEWBOURNE OIL COMPANY
MEWBOURNE DEVELOPMENT CORPORATION
and
MEWBOURNE ENERGY PARTNERS 97-A, L.P.
Dated as of
, 199
188
TABLE OF CONTENTS
PAGE
Section 1. Certain Defined Terms and References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 2. Acquisition of Interests in Prospects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 3. Allocation of Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 4. Allocation of Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 5. Ownership of Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Section 6. Management of Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 7. Removal of the Program Manager . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 8. Reimbursement of the Program Manager . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 9. Tax Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 10. Sales of Interests by MD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 11. Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 12. Term and Amendment of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
Section 13. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
Section 14. Partnership Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
Section 15. Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 16. Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 17. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 18. Attachments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 19. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Attachment A Tax Partnership Provisions
Attachment B Form of Operating Agreement - Incorporated by
reference to the form of Operating Agreement filed as
Exhibit 10.03 to the Registration Statement on Form
S-1, Registration No.
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DRILLING PROGRAM AGREEMENT
THIS DRILLING PROGRAM AGREEMENT (this "Agreement"), dated as of
, 199 is made by and among Mewbourne Oil Company, a Delaware corporation
("MOC"), Mewbourne Development Corporation, a Delaware corporation ("MD"), and
Mewbourne Energy Partners 97-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:
"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.
"Participants" shall mean MD and the Partnership, and
"Participant" shall mean MD or the Partnership, individually.
"Partnership" shall have the meaning assigned to such term in
the preamble to this Agreement.
"Partnership Agreement" shall mean the Agreement of
Partnership dated , 199 , creating the
Partnership and designating MD as the Managing Partner of the
Partnership.
"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.
"Prospectus" shall mean the Prospectus dated
, 199 , as amended or supplemented from time to time, describing
the offer and sale of interests in the Partnership.
(b) Other Defined Terms. The following terms shall have the
respective meanings assigned to them in the Prospectus:
"Affiliate"
"Affiliated Program"
"Code"
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"Drilling and Completion Costs"
"General and Administrative Expenses"
"Lease"
"Lease Acquisition Cost"
"Managing Partner"
"Operating Agreement"
"Operating Costs"
"Partners"
"person"
"Prospect"
"Reporting and Legal Expenses"
(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
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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 87.878787% and MD 12.121213%. 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 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.
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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) Lease Acquisition Costs and Drilling and Completion Costs.
The acquisition costs of Leases (which shall be determined in accordance with
Section 2(c)) and all Drilling and Completion Costs incurred with respect to
Program Wells shall be allocated 2.020202% to MD and 97.979798% to the
Partnership.
(b) Operating Costs and Reporting and Legal Expenses. All
Operating Costs and Reporting and Legal Expenses incurred with respect to
Program Wells shall be allocated 12.121213% to MD and 87.878787% to the
Partnership.
(c) General and Administrative Expenses. All General and
Administrative Expenses 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 12.121213% to MD and 87.878787% to the Partnership and shall be
reimbursed by the Participants pursuant to Section 8.
(d) Other Costs. All other costs incurred shall be allocated
12.121213% to MD and 87.878787% 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 12.121213% to MD and 87.878787% 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 12.121213% to MD and 87.878787%
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 12.121213% to MD and 87.878787% to the
Partnership.
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(iii) All revenues resulting from the disposition of any
other property shall be allocated 12.121213% to MD and 87.878787% 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 Drilling and Completion 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 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.
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(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 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
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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.
(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.
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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 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 that
also receive an assignment of a proportionate part of MD's Managing
Partner interest in the Partnership pursuant to the terms of the
Partnership Agreement;
(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
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(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 the Program Manager determines in its
discretion that it is reasonable under the circumstances to do so, will halt
all drilling activity until such time as comparable replacement insurance
coverage is obtained.
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.
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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 97-A, L.P.
By: MEWBOURNE DEVELOPMENT CORPORATION,
its Managing General Partner
By:
------------------------
Title:
------------------------
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ATTACHMENT A
TAX PARTNERSHIP PROVISIONS
1. Relationship of the Parties. This Attachment and the Drilling
Program Agreement of which it is a part (in this Attachment called the
"Agreement") is not intended to create, nor shall such be construed as
creating, any mining partnership, commercial partnership or other partnership
relation or joint venture among the parties, and the liabilities of each of the
parties hereto shall be several and not joint or collective. The relationship
created by this Attachment and the Agreement shall be considered as a
partnership solely for United States federal and state income tax reporting
purposes (and shall be a partnership for those purposes only so long as this
Attachment remains in effect), as provided in paragraph 2 hereinbelow, and such
relationship shall not be a partnership to any other extent or for any other
purpose. The relationship of the parties hereunder is sometimes herein called
the "tax partnership".
2. Election with Respect to Subchapter K. Notwithstanding
anything to the contrary in this Attachment or in the Agreement, each party
hereto agrees, so long as the provisions of this Attachment remain in effect,
with respect to all operations conducted under the Agreement, (a) not to elect
to be excluded from the application of Subchapter K of Chapter 1 of Subtitle A
of the Code, and any provisions of applicable state laws comparable to
Subchapter K of Chapter 1 of Subtitle A of the Code, and (b) to join in the
execution of such additional documents and elections as may be required in
order to effectuate the foregoing. With respect to activities conducted on
Leases in which parties other than the Participants have an interest, the
Program Manager shall be authorized to elect on behalf of all Participants that
any joint operation with respect to any such Lease shall be excluded from the
application of Subchapter K of Chapter 1 of Subtitle A of the Code, but no such
election by the Program Manager shall have any impact on or result in any
change in the relationship among the Participants as set forth in the first
sentence of this paragraph 2. (Capitalized terms used in this paragraph 2, if
not otherwise defined in this Attachment, shall have the same meanings as are
provided in the Agreement.)
3. Term. The provisions of this Attachment shall be effective as
of the effective date of the Agreement and shall continue in full force and
effect from and after such date until the earlier of (a) the termination of the
Agreement among the parties pursuant to its terms, (b) upon the mutual
agreement of the parties, or (c) upon the occurrence of an event described in
Section 708(b)(1) of the Code. Upon the occurrence of any of the
above-enumerated events, the provisions of paragraph 9 hereinbelow shall be
applicable.
4. Capital Contributions and Capital Accounts.
(a) The capital contributions of each party shall be all amounts
paid by it pursuant to the Agreement. With respect to each oil and gas property
and the related assets subject to the Agreement, each party shall be treated as
having contributed to the tax partnership an amount of cash equal to such
party's share of any Lease acquisition or other property costs and the tax
partnership shall be treated as having purchased such property from the party
to whom such amounts are paid.
(b) An individual capital account shall be maintained for each
party in accordance with the following:
(i) The capital account of each party shall, except as
otherwise provided herein, be (A) credited by the amount of cash and
fair market value of any property contributed to the tax partnership
(net of any liabilities assumed by the parties hereto or to which such
property is subject at the time of contribution) as provided in
subparagraph (a) of this paragraph 4, and (B) 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 party.
(ii) The capital account of each party shall be debited by
(A) the amount of any item of tax deduction or loss allocated to such
party, (B) such party's allocable share of expenditures not deductible
in computing taxable
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income and not properly chargeable as capital expenditures, including
any non-deductible book amortizations of capitalized costs, and (C)
the amount of cash or the fair market value of any property (net of
any liabilities assumed by such party or to which such property is
subject at the time of distribution) distributed to such party (after
making the adjustment provided in subparagraph (b)(iii) in this
paragraph 4).
(iii) Immediately prior to any distribution of property
that is not pursuant to a liquidation of the tax partnership, the
parties' capital accounts shall be adjusted by assuming that the
distributed assets were sold for cash at their respective fair market
values as of the date of distribution and crediting or debiting each
party'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 paragraphs 4(b)(iv)
and 6 for actual sales of such properties.
(iv) The allocation of basis prescribed by Section
613A(c)(7)(D) of the Code and provided for in paragraph 6 hereinbelow
and each party's depletion deductions shall not reduce such party's
capital account, but such party's capital account shall be decreased
by an amount equal to the product of (A) the depletion deductions that
would otherwise be allocable to the tax 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 party) and (B) such
party's percentage share of the adjusted basis of the property with
respect to which such depletion is claimed (herein called "Simulated
Depletion"). The tax partnership's basis in any oil or gas property,
as adjusted from time to time for Simulated Depletion, is herein
called "Simulated Basis." No party's capital account shall be
decreased, however, by Simulated Depletion deductions attributable to
any depletable property to the extent such deductions exceed such
party's remaining Simulated Basis in such property. Upon the sale or
other disposition of an interest in a depletable property, each
party's capital account shall be credited with the gain ("Simulated
Gain") or debited with the loss ("Simulated Loss") determined by
subtracting from its allocable share of the amount realized on such
sale or disposition its Simulated Basis, as adjusted by Simulated
Depletion.
(v) Any adjustments of basis of 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) shall not affect the capital
accounts of the parties, and the parties' capital accounts shall be
debited or credited as if no such election had been made unless
otherwise required by applicable Treasury Regulations.
(vi) Capital accounts shall be adjusted, in a manner
consistent with subparagraph (b) of this paragraph 4, to reflect any
adjustments in items of income, gain, loss or deduction that result
from amended returns filed by the tax partnership or pursuant to an
agreement with the Internal Revenue Service or a final court decision.
(vii) In the case of property contributed to the tax
partnership by a party, the parties' capital accounts shall be debited
or credited for items of depreciation, 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 tax partnership, in lieu of the capital
account adjustments provided above for such items, all in accordance
with Section 704(c) of the Code and Treasury Regulation
1.704-1(b)(2)(iv)(g).
5. Federal and State Income Tax Returns and Elections.
(a) The parties agree that the Program Manager shall prepare and
file the necessary federal and state partnership income tax returns and each
party agrees to furnish the Program Manager all pertinent information relating
to operations under the Agreement and this Attachment which is necessary for
the Program Manager to prepare and file such returns.
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(b) The parties hereby authorize and direct the Program Manager to
make the following elections on the appropriate returns prepared and filed
under subparagraph (a) of this paragraph 5:
(i) To elect to adopt the accrual method of accounting,
and such accounting shall be maintained on a calendar year basis;
(ii) To elect, in accordance with Section 263(c) of the
Code and applicable federal income tax regulations and comparable
provisions of state law, to expense all intangible drilling and
development costs;
(iii) To elect to compute the allowance for depreciation or
cost recovery under the most accelerated tax depreciation method and
using the shortest life authorized by law with respect to all
depreciable assets; and
(iv) To make such other elections as may be deemed
appropriate by the Program Manager.
(c) The Program Manager shall be designated the tax matters
partner (in this paragraph 5(c) called the "TMP") as such term is defined in
Section 6231(a)(7) of the Code with respect to operations conducted pursuant to
the Agreement and shall be indemnified by the other parties as provided in the
Drilling Program Agreement. The TMP is authorized to take such actions and to
execute and file all statements and forms on behalf of the tax partnership
which may be permitted or required by the applicable provisions of the Code or
Treasury regulations issued thereunder, and the parties to the Agreement will
take all other action that may be necessary or appropriate to effect the
designation of the Program Manager as the TMP. In the event of an audit of the
tax partnership's income tax returns by the Internal Revenue Service, the TMP
may, at the expense of the parties to the Agreement, retain accountants and
other professionals to participate in the audit.
6. Allocations. The parties agree that for United States federal
and state income tax reporting purposes the distributive share of each of the
parties in each item of income, gain, loss, deduction or credit, including,
without limitation, the items specifically mentioned below, shall be determined
as follows:
(a) Income realized from the sale of production of oil, gas or
other hydrocarbon substances shall be allocated to each party to whom proceeds
from the sale of such production are allocated or to whom such production is
distributed under the terms of the Agreement.
(b) Deductions attributable to intangible drilling and development
and production costs shall be allocated to each party in accordance with its
respective contributions to the payment of such costs.
(c) Depreciation or cost recovery deductions with respect to
tangible equipment shall be allocated to each party in accordance with its
contribution to the adjusted basis (within the meaning of Section 1011 of the
Code) of such equipment.
(d) The depletion deductions with respect to each oil and gas
property (as such term is defined in Section 614 of the Code) subject to the
Agreement shall be computed separately by each party. For purposes of such
computation, each party shall be considered to own, and shall be allocated, its
proportionate share of the adjusted basis in each oil and gas property subject
to the Agreement. A party's proportionate share of the adjusted basis of an oil
or gas property shall be equal to its relative interest in either (i) the
capital used to acquire (and capitalized in the adjusted basis of) such
property (if the property is acquired other than by way of a capital
contribution by one or more parties), or (ii) the adjusted basis of such
property (if the property is considered a capital contribution by one or more
parties). Each party shall separately keep records of its share of the
adjusted basis in each oil and gas property, adjust such share of the adjusted
basis for any cost or percentage depletion allowable on such property, and use
such adjusted basis in the computation of its gain or loss on the disposition
of such property. For purposes of computing such gain or loss, and
notwithstanding anything in the Agreement to the contrary, the amount realized
from the sale or other taxable disposition of a depletable oil and gas
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property (other than production of oil, gas or other hydrocarbon substances)
and depreciable tangible property, shall be allocated in accordance with the
allocation of revenues from the sale or other taxable disposition of such
properties under Section 4(b) of the Agreement. Upon the request of the Program
Manager, each party shall advise the Program Manager of its adjusted basis in
each oil and gas property as computed in accordance with the provisions of this
subparagraph (d).
(e) Gains and losses from each sale, abandonment or other
disposition of property (other than depletable oil and gas properties and
depreciable tangible properties as provided in subparagraph (d) of this
paragraph 6 and production of oil, gas or other hydrocarbon substances as
provided in subparagraph (a) of this paragraph 6) shall be allocated to the
parties in such manner as will reflect the gains and the losses that would have
been includable in their respective income tax returns if such property were
not subject to the Agreement. In computing each party's gains and losses, each
party shall take into account its share of the proceeds derived from each sale,
abandonment or other disposition of such property during the year, selling
expenses and its respective contributions to the unadjusted cost basis of such
property, less any allowed or allowable depreciation, cost recovery,
amortization, or other deductions which have been allocated to it with respect
to such property as provided herein.
(f) All recapture of income tax deductions resulting from the sale
or other disposition of any property subject to the Agreement shall be
allocated among the parties in the ratios in which the deductions giving rise
to such recapture were allocated, but each party shall be allocated recapture
only to the extent that such party is allocated any gain from the sale or other
disposition of such property. The balance of such recapture, if any, shall be
allocated to the parties whose share of gain exceeds their share of recapture
("excess gain") and such balance shall be allocated among such parties in the
proportion which the excess gain of such party bears to the excess gains of all
parties.
(g) Income resulting from any dry hole or bottom hole monetary
contribution obtained from a third party in connection with the drilling of a
well or wells on the oil and gas properties subject to the Agreement shall be
allocated in the same manner as the costs of drilling such well or wells are
allocated.
(h) All other items of deduction and credit not falling within
subparagraphs (b) through (g) of this paragraph 6 shall be allocated to and
accounted for by each party in accordance with its respective contribution to
the costs resulting in such deductions and credits.
7. Sale of Program Prospects. The parties agree that any sale by
a party of any ownership interest in a Prospect held by such party as part of
the Program and subject to the Agreement shall be deemed to be a sale of all or
a portion of such party's interest in this tax partnership.
8. Termination of Party's Interest. Any distribution in
termination of any party's interest in the tax partnership other than pursuant
to paragraph 9 shall be in an amount of cash or fair market value of property
equal to the capital account balance of such party at the time such interest is
terminated, after such capital account balance has been adjusted in accordance
with paragraph 4 and the applicable Treasury Regulations under Section 704(b)
of the Code, and shall be made by the later of (i) the end of the tax
partnership taxable year in which such termination occurs or (ii) within 90
days after the date of such termination; provided, however, that if such
capital account balance is less than zero after taking into account such
adjustments and the distribution provided for in this paragraph 8, such party
shall contribute an amount of cash to the tax partnership sufficient to cause
its capital account to have a zero balance by the later of (i) the end of the
tax partnership taxable year in which such termination occurs or (ii) within 90
days after the date of such termination.
9. Distributions upon Termination. Upon termination of the
provisions of this Attachment pursuant to paragraph 3 above, the activities of
the parties under this Attachment shall be concluded and the assets subject to
the Agreement and this Attachment shall be distributed to the parties in the
manner and in the order set forth below:
(a) Debts of the parties created pursuant to operations under the
Agreement, other than to the parties, shall be paid.
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(b) Debts owed among the parties with respect to operations
pursuant to the Agreement shall be paid.
(c) All cash on hand representing unexpended contributions by any
party shall be returned to the contributor.
(d) The parties' capital accounts shall be adjusted by (i)
assuming the sale of all remaining assets subject to the Agreement for cash at
their respective fair market values as of the date of termination of the
Agreement and (ii) debiting or crediting each party's capital account with the
party's respective share of the hypothetical gains or losses resulting from
such assumed sales in the same manner as such party's capital account would be
debited or credited under subparagraph (b) of paragraph 4 for gains or losses
on actual dispositions of such properties.
(e) If the capital account of any party (stated as a percentage of
the aggregate capital accounts of all parties) is less than that party's
undivided interest in Leases owned by the Participants, as set forth in Section
2(a) of the Agreement, then such party may elect, upon ten days notice to the
other parties, to contribute cash to the tax partnership for distribution to
the other parties in an amount sufficient to cause such contributing party's
capital account (stated as a percentage of the aggregate capital accounts of
all parties) and its undivided interest in Leases owned by the Participants, as
set forth in Section 2(a) of the Agreement, to be equal.
(f) Thereafter, all remaining assets shall be distributed to the
parties by the later of (i) the end of the tax partnership taxable year in
which the termination occurs or (ii) 90 days after the date of such
termination, in accordance with their respective capital account balances as so
adjusted; provided, however that any party that has a capital account of less
than zero after taking into account the adjustments and distributions provided
for pursuant to and in the subparagraphs of this paragraph 9 shall contribute
an amount of cash to the tax partnership sufficient to cause its capital
account to have a zero balance by the later of (i) the end of the tax
partnership taxable year in which the termination occurs or (ii) 90 days after
the date of such termination. Any such contributions by parties having deficit
capital account balances shall be distributed to the remaining parties in
accordance with their respective positive capital account balances by the later
of (i) the end of the tax partnership taxable year in which the termination
occurs or (ii) 90 days after the date of such termination.
If property subject to the Agreement is distributed pursuant to this
paragraph, the amount of the distribution shall be equal to the fair market
value of the distributed property. In the event the parties do not agree as to
the fair market value of such property, the Program Manager shall cause a
qualified independent petroleum engineer to prepare an evaluation of the fair
market value of such property.
It is understood and agreed that it shall be the obligation of each
party to make such assignments as are required upon termination of the
provisions of this Attachment in accordance with the provisions of this
paragraph 9. Such assignments shall be made subject to the liability of each
assignee for costs, expenses and liabilities theretofore incurred or for which
commitment had been made by the Program Manager prior to the date of
termination and such costs, expenses and liabilities shall be allocated to such
assignee pursuant to this Attachment.
10. Effect of this Attachment. It is understood and agreed that in
the event the terms of this Attachment conflict with any of the terms and
conditions of the Agreement as between the parties hereto the terms of this
Attachment shall control with respect to the terms in conflict.
B-A5
205
EXHIBIT C
SPECIAL SUBSCRIPTION INSTRUCTIONS
MEWBOURNE ENERGY 97 DRILLING PROGRAM
206
[THIS PAGE INTENTIONALLY LEFT BLANK]
207
SPECIAL SUBSCRIPTION INSTRUCTIONS
Mewbourne Energy 97 Drilling Program
Checks for Interests should he made payable to "NationsBank Escrow
Agent for Mewbourne" and should be given to the subscriber's broker for
submission to the Escrow Agent. The minimum subscription is $5,000 (five
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 five 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 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, INDIANA, MICHIGAN, MISSOURI, NORTH
CAROLINA, OHIO, PENNSYLVANIA, SOUTH CAROLINA, TENNESSEE,
TEXAS, UTAH, VIRGINIA, 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 a minimum annual gross
income of $100,000 for the current year and for the two
previous years ($60,000 or more for the previous year and
expects to have an annual gross income of $60,000 or more for
the current year and for the succeeding year for ARIZONA, and
MISSOURI residents); 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.
C-1
208
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 97 DRILLING PROGRAM
WILL BEAR A LEGEND STATING THIS RESTRICTION ON TRANSFER.
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;
C-2
209
(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;
(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."
C-3
210
EXHIBIT D
SUBSCRIPTION AGREEMENT
MEWBOURNE ENERGY 97 DRILLING PROGRAM
211
SUBSCRIPTION AGREEMENT
Mewbourne Energy 97 Drilling Program
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 "NationsBank, Escrow Agent for
Mewbourne." Defined terms used and not defined herein shall have the meaning
assigned to such terms in the Prospectus dated , 1997, as amended
and supplemented from time to time, for the Mewbourne Energy 97 Drilling
Program (the "Prospectus"). 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 Properties 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,
INDIANA, MICHIGAN, MISSOURI, NORTH CAROLINA, OHIO,
PENNSYLVANIA, SOUTH CAROLINA, TENNESSEE, TEXAS, UTAH,
VIRGINIA, 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 (f) and is acting
for a person who would so qualify or 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 (iv) 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.
_____ (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.
D-1
212
_____ (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 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 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 it is anticipated that there
will not be any market for resale of the Interests subscribed
hereby and that assignment of such Interests is subject to
certain restrictions described in "Summary of Partnership
Agreement and Program Agreement -- Assignability of Interests"
in the Prospectus; accordingly, the investment subscribed to
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.
(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) 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.
D-2
213
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 me, 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 me, the Managing Partner, the Partnership, and
my and their respective successors, heirs, representatives, and assigns.
SEND SUBSCRIPTION AND CHECK TO:
NATIONSBANK TEXAS, N.A., ESCROW AGENT
3301 GOLDEN ROAD
TYLER, TEXAS 75701
(903) 510-5041
D-3
214
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 $5,000
(five Interests), with additional amounts available in $1,000 increments (one
Interest).
SUBSCRIPTION: $ PARTNERSHIP: Mewbourne Energy Partners 97-A, L.P.
--------------
Type of Interests [ ] General Partner Interests IF NO SELECTION IS MADE, THE PARTNERSHIP CANNOT
Purchased: ACCEPT YOUR SUBSCRIPTION AND WILL HAVE TO
[ ] Limited Partner Interests RETURN THIS SUBSCRIPTION AGREEMENT AND YOUR
MONEY TO YOU.
Check one:
Individual Employee Benefit Plan as defined Keogh Plan (HR-10)
- --- --- in Section 3(3) of ERISA ---
Community Property Tax/Partnership IRA, IRA Rollover or SEP
- --- --- ---
Tenants in Common Corporation ________________________ Other Qualified Plan
- --- --- (Place of Incorporation) ---
Joint tenants with right of survivorship Foreign person or entity Tax-exempt under 501(c)(3)
- --- --- ---
Other (________________)
--- please specify
- -------------------------------------------------------------------------------------------------------------------------
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.
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
- -------------------------------------------------------------------------------------------------------------------------
Acct. 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.
- -------------------------------- -------------------------------------
Signature of Applicant or Signature of Joint Applicant or
Authorized Representative* Authorized Representative*
Date: Date:
--------------------------- --------------------------------
* An "Authorized Representative" may not execute this subscription agreement
for individual investors residing in the following jurisdictions: MICHIGAN,
NORTH CAROLINA, OHIO, PENNSYLVANIA, AND TENNESSEE.
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.
D-4
215
FOR SOLICITING DEALER USE ONLY
- -------------------------------------------------------------------------------------------------------------------------
Firm
- ---------------------------------------------------------------- -----------------------------------------------------
Branch Office Address Phone No.
- ---------------------------------------- -------- ----------------
City State Zip Code
- -------------------------------------------------------------
Branch No./Investor Acct. No./Ref. No.
- -------------------------------------------------- -------------------------------------------------------------
Print Name of Registered Representative Authorized Signature for Branch Office+
+By signing on this line I hereby represent that I have discharged my
affirmative obligations under Sections 3(b) and 4(d) of Section 34 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:
----------------------------------
D-5
216
================================================================================
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 OF CONTENTS
Page
----
Summary of Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Terms of the Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Additional Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Investment Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Proposed Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Application of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Participation in Costs and Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Compensation and Reimbursement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Estimated Drilling Program Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Ownership Structure of Mewbourne Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Conflicts of Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Prior Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Tax Aspects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Competition, Markets and Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Liability of Investor Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
Summary of Partnership Agreement and
Program Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
Legal Opinions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
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 97
DRILLING PROGRAMS
2,000 LIMITED PARTNER INTERESTS
AT $1,000 PER INTEREST
MINIMUM PURCHASE OF
FIVE LIMITED PARTNER INTERESTS
8,000 GENERAL PARTNER INTERESTS
AT $1,000 PER INTEREST
MINIMUM PURCHASE OF
FIVE GENERAL PARTNER INTERESTS
___________________
PROSPECTUS
___________________
_________, 1997
================================================================================
217
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
2,000 Limited Partner Interests and 8,000 General Partner Interests are sold.
Costs of Offering:
-----------------
Securities Act of 1933 Registration Fee . . . . . . . . . . . . . . . . . . . . . . $ 3,030
National Association of Securities Dealers, Inc. Filing Fee . . . . . . . . . . . . 1,500
Blue Sky Qualification Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . 21,000*
Printing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,000*
Legal Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000*
Accounting Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000*
Expenses of MD Incurred in Connection With the Distribution . . . . . . . . . . . . 50,000*
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000*
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 260,530
=========
* Estimated
____________
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 5.4 of the Partnership Agreement provides that neither MD nor any
Affiliate thereof shall have any liability to the 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 MD 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 MD or
such Affiliate. Section 11.6 of the Partnership Agreement provides that any
act or omission performed or omitted by MD on advice of legal counsel or an
independent consultant who has been employed or retained by the Partnership
will be presumed to have been performed or omitted in good faith. Section 6(f)
of the Program Agreement provides parallel protection from liability to MOC, in
its individual capacity as the Program Manager, and Affiliates thereof.
Section 5.5 of the Partnership Agreement and Section 6(f) of the Program
Agreement provides, subject to certain conditions, for indemnification of MD
and Affiliates thereof, and each permit, subject to certain conditions, for
insurance to be purchased and maintained on behalf of MD and Affiliates thereof
against any liabilities asserted against or expenses incurred by MD and
Affiliates thereof in connection with activities of the Partnership or 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 Partnership
and MD have agreed to indemnify the Soliciting Dealers against certain
liabilities, including certain liabilities under the Securities Act. In
addition, MD may enter into similar agreements with certain Soliciting Dealers
on behalf of the Partnerships under which MD and the Partnerships will
indemnify those Soliciting Dealers against certain liabilities, including
certain liabilities under the Securities Act.
II-1
218
As permitted by Section 102(b)(7) of the Delaware General Corporation Law,
Article 10 of each of MD's and MOC's Certification of Incorporation contains a
limitation of liability provision under which a director will not be personally
liable to MD, MOC 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 MD's and MOC's By-laws provides that MD or
MOC, 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 MD 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 MD or MOC, 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 Sections 5.5 and 11.6 of the
Partnership Agreement, Section 6(f) of the 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 MD's and MOC's Certificate of
Incorporation, Article 7, Section 7 of each of MD's and MOC'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 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 MD's and MOC'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 MD's and MOC'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 the Partnership, the Organizational
Partner thereof will contribute $100 to the Partnership's capital. Upon the
initial admission of Investor Partners to that Partnership, the subscription of
the Organizational Partner therein will be terminated and the $100 contribution
will be returned to him. The Partnership has not otherwise sold or issued
within the past three years any securities which were not registered under the
Securities Act.
During the last quarter of 1994, MD sponsored a private offering of general
and limited partnership interests in Mewbourne Energy Partners 1994 Private
L.P. ("Mewbourne 94 Private"). On December 30, 1994, the private offering was
closed with a total of 73.5 general partnership interests and limited
partnership interests being sold at $20,000 per interest. Sales Commissions
and Due Diligence Fees in an amount equal to 8.5% of the sales price was paid
to certain soliciting dealers with respect to the sales of interest to persons
who are not affiliates of MD or officers, directors or registered
representatives of a soliciting dealer. The interests were sold to 35
accredited investors and to 7 non-accredited investors. In connection with
this transaction, MD and Mewbourne 94 Private relied upon the exemption
contained in Rule 506 of Regulation D promulgated pursuant to Section 4(2) of
the Securities Act. In claiming the exemption contained in Rule 506 of
Regulation D for the above transaction, MD and Mewbourne 94 Private relied on
the following facts: (i) offers were made only to accredited investors and a
limited number of non-accredited investors, (ii) no general solicitation or
general advertising was done, (iii) material as contemplated by Rule 506 of
Regulation D was provided to all offerees, and (iv) the purchasers represented
to MD and Mewbourne 94 that the purchases of the interests were made for the
purchaser's account without a view to distribution.
II-2
219
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Exhibit
Number Exhibit
------ -------
1.1 -- Form of Soliciting Dealer Agreement to be entered into between MD and the
Soliciting Dealers.*
1.2 -- Form of Dealer Manager Agreement.*
3.1 -- Form of Certificate of Limited Partnership of Mewbourne Development
Partners 97-A, L.P.*
3.2 -- Form of Amendment to Certificate of Limited Partnership of Mewbourne Development
Partners 97-A, L.P.*
3.3 -- Certificate of Incorporation of MD.*
3.4 -- Bylaws of MD.*
3.5 -- Certificate of Incorporation of MOC.*
3.6 -- Bylaws of MOC.*
4.1 -- Form of Agreement of Partnership of Mewbourne Development Partners 97-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 MD, MOC and Mewbourne Development
Partners 97-A, L.P. (filed as Exhibit B to the Prospectus forming a part of this
Registration Statement).**
10.2 -- Form of Escrow Agreement between MD and NationsBank Texas, N.A.*
10.3 -- Form of Operating Agreement between Mewbourne Development Partners ,
L.P., MD and MOC.*
23.1 -- Consent dated June 11, 1997 of Coopers & Lybrand L.L.P, independent accountants.**
23.2 -- Consent of Vinson & Elkins L.L.P. (included as part of Exhibits 5.1).*
II-3
220
Exhibit
Number Exhibit
------ -------
23.3 -- Consent dated June 11, 1997 of Forrest A. Garb & Associates, Inc., independent
engineers.**
23.4 -- Consent of Vinson & Elkins L.L.P. (included as part of Exhibit 8.1).*
24.1 -- Power of Attorney (included on the signature page to the Registration Statement).*
27.1 -- Financial Data Schedule*
___________________________
*Previously filed
**Filed herewith
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 the 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 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;
II-4
221
(b) no reference to any specific prospect (unless such
prospect is described in the Prospectus or an amendment thereto) 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 thereto.
(6) to provide to the Partners 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 during the distribution period for the Partnership
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 Investor Partners. 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
may be permitted to directors, officers and controlling persons of MD pursuant
to the foregoing provisions, or otherwise, MD 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 and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by MD of expenses incurred or paid by a
director, officer or person controlling MD 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, MD 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 and will be governed by the final adjudication of such issue.
II-5
222
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Second Amendment to its Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Tyler, State of Texas, on June 11, 1997.
MEWBOURNE ENERGY 97 DRILLING PROGRAM, consisting of Mewbourne Energy
Partners 97-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.
Signature Title Date
--------- ----- ----
* President and Director June 11, 1997
------------------------------- (Principal Executive Officer)
CURTIS W. MEWBOURNE
* Treasurer June 11, 1997
------------------------------- (Principal Financial and
J. ROE BUCKLEY Accounting Officer)
------------------------------- Director
DOROTHY M. CUENOD
* Director June 11, 1997
-------------------------------
RUTH M. BUCKLEY
* Director June 11, 1997
-------------------------------
JULIE M. GREENE
*By: /s/ J. ROE BUCKLEY
-------------------------------
J. Roe Buckley
Attorney-in-Fact
II-6
223
EXHIBIT INDEX
Exhibit
Number Exhibit
------ -------
1.1 -- Form of Soliciting Dealer Agreement to be entered into between MD and the
Soliciting Dealers.*
1.2 -- Form of Dealer Manager Agreement.*
3.1 -- Form of Certificate of Limited Partnership of Mewbourne Development
Partners 97-A, L.P.*
3.2 -- Form of Amendment to Certificate of Limited Partnership of Mewbourne Development
Partners 97-A, L.P.*
3.3 -- Certificate of Incorporation of MD.*
3.4 -- Bylaws of MD.*
3.5 -- Certificate of Incorporation of MOC.*
3.6 -- Bylaws of MOC.*
4.1 -- Form of Agreement of Partnership of Mewbourne Development Partners 97-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 MD, MOC and Mewbourne Development
Partners 97-A, L.P. (filed as Exhibit B to the Prospectus forming a part of this
Registration Statement).**
10.2 -- Form of Escrow Agreement between MD and NationsBank Texas, N.A.*
10.3 -- Form of Operating Agreement between Mewbourne Development Partners ,
L.P., MD and MOC.*
23.1 -- Consent dated June 11, 1997 of Coopers & Lybrand L.L.P, independent accountants.**
23.2 -- Consent of Vinson & Elkins L.L.P. (included as part of Exhibits 5.1).*
23.3 -- Consent dated June 11, 1997 of Forrest A. Garb & Associates, Inc., independent
engineers.**
23.4 -- Consent of Vinson & Elkins L.L.P. (included as part of Exhibit 8.1).*
24.1 -- Power of Attorney (included on the signature page to the Registration Statement).*
27.1 -- Financial Data Schedule*
___________________________
*Previously filed
**Filed herewith