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Registration No. ___-_____
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
----------------------
MEWBOURNE ENERGY PARTNERS 99-A, L.P.
MEWBOURNE ENERGY PARTNERS 00-A, L.P.
(Exact name of registrants)
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DELAWARE 1311
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
</TABLE>
3901 S. BROADWAY
TYLER, TEXAS 75701
(903) 561-2900
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
----------------------
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COPIES TO:
CURTIS W. MEWBOURNE A. WINSTON OXLEY
MEWBOURNE DEVELOPMENT CORPORATION KEEFE M. BERNSTEIN
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 number, DALLAS, TEXAS 75201
including area code, of agent for service) (214) 220-7700
</TABLE>
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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
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PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF SECURITIES TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED (1) PER INTEREST (2) OFFERING PRICE (1) FEE(3)
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Limited Partner Interests (3)..... 20,000 $1,000 $ 4,000,000 $ 1,112
General Partner Interests......... 16,000 $1,000 $ 16,000,000 $ 4,448
TOTAL..................................................................................... $ 5,560
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(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 16,000 additional limited partner
interests into which general partner interests are convertible if the
maximum aggregate subscriptions contemplated by this offering are
obtained. No subscriber will be admitted as an investor partner in a
partnership unless, at the end of the subscription period for interests in
that partnership, subscription funds have been received and accepted by
Mewbourne Development Corporation in an amount of $1,000,000 or more and
Mewbourne Development Corporation determines, in its sole discretion, to
proceed with the funding of that partnership.
(2) Subscriptions will be accepted in the minimum amount of five interests
($5,000), subject to certain state law requirements.
(3) The registration statement fee for the 16,000 additional Limited Partner
Interests was previously paid in connection with the registration of the
General Partner Interests.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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P R O S P E C T U S
MEWBOURNE ENERGY PARTNERS
99-00 DRILLING PROGRAMS
(PER PARTNERSHIP MINIMUM OFFERING AMOUNT)
$1,000,000 (1,000 GENERAL AND/OR LIMITED PARTNER
INTERESTS AT $1,000 PER INTEREST)
Minimum Purchase: 5 Interests ($5,000)
We are offering to qualified investors during 1999 and 2000 an
aggregate of up to 4,000 ($4,000,000) limited partner interests and 16,000
($16,000,000) general partner interests in a series of two Delaware limited
partnerships formed or to be formed by us. We will sell these interests to
investors for $1,000 each. The minimum number of interests that we will offer
for any one partnership is 1,000 and the minimum subscription in any one
partnership is five interests ($5,000). The maximum number of interests that we
will offer for any one partnership is 10,000. Therefore, the minimum offering
amount for any one partnership will be $1,000,000 and the maximum offering
amount for any one partnership will be $10,000,000. If we accept your
subscription for a partnership, you may elect to be admitted as a general
partner or limited partner in the partnership you have invested in. Each
partnership will participate with us and our affiliate, Mewbourne Oil Company,
in a drilling program. The primary objective of each drilling program will be
to establish oil and gas reserves by drilling wells in the Permian and Anadarko
Basins.
A partnership will not be funded with less than $1,000,000 in capital
contributions from investors. Therefore if we do not receive at least
$1,000,000 in funds from investors by the end of a partnership's subscription
period, we will promptly return to investors all funds we have received for
that partnership. However, it is the current intention of Mewbourne Development
Corporation as managing partner of each partnership to subscribe, or have one
of its affiliates subscribe, for as many interests as may be necessary to
ensure that each partnership receives the minimum subscription amount of 1,000
interests.
The partnerships will not be listed on any national securities
exchange and, therefore, we do not anticipate that investors will have a market
to sell their interests.
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Per Partnership
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Per Interest Total Minimum(1) Total Maximum(2)
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Public Price.................................... $ 1,000 $10,000,000 $10,000,000
Underwriting Discounts.......................... 85 850,000 850,000
Proceeds Available to a partnership(3).......... 1,000 10,000,000 10,000,000
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(1) We will not admit a subscriber as a partner in a partnership unless we
receive and accept subscription funds in an amount of $1,000,000 or
more by the end of the partnership's subscription period and we
determine, in our sole discretion, to proceed with the funding of the
partnership.
(2) The maximum offering amount for any one partnership is $10,000,000.
The maximum offering amount for both partnerships in the aggregate is
$20,000,000.
(3) The managing partner, or an affiliate of the managing partner, shall
pay all Organization and Offering Expenses, Sales Commissions and Due
Diligence Fees on behalf of each partnership.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
The date of this prospectus is , 1999.
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(continued from previous page)
Soliciting dealers will be soliciting subscriptions on a
"minimum/maximum best efforts" basis. Therefore, the soliciting dealers will
not be obligated to purchase any interests not purchased by investors. The
soliciting dealers for this offering will all be members of the National
Association of Securities Dealers, Inc. Mewbourne Securities, Inc., our
affiliate, is a broker-dealer which may act as a soliciting dealer for one or
both of the partnerships.
SEE "RISK FACTORS" BEGINNING ON PAGE ON PAGE SIX FOR A DISCUSSION OF
FACTORS THAT YOU SHOULD CONSIDER BEFORE YOU INVEST IN EITHER PARTNERSHIP BEING
SOLD WITH THIS PROSPECTUS. These "risk factors" include but are not limited to:
o Drilling to establish productive oil and natural gas properties is
highly risky and includes the possibility of a total loss of one's
investment.
o If you purchase a general partner interest you may be subject to
unlimited liability for that partnership's obligations.
o If you invest in a partnership you will have to totally rely on the
managing partner for management and control of the partnership.
o No drilling prospects have yet been selected and therefore investors
will not have an opportunity to evaluate drilling prospects before
investing in a partnership.
o The number of oil and gas wells and prospects in which the
partnerships will participate depends upon the amount of capital
raised. To the extent that funds available to a partnership are
limited, its ability to diversify its risk over a larger number of oil
and gas wells and prospects will be limited.
o The managing partner, or its affiliate, intends to purchase interests
in one or both partnerships if necessary to assure that the minimum
aggregate subscription amount for each partnership is reached.
Interests owned by the managing partner or an affiliate of the
managing partner will have voting rights under the partnership
agreements, and, therefore, these interests will dilute the voting
power of the other partners in a partnership.
o A partnership may only make distributions from partnership funds
realized from operations. Accordingly, we cannot assure that any
distributions from either partnership will be made to you.
o The partnerships are subject to various conflicts of interest which
are inherent in its relationship with the managing partner and its
affiliates. When these conflicts of interest occur, they may not in
every instance be resolved to the maximum benefit of a partnership. We
cannot assure that transactions between a partnership and affiliated
parties will be on terms as favorable as could be obtained with
unaffiliated third parties.
o We will receive reimbursement for fees and expenses incurred on behalf
of a partnership. These reimbursements may be substantial.
o The partnership agreements contain provisions which modify what would
otherwise be the applicable Delaware law relating to the fiduciary
standards of the managing partner to the investors. The fiduciary
standards in the partnership agreements could be less advantageous to
the investors and more advantageous to the managing partner than the
corresponding fiduciary standards otherwise applicable under Delaware
law, specifically:
-- a 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 a partnership;
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(continued from previous page)
-- the managing partner and its affiliates may conduct business with
a partnership in a capacity other than as manager of the
partnership;
-- the managing partner and its affiliates may pursue business
opportunities that are consistent with a partnership's investment
objectives for their own account; and
-- the managing partner may manage multiple programs simultaneously.
o An investment in a partnership is illiquid. You may not be able to
sell any interests you purchase because there will be no market for
them.
o Revenues from the partnerships are directly related to oil and natural
gas prices which cannot be predicted and can be volatile.
o You should only invest in a partnership if you have substantial
financial resources and you desire a long-term investment.
o Significant tax considerations are involved in any investment in a
partnership, including;
-- possible modification or elimination of tax benefits;
-- possible loss of partnership classification;
-- limited partners should have substantial current taxable income from
passive trade or business activities to benefit from tax losses
arising from a partnership; and
-- you may recognize taxable income with no corresponding cash
distribution by a partnership.
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.
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TABLE OF CONTENTS
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SUMMARY OF OFFERING...........................................................1
The Partnership............................................................1
Investment Objectives......................................................1
Proposed Activities........................................................2
Application of Proceeds....................................................2
Participation in Costs and Revenues........................................4
Investment as a Limited Partner or General Partner
.......................................................................4
Liability of General Partners...........................................5
Liability of Limited Partners...........................................5
How to Subscribe........................................................5
RISK FACTORS..................................................................6
Particular Risks Relating to the Interests.................................6
Liability of Limited Partners...........................................6
Liability of General Partners...........................................6
Liability of Joint Working Interest Owners..............................6
Possibility of Reduction or Unavailability of
Insurance............................................................6
Sole Reliance on Us for Management......................................7
Prospects Not Yet Identified or Selected; No
Opportunity to Evaluate Prospects....................................7
Concentration of Investment Risks.......................................7
Ownership of Interests by Our Affiliates................................7
Additional Financing....................................................8
Uncertainty of Cash Distributions.......................................8
Conflicts of Interest...................................................8
Compensation of Program Manager and
Affiliates...........................................................9
Inside Board of Directors and Other Family
Relationships........................................................9
Limitations on the Fiduciary Obligations of the
Managing Partner and the Managing
Partner's Responsibility to Determine the
Application of the Limitations.......................................9
Joint Activities With Others............................................9
Lack of Liquidity......................................................10
Indemnification of Us and Our Affiliates...............................10
Limited Ability to Remove Managing Partner
and Difficulty in Finding a Successor
Management Partner..................................................10
Withdrawal of Partners.................................................11
Dissolution of a Partnership and Termination of
the Drilling Program................................................11
Ability of the Managing Partner to Cause
Dissolution of a Partnership and the Related
Drilling Program....................................................11
Unauthorized Acts of General Partners Could
Be Binding Against the Partnership..................................11
General Risks Relating to Oil and Natural Gas
Operations.............................................................12
Speculative Nature of Oil and Gas Activities...........................12
The Partnerships and the General
Partners Could be Liable for
Environmental Hazards
...................................................................12
Dependence on Future Prices,
Supply and Demand for Oil
and Gas.............................................................12
Natural Gas Market.....................................................13
Loss of Partnership Property...........................................13
Competition............................................................13
Government Regulation..................................................13
Risks Relating to Limited Partnerships
Generally..............................................................13
Lack of Liquidity......................................................13
Lack of Substantial Voting Rights......................................14
Lack of Appraisal Rights...............................................14
Tax Risks.................................................................14
General................................................................14
Partnership Classification for Tax
Purposes; No IRS Ruling
Sought..............................................................14
Allocations............................................................15
Passive Activity Limitations...........................................15
Considerations for Tax-Exempt
Investors...........................................................15
Tax Shelter Registration...............................................16
Current Tax Deductions.................................................16
Conversion of General Partner
Interests...........................................................16
Tax Liabilities in Excess of Cash
Distributions.......................................................16
Risks of Borrowings....................................................17
Percentage Depletion...................................................17
Farmouts and Backin Interests..........................................17
Recapture..............................................................17
Audits.................................................................17
Changes in Federal Income Tax
Laws................................................................17
Significance of Tax Aspects............................................17
DEFINITIONS..................................................................19
TERMS OF THE OFFERING........................................................24
General...................................................................24
Subscription Refunds......................................................24
Subscription Period.......................................................24
Suitability Standards.....................................................25
General................................................................25
Minimum Suitability Standards..........................................25
Additional Suitability Standards.......................................26
Additional Requirements................................................27
Subscription Procedure....................................................28
Conversion of General Partner Interests...................................29
Right of Presentment......................................................29
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ADDITIONAL FINANCING.........................................................31
General...................................................................31
Limitation on Borrowings..................................................31
PLAN OF DISTRIBUTION.........................................................32
INVESTMENT OBJECTIVES........................................................32
PROPOSED ACTIVITIES..........................................................33
Development Policy........................................................33
Area of Geographic Concentration..........................................33
Prospect Evaluation.......................................................34
Cost Estimates............................................................34
Acquisition of Leases.....................................................35
Transactions with Affiliates..............................................35
Sale of Leases to a Partnership........................................35
Purchase of Leases from a Partnership..................................36
Participation by Mr. Mewbourne.........................................37
Farmouts..................................................................37
Operations................................................................38
Title to Partnership Properties...........................................39
Insurance.................................................................39
The Managing Partner's Policy Regarding Roll-Up
Transactions...........................................................41
APPLICATION OF PROCEEDS......................................................42
PARTICIPATION IN COSTS AND REVENUES..........................................44
Costs and Revenues........................................................44
Distributions.............................................................44
Capital Accounts..........................................................45
Allocations of Federal Income Tax Items...................................45
Proportionate Interests of Partners.......................................45
COMPENSATION AND REIMBURSEMENT...............................................46
Partnership and Program Interest..........................................46
Lease and Equipment Purchases from Mewbourne
......................................................................46
ESTIMATED DRILLING PROGRAM EXPENSES
.........................................................................48
Prior Partnerships........................................................49
Contracts with Mewbourne and Its Affiliates...............................49
Compensation as Operator..................................................49
Past Compensation.........................................................50
MANAGEMENT...................................................................50
OWNERSHIP STRUCTURE OF MEWBOURNE
COMPANIES.................................................................52
Officers, Directors and Key Employees of the
Managing Partner and the Drilling Program
Manager................................................................53
Key Employees.............................................................54
Compensation..............................................................55
Executive Officer.........................................................55
Cash Compensation to Executive
Officer.............................................................55
Executive Officer Compensation
Pursuant to Plans...................................................55
Non-Cash Compensation of
Executive Officer...................................................56
Certain Transactions......................................................56
Participation in Drilling Program
Activities..........................................................56
CONFLICTS OF INTEREST........................................................57
Fiduciary Responsibility of the
Managing Partner.......................................................57
Limitations on the Fiduciary
Obligations of the Managing
Partner and the Managing
Partner's Responsibility to
Determine the Application of
the Limitations.....................................................57
Farmouts..................................................................59
Purchase of Leases from a Partnership.....................................59
Sale of Leases to a Partnership...........................................60
Adjacent Acreage..........................................................60
Other Activities..........................................................61
Contracts with Mewbourne and
Affiliates.............................................................61
Mewbourne Oil Company as Operator.........................................62
Ownership of Interests by the Managing
Partner or any Affiliates..............................................62
PRIOR ACTIVITIES.............................................................63
Prior Partnerships........................................................63
Previous Drilling Activities..............................................65
Payout and Net Cash Tables................................................65
Tax Deductions and Tax Credits............................................70
Reserves and Future Net Revenues of
Prior Programs.........................................................72
TAX ASPECTS..................................................................74
Opinion of Counsel........................................................74
Partnership Taxation......................................................76
General................................................................76
Partnership Classification.............................................76
Taxation of Partners...................................................78
Allocations............................................................78
Elections and Returns..................................................80
Determinations of Partnership Items
at Partnership Level................................................80
Administrative Costs...................................................80
Conversion of General Partner
Interests...........................................................81
Special Features of Oil and Gas
Taxation...............................................................81
Lease Acquisition Costs................................................81
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Geophysical Costs......................................................81
Operating and Administrative Costs.....................................81
Intangible Drilling Costs..............................................81
Depreciation...........................................................82
Depletion..............................................................82
Passive Activity Loss Limitations......................................83
Limitations on Interest Deductions.....................................85
For Profit Limitation..................................................85
Basis and At Risk Limitations..........................................85
Sale of Property.......................................................86
Termination of a Partnership...........................................87
Sale of Interests......................................................87
Farmouts and Backin Interests..........................................88
General Tax Provisions....................................................89
Other Tax Consequences....................................................89
Alternative Minimum Tax................................................89
Tax Shelter Registration...............................................89
Compliance Provisions..................................................89
Consistency Requirements...............................................90
Nominees...............................................................90
Social Security Benefits; Self-Employment Tax
...................................................................90
Investment by Tax-Exempt Entities......................................90
State Law Tax Aspects..................................................91
Anticipated Federal Income Tax Deductions.................................92
Individual Tax Advice Should be Sought....................................92
COMPETITION, MARKETS AND REGULATION
.........................................................................92
Competition...............................................................92
Markets For Sale Of Production............................................92
Regulation Of Production..................................................93
Natural Gas Prices........................................................93
Oil and Liquid Hydrocarbon Price Controls.................................93
Possible Legislation......................................................94
Regulation of the Environment.............................................94
LIABILITY OF GENERAL AND LIMITED
PARTNERS..................................................................94
General Partners..........................................................94
Limited Partners..........................................................95
SUMMARY OF PARTNERSHIP AGREEMENT AND
DRILLING PROGRAM AGREEMENT................................................95
Term......................................................................95
Rights and Powers of Partners.............................................96
General and Limited Partners...........................................96
Limited Partners.......................................................97
General Partners.......................................................97
Rights and Powers of the Managing Partner.................................97
Indemnification of the Managing Partner and its
Affiliates.............................................................98
Right of Presentment......................................................98
Assignability of Interests................................................99
Removal or Withdrawal....................................................100
Dissolution, Liquidation and
Termination...........................................................100
Reconstitution of a Partnership..........................................101
Amendments...............................................................102
Reports to Partners......................................................102
Access to List of General and Limited
Partners..............................................................103
Power of Attorney........................................................104
LEGAL OPINIONS..............................................................104
EXPERTS.....................................................................104
WHERE YOU CAN FIND MORE INFORMATION
........................................................................104
Revenue recognition................................................F1 - 3
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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
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SUMMARY OF OFFERING
This summary highlights some information from this prospectus. It may
not contain all of the information that is important to you. To understand this
offering fully, you should read the entire prospectus carefully. For
definitions of key terms used in this prospectus, see "Definitions." FOR A
DISCUSSION OF MATTERS THAT SHOULD BE CONSIDERED IN EVALUATING AN INVESTMENT IN
THE INTERESTS, SEE "RISK FACTORS."
THE PARTNERSHIPS
We are offering to qualified investors an aggregate of up to 4,000
($4,000,000) limited partner interests and 16,000 ($16,000,000) general partner
interests in a series of two Delaware limited partnerships formed or to be
formed by us. We will sell these interests to investors for $1,000 each. The
minimum number of interests that we will offer for any one partnership is 1,000
and the minimum subscription in any one partnership is five interests ($5,000).
The maximum number of interests that we will offer for any one partnership is
10,000. Therefore, the minimum offering amount for any one partnership will be
$1,000,000 and the maximum offering amount for any one partnership will be
$10,000,000. A partnership will not commence operations or have any material
assets or liabilities prior to the termination of the subscription period for
interests in such partnership.
The subscription period for interests in Mewbourne Energy Partners
99-A, L.P. will commence on the date of this prospectus and terminate on
November 5, 1999, unless we, as managing partner, in our sole discretion
accelerate or delay the offering termination date, provided that our ability to
delay the offering termination date is subject to our obligation to return the
purchase price for any interests not invested in a partnership within any
period required by state securities law. The subscription period for interests
in Mewbourne Energy Partners 00-A, L.P. will commence on the date disclosed in
a supplement or amendment to this prospectus. The subscription period for
interests in Mewbourne Energy Partners 00-A, L.P. will expire on December 31,
2000 unless earlier terminated or withdrawn by the managing partner.
A partnership will not be funded with less than $1,000,000 in capital
contributions from investors. If we have not received subscription funds of at
least $1,000,000 by the end of a partnership's subscription period, we will
promptly return all funds we have received for that partnership to subscribers.
We and our affiliates are eligible to subscribe for interests.
However, we may only purchase interests for investment purposes and not for
resale or any further public distribution. We currently intend to subscribe for
as many interests as may be necessary to assure that both partnerships receive
the minimum subscription amount of $1,000,000. The number of interests in the
partnerships that we may purchase is not subject to any specific maximum
limitations but instead depends upon the number of subscriptions we receive and
accept from non-affiliates.
INVESTMENT OBJECTIVES
Each partnership will participate in a drilling program consisting of
the acquisition, drilling and development of oil and gas prospects pursuant to
a drilling program agreement with us and our affiliate, Mewbourne Oil Company.
The primary investment objective of each partnership is to conduct oil and gas
drilling and development activities on prospects in an attempt to establish
long-life oil and gas reserves. In addition, the drilling program's structure
is intended to result in tax benefits, consisting principally of deductions for
Intangible Drilling Costs, depletion, and depreciation. To the extent that the
operations of a partnership and the drilling program result in a net loss for a
taxable period, general partners will be able to claim their respective shares
of the deductions giving rise to such loss in the current year, but limited
partners will not be able to claim their shares of the deductions comprising
such loss in the current year except to the extent they have net passive income
from other sources. See "Tax Aspects." The drilling program agreement provides
that Mewbourne Oil Company, in its capacity as manager of the drilling program,
will have the exclusive power and authority to act on behalf of a partnership
with respect to the management, control and administration of the business and
affairs of the drilling program and the oil and gas properties subject to the
drilling program agreement. See "Management."
Each drilling program is intended to be a partnership for income tax
purposes only. See "Tax Aspects -- Partnership Taxation -- Partnership
Classification." For all other purposes, each drilling program is intended to
be an agreement among us, the related partnership and Mewbourne Oil Company in
its capacity as manager of the drilling
1
<PAGE> 10
program. The participants in a drilling program will be co-owners or
tenants-in-common of undivided interests in the oil and gas properties subject
to that drilling program agreement. Each drilling program agreement sets out
the rights, duties, and obligations of the drilling program manager and the
other participants in the related drilling program.
PROPOSED ACTIVITIES
The primary objective of each partnership is to establish long-life
oil and gas reserves through the development of oil and gas prospects located
in the shelf and the shelf-slope regions of the Permian Basin, located in West
Texas and Southeastern New Mexico, and the Anadarko Basin, located in Western
Oklahoma, the Texas Panhandle and Southwest Kansas, by participating in a
drilling program formed and managed by Mewbourne Oil Company or its successor.
Although subject to change based on subsequent events and conditions, we
anticipate that each partnership will conduct oil and gas drilling and
development activities on prospects in the Permian and Anadarko Basins through
a drilling program. However, these prospects in the Permian and Anadarko Basins
have not yet been identified. We also anticipate that each partnership's
activities through the related drilling program will primarily focus upon
activities relating to Development Wells rather than Exploratory Wells.
However, at our discretion, a partnership may expend up to 20% of its capital
contributions in connection with activities relating to Exploratory Wells. See
"Proposed Activities." We may also determine that it is in the best interest of
a partnership to conduct activities in other geographic areas.
Over the past 34 years, Mewbourne Oil Company and its affiliates have
conducted operations throughout the Permian Basin. Mewbourne Oil Company
currently operates approximately 172 wells in the Permian Basin and Melbourne
Oil Company and its affiliates have drilled approximately 168 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. We anticipate that each
partnership will, through a drilling program, conduct a portion of its oil and
gas drilling and development activities in this area of the Permian Basin.
Predominantly, wells drilled by Mewbourne Oil Company in this region of the
Permian Basin are classified as gas wells but produce both oil and gas.
However, Mewbourne Oil Company and its affiliates have drilled a number of
wells in this area which have been classified as oil wells.
Over the past 23 years, Mewbourne Oil Company and its affiliates have
conducted operations throughout the Anadarko Basin. Mewbourne Oil Company
currently operates approximately 215 wells in the Anadarko Basin and Mewbourne
Oil Company and its affiliates have drilled approximately 344 commercially
productive wells in the Anadarko Basin. Most current operations are centered on
the shelf area of Western Oklahoma and the Texas Panhandle. It is anticipated
that each partnership will, through the related drilling program, conduct a
portion of its drilling and development activities along the shelf area of
Western Oklahoma, the Texas Panhandle and Southwest Kansas. A majority of the
wells drilled by Mewbourne Oil Company over the past 23 years in this region of
the Anadarko Basin have been classified as gas wells but produce both oil and
gas. However, Mewbourne Oil Company and its affiliates have drilled a number of
wells in this area which have been classified as oil wells.
Mewbourne Oil Company and its affiliates have drilled approximately
660 wells since 1965 and completed approximately 513 commercially productive
wells for an overall success rate of 78% which includes the drilling of both
Exploratory Wells and Development Wells. However, over the 34 year history, the
vast majority of wells drilled have been Development Wells. With respect to the
11 partnerships sponsored by affiliates of the managing partner since 1992,
such partnerships have participated in a total of approximately 114 wells and
completed approximately 98 commercially productive wells for an overall success
rate of 86%. These historical results are not indicative of the results that
may be achieved by a 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.
APPLICATION OF PROCEEDS
Interests in each partnership may be sold in an aggregate amount from
$1,000,000 to $10,000,000. There is no deduction from the proceeds realized
from the sale of interests to investors for Organization and Offering Expenses,
Sales Commissions, and Due Diligence Fees and, therefore, all of such sales
proceeds will be available to each partnership for the partnership's
operations. The managing partner under the terms of each drilling program
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<PAGE> 11
agreement will pay all Organization and Offering Expenses, Sales Commissions,
and Due Diligence Fees. See "Application of Proceeds" and "Participation in
Costs and Revenues."
We estimate that of the total contributions made to each partnership's
drilling program approximately 12% will be expended for Organization and
Offering Expenses, Sales Commissions and Due Diligence Fees, approximately 15%
to 20% will be made in the form of Lease Acquisition Costs of prospects,
approximately 12% to 16% will be expended for Tangible Costs, approximately 55%
to 60% will be expended for Intangible Drilling Costs and the remainder will be
expended for other Direct Costs. These percentages are estimates only, and we
cannot assure that these percentages will be actually realized or that
variations in the percentages will not be significant to a partnership or its
drilling program.
The following table shows the calculation of the maximum and minimum
amounts which will be contributed to each drilling program to be conducted by
each partnership.
<TABLE>
<CAPTION>
MAXIMUM MINIMUM
CAPITAL CAPITAL
<S> <C> <C>
Capital contributions of investor partners (1)................ $ 10,000,000(1) $1,000,000(1)
Managing partner's capital contribution to the 0 0
partnership(2)................................................
Initial partnership capital and total partnership funds 10,000,000
available for drilling program operations..................... 1,000,000
Plus:
Contributions of the managing partner as a participant
in the drilling program....................................... 4,000,000(3)(4) 400,000(3)(4)
TOTAL AMOUNTS TO BE CONTRIBUTED TO $ 14,000,000 $1,400,000
EACH DRILLING PROGRAM.........................................
</TABLE>
- -------------------------
(1) There is no deduction from the proceeds realized from the sale of
interests for Organization and Offering Expenses, Sales Commissions,
and Due Diligence Fees. Under the terms of each drilling program
agreement we will contribute to each drilling program funds necessary
for the payment of all Organization and Offering Expenses, Sale
Commissions, and Due Diligence Fees incurred in connection with the
related partnership. The amount of Organization and Offering Expenses
is estimated to be approximately 3.5% of the capital contributions
initially made by investor partners to each partnership in exchange
for their respective interests. The amount of Sales Commissions and
Due Diligence Fees will equal 8% and .5% respectively of the capital
contributions initially made by investor partners to each partnership
in exchange for their respective interests.
(2) It is not anticipated that we will make any capital contributions
directly to a partnership, but rather we will make our capital
contributions directly to the drilling program in which the
partnership is a participant.
(3) We will contribute to each drilling program the oil and gas leases
upon which the drilling program will conduct its operations. Our
contribution of oil and gas leases to each drilling program will be
credited to the drilling program at the Lease Acquisition Costs of the
oil and gas leases contributed or at fair market value if the Lease
Acquisition Costs is materially more than fair market value.
(4) The aggregate amount of contributions to be made to the related
drilling program by us as a participant, in respect of Organization
and Offering Expenses, Sales Commissions, Due Diligence Fees and oil
and gas leases, must equal at least 40% of the capital contributions
initially made by investor partners to the related partnership. In the
event that our aggregate contributions to the related drilling program
in respect of
3
<PAGE> 12
Organizational and Offering Expenses, Sales Commissions, Due Diligence
Fees and oil and gas leases is less than an amount equal to 40% of the
capital contributions initially made by investor partners to the
related partnership, then we shall contribute to the drilling program
such additional funds in respect of Tangible Costs as may be necessary
to cause our aggregate contributions to the related drilling program
to be not less than 40% of the capital contributions initially made by
investor partners to the related partnership.
PARTICIPATION IN COSTS AND REVENUES
The combination of the allocation provisions contained in each
partnership agreement and the related drilling program agreement results in
aggregate allocations of revenues and costs, and income and gain relating
thereto, to the investor partners in the partnership and to us on a
consolidated basis as set forth in the table below:
<TABLE>
<CAPTION>
INVESTOR MANAGING
PARTNERS PARTNER
<S> <C> <C>
Participation in Revenues:
Revenues from operations(1) ..................................................... 60% 40%
Participation in Costs:
Organization and Offering Expenses, Sales Commissions and Due
Diligence Fees ................................................................ 0% 100%
Operating Costs ................................................................. 60% 40%
Administrative Costs ...................................................... 60% 40%
Reporting and Legal Expenses .................................................... 60% 40%
Lease Acquisition Costs ................................................... 0% 100%
Intangible Drilling Costs ....................................................... 100% 0%
Tangible Costs(2) ............................................................... 100% 0%
All other Direct Costs .......................................................... 60% 40%
</TABLE>
(1) 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."
(2) All Tangible Costs shall be allocated entirely to the related
partnership; provided however, that to the extent, if any, that the
total costs allocated to us for Organization and Offering Expenses,
Sales Commissions and Due Diligence Fees and Lease Acquisition Costs
are less than an amount equal to 40% of the aggregate capital
contributions initially made by investor partners to that partnership
(a "Deficit Amount"), then we will be allocated an amount of Tangible
Costs equal to that Deficit Amount.
See "Participation in Costs and Revenues" for a description of the
allocation of all costs and revenues among the investor partners and the
managing partner.
INVESTMENT AS A LIMITED PARTNER OR GENERAL PARTNER
You have the option to invest in a partnership as a limited partner or
general partner. If you invest, the allocations of costs and revenues relating
to a partnership's drilling activities to you will be the same regardless of
whether you elect to become a limited partner or a general partner of a
partnership. However, if you elect to become a general partner you may
experience economic and tax consequences different from those you would
experience if you were to elect to become a limited partner due to differences
in the legal obligations and tax treatment of general partners and limited
partners. 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. We
generally will receive the same tax benefits and assume the same obligations as
the general partners.
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<PAGE> 13
Liability of General Partners. By law, each general partner is jointly
and severally liable for the obligations of a partnership. Furthermore, each
partnership will own working interests in oil and gas leases subject to some
portion of the costs of development, operation or maintenance. We, and likely
others, will also own similar working interests in these leases. Therefore, the
general partners could be liable for the obligations of all such joint working
interest owners. However, we will indemnify each general partner from any
liability in excess of his share of a partnership's undistributed assets. See
"Risk Factors -- Particular Risks Relating to the Interests -- Liability of
Joint Working Interest Owners."
Liability of Limited Partners. Assuming that a limited partner does
not take part in the control of the business of a partnership, his liability
under Delaware law will be limited, generally to the amount of capital he has
contributed to the partnership. Under the laws of the states where we
anticipate the partnerships will conduct substantially all of their business,
the liability of limited partners will be governed by Delaware law. See
"Liability of Investor Partner--Limited Partners" and "Risk Factors --
Particular Risks Relating to the Interests -- Liability of Limited Partners."
The partnership agreement does not authorize additional assessments,
either mandatory or voluntary, of any general or limited partner.
How to Subscribe. If you are an eligible investor you may subscribe
for interests in a partnership prior to the end of the subscription period for
those interests by properly completing, executing, and delivering to your
soliciting dealer:
o a Subscription Agreement, and
o a check payable to the order of "Bank of America, Escrow Agent for
"Mewbourne 99-00 Drilling Program" in an amount equal to the purchase
price for the number of interests you intend to purchase (you must
purchase at least five interests in each partnership you invest in).
By executing a Subscription Agreement you are making a binding offer
to purchase interests in a partnership. Once you subscribe for interests, you
will not be able to revoke your subscription except as otherwise provided by
applicable state securities laws.
THE FOREGOING IS A VERY BRIEF, INCOMPLETE SUMMARY OF MATTERS RELATING
TO THE OFFERING OF INTERESTS. THIS SUMMARY MUST BE CONSIDERED TOGETHER WITH
INDEPENDENT ADVICE AND A CAREFUL READING AND EXAMINATION OF THIS ENTIRE
PROSPECTUS AND THE ATTACHED EXHIBITS.
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<PAGE> 14
RISK FACTORS
You should recognize that oil and gas drilling and exploration is a
high risk venture. Therefore, we recommend that you invest in a partnership
only if you are prepared to assume the substantial risks discussed below and
elsewhere in this prospectus. The nature of these risks requires persons who
purchase interests to be in a position:
o to hold such investment for a substantial number of years,
and
o to absorb the possible loss of such investment.
PARTICULAR RISKS RELATING TO THE INTERESTS
Liability of Limited Partners. Each partnership will be governed by
the Delaware Revised Uniform Limited Partnership Act. Under Delaware law, as a
general rule, a limited partner's liability for the obligations of a
partnership is limited to such limited partner's capital contribution and such
limited partner's share of the partnership's assets. A limited partner of the
partnership will not otherwise be liable for the obligations of the partnership
unless, in addition to the exercise of his or her rights and powers as a
limited partner, such limited partner participates in the control of the
business of a partnership. In such case the limited partner is liable only to
persons who transact business with the partnership with actual knowledge of the
limited partner's participation in control. Accordingly, if a limited partner
were to take an action which was subsequently determined to constitute
participating in the control of the business of a partnership, such limited
partner could become liable for the partnership debts and obligations. See
"Liability of Investor Partners -- Limited Partners."
Liability of General Partners. Under Delaware law, each general
partner in a partnership will be jointly and severally liable for the
liabilities and recourse obligations of the partnership. Furthermore, each
partnership will own working interests in oil and gas leases subject to some
portion of the costs of development, operation or maintenance. We, and likely
others, will also own similar working interests in these oil and gas leases.
Therefore, the general partners could be liable for the obligations of all such
joint working interest owners. We will indemnify each general partner from any
liability in excess of his share of a partnership's undistributed assets.
However, a general partner still could be subject to such liability if we
should become bankrupt or for any other reason we are unable to meet our
financial commitment to indemnify the general partners. This liability could
obligate a general partner to make additional payments to the partnership. The
possible amount of such a liability cannot be predicted. See "Proposed
Activities -- Insurance" and "Liability of Investor Partners -- General
Partners."
Liability of Joint Working Interest Owners. Pursuant to the drilling
program agreement, each drilling program participant, including the managing
partner and each partnership, will hold its working interest in oil and gas
leases in its own name and will be a joint working interest owner with the
other drilling program participants and also with third parties. It has not
been clearly established under the laws of some of the jurisdictions where a
portion of each drilling program's properties will be located whether 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 oil and gas leases will specify that
the liabilities of joint working interest owners will be several, though we
cannot assure that such a provision would be enforceable against a third party.
If the participants in a drilling program 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 a partnership has
available may become unavailable or prohibitively expensive. If the program
manager and its affiliates cease to retain the coverage described for any
reason for a period of more than 20 days during the subscription period for a
partnership, the offering of interests in that partnership shall cease, and
subscribers for interests in any partnership in which investors have not been
admitted shall receive a refund of their subscription funds. The managing
partner will also promptly notify those investors of any material reduction in
the insurance coverage of the drilling programs and the partnerships. The
managing partner shall give investors this notice as soon as possible after it
learns of such change and if possible at least 30 days in advance of the change
in insurance coverage. In addition, if a drilling program or a partnership,
after the admission of investors, has its insurance coverage materially reduced
for any reason, that partnership will halt all drilling activity until such
time as comparable replacement coverage is obtained. If a partnership has its
insurance coverage materially reduced after you
6
<PAGE> 15
invest, you could be subject to a greater risk of loss of your investment since
less insurance would be available to protect your investment from casualty
losses. See "Proposed Activities -- Insurance."
Sole Reliance on Us for Management. Under the partnership agreement,
Mewbourne Development Corporation is designated as the managing partner of each
partnership and is given the exclusive authority to manage and operate each
partnership's business. We are required to devote only such time as is
reasonably needed to the operations of the partnerships. Accordingly, if you
invest in a partnership you must rely solely on us to make all decisions on
behalf of each partnership. Investors will have no role in the management of
the business of either partnership. Therefore, each partnership's success will
depend, in part, upon the management we provide, our ability, and the ability
of Mewbourne Oil Company as manager of each drilling program to:
o select and acquire oil and gas leases on which oil and gas wells
capable of producing oil and natural gas in commercial quantities may
be drilled,
o successfully drill and develop oil and gas well on the properties
selected, and
o market oil and natural gas produced from such oil and gas wells.
Prospects Not Yet Identified or Selected; No Opportunity to Evaluate
Prospects. Although we maintain an inventory of leasehold acreage covering
numerous prospects, we have not, as of the date of this prospectus, selected or
agreed to transfer from such owned inventory any particular oil and gas leases
to a partnership or related drilling program. The drilling program manager will
select all oil and gas leases that the partnerships and the related drilling
programs will acquire or drill. You will not have an opportunity to review
those oil and gas leases before investing in a partnership. You will also not
have an opportunity to participate in the selection of oil and gas leases after
an investment is made. We may during the course of this offering select, and
cause this prospectus to be amended or supplemented to describe, prospects
designated for acquisition by participants in a drilling program. If you
subscribe for interests prior to any such amendment or supplement you will not
be permitted to withdraw your subscription as a result of the selection of any
such designated prospect and you may not be notified of the selection of any
such designated prospect prior to funding of the partnership or partnerships in
which you have invested. See "Proposed Activities -- Acquisition of Leases."
Concentration of Investment Risks. A partnership could be formed with
as little as $1,000,000 in capital contributions from investors. To the extent
that the funds available to a partnership are limited, its ability to spread
risks over a large number of oil and gas wells and prospects will be reduced.
The number of oil and gas wells which can be drilled based on the minimum
investment amount cannot be determined because prospects have not been
selected. However, even if a drilling program is formed with substantially more
than the minimum required capital, investors must rely on us to diversify
drilling activities of the related partnership. See "Terms of the Offering --
General" and "Proposed Activities -- Area of Geographic Concentration."
Ownership of Interests by Our Affiliates. We and our affiliates are
eligible to subscribe for interests. However, any interests we or our
affiliates purchase must be purchased for investment purposes only and not for
the purpose of resale or any further public distribution. As the initial
managing partner, we currently intend to subscribe for such number of interests
as may be necessary for each partnership in which interests are being offered
to receive the minimum subscription number of 1,000 interests. The number of
interests in a partnership that we and/or our affiliates may purchase is not
subject to any specific maximum limitations but instead depends upon the number
of subscriptions for interests received and accepted from non-affiliates.
Therefore, there are no limitations upon the number of interests that we or our
affiliates may purchase. Interests we or our affiliates own will have voting
rights under the partnership agreement. However, during the time period that we
or our affiliate serve as the managing partner of a partnership, any interests
we or our affiliates own, which in the aggregate represent more than 20% of the
total interests held by the general and limited 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 us or our affiliates shall be counted
for voting purposes or for purposes of determining a quorum or have any voting
rights concerning the removal of us as managing partner or any transaction
between that partnership and us or our affiliates. Notwithstanding the voting
limitations imposed upon interests owned by us or our affiliates, to the extent
that we or our affiliates acquire interests in a partnership, such ownership
will dilute the voting power of the other investors in that partnership.
7
<PAGE> 16
Additional Financing. We anticipate that the net proceeds from the
sale of interests in a particular partnership will be sufficient to finance
that partnership's share of the related drilling program's costs of:
o drilling and completing oil and gas wells, and
o providing necessary production equipment and facilities to
service such oil and gas wells and plugging and abandoning
non-productive oil and gas wells.
However, due to unforeseen circumstances, it could become necessary to finance
the costs of additional partnership operations through partnership borrowings,
utilization of partnership revenues obtained from production or other methods
of financing. These additional operations may include the acquisition of
additional oil and gas leases and the drilling, completing and equipping of
additional wells to further develop drilling program prospects. See "Additional
Financing." Each partnership agreement provides that outstanding partnership
borrowings may not at any time exceed 20% of the aggregate capital
contributions of the general and limited partners. Furthermore, a partnership
may borrow funds only if the lender agrees that it will have no recourse
against individual general partners. If the above-described method of financing
should prove insufficient to maintain the desired level of development
operations for the drilling program, such operations could be continued through
farmout arrangements with third parties, including the managing partner and/or
its affiliates. These farmouts could result in the drilling program giving up a
substantial interest in any oil and gas revenues so developed. See "Proposed
Activities -- Development Policy" and "-- Farmouts."
Uncertainty of Cash Distributions. No distributions will be made from
a partnership to the general or limited partners of that partnership until that
partnership has funds which the managing partner determines are not needed for
the operation of the partnership and the drilling program. Accordingly, we
cannot assure that any distributions from a partnership will be made to its
general and limited partners. Distributions will depend primarily on a
partnership's net cash receipts from oil and gas operations. Moreover,
distributions could be delayed to repay the principal and interest on
partnership borrowings, if any, or to fund partnership costs. partnership
income will be taxable to the general and limited partners in the year earned,
even if cash is not distributed. See "Tax Aspects -- Partnership Taxation --
General."
Conflicts of Interest. Investors will not be involved in the
day-to-day operations of the partnerships. Accordingly, if you invest in a
partnership, you must rely on our judgment in such matters. Inherent with the
exercise of our judgment, we will be faced with conflicts of interest,
including:
o We will participate in the drilling programs in our
individual capacity. As a result, actions taken by a
partnership may be more beneficial to us than the
partnership,
o We or our affiliates may participate in oil and gas
activities on behalf of other programs that we sponsor, will
sponsor or are for our account. We owe a duty of good faith
to each of the partnerships which we manage and it is
possible that actions taken with regard to other partnerships
may not be advantageous to a partnership.
o We and/or our affiliates may provide services to a
partnership. We and/or our affiliates will be compensated for
these services at rates competitive with the rates charged by
unaffiliated persons for similar services.
o If we or our affiliates' own interests in a partnership this
ownership may dilute the voting power of the other general
and limited partners in that partnership.
o The oil and gas leases that may be contributed to a
partnership may be adjacent to acreage or oil and gas leases
which we or our affiliates hold or will hold. While the
drilling program will not drill any well for the purpose of
proving or disproving the existence of oil or gas on any
adjacent acreage, such drilling activities may incidentally
develop information valuable to us or our affiliates in
evaluating our nearby acreage at no cost to us. Accordingly,
a conflict of interest will exist between our interests and
the interest of a partnership in selecting the location and
type of operations which the drilling program will conduct on
drilling program oil and gas leases.
We will attempt, in good faith, to resolve all conflicts of interest in a fair
and equitable manner with respect to all persons affected by those conflicts of
interest. However, we cannot assure that transactions between a partnership and
its affiliates will be on terms as favorable as could have been negotiated with
unaffiliated third parties. See "Proposed
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<PAGE> 17
Activities -- Transactions with Affiliates." You should be aware that we have
not formally adopted any procedures or criteria to avoid or to resolve any
conflicts of interest that may arise between us and a partnership. You are
urged to review the discussion under "Conflicts of Interest" for a more
complete description of possible conflicts of interests.
Compensation of Program Manager and Affiliates. Pursuant to the
drilling program agreement, Mewbourne Oil Company will receive fees and
reimbursement of expenses as the drilling program manager and as operator,
which may be deemed to be compensation. These reimbursements and fees may be
substantial. See "Compensation and Reimbursement -- Management Fee" 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 Mewbourne
Development Corporation, the managing partner, and the Board of Mewbourne Oil
Company, the drilling program manager. Dorothy Cuenod, Ruth Buckley and Julie
Greene, each a daughter of Curtis Mewbourne, each serve as both one of our
officers and directors and an officer and director of Mewbourne Oil Company. J.
Roe Buckley, Ruth Buckley's husband, serves as one of our officers and an
officer of Mewbourne Oil Company. Michael F. Shepard, Secretary and General
Counsel, is our only officer not related to our other officers. Joseph F. Odom,
Vice President of Administration and Personnel, Kenneth S. Waits, Vice
President of Exploration and Monty L. Whetstone, Vice President of Production,
are the only officers of Mewbourne Oil Company not related to the other
officers of Mewbourne Oil Company. Neither us nor Mewbourne Oil Company has a
director who is not either a full time employee or a family relation of Mr.
Mewbourne. Therefore, our activities and the activities of Mewbourne Oil
Company should not 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 Us and Mewbourne Oil
Company."
Limitations on the Fiduciary Obligations of the Managing Partner and
the Managing Partner's Responsibility to Determine the Application of the
Limitations. The partnership agreement contains provisions which modify what
would otherwise be the applicable Delaware law relating to the fiduciary
standards of the managing partner to the general and limited partners. The
fiduciary standards in the partnership agreement could be less advantageous to
the general and limited partners and more advantageous to the managing partner
than the corresponding fiduciary standards otherwise applicable under Delaware
law, specifically:
o we and our affiliates may be indemnified and held harmless by
a partnership,
o we are required to devote only so much of its time as is
necessary to manage the affairs of a partnership'
o we and our affiliates may conduct business with a partnership
in a capacity other than as a manager of the partnership,
o we and/or our affiliates may pursue business opportunities
that are consistent with a partnership's investment
objectives for their own account if we determine that such
opportunity cannot be pursued by the partnership either
because of insufficient funds or because it is not
appropriate for the partnership under the existing
circumstances, and
o we may manage multiple programs simultaneously.
In addition, the partnership agreement limits the liability of us or
our affiliates to a partnership or to general and limited partners for acts or
omissions if we determine in good faith, as of the time of the conduct or
omission, that the course of conduct or omission was in the best interest of
that partnership and that such conduct or omission did not constitute
negligence or misconduct.
Your purchase of an interest in a partnership may be deemed as consent
to the limitations upon the fiduciary standards set forth in the partnership
agreement. As a result of these provisions in the partnership agreement, the
general and limited partners may find it more difficult to hold us responsible
for not acting in the best interests of a partnership and its general and
limited partners than if the fiduciary standards of the otherwise applicable
Delaware law governed the situation. See "Conflicts of Interests -- Fiduciary
Responsibility of the Managing Partner."
Joint Activities With Others. We anticipate that the participants in
the drilling programs, including the related partnerships, will not own the
full working interest in most prospects to be explored and developed pursuant
to the drilling program agreement. It is likely that a third party or parties
will own a partial working interest in a prospect to be developed pursuant to
the drilling program agreement. These third parties could be either our
affiliates
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<PAGE> 18
or unrelated to us and could also include Mr. Mewbourne. While Mewbourne Oil
Company, on behalf of each drilling program, would participate in decisions
affecting the development of such prospects, decisions with respect to
development activities might be controlled or affected by the other owners of
working interests in such prospects. Furthermore, a partnership could be held
liable for the joint activity obligations of such other working interest
owners, and this liability could in turn result in individual liability for the
general partners in that partnership. See "-- Particular Risks Relating to the
Interests -- Liability of Joint Working Interest Owners" and "Liability of
General and Limited Partners -- General Partners."
Lack of Liquidity. We anticipate that there will not be any market for
resale of the interests. Although the partnership agreement permits the
assignment of interests by general and limited partners, transfers of interests
are subject to restrictions. As one example, an assignee of an interest may not
become a substituted general or limited partner without our consent. See
"Summary of Partnership Agreement and Drilling Program Agreement --
Assignability of Interests" for a description of these restrictions.
Accordingly, if you purchase an interest you should be prepared to bear the
investment risks attendant upon your investment for an indefinite period of
time. In addition, the transfer restrictions contained in the partnership
agreement may reduce interest in a partnership as a potential acquisition
target. Alternatively, the transfer restrictions may encourage persons
considering an acquisition or takeover of a partnership to negotiate with us
rather than pursuing a non-negotiated acquisition or takeover attempt.
However, we cannot assure that the transfer restrictions will have these
effects.
General and limited partners will not have the right to withdraw any
capital from a partnership or to receive the return of all or any portion of
their capital contributions, except out of distributions of operating revenues,
upon a sale or other disposition of that partnership's property or the
dissolution and liquidation of that partnership. See "Summary of Partnership
Agreement and Drilling Program Agreement -- Dissolution, Liquidation and
Termination." Although general and limited partners may under certain
circumstances require us, or an affiliate that we have designated, to purchase
their interest in whole but not in part, this obligation is limited and does
not assure the liquidity of an investor's investment. See " Terms of the
Offering -- Right of Presentment."
Indemnification of Us and Our Affiliates. The partnership agreement
provides for indemnification of us, our affiliates and the officers and
directors of such persons against claims arising from conduct on behalf of a
partnership or the related drilling program. In addition, the drilling program
agreement provides for indemnification of Mewbourne Oil Company, its
affiliates, and the officers and directors of such persons against claims
arising from conduct on behalf of the related drilling program. In the event of
any such indemnification for losses, liabilities or expenses arising from or
out of an alleged violation of federal or state securities laws, a court must
approve the indemnification. In all other instances of indemnification, we will
decide whether or not indemnification is appropriate under the partnership
agreement or drilling program agreement. Therefore, if you invest, in such
situations you must rely upon our integrity to cause a partnership to indemnify
us and our affiliates only when such indemnification is justified under the
partnership agreement or drilling program agreement. You should also bear in
mind that in any situation involving indemnification, a partnership's funds
could be applied to the indemnification of us and our affiliates rather than to
make distributions to the general and limited partners. See "Summary of
Partnership Agreement and Drilling Program Agreement -- Indemnification of the
Managing Partner and its Affiliates.
Limited Ability to Remove Managing Partner and Difficulty in Finding a
Successor Management Partner. A majority in interest of the general and limited
partners of a partnership will have the right to remove us from our position as
the managing partner, and, the right to remove Mewbourne Oil Company from its
position as the drilling program manager. The general and limited partners in
certain circumstances must, in order to continue the partnership, elect a
successor to the removed managing partner if the removal of the managing
partner causes a dissolution of that partnership. See "Summary of Partnership
Agreement and Drilling Program Agreement -- Rights and Powers of Partners." In
the event the drilling program manager is removed, the related partnership must
elect a successor to the removed drilling program manager. There is a risk that
the general and limited partners could not find a new managing partner or
drilling program manager if we or Mewbourne Oil Company were to be removed from
such positions.
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Withdrawal of Partners. Pursuant to the partnership agreement, each
general partner will agree that he will not voluntarily withdraw from a
partnership. We agree that we will not voluntarily withdraw from a partnership
prior to the later to occur of:
o completion of the partnership's primary drilling activities
under the related drilling program, and
o the fifth anniversary of the date that general and limited
partners were admitted to the partnership.
In order to exercise its right of withdrawal, we must give the general
and limited partners at least 120 days' advance written notice. A general
partner who withdraws in violation of this agreement will be obligated to
reimburse the partnership and the other partners for any expenses associated
with such withdrawal. We expect that such expenses may be substantial and could
exceed the amount of the withdrawing general partner's original investment in
the partnership. Furthermore, a withdrawing general partner will no longer be
entitled to receive any distributions nor shall such general partner have any
rights as a partner under the partnership agreement. See "-- Reconstitution of
the Partnership" below.
Dissolution of a Partnership and Termination of the Drilling Program.
A partnership will be dissolved and terminated upon the occurrence of any of
the events listed under "Summary of Partnership Agreement and Drilling Program
Agreement -- Dissolution, Liquidation and Termination." These events include:
o the expiration of that partnership's term or
o the vote or consent in writing at any time by a majority in
interest of the general and limited partners.
However, a partnership could also be dissolved and both it and the related
drilling program terminated as a result of events which do not include the
passage of time or the consent of the general and limited partners. These
events include our bankruptcy, insolvency, dissolution, or withdrawal from the
partnership. The general and limited partners have the right to reconstitute a
partnership under such circumstances and thereby avoid termination of that
partnership. However, there is no certainty that the general and limited
partners could find a new managing partner to replace us in such circumstances.
We currently have no intention of withdrawing as the managing partner of a
partnership. See "Summary of Partnership Agreement and Drilling Program
Agreement -- Dissolution, Liquidation and Termination."
Ability of the Managing Partner to Cause Dissolution of a Partnership
and the Related Drilling Program. The partnership agreement and applicable law
provide our withdrawal from a partnership, directly or as a result of
bankruptcy, dissolution or similar event, will cause dissolution of that
partnership. We have undertaken not to withdraw as the managing partner of a
partnership prior to the later to occur of
o completion of that partnership's primary drilling activities
under the related drilling program, and
o the fifth anniversary of the date that general and limited
partners were admitted to that partnership.
However, we have the power under applicable law to withdraw from a partnership
in violation of the partnership agreement. We currently do not intend to
withdraw from a partnership. The partners of each partnership are given the
right under the partnership agreement to reconstitute a partnership upon our
withdrawal, but there is an additional risk in such event that the partners of
a partnership could not find a successor managing partner.
Unauthorized Acts of General Partners Could Be Binding Against the
Partnership. Under Delaware law, the act of a general partner of a partnership
apparently carrying on the business of the partnership binds the partnership,
unless the general partner in fact has no authority to act for the partnership
and the person with whom the partner is dealing has knowledge in good faith of
the fact that such general partner has no such authority. While there is a risk
that a general partner might bind a partnership by his acts, we believe that
the managing partner will have such exclusive control over the conduct of the
business of the partnerships that it is unlikely that a third party, in the
absence of bad faith, would deal with a general partner in connection with a
partnership's business. The participation
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by a general partner in the management and control of a partnership's business
is expressly prohibited by the partnership agreement, and a violation of such
prohibition would give rise to a cause of action by the partnership against
such general partner. Nevertheless, there is always the possibility that a
general partner could attempt to take unauthorized actions on behalf of a
partnership, and if a court were to hold that such actions were binding against
the partnership such unauthorized actions could be contrary to the best
interests of that partnership and could adversely impact such partnership.
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 drilling program agreement, the activities of each partnership
will focus upon the acquisition of oil and gas leases, the drilling of
Development Wells, the development of prospects, and the production and
operation of the resulting properties. In addition to Development Wells, at our
discretion, up to 20% of a partnership's capital contributions may be expended
in connection with activities relating to Exploratory Wells. All drilling
activities involve a high degree of risk with Exploratory Wells presenting a
higher degree of risk than Development Wells. We cannot assure that the
objective formation(s) will be encountered or that any or sufficient oil or gas
production will be obtained through drilling program activities, or if
production is obtained, that such production will be sold at sufficient prices
to enable an investor to recoup his investment in a partnership. During the
drilling and completion of wells, a drilling program could encounter hazards
such as unusual or unexpected formations, pressures or other conditions,
blow-outs, fires, failure of equipment, downhole collapses, and other hazards,
whether similar or dissimilar to those enumerated. Although a partnership will
maintain the insurance coverage described under "Proposed Activities --
Insurance," the drilling program may suffer losses due to hazards against which
it cannot insure or against which it may elect not to insure. Such liabilities
could result in personal liability for a general partner. See "-- Particular
Risks Relating to the Interests -- Liability of Partners" below and "Liability
of General and Limited Partners."
The Partnerships and the General Partners Could be Liable for
Environmental Hazards. There are numerous natural hazards involved in the
drilling of wells, including unexpected or unusual formations, pressures,
blowouts, and accidental leakage involving possible damage to property and
third parties. Such hazards may cause substantial liabilities to third parties
or governmental entities. Although we anticipate that customary insurance will
be obtained, a partnership may be subject to liability for pollution and other
damages due to hazards which cannot be insured against or will not be insured
against due to prohibitive premium costs or for other reasons. Liabilities to
third parties or governmental entities for pollution could reduce funds
available for distributions and for drilling operations, result in the loss of
partnership property, or result in the personal liability of the general
partners if the liability exceeded insurance proceeds, a partnership's assets,
and the managing partner's ability to indemnify such general partners.
Dependence on Future Prices, Supply and Demand for Oil and Gas. The
revenues generated from the activities of each 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 the drilling program manager during 1998 was approximately $15.54 per barrel
and $9.60 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.
The United States average daily production of oil declined from 9.0
million barrels in 1985 to approximately 6.4 million barrels in 1998. 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 declined from 1,003 at the end of 1997 to 621 at the end of 1998.
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 1998, imports averaged approximately 55% of the
United States' consumption.
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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 the drilling
program manager for gas produced and sold during 1998 was approximately $2.12
per mmbtu and $1.54 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 of those
groups. This process, which began with the issuance of the Federal Energy
Regulatory Commission open access transportation program, often known as Order
No. 436, and culminated with the implementation of Federal Energy Regulatory
Commission 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. A portion of the working interest that a
drilling program acquires may 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 and gas industry as a
"non-consent interest." In most cases, such a 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 working 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 a
drilling program will be entitled to recoup at least 300% of such costs and
expenses before such reversion.
Competition. The partnerships will be competing with a number of other
parties, many of which have greater financial resources available to them. When
drilling is completed on a prospect, a 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 oil and gas wells may be regulated. Governmental regulation
also may affect the market for a partnership's production. Governmental
regulations relating to environmental matters could also affect a partnership's
operations. We cannot predict the nature and extent of various regulations, the
nature of other political developments and their overall effect upon a
partnership and the related drilling program. See "Competition, Markets and
Regulation."
RISKS RELATING TO LIMITED PARTNERSHIPS GENERALLY
Each partnership is structured as a limited partnership. There are 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 partnerships.
Lack of Liquidity. In order to avoid being treated as a corporation
under Section 7704 of the Internal Revenue Code, a partnership must not be
classified as a publicly traded partnership. See "Tax Aspects -- Partnership
Taxation -- Partnership Classification." Under Section 708 of the Internal
Revenue Code, a partnership will terminate for federal income tax purposes if
partnership interests representing a 50% or more interest in the capital or
profits of that 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 general and limited partners, the managing
partner has retained the right to disallow transfers of interests. Accordingly,
an investment in a partnership has been structured as
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an illiquid investment. This lack of liquidity can be disadvantageous to an
investor who may wish to dispose of his or her interest in a partnership.
Lack of Substantial Voting Rights. In order to preserve the limited
liability of the limited partners of the partnerships, the limited partners may
not take part in the control of the business of a partnership. Although those
investors who elect to invest as general partners will not initially be limited
partners of a partnership, we are presuming that the vast majority, if not all,
of the general partner interests will be converted into limited partner
interests upon completion of the partnership's drilling activities. In order to
preserve the limited liability of the limited partners, limited partners are
not permitted to take actions which generally may be taken by stockholders of
public corporations, such as annual votes to approve important matters. Because
limited partners are not permitted to take part in the control of a
partnership, limited partnerships, such as the partnerships, do not generally
hold annual meetings such as those at which stockholders may express their
views and confront management directly. Because of the general and limited
partners' lack of substantial voting rights, the control of business of a
partnership is vested exclusively in us, and you must rely on us to fulfill our
fiduciary duties to you and the other partners and to maximize the
partnership's economic performance.
Lack of Appraisal Rights. Unlike most modern corporation laws and the
solid body of judicial case law which provides most corporate stockholders with
appraisal rights to have their shares of stock redeemed by the corporation in
certain instances, limited partnership acts generally provide no such rights.
Although the partnership agreement does provide general and limited partners
with limited appraisal rights in the case of mergers and similar events, see
"Proposed Activities -- The Managing Partner's Policy Regarding Roll-Up
Transactions," an investor may not have appraisal rights in as many situations
as would some corporate stockholders. There is no extensive judicial case law
interpreting and upholding the appraisal rights of limited partners.
TAX RISKS
General. We have not requested, and we will not request, a ruling from
the IRS regarding the tax consequences of investing in interests. Based on our
representations and various assumptions and qualifications, our counsel has
rendered an opinion that the material federal income tax benefits of an
investment in interests, in the aggregate, more likely than not will be
realized in substantial part by a partner who is a United States citizen and
who acquires his interests for profit, provided that an investor who acquires
limited partner interests either is not subject to the passive activity loss
limitations of Section 469 of the Internal Revenue Code or has sufficient
passive income against which he can deduct his share of any partnership
deductions and losses. See "Tax Aspects -- Opinion of Counsel."
Partnership Classification for Tax Purposes; No IRS Ruling Sought. In
order for income and deductions to be passed through to the general and limited
partners, a partnership and the related drilling program must be classified as
partnerships for federal income tax purposes. If a partnership or the related
drilling program were taxed as 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 our representations and various assumptions and
qualifications, our counsel is of the opinion that, at the time of formation,
each partnership and each related drilling program will be treated as a
partnership for federal income tax purposes and that neither partnership will
be treated as a corporation pursuant to the "publicly traded partnership" rules
of Section 7704 of the Internal Revenue Code. We cannot assure, however, that
future legislative, judicial or administrative action will not affect the
classification of a partnership or a drilling program for federal income tax
purposes. See "Tax Aspects -- Partnership Taxation -- Partnership
Classification."
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Allocations. The partnership agreement and the drilling program
agreement contain provisions that allocate federal income tax consequences of a
drilling program's activities among us and the general and limited partners.
See "Participation in Costs and Revenues." If such allocation provisions were
not recognized for federal income tax purposes:
o a portion of the federal income tax deductions allocated to
and claimed by the general and limited partners, including
deductions for Intangible Drilling Costs, could be
reallocated to us. This reallocation could occur
notwithstanding the fact that such general and limited
partners had been charged with the expenditures giving rise
to such deductions, and
o a portion of the taxable income allocated to us could be
taxed to the general and limited partners. This allocation
could occur notwithstanding the fact that the revenues giving
rise to such taxable income had been credited to us.
Based on our representations and various assumptions and qualifications, our
counsel is of the opinion that, except as noted below, the allocation of
income, gains, losses, and deductions between us and the general and limited
partners under the partnership agreement and between us and a partnership under
the drilling program agreement will be recognized for federal income tax
purposes. Our counsel's opinion is not binding on the IRS, however, and we
cannot assure that the IRS will not challenge such allocations. See "Tax
Aspects -- Partnership Taxation -- Allocations."
Passive Activity Limitations. A limited partner's interest in a
partnership will be treated as a "passive activity," and any tax losses derived
by a limited partner from a partnership will be allowable only to the extent of
such limited partner's "passive income." Disallowed passive losses in any year
can be carried forward indefinitely and used to offset future passive income or
can be deducted in full when the limited partner disposes of his entire
interest in the partnership to an unrelated person in a fully taxable
transaction.
A taxpayer's interest in an oil or gas well drilled or operated
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 our representations and various assumptions and
qualifications, our counsel is of the opinion that the passive activity loss
limitations of Section 469 of the Internal Revenue Code should not apply to
general partners in a partnership, prior to any conversion of a general partner
interest to a limited partner interest, to the extent that a partnership drills
or operates wells 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. However, a general partners' ability to take
deductions will be subject to basis and "at risk" limitations. The exception
for working interests would not be applicable to any operations of a
partnership other than the drilling and operation of wells pursuant to working
interests. Therefore, if a partnership acquires an interest or participates in
other activities, such activities will be treated as passive activities to the
general partners and any losses derived by them with respect to such activities
will be passive losses allowable only to the extent of their passive income. In
addition, the exception for working interests will not apply from and after a
conversion of a general partner interest to a limited partner interest. See
"Tax Aspects -- Special Features of Oil and Gas Taxation -- Passive Activity
Loss Limitations."
The treatment of a partnership as a "publicly traded partnership" for
purposes of applying the passive activity loss limitations would even more
severely restrict or eliminate a limited partner's ability to use any
partnership losses to offset income from other sources. Based on our
representations and various assumptions and qualifications, our counsel is of
the opinion that neither partnership will be treated as a publicly traded
partnership for purposes of the application of the passive activity loss
limitations of Section 469 of the Internal Revenue Code. Our counsel's opinion
is not binding on the IRS, however, and we cannot assure that the IRS will not
assert that a partnership is a publicly traded partnership for purposes of
applying the passive activity loss limitations. See "Tax Aspects -- Special
Features of Oil & Gas Taxation -- Passive Activity Loss Limitations."
Considerations for Tax-Exempt Investors. 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" in excess of $1,000 in any particular year. Substantially all
the income from a partnership's
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operations will constitute "unrelated business taxable income" and may give
rise to tax liability to an otherwise tax-exempt investor which is a limited
partner or a general partner. Such investor may be required to file a tax
return even if the investor does not realize net taxable income from a
partnership or taxable income exceeding $1,000 in a year. Although the
"unrelated business taxable income" rules generally permit a tax-exempt
investor to offset any loss from a 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 a 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 a 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 a partnership may
generate tax benefits, a partnership should not be considered a "tax shelter"
as that term is commonly understood. Nevertheless, because of the expansive
definition of the term "tax shelter" under applicable Treasury Regulations, we
will apply to the IRS for a "tax shelter" registration number with respect to
each partnership. We will furnish the registration number to each partner. Each
partner must include the registration number on his individual tax return and
must furnish the number and certain other information to any transferee of his
interests. We will also maintain and make available to the IRS on request a
list of the general and limited partners in each partnership. See "Tax Aspects
- -- General Tax Provisions -- Tax Shelter Registration."
Current Tax Deductions. We will use reasonable efforts to expend or
contract for the expenditure of the capital contributions of each partnership
in the year such contributions are received. However, some of the expenses may
be incurred prior to the actual drilling of the oil and gas wells. We cannot
assure that any Intangible Drilling Costs incurred in a year prior to the year
of the actual drilling of the oil and gas wells will be deductible in the year
incurred. In particular, a partnership might not expend or contract for the
expenditure of a substantial portion of its capital contribution in the year in
which general and limited partners are admitted to a partnership, in which
event no substantial partnership tax deductions would be available in that
year. We have sponsored a series of ten public limited partnerships similar to
the partnerships being offered by this prospectus since December 1992 and,
based on the historic results of these previous limited partnerships, we
anticipate that no more than 50% of the total Intangible Drilling Costs
incurred by a partnership will be incurred and deductible by investors in that
partnership in the year they are admitted as general or limited partners to
such partnership. See "Tax Aspects -- 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. We anticipate that the
general partner interests in a partnership will be converted to limited partner
interests following the completion of the partnership's drilling activities. We
anticipate a partnership will complete drilling activities within approximately
8 to 15 months after the funding of the partnership. The tax consequences of
such a conversion will depend upon the law in existence at the time of
conversion and upon the results of that partnership's operations prior to that
time. Such consequences may be adverse if the conversion is deemed a
"constructive termination" of the partnership for federal income tax purposes
or may be adverse under the passive loss rules as a result of a partner's
particular circumstances. If we determine that the conversion of the general
partner interests in a partnership to limited partner interests will have an
adverse effect on the general partners or the partnership, due to adverse tax
consequences or other reasons, we may elect not to convert those interests.
Accordingly, we cannot assure that any general partner interests will be
converted to limited partner interests or when any such conversion will occur.
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. A partner must report
and pay income tax on his share of partnership income, regardless of whether
such income is retained and used for debt service, working capital, or other
reasons, any of which uses may not be deductible for federal income tax
purposes. The receipt of cash distributions by the general and limited partners
may be delayed due to various factors, such as the use of revenues to finance
permitted activities. To the extent that the general and limited partners are
credited with net income from a partnership, an income tax liability will be
incurred even though the general and limited partners may not yet have
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received any cash distributions from the partnership. The timing and amount of
cash distributions will be determined by us in our complete discretion. If you
invest in a partnership, you will be required to report your share of any
partnership income on your federal, state and local tax returns and you will be
responsible for the payment of taxes attributable to such income. In any year,
your resulting tax liability may exceed the amount of cash distributed to you
by a partnership. See "Tax Aspects -- Partnership Taxation -- General."
Risks of Borrowings. We are authorized to cause a partnership to
obtain additional loans from banks or other financial sources, or from us or
our affiliates, provided that the total amount of such loans may not in the
aggregate exceed 20% of the capital contributions to the partnership. A
partner's share of revenue applied to the repayment of loans, will be included
in his taxable income. Although such income may be offset in part by deductions
for depletion, cost recovery, depreciation, and Intangible Drilling Costs, such
loans could cause a partner to become subject to an income tax liability in
excess of the amount of cash distributions he receives from the partnership.
Percentage Depletion. 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."
Farmouts and Backin Interests. If a partnership acquires working
interests in oil and gas leases pursuant to the terms of a farmout agreement,
the value of such working interests may have to be reported as taxable income.
In addition, the ability of a partnership to deduct all Intangible Drilling
Costs paid by it with respect to oil and gas leases burdened by a backin
working interest may be limited. A backin working interest is a right held by
another party to become a working interest owner in the oil and gas lease on
payout of the initial well on the oil and gas lease. See "Tax Aspects --
Special Features of Oil and Gas Taxation -- Farmouts and Backin Interests."
Recapture. Certain deductions for Intangible Drilling Costs,
depletion, and depreciation must be recaptured as ordinary income on
disposition of property by a partnership or on disposition of interests by a
partner. See "Tax Aspects -- Special Features of Oil and Gas Taxation --
Intangible Drilling and Development Costs," "-- Depletion" and "--
Depreciation."
Audits. The IRS may audit the tax returns of the partnership you
invest in or its related drilling program, in which case an audit of your
individual tax returns also may result. If such audits occur, tax adjustments
may be made, including adjustments to items on your returns unrelated to the
partnership. Furthermore, any settlement or judicial determination of the
partnership's or the drilling program's income may be binding on you. This is
the case even though you may not have participated directly in the settlement
proceedings or litigation. See "Tax Aspects -- Partnership Taxation --
Elections and Returns."
Changes in Federal Income Tax Laws. Significant and fundamental
changes in the nation's federal income tax laws have been made in recent years
and additional changes are likely. Any such change may affect the partnerships
and the general and limited partners. Moreover, judicial decisions, regulations
or administrative pronouncements could unfavorably affect the tax consequences
of an investment in a partnership.
Significance of Tax Aspects. These interests are being offered to
parties who may avail themselves of the benefits presently allowed oil and gas
activities under federal income tax laws. We cannot assure that:
o money invested in a partnership will be recovered,
o any capital contributions to a partnership will be expended
and result in any tax deductions in the year such
contributions are received by a partnership,
o federal income tax laws or the present interpretation of
those laws will not be changed, or that
o any position taken by a partnership or a drilling program on
its federal income tax returns will not be challenged by the
IRS.
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In addition, federal income tax provisions may:
o limit deductions,
o trigger or increase a partner's liability for the alternative
minimum tax on tax preference items,
o increase tax liability on the disposition of interests,
o or otherwise increase the federal income tax liability of a
partner.
Notwithstanding enactment of additional legislation or interpretations of
legislation which might require different treatment from the discussion under
"Tax Aspects," a partnership is authorized to expend the proceeds from the sale
of interests and to conduct its business and operations as described in this
prospectus. Each item of partnership income, gain, loss, or deduction will be
shared or borne financially in the manner specified in this prospectus. It is
suggested that you obtain professional guidance from your tax advisor in
evaluating the tax risks involved in investing in a partnership.
FORWARD LOOKING STATEMENTS
Forward-looking statements are inherently uncertain some statements
under the captions "Summary of Offering," "Risk Factors," "Application of
Proceeds," and elsewhere in this prospectus are forward-looking statements.
These forward-looking statements include, but are not limited to, statements
about our industry, plans, objectives, expectations, intentions and assumptions
and other statements contained in the prospectus that are not historical facts.
When used in this prospectus, the words "expect," "anticipate," "intend,"
"plan," "believe," "seek," "estimate" and similar expressions are generally
intended to identify forward-looking statements. Because these forward-looking
statements involve risks and uncertainties, including those described in this
"Risk Factors" section, actual results may differ materially from those
expressed or implied by these forward-looking statements. We do not intend to
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. Market data and forecasts used in this
prospectus have been obtained from independent industry sources. Although we
believe these sources are reliable, we do not guarantee the accuracy and
completeness of historical data obtained from these sources and we have not
independently verified these data. Forecasts and other forward-looking
information obtained from these sources are subject to the same qualifications
and the additional uncertainties accompanying any estimates of future market
size.
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DEFINITIONS
The following are definitions of certain terms used in this
prospectus. In order to fully understand the terms of this offering, you should
read these definitions carefully.
"Administrative Costs" shall mean all customary and routine expenses
incurred by the managing partner or its affiliates for the conduct of the
administration of a partnership or a drilling program, including: legal,
finance, accounting, secretarial, travel, office rent, telephone, data
processing, and other items of a similar nature.
"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 partnerships, for or of which the managing
partner or an affiliate thereof serves as manager or managing partner or acts
in a similar capacity.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Development Well" shall mean a well drilled within the proved area of
an oil or gas reservoir to the depth of a stratigraphic zone or horizon known
to be productive, including, without limitation, a well drilled as an
additional well to the same reservoir as another producing well on an oil and
gas lease, drilled to the same reservoir which previously contained a producing
well, drilled on an offset oil and gas 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 a drilling program and generally attributable to
the goods and services provided to the drilling program by parties other than
the managing partner or its affiliates. Direct costs shall not include any cost
otherwise classified as Organization and Offering Expenses, Administrative
Costs, Operating Costs, or Lease Acquisition Costs. Direct Costs 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."
"Due Diligence Fees" shall mean fees to be paid to the soliciting
dealers, which may be in an amount of up to .5% of the sales price of interests
sold to persons other than
o officers, directors or employees of the managing partner or
its affiliates,
o officers, directors, employees, or registered representatives
of a soliciting dealer, or
o an affiliate of the managing partner.
"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.
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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 in such leases, 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.
o 246,080 acres, of which no more than 200,000 may be under
option, in any one state other than Alaska and
o 300,000 acres, of which no more than 200,000 may be under
option, in each of the northern and southern leasing
districts of Alaska.
"Exploratory Well" shall mean a well drilled to find commercially
productive hydrocarbons in an unproven area, to find a new commercially
productive zone or horizon in a field previously found to be productive of
hydrocarbons at another zone or horizon, or to significantly extend a known
prospect.
"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.
"Intangible Drilling Costs" means those expenditures associated with
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; and includes all expenditures made with respect to any well prior to
the establishment of production in commercial quantities for wages, fuel,
repairs, hauling, supplies and other costs and expenses incident to and
necessary for the drilling of such well and the preparation of such well for
the production of oil or gas, that are currently deductible pursuant to Section
263(c) of the Code and Treasury Reg. Section 1.612-4, which are generally
termed "intangible drilling and development costs," including the expense of
plugging and abandoning any well prior to a completion attempt. The term
Intangible Drilling Costs shall not include Lease Acquisition Costs.
"Lease Acquisition Costs" means, when used to describe the costs of
any oil and gas lease, the sum of
(a) all monetary consideration paid or given for the oil and gas
lease to a non-affiliate of the managing partner, including
but not limited to lease bonuses and advance rentals paid to
a non-affiliate of the managing partner,
(b) all costs of lease acquisition and title examination
including but not limited to curing or defending title, title
insurance or examination costs, brokerage commissions, the
fees and wages of landsmen and lease brokers and their
expenses, filing fees, recording costs, transfer taxes, and
like charges paid in connection with the acquisition of the
oil and gas lease,
(c) all delay rentals and other similar payments and ad valorem
taxes paid by the seller with respect to the oil and gas
lease,
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(d) such portion as may be allocated to the oil and gas lease in
accordance with generally accepted accounting principles and
industry standards of all reasonable, necessary, and actual
costs and expenses of the managing partner or its affiliates
for geological, geophysical, seismic, land, engineering,
drafting, accounting, legal, and other like services together
with related 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 the oil and gas lease in
accordance with generally accepted accounting principles and
industry standards of all costs and expenses incurred in the
acquisition of farmouts, subleases, pooling orders, or other
oil and gas interests,
(f) interest and points actually incurred on funds borrowed to
pay any of the costs and expenses described in clauses (a)
through (e) above calculated from the date of their
incurrence until the date of their reimbursement by a
drilling program at the time the oil and gas lease is
acquired by the drilling program, and
(g) with respect to oil and gas leases held on the date of this
prospectus by or acquired after such date by the managing
partner or an affiliate of the managing partner, an interest
in which is transferred to the participants pursuant to the
drilling program agreement, the costs of such transfer;
provided that the expenses described in clauses (c), (d),
(e), and (f) shall have been incurred by the managing partner
or its affiliates not more than 36 months prior to the
acquisition by a drilling program of the oil and gas lease;
and provided further, that such time limitation shall not be
applicable to an oil and gas lease having a primary term of
five or more years.
Lease Acquisition Costs of an oil and gas lease shall not include any costs or
expenses which represent costs or expenses incurred in connection with the past
drilling of wells which are not producers of sufficient quantities of oil or
natural gas to make commercially reasonable their continued operation.
"Operating Agreement" shall mean a Model Form Operating Agreement
based upon the American Association of Petroleum Landsmen 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.
"Organization and Offering Expenses" shall mean all costs and expenses
incurred by the managing partner and its affiliates in connection with the
organization of a partnership and a drilling program, the registration of the
interests for offer and sale under applicable federal and state securities
laws, and the offer and sale of the interests, including without limitation,
fees paid to persons performing due diligence examinations or otherwise acting
in relation to a partnership or the managing partner with respect to the
offering and sale of the interests and all expenses reasonable for the managing
partner and its affiliates incurred in assisting with the distribution of the
interests or such due diligence, 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.
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"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.
o "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:
o "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
o "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.
o "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.
"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 a drilling
program's or a partnership's business.
"Sales Commissions" shall mean the sales commissions to be paid to the
soliciting dealers, which may be in an amount of up to 8% of the sales price of
interests sold to persons other than:
o officers, directors or employees of the managing partner or
its affiliates
o officers, directors, employees, or registered representatives
of a soliciting dealer
o an affiliate of the managing partner.
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"Sharing Ratio" shall mean for any partner in a partnership the
proportion obtained by dividing
o the amount of such partner's capital contribution to the
partnership by
o the sum of all capital contributions paid by all partners to
that partnership;
provided that in the event of an assignment (voluntarily, by operation of law
or the partnership agreement or otherwise) by a partner of interests in a
partnership (other than an assignment solely of an interest in distributions of
partnership revenues), the Sharing Ratio of such partner shall be
proportionately reduced, based upon the number of interests assigned compared
to the total number of interests owned by such partner, 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.
"Special Subscription Instructions" shall mean the special
subscription instructions in the form of Exhibit C hereto.
"Sponsor" shall mean any person directly or indirectly instrumental in
organizing, wholly or in part, a partnership or any person who will manage or
is entitled to manage or participate in the management or control of a
partnership. Sponsor includes the managing partner and any other person who
actually controls or selects any person who controls 25% or more of the
exploratory, developmental, or producing activities of a partnership or any
segment 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. The term Sponsor shall also be deemed to
include its affiliates.
"Subscription Agreement" shall mean, a subscription agreement in the
form of Exhibit D hereto.
"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.
"Tangible Costs" shall mean those costs association with drilling and
completion of oil and gas wells which are generally accepted as capital
expenditures pursuant to the provisions of the Code; and includes all costs of
equipment, parts and items of hardware used in drilling and completing a well,
and those items necessary to deliver acceptable oil and gas production to
purchasers to the extent installed downstream from the wellhead of any well and
which are required to be capitalized pursuant to applicable provisions of the
Code and regulations promulgated thereunder.
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TERMS OF THE OFFERING
GENERAL
Mewbourne Development Corporation, as managing partner, is offering to
qualified investors during 1999 an aggregate of up to 4,000 ($4,000,000)
limited partner interests and up to 16,000 ($16,000,000) general partner
interests in a series of two partnerships. The minimum offering amount for a
partnership is 1,000 interests ($1,000,000) with the maximum offering amount
being 10,000 interests ($10,000,000). Each partnership will be a distinct
entity, and a purchaser of interests in any one partnership will not obtain an
interest in the other partnership. No partnership will commence operations
prior to the termination of the subscription period for interests. Each
partnership will participate, together with us and our affiliate Mewbourne Oil
Company, in a drilling program. Pursuant to the drilling program agreement, the
activities of each partnership will focus upon the acquisition of oil and gas
leases covering prospects, the drilling of Development Wells and the production
and operation of the resulting properties.
The minimum subscription in a partnership is 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 a
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 other than pursuant to
applicable state securities laws. The managing partner may refuse to accept any
subscription without liability to the subscriber. The managing partner may
reject a subscription if, for example, the prospective investor does not
satisfy the suitability standards or if the subscription is received after the
offering period has terminated. The execution of a Subscription Agreement and
its acceptance by the managing partner also constitute the execution of the
partnership agreement and an agreement to be bound by the terms 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 various documents and instruments.
See "Summary of Partnership Agreement and Drilling Program Agreement -- Power
of Attorney."
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 its affiliate will subscribe for such number of
interests as may be necessary for each partnership to receive the minimum
subscription amount of 1,000 interests ($1,000,000). The number of interests in
a partnership that may be purchased by the managing partner and/or its
affiliates 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
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 Our
Affiliates.
SUBSCRIPTION REFUNDS
If, within 12 months after the admission of the general and limited
partners to a partnership, the partnership has not expended or committed for
expenditure an amount equal to the total capital contributions of the
partnership's investor general and limited partners, the managing partner shall
distribute, as a return of capital, to the general and limited partners on a
pro rata basis the amount of such unexpended and uncommitted partnership funds,
after deducting an amount that the managing partner reasonably determines will
be equal to the operating capital to be required by that partnership that will
not be provided by anticipated revenues from partnership operations. For a
description of the tax consequences resulting from the distribution of such
uncommitted amounts, see "Tax Aspects -- Special Features of Oil & Gas Taxation
- -- Basis and At Risk Rules."
SUBSCRIPTION PERIOD
The subscription period for interests in Mewbourne Energy Partners
99-A, L.P. will commence on the date of this prospectus and terminate on
November 5, 1999, unless we, as managing partner, in our sole discretion,
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accelerate or delay the offering termination date, provided that our ability to
delay the offering termination date is subject to our obligation to return the
purchase price for any interests not invested in a partnership within any
period required by state securities law. The subscription period for interests
in Mewbourne Energy Partners 00-A, L.P. will commence on the date disclosed in
a supplement or amendment to this prospectus. The subscription period for
interests in Mewbourne Energy Partners 00-A, L.P. will expire on December 31,
2000 unless earlier terminated or withdrawn by the managing partner.
A partnership shall not be funded with less than $1,000,000 in capital
contributions from investor general and limited partners. If, at the end of the
subscription period for interests in a partnership, subscription funds of less
than $1,000,000 have been received by us, such funds will be promptly returned
to subscribers.
SUITABILITY STANDARDS
General.
Investment in a partnership involves a high degree of financial risk
and is suitable only for persons of substantial means who have no need for
liquidity in their investment and who can afford to lose all or substantially
all of their investment. In particular, investment as a general partner is
recommended only to those persons who are in a position to benefit from the
treatment given such investment under current federal income tax laws. The
following suitability requirements represent the minimum suitability
requirements for investors in a partnership, and the satisfaction of such
requirements by a prospective investor does not necessarily mean that an
investment in a partnership is a suitable investment for that investor.
Based upon the information provided by each subscriber concerning
his/her investment objectives, other investments, financial situation and
needs, and any other pertinent information, each person offering and selling
interests is required to make every reasonable effort to assure that the
purchase of interests and an investment in a partnership are an appropriate
investment for an investor in light of the suitability standards set forth in
this prospectus and that an investment in interests is consistent with such
investor's investment objectives and financial situation. In addition, such
persons will make every reasonable effort to assure that:
o 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,
o the subscriber has a fair market net worth sufficient to
sustain the risks inherent in an investment in a partnership,
including loss of investment and lack of liquidity,
o an investment in a partnership is otherwise suitable for such
subscriber, and
o they have a reasonable basis to believe that the subscriber,
along or with one or more representatives, advisors, or
agents has the knowledge and experience in financial and
business matters to be capable of evaluating the merits and
risks of the offering.
Such information will be maintained by the managing partner and the applicable
soliciting dealer for at least six years.
Minimum Suitability Standards
Each subscriber for interests must represent in writing that he/she
has:
o a minimum annual gross income of $60,000 and a minimum net
worth of $60,000 exclusive of home, home furnishings and
automobiles, or
o a minimum net worth of $225,000 (exclusive of home, home
furnishings and automobiles).
Investors who are residents of the states set forth below may be
subject to higher and/or alternative suitability standards, which are described
below. Additional representations and warranties required of general and
limited
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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 ALABAMA, ARIZONA, IOWA, KANSAS, MICHIGAN, MINNESOTA, MISSISSIPPI,
MISSOURI, NORTH CAROLINA, OHIO, OREGON, PENNSYLVANIA, SOUTH CAROLINA, SOUTH
DAKOTA, TENNESSEE, TEXAS, UTAH, VIRGINIA, WASHINGTON AND WEST VIRGINIA,
RESIDENTS. A resident of the States of ALABAMA, ARIZONA, IOWA, KANSAS,
MICHIGAN, MINNESOTA, MISSISSIPPI, MISSOURI, NORTH CAROLINA, OHIO, OREGON,
PENNSYLVANIA, SOUTH CAROLINA, SOUTH DAKOTA, TENNESSEE, TEXAS, UTAH, VIRGINIA,
WASHINGTON, AND WEST VIRGINIA, and who are subscribers for general partner
interests must represent in writing that he/she has:
o minimum net worth of $225,000 without regard to the
investment in the partnership, exclusive of home, home
furnishings and automobiles, and as to the residents of
Alabama, Minnesota, North Carolina, Pennsylvania, South
Carolina, Tennessee, Texas, Utah, Virginia, Washington and
West Virginia a minimum annual gross income of $100,000 for
the current year and for the two previous years, and as to
residents of Arizona, Iowa, Kansas, Michigan, Mississippi,
Missouri, Ohio, Oregon and South Dakota a taxable income of
$60,000 or more for the previous year and the expectation of
an annual taxable income of $60,000 or more for the current
year and for the next succeeding year, or
o a minimum net worth in excess of $1,000,000, inclusive of
home, home furnishings, and automobiles, or
o a minimum net worth of $500,000, exclusive of home, home
furnishings and automobiles, or
o a minimum annual gross income of $200,000 in the current year
and the two previous years.
The subscriber must also represent in writing that the investment in a
partnership does not represent more than ten percent of the subscriber's net
worth, less the value of the subscriber's other investments in limited
partnership interests.
For CALIFORNIA Residents. A resident of the State of CALIFORNIA who
subscribes for limited partner interests must represent in writing that he/she
has:
o a net worth of at least $250,000 or more, exclusive of home,
home furnishings, and automobiles and had during the last tax
year or estimates that he/she will have during the current
tax year, a gross annual income of $65,000 or more, or
o a net worth of $500,000 or more, exclusive of home, home
furnishings, and automobiles.
A resident of the State of CALIFORNIA who subscribes for general
partner interests must represent in writing that he/she has:
o a net worth of at least $250,000 or more, exclusive of home,
home furnishings, and automobiles and had during the last tax
year, or estimates that he/she will have during the current
tax year, a gross annual income of $120,000 or more, or
o a net worth of $500,000 or more, exclusive of home, home
furnishings, and automobiles, or
o a net worth of $1,000,000 or more, inclusive of home, home
furnishings, and automobiles, or
o had during the last tax year, or estimates that he/she will
have during the current tax year, a gross annual income of
$200,000 or more.
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For MICHIGAN and OHIO Residents. A resident of MICHIGAN OR OHIO must
represent that the investment in a partnership does not exceed ten percent of
the subscriber's individual or joint net worth, exclusive of home, home
furnishings, and automobiles.
For TENNESSEE Residents. A resident of the State of TENNESSEE who
subscribes for interests must, at a minimum, represent in writing that he/she
has:
o an individual net worth of at least $250,000, exclusive of
home, home furnishings, and automobiles, and had during the
last tax year and estimates that he/she will have during the
current tax year, a gross income of at least $65,000, or
o a net worth of at least $500,000, exclusive of home, home
furnishings, and automobiles.
Additional Requirements.
IN THE CASE OF SALES TO IRAS, KEOGH PLANS, AND VARIOUS 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 A 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 A 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 general and
limited partners must also meet the suitability requirements discussed above,
provided that the requirements with respect to net worth and taxable income may
be waived at the managing partner's discretion under limited circumstances,
including transfers of interests by an investor partner to a dependent or to a
trust for the benefit of a dependent or transfers by will, gift, or by the laws
of descent and distribution.
For CALIFORNIA Residents. Assignability or transfer of an interest is
limited so that no assignee or assignor, transferee or transferor may hold less
than $5,000 in interests. See the Special Subscription Instructions for
restrictions that limit the transferability of interests.
For NORTH CAROLINA Residents. The minimum subscription in a
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 each partnership will acquire interests in
federal oil and gas leases, thus subscriptions for interests will not be
accepted from a person who is not an Eligible Citizen. In general, an Eligible
Citizen is any person who is a citizen of the United States or is otherwise
eligible to be qualified to hold an interest in oil and gas leases on federal
lands, including offshore areas, under federal laws and regulations in effect
from time to time. Each prospective investor must represent in writing that he
or she is an Eligible Citizen.
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SUBSCRIPTION PROCEDURE
An eligible subscriber may subscribe for interests in a partnership
prior to the end of the subscription period for the partnership by properly
completing, executing, and delivering the following documents to his soliciting
dealer:
a. A Subscription Agreement; and
b. A check payable to the order of "Bank of America, Escrow Agent
for Mewbourne 99-00 Drilling Program" in an amount equal to the purchase price
for the number of interests to be purchased by that investor.
The managing partner will not accept any Subscription Agreement that
has been executed by someone other than the investor, except a Subscription
Agreement on the part of a fiduciary account that has been executed by an
individual having the legal power of attorney to so act. Unless a subscription
is rejected by the managing partner at any time prior to the admission of
general and limited partners to a partnership or the managing partner elects
not to admit general and limited partners to a partnership, fully paid
subscriptions in proper form will be deemed accepted, subject to reduction in
accordance with the Subscription Agreement. By its terms, the Subscription
Agreement constitutes a binding agreement of the subscriber. Subject to the
right of the managing partner to reject subscriptions, each subscriber will
become an investor partner in a partnership at the time he is admitted to the
partnership. General and limited partners will be admitted to a partnership
contemporaneously with the release of the funds from the escrow account, and
thereafter general and limited partners will be admitted to a partnership not
later than the last day of the calendar month in which their subscriptions were
accepted by the managing partner. Subscriptions will be accepted or rejected by
the managing partner within 30 days of their receipt or such other shorter time
period as may be required by applicable laws of the state in which the
subscriber resides. If a subscription is rejected, the subscription funds
tendered in connection therewith will be immediately returned to the
appropriate subscriber without interest or deduction for expenses. If general
and limited partners are not admitted to a partnership on or before the
expiration of the subscription period for interests in that partnership, all
subscription funds relating to that partnership will be immediately returned in
full, together with any interest thereon, to the appropriate subscribers.
Subscription funds will be deposited in an escrow account at Bank of
America, N.A., Tyler, Texas, or another federally insured institution
designated by the managing partner; provided that upon receipt and clearance of
aggregate subscription funds of $1,000,000 or more from subscribers that the
managing partner deems suitable to be general and limited partners in a
partnership, the managing partner may, upon written request, cause those
subscription funds to be withdrawn from the escrow account and to be deposited
in an account established for that partnership and all subscribers whose
subscriptions have been accepted shall be admitted as an investor partner in
that partnership within 15 days after such deposit. Thereafter, subscription
funds will be deposited in a partnership account with each subscriber whose
subscription has been accepted being admitted as an investor partner in that
partnership no later than the last day of the calendar month in which such
subscription was accepted. Until subscribers are admitted as general or limited
partners in a partnership, no expenses may be paid from the partnership
account. Each subscriber whose subscription has been accepted and who has been
admitted as an investor partner will be provided confirmation of such
acceptance and admission. Funds deposited in the escrow account or partnership
account will be invested in time deposits, short-term bank certificates of
deposit, short-term governmental obligations, U.S. treasury bills, 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 a
partnership.
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After the subscription period for a partnership has expired, no
additional interests in the partnership will be offered or sold. Notice of the
admission of general and limited partners to a partnership and the percentage
of ownership of each investor partner in that partnership will be furnished to
each investor partner following their admission to the partnership.
Pending their use in partnership activities, the managing partner
intends to invest the balance of the capital contributions in time deposits,
short-term governmental obligations, U.S. treasury bills, money market
accounts, commercial paper and similar investments. Any interest earned on
capital contributions from investor general and limited partners will be
allocated solely to the investor general and limited partners, and will be
distributed to the general and limited partners periodically. See
"Participation in Costs and Revenues." Funds of a partnership will not for any
purpose be commingled with funds of any partnership, the managing partner or an
affiliate of the managing partner or any other entity.
NO SUBSCRIPTION AGREEMENT WILL BE ACCEPTED UNTIL AT LEAST 5 BUSINESS
DAYS HAVE ELAPSED FROM THE DATE THAT THE SUBSCRIBER RECEIVED A COPY OF THIS
PROSPECTUS.
CONVERSION OF GENERAL PARTNER INTERESTS
We anticipate that the general partner interest in a partnership held
by a general partner (a "Converted Partner") will be converted to a limited
partner interest in that partnership following the completion of that
partnership's drilling activities; which we anticipate will occur within
approximately 8 to 15 months after the funding of that partnership. Generally,
the discussion in this prospectus relating to limited partners and limited
partner interests, other than the discussion of the federal income tax
consequences of an initial investment as a limited partner, will apply to
Converted Partners after the time of such conversion. However, Converted
Partners will continue to have the rights and obligations of general partners
with respect to activities occurring prior to conversion, including liability
for the partnership's obligations. See "Liability of General and Limited
Partners -- General Partners." Furthermore, the tax treatment of Converted
Partners will in some respects be determined by their previous status as
general partners. See "Tax Aspects -- Partnership Taxation -- Conversion of
General Partner Interests" and "Tax Aspects -- Special Features of Oil and Gas
Taxation -- Passive Activity Loss Limitations." If the managing partner
determines that the conversion of the general partner interests in a
partnership to limited partner interests will have an adverse effect on the
general partners or the partnership, due to adverse tax consequences or other
reasons, the managing partner may delay the conversion or may elect not to
convert the general partner interests; provided that if the managing partner
determines that such conversion would not be in the best interests of the
general partners or the partnership, the insurance coverage limits as set forth
under "Proposed Activities -- Insurance" will not be reduced unless such
coverage becomes unobtainable or is only available at premiums which are
prohibitively more expensive than the premiums now being paid for such
policies.
RIGHT OF PRESENTMENT
Each investor partner in a partnership may request in writing that the
managing partner purchase for cash all, but not less than all, of that investor
partner's interests on the terms and subject to the limitations set forth below
(the "Right of Presentment"). The managing partner may cause its affiliate to
fulfill its obligation to purchase an investor partner's interests. Partners in
a partnership formed in 1999 may make such requests in each of the years 2003
through 2008 and partners in a partnership formed in 2000 may make such
requests in each of the years 2004 through 2008. 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 any
time at the option of the managing partner. Any such listing could have an
adverse effect on the tax consequences of an investment in interests. See "Tax
Aspects - Partnership Taxation." If the obligation of the managing partner or
its purchaser designee to purchase interests from general and limited partners
is determined to violate any existing or future laws, such obligation will be
eliminated or modified appropriately.
The obligation of the managing partner to purchase interests in a
partnership in any single calendar year is limited to no more than 5% of the
total number of interests of that partnership outstanding at the beginning of
such calendar year; provided, however, the total amount of funds that the
managing partner directly and by means of a purchaser designee is required to
expend in any single calendar year to purchase partnership interests from
investors in all of the oil and gas drilling partnerships as to which the
managing partner or an affiliate of the managing partner
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serves as Sponsor shall not exceed $500,000. Additionally, if subsequent to the
Valuation Date (defined below), the price for either oil or gas received by a
partnership from its program wells decreases by 20% or more as compared to the
price being received as of the Valuation Date, then the managing partner may in
its sole and absolute discretion refuse to purchase any interests in that
partnership.
During the first calendar quarter of each of the years during which
the Right of Presentment exists, each investor partner in a partnership may
request in writing that the managing partner purchase all, but not less than
all, of his interests. Prior to May 31 of each such year, the managing partner
will notify each requesting investor partner of the amount that the managing
partner or its purchaser designee will pay to purchase each interest and those
general and limited partners shall have twenty (20) days from the receipt of
such notice in which to elect whether to present their interests for purchase.
If a greater number of interests are presented than the managing partner is
required to purchase, the interests to be purchased will be selected by lot or
by such other method as the managing partner deems reasonable. Interests that
are not purchased will not have any priority with respect to purchase in
subsequent years.
The purchase price paid to an investor partner upon repurchase of his
interests in a partnership will be the pro rata share represented by his
interests of the sum of:
o 65% of the unescalated value of future net revenues
attributable to Proved Developed Producing Reserves of that
partnership, and
o 50% of the unescalated value of future net revenues
attributable to Proved Developed Non-Producing Reserves of
that partnership, as such are determined by an Independent
Expert selected by the managing partner and after such value
has been discounted as described below, less the share of
that partnership's debts, expenses, and obligations of all
kinds incurred and then allocable to those interests.
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, a partnership will cause an Independent Expert to estimate annually
the future net revenues attributable to the partners' interests in that
partnership's Proved Reserves on an unescalated basis based upon pricing for
oil and gas being received by that partnership as of the Valuation Date. Such
future net revenues attributable to Proved Reserves:
o will first be adjusted by the Independent Expert to reflect
the risks of production and development of such reserves and
any other economic contingencies that normally would be
considered by a purchaser of Proved Reserves and
o will then be discounted to present value at a rate equal to
10%.
A selling investor partner will be entitled to no further partnership
distributions with respect to the interests he has sold after the date on which
payment of the purchase price is tendered by the managing partner or its
purchaser designee.
Although the managing partner anticipates that its financial
resources, including its borrowing capabilities, will be sufficient to meet its
purchase obligations under the Right of Presentment, no assurance can be given
that contingencies will not arise which will require funding beyond the
financial resources committed to it. Therefore, there can be no assurance that
either the managing partner or its affiliates will have sufficient funds
available to meet the obligation to purchase interests pursuant to the Right of
Presentment. If the managing general partner assigns or transfers its interest
in a partnership, the assignee of such interest will be required to assume the
withdrawing managing partner's obligations with respect to the Right of
Presentment.
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An investor who sells his interests 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 from such reserves are
based on variable and uncertain factors and assumptions, including the price at
which production can be sold, and amounts of actual production and net revenues
will vary from the estimates. Estimates made during the first few years of
production from a property will be based on relatively little production
history and generally are less reliable than estimates based on a longer
production history. Accordingly, reserve estimates and estimates of future net
revenues from production are likely to vary from year to year. For these and
other reasons, the price paid for purchased interests may be less than the fair
market value or initial price of such interests.
The sale of interests 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."
ADDITIONAL FINANCING
General. The actual costs of the proposed drilling activities of a
drilling program may exceed the estimated costs of such activities and it is
possible that additional funds in addition to the initial contributions from
the participants in that drilling program may be required to complete such
drilling activities, to further develop the drilling program's oil and gas
leases and to pay for other drilling program operations. The partnership
agreement does not provide for any additional assessments, either mandatory or
voluntary of any general and limited partners. Thus, it is anticipated that a
partnership's share of such additional expenditures will be financed by
partnership borrowings, partnership revenues or the proceeds of sale of
partnership properties. There can be no assurance that such additional funds
can be obtained, and if they cannot be obtained a partnership might have to
forego further drilling activities or development of the related drilling
program's oil and gas leases. Also, the terms of oil and gas leases may bind
the participants in the drilling program to a specified drilling schedule and
the inability of a partnership to fund on a timely basis its portion of the
cost of such additional specified drilling could result in the forfeiture of a
partnership's interest in such oil and gas leases. Further, the inability to
finance additional activities could result in the sale of undeveloped acreage
or farmouts to independent parties or to affiliates of the managing partner
including Affiliated Programs, under which circumstances a partnership may not
realize the full value of its properties.
Limitation on Borrowings. The partnership agreement authorizes the
managing partner to borrow money on behalf of a partnership and to mortgage or
pledge a partnership's property, including production from such property, as
security and to engage in any other method of financing customary in the oil
and gas industry. The sum of outstanding borrowings by a partnership may not at
any time exceed 20% of the aggregate capital contributions to the partnership.
The partnership agreement permits borrowing to finance partnership operations,
including without limitation drilling and completion activities. A partnership
may borrow funds only if the lender agrees that it will have no recourse
against the individual general and limited partners. Borrowings may be secured
by a partnership's assets or income and may be made with or without recourse to
the managing partner. The managing partner contemplates, however, that any
borrowing by a partnership will be incurred without recourse to the managing
partner and will be secured by the partnership's property. The managing partner
does not presently intend to guarantee nonrecourse loans by third parties to a
partnership. A partnership's ability to borrow will depend in large part upon
the success of its drilling activities. There is no assurance that the managing
partner will be able to secure nonrecourse financing in an amount sufficient to
conduct drilling operations if such financing is sought, that any such
financing can be secured without the guarantee of the managing partner or an
affiliate of the managing partner or that financing can be obtained at
satisfactory interest rates or terms. A partnership's borrowings will be repaid
from the partnership revenues allocable to the partners, reducing the amounts
available for distribution to them and creating the risk that an investor
partner's share of a partnership's taxable income may be greater than the
amounts distributed to him. See "Tax Aspects -- Partnership Taxation --
General."
The partnership agreement further authorizes the managing partner and
its affiliates to make loans to a partnership for purposes permitted by the
partnership agreement. Interest charged by the managing partner or the
affiliate of the managing partner on advances made by the managing partner or
such affiliate to a partnership will be at a rate not in excess of the lesser
of the effective rate then being paid by the managing partner or the affiliate
for similar type borrowings or the highest lawful rate, and in no event at a
rate in excess of the amount which would be
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charged to the partnership by independent third parties for the same purpose.
The managing partner or an affiliate of the managing partner may not receive
points or other financing charges or fees on advances made by it to a
partnership. In addition, a partnership may not make loans to the managing
partner or any affiliate of the managing partner. The managing partner may
pledge its interest in a partnership but may not pledge partnership assets for
its own benefit. The managing partner however, may pledge its directly owned
interest in drilling program properties at any time and may sell its working
interests in drilling program properties pursuant to the drilling program
agreement after the cessation of substantially all drilling activities of such
drilling program.
PLAN OF DISTRIBUTION
Subscription for interests will be solicited 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 of the National Association of Securities Dealers, Inc. Mewbourne
Securities, Inc., an affiliate of the managing partner, is a broker-dealer
which may act as a soliciting dealer for the partnerships. While there is no
limitation on the number of interests that may be sold by Mewbourne Securities,
it is anticipated that the number of interests, if any, sold by Mewbourne
Securities will not be material.
Each soliciting dealer will receive Sales Commissions and Due
Diligence Fees in an aggregate amount of up to 8.5% of the sales price of
interests sold by that soliciting dealer. No Sales Commissions or Due Diligence
Fees will be paid on sales of interests to:
o officers, directors, or employees of the managing partner or
its affiliates,
o officers, directors, employees, or registered representatives
of a soliciting dealer, or
o an affiliate of the managing partner.
The total commission and fees paid to a particular soliciting dealer
may be comprised of a Sales Commission in an amount up to 8% of the sales price
of interests in a partnership sold by the soliciting dealer, and a Due
Diligence Fee in an amount of up to .5% of the sales price of interests sold by
the soliciting dealer; provided that the aggregate commission and fees paid to
a soliciting dealer shall not exceed 8.5% of the sales price of interests in a
partnership sold by the soliciting dealer.
The managing partner has engaged its affiliate, Mewbourne Securities,
Inc. to serve as the dealer manager for purposes of forming a soliciting dealer
group comprised of members of the National Association of Securities Dealers,
Inc. Mewbourne Securities, Inc., in its role as dealer manager and each
soliciting dealer participating in the offering of the interests may be deemed
to be an underwriter within the meaning of the Securities Act of 1933. The
managing partner and the partnerships have agreed to indemnify the soliciting
dealers, including Mewbourne Securities, Inc., against various civil
liabilities, including liabilities arising under the Securities Act of 1933.
In offering the interests, in addition to this prospectus, the
managing partner has prepared and intends to provide soliciting dealers and
investors with a brochure entitled "Mewbourne Energy Partners" concerning the
offering of the interests. Prior to the distribution, such sales materials must
be filed with and reviewed by the Securities and Exchange Commission, various
state securities administrators and by state regulatory authorities. When
utilized, such sales material must be accompanied or preceded by a prospectus.
No other sales material has been authorized by the managing partner for use in
connection with this offering.
INVESTMENT OBJECTIVES
Each partnership will participate in a drilling program, to be managed
by Mewbourne Oil Company in its capacity as drilling program manager,
consisting of the acquisition and development of oil and gas prospects. The
primary investment objective of each partnership is to conduct oil and gas
drilling and development activities on prospects in an attempt to establish
long-life oil and gas reserves. In addition, a drilling program's structure is
intended to result in tax benefits, consisting principally of deductions for
Intangible Drilling Costs, depletion, and
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depreciation. To the extent that the operations of a partnership and the
related drilling program result in a net loss for a taxable period, general
partners will be able to claim their respective shares of the deductions giving
rise to such loss in the current year, but limited partners will not be able to
claim their shares of the deductions comprising such loss in the current year
except to the extent they have net passive income from other sources. See
"Proposed Activities" and "Tax Aspects."
PROPOSED ACTIVITIES
Pursuant to the drilling program agreement, the activities of the
partnerships will focus upon the acquisition of oil and gas leases covering
prospects, the drilling of Development Wells, and the production and operation
of the resulting properties. In addition to Development Wells, at the
discretion of the managing partner, up to 20% of a partnership's capital
contributions may be expended in connection with activities relating to
Exploratory Wells. All drilling activities involve a high degree of risk with
Exploratory Wells presenting a higher degree of risk than Development Wells.
Mewbourne Development Corporation will act as the managing partner of each
partnership. See "Summary of Partnership Agreement and Drilling Program
Agreement -- Rights and Powers of the Managing Partner." Mewbourne Oil Company
will act, in its individual capacity, as the drilling program manager of each
drilling program and as operator under each Operating Agreement.
The managing partner intends to cause the partnerships to engage in
drilling for oil and gas on a number of different prospects, none of which is
yet determined. For a number of reasons, it is impossible at this time to
predict with certainty the drilling activities that will be conducted by either
partnership. Among these reasons are that neither partnership has yet to
acquire working interests or other rights to any particular oil and gas leases
and it will do so only after the prospective offering of interests is
completed. Further, the amount of capital that will be raised by a partnership
as a result of this offering has not yet been determined. The result of the
initial drilling activities conducted by a partnership also may have a
significant effect on the number and location of subsequent wells. Decisions as
to the management, business, and affairs of a partnership will be made by the
managing partner based upon its judgment at the time as to the best interests
of the partnership.
DEVELOPMENT POLICY
Decisions as to the number and location of the prospects in which a
partnership will invest and as to the amounts spent on drilling will be made
solely by the managing partner for the partnership and by the drilling program
manager on behalf of the related drilling program. The managing partner intends
to cause each partnership to acquire an interest in as many prospects as
practicable in order to best diversify the risks associated with drilling for
oil and gas, however, the number and type of wells to be drilled by a
partnership will vary according to the amount of funds raised, the costs of
each well and the size of the fractional working interests selected in each
well.
The managing partner will designate in writing the area comprising a
prospect in which a partnership is to acquire an interest pursuant to the
related drilling program agreement at or prior to the date on which a well is
spudded (i.e., boring is commenced) on such prospect. The prospect area may be
enlarged or contracted from time to time by the managing partner on the basis
of subsequently acquired geological and engineering data to define or redefine
the productive limits of the original area of the prospect. Notwithstanding the
foregoing, with respect to any large, continuous known stratigraphic trend
which could be defined as a continuous reservoir, the managing partner, acting
in good faith, shall be permitted to limit or reduce the area of a prospect to
the minimum area permitted by state law or local practices whichever is
applicable, to protect against drainage from adjacent wells.
AREA OF GEOGRAPHIC CONCENTRATION
The managing partner anticipates that all of a partnership's funds
available for drilling activities will be expended in the Permian Basin,
located in West Texas and Southeastern New Mexico, and also the Anadarko Basin,
located in Western Oklahoma, the Texas Panhandle and Southwest Kansas. However,
if the managing partner determines that it is in the best interest of a
partnership to conduct additional drilling activities in other onshore
geographic areas of the United States, the related drilling program and the
partnership may expend available funds in such areas. At the present time, the
partnerships are not committed to any specific drilling sites. No geological,
engineering or other information about any geographic area, other than that
contained in this prospectus, will be
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furnished to any prospective investor and, for that reason, no person should
invest in a partnership on the basis of any expectation regarding the results
of drilling on any particular drilling location.
The Permian Basin encompasses a large area of approximately 75,000
square miles located in West Texas and Southeastern New Mexico. Since 1921,
over 26 billion barrels of oil and 76 trillion cubic feet of natural gas have
been produced from the Permian Basin.
Two interior basins, the Midland Basin in West Texas and the Delaware
Basin in West Texas and Southeastern New Mexico, subdivide the Permian Basin.
Although drilling depths range from very shallow to more than 20,000 feet, the
managing partner and its affiliates target multiple Pennsylvanian and Permian
age sandstone and carbonate reservoirs along the shelf and shelf-slope areas
within the interior subbasins, which lay at depths ranging from 3,000 to 13,000
feet.
Over the past 34 years, Mewbourne Oil Company and its affiliates have
conducted operations throughout the Permian Basin. Mewbourne Oil Company
currently operates approximately 172 wells in the Permian Basin and Mewbourne
Oil Company and its affiliates have drilled approximately 168 commercially
productive oil and gas wells in the Permian Basin. These historical results are
not indicative of the results that may be achieved by the partnerships and such
results should not be used by potential investors in making an investment
decision. In addition, a commercially productive well may not necessarily have
sufficient production to recover both operating expenses and drilling and
development costs. Most current operations are centered on the shelf and along
shelf slope areas of the Delaware Basin located in Eddy, Chaves, and Lea
County, New Mexico. It is anticipated that each partnership will, through the
related drilling program, conduct a portion of its oil and gas drilling and
development activities in this area of the Permian Basin. Predominantly, wells
drilled by Mewbourne Oil Company in this region of the Permian Basin are
classified as gas wells but produce both oil and gas. However, Mewbourne Oil
Company and its affiliates have drilled a number of wells in this area which
have been classified as oil wells.
The Anadarko Basin of Western Oklahoma, the Texas Panhandle and
Southwestern Kansas encompasses an area of approximately 60,000 square miles.
First production was established in 1917 and since that time over 6 billion
barrels of oil and 80 trillion cubic feet of natural gas have been produced
from this geological basin.
Production in the Anadarko Basin ranges from several hundred feet to
over 26,000 feet in depth. Over the past 23 years, Mewbourne Oil Company and
its affiliates have drilled approximately 344 commercially productive wells
that have targeted Pennsylvanian, Mississippian, Devonian, and Silurian age
sandstone and carbonate reservoirs along the shelf area of Western Oklahoma and
the Texas Panhandle at depths of between 6,000 and 13,000 feet. Mewbourne Oil
Company currently operates approximately 215 wells in the Anadarko Basin. It is
anticipated that each partnership will, through the related drilling program,
conduct a portion of its drilling and development activities along the shelf
area of Western Oklahoma, the Texas Panhandle and Southwest Kansas. A majority
of the wells drilled by Mewbourne Oil Company over the past 23 years in this
region of the Anadarko Basin have been classified as gas wells but produce both
oil and gas. However, Mewbourne Oil Company and its affiliates have drilled a
number of wells in this area which have been classified as oil wells.
PROSPECT EVALUATION
Mewbourne Oil Company currently employs 15 engineers, 8 geologists and
7 landmen which are available to assist in prospect origination for each
drilling program. It is anticipated that Mewbourne Oil Company, as drilling
program manager, will conduct substantially all prospect origination for each
drilling program, although a program may conduct operations on prospects
originated by third parties. Prospect origination is the process of formulating
a geological or geophysical concept and negotiating for the acquisition of a
sufficient interest in oil and gas leases covering the area to warrant drilling
and testing. Before selecting a prospect for a drilling program, the drilling
program manager will review all available engineering and geological data,
which may include, but is not limited to, logs, completion reports and plugging
reports for wells located in the vicinity of the proposed prospect.
COST ESTIMATES
Prior to conducting drilling activities on behalf of a partnership,
the managing partner will estimate the costs to be incurred by a partnership in
drilling the wells planned for the partnership. Such estimates will be based
upon the
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managing partner's historic experience and contracts to be entered into by the
managing partner or its affiliates and non-affiliated drilling contractors
fixing the footage drilling rates, and in limited circumstances stimulation
costs to be incurred by the partnership.
ACQUISITION OF LEASES
The decision for a partnership to acquire an interest in a prospect,
the size and nature of the interest acquired and the terms of each such
acquisition will be based upon evaluations of the properties conducted by the
managing partner after consultation with the drilling program manager or
independent geologists or engineers. To assist in conducting and interpreting
such evaluations, the managing partner or its affiliates employ a staff of
technical personnel. See "Management."
TRANSACTIONS WITH AFFILIATES
Sale of Leases to a Partnership. All oil and gas leases to be acquired
by a partnership or related drilling program will be selected by the managing
partner from a variety of prospects, substantially all of which will be
originated by the drilling program manager. The partnership agreement provides
that neither the managing partner, nor any affiliate thereof, including an
Affiliated Program, is permitted to sell, transfer or convey any oil and gas
lease to a partnership, directly or indirectly, except 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 an oil and gas lease to a 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 oil and gas 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 its affiliate
sells any oil and gas lease within a prospect to a partnership, it must, at the
same time, sell to the partnership an equally proportionate interest in all
other oil and gas leases that it owns in the same prospect.
(c) If at any time within a period of five
years from a partnership's funding, the managing partner or its affiliate
proposes to acquire an interest from a non-affiliated person in a prospect in
which the partnership possesses an interest or in a prospect in which the
partnership's interest has been terminated without compensation within one year
preceding such proposed acquisition, the following conditions will apply:
o if the managing partner or any affiliate of the
managing partner does not currently own property in
the prospect separately from the partnership, then
neither the managing partner nor any affiliate of
the managing partner will be permitted to purchase
an interest in the prospect; and
o if the managing partner or any affiliate of the
managing partner currently owns a proportionate
interest in the prospect separately from the
partnership, then the interest to be acquired will
be divided between that partnership and the managing
partner or an affiliate of the managing partner in
the same proportion as is the other property in the
prospect; provided, however, if cash or financing is
not available to the partnership to enable it to
consummate a purchase of the additional interest to
which it is entitled, then neither the managing
partner, nor any affiliate thereof may purchase any
additional interest in the prospect during such five
year period.
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(d) If the area constituting a partnership's
prospect is subsequently enlarged to encompass any area in which the managing
partner or any affiliate of the managing partner owns a separate oil and gas
lease, such separate oil and gas lease or a portion of such lease must be sold,
transferred, or conveyed to the partnership, if the activities of the
partnership were material in establishing the existence of Proved Undeveloped
Reserves that are attributable to such oil and gas lease.
(e) A sale, transfer, or conveyance of less
than all of the ownership of the managing partner or any affiliate of the
managing partner in any oil and gas lease is prohibited unless the interest
retained by the managing partner or such affiliate is a proportionate working
interest, the respective obligations of the managing partner or such affiliate
and the partnership are substantially the same after the sale of the interest
by the managing partner or such affiliate, and its interest in revenues does
not exceed the amount proportionate to its retained working interest. Neither
the managing partner, nor any affiliate of the managing partner may retain any
overriding royalty interest or other burden on an interest conveyed to a
partnership.
(f) For the purposes of the preceding four
paragraphs, the term "affiliate" does not include an Affiliated Program in
which the interest of the managing partner or an affiliate of the managing
partner is substantially similar to or less than its interest in the
partnership.
(g) If a partnership acquires an oil and gas
lease pursuant to a farmout or joint venture from an Affiliated Program, the
managing partner's, and any of its affiliate's aggregate compensation
associated with the property and any direct or indirect ownership interest in
the property may not exceed the lower of the compensation and ownership
interest the managing partner and such affiliates could receive if the property
were separately owned or retained by either the partnership or such other
Affiliated Program.
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 a Partnership. Neither the managing partner
nor any affiliate of the managing partner, including Affiliated Programs, may
purchase or acquire any oil and gas lease from a partnership, directly or
indirectly, except pursuant to transactions that are fair and reasonable to the
partnership and then subject to the following conditions:
o A sale, transfer, or conveyance, including a farmout, of an
undeveloped oil and gas lease (i.e. an oil and gas lease not
having any Proved Developed Reserves attributable to it) from
a partnership to the managing partner or its affiliate, other
than an Affiliated Program, must be made at the higher of the
Lease Acquisition Costs or fair market value.
o A sale, transfer, or conveyance of a developed oil and gas
lease (i.e. an oil and gas lease having Proved Developed
Reserves attributable to it) from a partnership to the
managing partner or its affiliate, other than an Affiliated
Program in which the interest of the managing partner or its
affiliate is substantially similar to or less than its
interest in the partnership, is not permitted except in
connection with the liquidation of the partnership and then
only at fair market value.
o Except in connection with farmouts or joint ventures made in
compliance with the restrictions described in paragraph (b)
above under the heading "Sales of Leases to a Partnership," a
transfer of an undeveloped oil and gas lease from a
partnership to an Affiliated Program must be made at fair
market value if the oil and gas lease has been held for more
than two years; otherwise, if the managing partner deems it
to be in the best interest of the partnership, the transfer
may be made at the Lease Acquisition Costs.
o Except in connection with farmouts or joint ventures made in
compliance with the restrictions described in paragraph (b)
above under the heading "Sales of Leases to a Partnership," a
transfer of any oil and gas lease from a partnership to an
Affiliated Program, whose investment objective is to directly
acquire, hold, operate and/or dispose of producing oil and
gas properties, must be made at fair market value if the oil
and gas lease has been held for more than six months or there
have been
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<PAGE> 45
significant expenditures made in connection with the oil and
gas lease; otherwise, if the managing partner deems it to be
in the best interest of the partnership, the transfer may be
made at the Lease Acquisition Costs as adjusted for
intervening operations.
A determination of fair market value must be supported by an appraisal
from an Independent Expert. Such opinion and any associated supporting
information must be maintained in the drilling program's records for at least
six years.
Participation by Mr. Mewbourne. Mr. Mewbourne has historically
invested directly or indirectly in the drilling and development activities of
Mewbourne Oil Company and its affiliates during the past 34 years. In addition
he has been an investor in the joint ventures and drilling agreements through
which other investors participated in various Mewbourne Oil Company managed
programs. Mr. Mewbourne's annual participation varied considerably both in
level of investment and form, but in general approximated 25% to 50% of the
annual expenditures.
Mr. Mewbourne and/or affiliates intend to invest alongside each
partnership in the activities of the related drilling program, however, there
is no assurance that the amount of Mr. Mewbourne's participation will be in
accordance with his historical custom. The amount of such investment will be
subject to many variables, including the availability of working interests in
the oil and gas leases, the amount of capital available to the partnerships
from subscriptions, the timing of the drilling activities, and other such
matters.
FARMOUTS
A partnership will acquire only those oil and gas leases that are
reasonably required for the stated purpose of the partnership, and no oil and
gas leases will be acquired for the purpose of subsequent sale or farmout,
unless the acquisition of such oil and gas leases by the partnership is made
after a well has been drilled to a depth sufficient to indicate that such an
acquisition is believed to be in the best interests of the partnership.
The necessity to enter into farmouts is most likely to occur when a
partnership has insufficient funds to bear development costs accompanying an
oil and gas lease or where the development costs or attendant risks are
substantial. The managing partner may arrange for the development or
disposition of a partnership's oil and gas leases by farmout arrangements with
third parties or affiliates, including an Affiliated Program, if the managing
partner, in exercising the standard of a prudent operator, determines that:
o a partnership lacks sufficient funds to drill on the oil and
gas leases and cannot obtain suitable alternative financing
for such drilling,
o the oil and gas leases have been downgraded by events
occurring subsequent to their acquisition by that partnership
so that the drilling of the oil and gas leases would no
longer be desirable to the partnership,
o drilling on the oil and gas leases would result in an
excessive concentration of a partnership's funds in one
location creating, in the opinion of the managing partner,
undue risk to the partnership, or
o the best interests of a partnership would be served by the
farmout.
A partnership will not farmout an oil and gas lease for the primary
purpose of avoiding payment of its costs related to drilling such oil and gas
lease or prospect.
A partnership may also farmin oil and gas leases from third parties or
its affiliates, including Affiliated Programs, in partial or in full
consideration for its agreement to drill one or more wells thereon.
Any farmouts between a partnership and the managing partner or an
affiliate of the managing partner will be on terms substantially consistent
with, in the opinion of the managing partner, those available from
non-affiliated third parties in the same geographic area for similar
arrangements. No farmout shall be entered into between a partnership and the
managing partner or an affiliate of the managing partner unless the managing
partner, exercising the standard of a prudent operator, shall determine that
the farmout is in the best interests of that partnership and the general and
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<PAGE> 46
limited partners. A partnership's authority to enter into farmouts with the
managing partner or an affiliate of the managing partner is subject to the same
restrictions as its authority to purchase property from or sell property to the
managing partner or an affiliate. See "-- Transactions with Affiliates" above.
For a discussion of the prudent operator standard of conduct, see "Conflicts of
Interest -- Fiduciary Responsibility of the Managing Partner."
Any decision with respect to farmouts and farmins and the terms of any
such farmout or farmin to or from a drilling program will involve conflicts of
interest, as the managing partner may benefit from cost savings and reduction
of risk, and in the event of a farmout or farmin to or from an Affiliated
Program, the managing partner will represent both programs involved in the
transaction. See "Conflicts of Interest."
For a discussion of federal income tax risks and considerations
associated with farmouts, see "Tax Aspects -- Special Features of Oil and Gas
Taxation -- Farmouts and Backin Interests."
OPERATIONS
All administration of each drilling program, including the origination
of prospects and the supervision of drilling and completion activities with
respect to those operations for which it is acting as operator, will be
conducted by Mewbourne Oil Company in its capacity as the drilling program
manager. All management functions of a partnership will be conducted by
Mewbourne Development Corporation in its capacity as managing partner. The
drilling program manager will perform all operating services relating to
program wells, and will be entitled to be reimbursed for such services in an
amount equal to all charges, including certain overhead charges, which
constitute direct and indirect charges under the Operating Agreement or other
applicable operating agreements incurred by the drilling program manager in
connection with drilling or operating a program well, including an initial
fixed rate, per- month, overhead charge of $780 for each producing well and
$7,420 for each drilling well. The drilling program manager and affiliates of
the drilling program manager currently employ approximately 97 persons on a
full time basis, many of whom will be engaged in some aspect of a drilling
program's activities. In addition to its own employees, the drilling program
manager may utilize the services of consultants for well drilling and
completion activities, production accounting and other activities. The managing
partner currently employs 3 persons, all of whom are members of the drilling
program manager's executive management group.
Under the drilling program agreement, the drilling program manager has
agreed to act as operator with respect to drilling and production operations
conducted on each program well, except in those instances in which:
o the oil and gas lease on which such program well is to be
drilled is already subject to an existing operating agreement
under which a third party has been designated as operator,
o the requisite number of third parties being joint working
interest owners in such well elect another entity as
operator, or
o the drilling program manager determines in good faith that it
is not in the best interests of the participants in the
drilling program and of the drilling program manager for it
to act as operator.
In any case in which the drilling program manager or its affiliate
acts as operator for a drilling program's properties or provides other services
or materials to a drilling program, it will do so only 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 agreement will precisely
describe the services to be rendered and all compensation to be paid and will
require a partnership and its partners to pay only that portion of the fees
allocable to their working interest. Fees received by the drilling program
manager or its affiliate under any such operating agreement may constitute
additional compensation. See "Compensation and Reimbursement."
With respect to each program well for which the drilling program
manager is to serve as operator, all operations relating to the program well,
including without limitation, all costs and expenditures of drilling, testing,
completing, equipping, and operating the program well shall be conducted
pursuant to an operating agreement between the drilling program manager as
operator, and the participants in the drilling program as non-operator, with
the operating agreement to be substantially in the form and substance as the
Operating Agreement attached hereto as Attachment B to the drilling program
agreement. In the event, at the time of acquisition of an oil and gas lease by
the
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<PAGE> 47
drilling program, such oil and gas lease is subject to another operating
agreement or if the drilling program manager enters into an operating agreement
with third parties being joint working owners in such program well,
nevertheless, the Operating Agreement between the drilling program manager and
the participants in the drilling program shall govern operations as between
them. However, the drilling program manager and the managing partner shall have
the right to amend the Operating Agreement between the drilling program manager
and the participants in the drilling program covering specified oil and gas
leases in order to conform to such other operating agreement, except that the
Operating Agreement may not be amended in any manner that the managing partner
determines will adversely affect a partnership or the general and limited
partners in any material respect. The drilling program manager shall have the
right to charge the joint account under the Operating Agreement between the
drilling program manager and the participants in the drilling program a share
attributable to the participants' working interest of any costs or expenses
incurred by the drilling program manager under such other operating agreement
which are not otherwise provided for in the drilling program agreement or in
the Operating Agreement between the drilling program manager and the
participants in the drilling program.
TITLE TO PARTNERSHIP PROPERTIES
Program wells will be drilled on oil and gas leases having limited
warranties of title, or none at all. As is customary in the oil and gas
industry, the only investigation of title made at the time of acquisition of
undeveloped properties is a preliminary review of local real estate records.
Prior to drilling a program well on a prospect, the drilling program manager
shall cause to be done or be satisfied that there has been done such title
examination and other title curative work as the drilling program manager in
its sole discretion, shall determine to be necessary or appropriate in
accordance with general industry standards. In addition, a drilling title
opinion is generally secured before commencement of drilling operations. Title
to a partnership's properties will be held temporarily in the name of the
drilling program manager in the capacity of nominee, with record title being
transferred to a partnership following commencement of production from a
program well. In certain circumstances a partnership will not receive record
title. These circumstances include without limitation:
o 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
o in the case of a federal, state, or other oil and gas lease,
where an approval to the transfer is required.
In cases where approval of a third party is required in order to
transfer a working interest in an oil and gas lease, the drilling program
manager will take steps to obtain approval of appropriate third parties to the
assignment to the participants in the drilling program as promptly as possible.
INSURANCE
The managing partner expects to conduct the business of each
partnership and to cause the drilling program manager to conduct the business
of each drilling program in a manner intended to limit, to the extent
practicable, the exposure of the general partners to liability in excess of
their capital contributions to that partnership. See "Liability of General and
Limited Partners -- General Partners" for a discussion of the potential
liability of general partners. It is anticipated that drilling activities of
the partnerships will be conducted in the medium depths between 3,000 to 13,000
feet of the Northwest Shelf, and the shelf of the Delaware and Midland Basins,
and Central Basin Platform geological sub-regions of the Permian Basin and the
shelf and the shelf slope area of the Anadarko Basin where the probability of
encountering severely over-pressured formations and other hazards associated
with drilling activities is less likely. The drilling program manager and its
affiliates will maintain extensive insurance coverage to protect, to the extent
practicable, each partnership from losses that could arise in connection with
program activities, including legal and contractual liability to third parties.
The drilling program manager and its affiliates expect to retain the
insurance coverage described below, unless such coverage becomes unobtainable
or is only available at premiums which are prohibitively more expensive than
the premiums now being paid for such policies. However, the drilling program
manager and its affiliates will not be required to retain operator's extra
expense and care, custody and control insurance coverage for a partnership
after the related drilling program has completed its drilling activities.
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<PAGE> 48
A brief discussion of the insurance policies that the drilling program
manager and its affiliates have obtained on behalf of themselves and the
partnerships (collectively, the "Insured") is set forth below. Each of those
policies is subject to terms, conditions, exclusions, and limitations that may
preclude a partnership from recovering damages, expenses, and liabilities
suffered by that partnership, including typically, damages and liabilities
arising from or caused by:
o the violation of any federal, state, or local statute,
ordinance, or regulation,
o fines, penalties, and punitive and exemplary damages,
o war and terrorist acts,
o normal operation including wear and tear,
o faulty design, and
o infidelity of employees.
Other exclusions that are customary in the insurance and oil and gas industries
may also apply, including exclusions relating to pollution and environmental
damages. The drilling program manager believes that from time to time the
terms, conditions, exclusions, and limitations described in this section of the
prospectus may prevent a partnership from recovering the full amount of any
damages, expenses, and liabilities suffered by the partnership which arise in
the event of an accident. In some cases a partnership may not recover any
portion of such damages, expenses, and liabilities.
If the drilling program manager and its affiliates cease to retain the
coverage described below for any reason for a period of more than 20 days
during the subscription period for a partnership, the offering of interests in
that partnership shall cease, and subscribers for interests who have not been
admitted as general and limited partners in the partnership shall receive a
refund of their subscription funds. The managing partner will notify general
and limited partners of any material reduction in the insurance coverage of a
drilling program and partnership. Such notice shall be given thirty days in
advance of the change in insurance coverage. In addition, if a drilling program
or a partnership has its insurance coverage materially reduced for any reason,
the partnership will halt all drilling activity until such time as comparable
replacement coverage is obtained.
The drilling program manager and its affiliates maintain comprehensive
general liability, employers liability, and commercial automobile insurance
policies that generally protect the insured against the routine hazards
encountered by the drilling program manager, its affiliates and its employees
and agents in the conduct of the business of the drilling program manager and
its affiliates. The coverage amount under each of these policies is limited to
$1,000,000 per occurrence. In addition, the drilling program manager and its
affiliates maintain a comprehensive energy package (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.
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 various other personal
property, for which the insured has liability or is legally liable, subject to
a maximum deductible of $5,000 per occurrence or $25,000 in the case of
earthquake.
The operators extra expense/seepage and pollution section of the
Package, which has a coverage limit of $3,000,000 for land wells less than
10,000 feet in depth and a limit of $10,000,000 for wells greater than 10,000
feet in depth, generally protects the insured from:
o the costs to regain control of a well that goes out of
control, costs to redrill or restore a well which has been
lost or otherwise damaged as a result of an out of control
well,
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<PAGE> 49
o third party claims for property damage relating to seepage,
pollution, or contamination arising from a well out of
control and the cost of cleaning up such substances,
o loss, damage, or expense arising from the uncontrollable flow
of oil, gas, or water from one subterranean stratum to
another through the bore of a well, and
o evacuation expense if ordered by a governmental agency.
The excess umbrella liability policies, which have coverage limits of
$50,000,000, generally protect the insured against all liabilities imposed upon
an insured by law or assumed under contract or agreement by the insured for
damages on account of personal injuries, property damage, or advertising
liability (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 waste substances or the transportation of waste
substances.
THE MANAGING PARTNER'S POLICY REGARDING ROLL-UP TRANSACTIONS
Although the managing partner has no intention of causing either
partnership to engage in a Roll-Up transaction, it is possible at some
indeterminate time in the future that a partnership will become so involved. A
Roll-Up means a transaction involving the acquisition, merger, conversion, or
consolidation, either directly or indirectly, of a partnership and the issuance
of securities by the "Roll-Up Entity." The term "Roll-Up" does not include a
transaction involving the conversion to corporate, trust, or association form
of only a partnership if, as the consequence of the transaction, there will be
no significant adverse change in any of the following:
o voting rights,
o the term of existence of the entity (formerly the
partnership),
o compensation to the managing partner and its affiliates, or
o the entity's investment objectives.
For the purposes of the foregoing, a "Roll-Up Entity" means a
partnership, trust, corporation, or other entity that would be created or
survive after the successful completion of a proposed Roll-Up transaction. In
the case of transactions excluded from the definition of a Roll-Up, the
additional protections for general and limited partners described below would
not be available to the general and limited partners. For the purposes of
determining whether or not a transaction constituted a Roll-Up, the managing
partner would make the determination as to whether or not there would be no
"significant adverse change" in voting rights, the term of existence,
compensation, or investment objectives. The managing partner realizes that to
some extent the determination of whether or not such a change would be
"significant" or "adverse" may vary from investor partner to investor partner.
Accordingly, the managing partner intends to interpret the terms "significant"
and "adverse" broadly if it is ever called upon to do so and will use its best
efforts to interpret those terms as to their applicability to any reasonable
investor partner, and not only as to what it perceives to be the circumstances
of a majority of the general and limited partners.
The partnership agreement provides various policies in the event that
a Roll-Up should occur in the future. These policies include:
o An appraisal of all partnership assets will be obtained from
a competent Independent Expert, and a summary of the
appraisal will be included in a report to the general and
limited partners in connection with a proposed Roll-Up.
o Any investor partner who votes "no" on the Roll-Up proposal
would be offered a choice of:
--- accepting the securities of the Roll-Up Entity
offered in the proposed Roll-Up, or
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--- either (a) remaining a limited partner or general
partner in the partnership and preserving his or her
interest in that partnership on the same terms and
conditions as existed previously, or (b) receiving
cash in an amount equal to his or her pro-rata share
of the appraised value of the net assets of that
partnership.
o A partnership will not participate in a proposed Roll-Up:
-- which would result in the diminishment of the
general and limited partners' voting rights in the
partnership agreement under the Roll-Up Entity's
organizational documents,
-- which includes provisions which would operate to
materially impede or frustrate the accumulation of
shares by any purchaser of the securities of the
Roll-Up Entity, except to the minimum extent
necessary to preserve the tax status of the Roll-Up
Entity,
-- which would limit the ability of an investor partner
to exercise the voting rights of its securities in
the Roll-Up Entity on the basis of the number of
Roll-Up Entity interests held by such investor
partner,
-- in which the participants' rights of access to the
records of the Roll-Up Entity would be less than
those provided in the partnership agreement, or
-- in which any of the costs of the transaction would
be borne by a partnership if the proposed Roll-Up
were not approved by the general and limited
partners.
o Any Roll-Up transaction involving a partnership requires the
approval of a at least 66% of the total interests held by the
general and limited partners.
Depending upon the structure of any possible Roll-Up which may present
itself, it is possible that remaining a limited partner or an general partner
in the related partnership on the same terms and conditions as existed prior to
the Roll-Up may not be possible. In such a situation, the managing partner
would be required to either not consummate the proposed Roll-Up if any investor
partner votes "no" or offer the general and limited partners the option of
receiving cash in an amount equal to his or her pro-rata share of the appraised
value of the net assets of the partnership.
General and limited partners should understand that the selection of a
cash payment in an amount equal to an their pro-rata share of the appraised
value of the net assets of a partnership may not fully compensate the investor
partner for his investment.
APPLICATION OF PROCEEDS
Interests in each partnership may be sold in an aggregate amount from
$1,000,000 to $10,000,000. There is no deduction from the proceeds realized
from the sale of interests to investors for Organization and Offering Expenses,
Sales Commissions, and Due Diligence Fees and, therefore, all of such sales
proceeds will be available to each partnership for the partnership's
operations. The managing partner under the terms of each drilling program
agreement will pay all Organization and Offering Expenses, Sales Commissions,
and Due Diligence Fees. See "Application of Proceeds" and "Participation in
Costs and Revenues."
A 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, each partnership
will have sufficient capital to engage in the proposed activities as set forth
under "Proposed Activities." However, to the extent that a partnership receives
the minimum capital contributions from the investor partners, the ability of
that partnership to participate in a large number of program wells and
prospects will be reduced, and therefore, the partnership may have a
concentration of risk. See "Risk Factors -- Particular Risks Relating to the
Interests -- Concentration of Investment Risks." It is not anticipated that the
liquidity of a partnership will depend
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upon the amount of capital contributions received from the investor partners,
because as set forth below, all of the capital contributions are to be expended
and none of such funds will be retained for liquidity purposes. A partnership's
liquidity is dependent upon the amount of revenues, if any, which are realized
as a result of the partnership activities. See "Proposed Activities --
Partnership Distributions."
We estimate that of the total contributions made to each partnership's
drilling program approximately 12% will be expended for Organization and
Offering Expenses, Sales Commissions and Due Diligence Fees, approximately 15%
to 20% will be made in the form of Lease Acquisition Costs of prospects,
approximately 12% to 16% will be expended for Tangible Costs, approximately 55%
to 60% will be expended for Intangible Drilling Costs and the remainder will be
expended for other Direct Costs. These percentages are estimates only, and we
cannot assure that these percentages will be actually realized or that
variations in the percentages will not be significant to a partnership or its
drilling program.
The following table shows the calculation of the maximum and minimum
amounts which will be contributed to each drilling program to be conducted by
each partnership.
<TABLE>
<CAPTION>
MAXIMUM MINIMUM
CAPITAL CAPITAL
------- -------
<S> <C> <C>
Capital contributions of investor partners (1)................................... $10,000,000(1) $1,000,000(1)
Managing partner's capital contribution to the
partnership(2) .................................................................. 0 0
Initial partnership capital and total partnership funds
available for drilling program operations ....................................... 10,000,000 1,000,000
Plus:
Contributions of the managing partner as a participant
in the drilling program ......................................................... 4,000,000(3)(4) 400,000(3)(4)
TOTAL AMOUNTS TO BE CONTRIBUTED TO
EACH DRILLING PROGRAM ........................................................... $14,000,000 $1,400,000
</TABLE>
- ------------------------
(1) There is no deduction from the proceeds realized from the sale of
interests for Organization and Offering Expenses, Sales Commissions,
and Due Diligence Fees. Under the terms of each drilling program
agreement we will contribute to each drilling program funds necessary
for the payment of all Organization and Offering Expenses, Sale
Commissions, and Due Diligence Fees incurred in connection with the
related partnership. The amount of Organization and Offering Expenses
is estimated to be approximately 3.5% of the capital contributions
initially made by investor partners to each partnership in exchange
for their respective interests. The amount of Sales Commissions and
Due Diligence Fees will equal 8% and .5% respectively of the capital
contributions initially made by investor partners to each partnership
in exchange for their respective interests.
(2) It is not anticipated that we will make any capital contributions
directly to a partnership, but rather we will make our capital
contributions directly to the drilling program in which the
partnership is a participant.
(3) We will contribute to each drilling program the oil and gas leases
upon which the drilling program will conduct its operations. Our
contribution of oil and gas leases to each drilling program will be
credited to the drilling program at the Lease Acquisition Costs of the
oil and gas leases contributed or at fair market value if the Lease
Acquisition Costs is materially more than fair market value.
(4) The aggregate amount of contributions to be made to the related
drilling program by us as a participant, in respect of Organization
and Offering Expenses, Sales Commissions, Due Diligence Fees and oil
and gas
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leases, must equal at least 40% of the capital contributions initially
made by investor partners to the related partnership. In the event
that our aggregate contributions to the related drilling program in
respect of Organizational and Offering Expenses, Sales Commissions,
Due Diligence Fees and oil and gas leases is less than an amount equal
to 40% of the capital contributions initially made by investor
partners to the related partnership, then we shall contribute to the
drilling program such additional funds in respect of Tangible Costs as
may be necessary to cause our aggregate contributions to the related
drilling program to be not less than 40% of the capital contributions
initially made by investor partners to the related partnership.
PARTICIPATION IN COSTS AND REVENUES
COSTS AND REVENUES
The combination of the allocation provisions contained in each
partnership agreement and the related drilling program agreement results in
aggregate allocations of revenues and costs, and income and gain relating
thereto, to the investor partners in a partnership and to the managing partner
on a consolidated basis as set forth in the table below:
<TABLE>
<CAPTION>
Investor Managing
Partners Partner
-------- --------
<S> <C> <C>
Participation in Revenues:
Interest earned on capital contributions of investor partners................ 100% --
Proceeds from disposition of depreciable property and depletable oil
and gas property(1)........................................................ 60% 40%
Revenues from operations..................................................... 60% 40%
Participation in Costs:
Organization and Offering Expenses, Sales Commissions
and Due Diligence Fees..................................................... 0% 100%
Operating Costs.............................................................. 60% 40%
Administrative Costs......................................................... 60% 40%
Reporting and Legal Expenses................................................. 60% 40%
Lease Acquisition Costs...................................................... 0% 100%
Intangible Drilling Costs.................................................... 100% 0%
Tangible Costs............................................................... 100% 0%
All other Direct Costs....................................................... 60% 40%
</TABLE>
- -------------------
(1) Proceeds from the sale of an oil and gas property (or depreciable
property) to the extent of a drilling program's Simulated Basis (or
adjusted tax basis) in the property will be allocated in accordance
with the manner in which costs attributable to such property's
purchase were allocated up to an amount equal to the drilling
program's Simulated Basis (or adjusted tax basis) in such property at
the time of sale. Any remaining sale proceeds will be allocated to the
partners in a manner which will cause the total proceeds from such
sale and all prior sales to be allocated, to the extent possible, as
if all such proceeds had been allocated in the percentages indicated.
(2) All Tangible Costs shall be allocated entirely to the related
partnership; provided however, that to the extent, if any, that the
total costs allocated to us for Organization and Offering Expenses,
Sales Commissions and Due Diligence Fees and Lease Acquisition Costs
are less than an amount equal to 40% of the aggregate capital
contributions initially made by investor partners to that partnership
(a "Deficit Amount"), then we will be allocated an amount of Tangible
Costs equal to that Deficit Amount.
DISTRIBUTIONS
That portion of a partnership's revenues, if any, which in the sole
judgment of the managing partner are not required to meet the obligations of
that partnership including, but not limited to, the obligations of a
partnership to reimburse the managing partner and its affiliates for
Administrative Costs will be distributed to the investor partners not less
often than quarterly. Accordingly, there is no assurance that any distributions
will be made to the investor
44
<PAGE> 53
partners. See "Compensation and Reimbursement." Such reimbursements and
payments by a partnership reduce the amounts otherwise available for
distribution to the investor partners and create a risk that an investor
partner's share of the partnership's taxable income may be greater than the
amounts distributed to him. See "Tax Aspects -- Partnership Taxation --
General." Interest earned on aggregate capital contributions of the investor
partners will be allocated solely to the investor partners and will be
distributed to them periodically at such time or times as the managing partner
shall determine.
CAPITAL ACCOUNTS
A capital account will be maintained by each partnership for each
partner and by each drilling program for each participant therein in the manner
described in "Tax Aspects -- Partnership Taxation -- Allocations."
ALLOCATIONS OF FEDERAL INCOME TAX ITEMS
All recapture of federal income tax deductions and credits resulting
from the sale or other disposition of partnership assets will be allocated
among the investor partners in the same proportions as the deductions or
credits giving rise to such recapture were allocated. Items of income, gain,
loss, deduction and credit are allocated for federal income tax purposes under
the drilling program agreement in accordance with the allocation of costs,
revenues, and expenses described above.
Notwithstanding the foregoing, the partnership agreement provides that
if during any fiscal year of a partnership, the allocation of any loss or
deduction (net of any income or gain) to a partner (the "Deficit partner")
would cause his capital account balance (as adjusted in accordance with
applicable Treasury Regulations for distributions and deductions reasonably
expected in subsequent years) to be less than zero as of the end of such fiscal
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, 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
a partnership the capital account balance (as adjusted in accordance with
applicable Treasury Regulations for 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 partners in a
partnership will be made in accordance with the proportion that the Sharing
Ratio of each partner in the partnership bears to the aggregate Sharing Ratios
of all partners in the partnership. A partner's Sharing Ratio is equal to the
amount determined by dividing that partner's capital contribution to a
partnership by the aggregate capital contributions of all partners to that
partnership.
In the event of a transfer or surrender of interests by an investor
partner, items of income, gain, loss, deduction, and credit will be allocated
between the transferring investor partner and the transferee based on the
number of days during the taxable year in which such transfer was made on which
each person owned such interests. For purposes of such allocations and for
purposes of the next following distribution of cash (except for cash
45
<PAGE> 54
attributable to a sale of a depletable property), transfers of interests will
be recognized, in accordance with the partnership agreement, effective as of a
date determined by the managing partner, which is expected to be the first day
of the month following the recordation of the transfer in the books and records
of the related partnership.
COMPENSATION AND REIMBURSEMENT
The managing partner and its affiliates will receive benefits, both
directly and indirectly, from its position as managing partner of the
partnerships and Mewbourne Oil Company's position as drilling program manager
of the drilling programs, which benefits may be considered to be compensation
to the managing partner and its affiliates.
Such benefits consist of the following:
<TABLE>
<CAPTION>
Form of Compensation/
Reimbursement Amount
------------- ------
<S> <C>
Reimbursement - Administrative Costs Indeterminate - reimbursement based upon allocation made
in accordance with generally accepted accounting
principles.
Compensation - operator Compensation initially based upon participation share of
$780 per producing well per month charge and $7,420 per
drilling well per month charge.
Compensation - partnership interest and drilling Indeterminate - based upon difference between the
program participation managing partner's share of drilling program revenues and
the managing partner's share of drilling program costs.
Compensation - lending of funds to a partnership Indeterminate - compensation based upon the lesser of
lender's incurred interest cost or the rates chargeable by
banks on comparable loans.
Compensation - payment for equipment, supplies and Indeterminate - based upon competitive prices.
other services
</TABLE>
PARTNERSHIP AND PROGRAM INTEREST
Under the terms of each drilling program agreement, the managing
partner as a participant in the drilling program will be required to make
contributions to the drilling program at a percentage which is lower than the
percentages of revenues to be received by the managing partner. Specifically,
the aggregate amount of contributions to be made by the managing partner to the
drilling program must equal at least 40% of the capital contributions initially
made by investor partners to the related partnership or 28.57% of the aggregate
contributions made by all participants to the drilling program, and all
revenues from drilling program operations (other than from disposition of
depletable or depreciable property) generally shall be allocated 60% to the
investor partners and 40% to the managing partner.
LEASE AND EQUIPMENT PURCHASES FROM MEWBOURNE
The managing partner as a participant under the terms of each drilling
program agreement will contribute to each drilling program the oil and gas
leases upon which the drilling program will conduct its operations. The
managing partner's contribution of oil and gas leases to the drilling program
will be credited to the drilling program at the Lease Acquisition Costs or at
fair market value if the Lease Acquisition Costs is materially more than fair
market value. In addition, a partnership may buy or lease supplies and
equipment from the managing partner or its affiliates for compensation, prices
or rentals that are no less favorable to a partnership than are generally
available from unrelated third parties in the area engaged in the business of
selling or leasing comparable supplies or equipment. See "Proposed Activities
- -- Transactions with Affiliates."
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<PAGE> 55
ADMINISTRATIVE COSTS
The managing partner of each partnership, and the drilling program
manager of each related drilling program, will be entitled to reimbursement of
Administrative Costs and Reporting and Legal Expenses incurred by them in
connection with managing and conducting the affairs relating to a partnership's
interest in the related drilling program or of the partnership, as applicable.
The amount of Administrative Costs that are reimbursed by a partnership shall
be allocated to the partnership and the related drilling program on a basis
conforming with generally accepted accounting principles and must be supported
in writing as to the application of such costs and as to the amount charged.
Regardless of the actual amount of Administrative Costs incurred by the
managing partner or drilling program manager in connection with the affairs of
a partnership, during any particular calendar year the total amount of
Administrative Costs allocable to that partnership shall not exceed the greater
of:
o 3.5% of the partnership's gross revenues from the sale of oil
and natural gas production during such year, calculated
without any deduction for Operating Costs or other costs and
expenses, or
o the sum of $50,000 plus .25% of the capital contributions of
general and limited partners to such partnership.
The above limitation on Administrative Costs shall not be applicable to
Administrative Costs otherwise allocable to a partnership which are
extraordinary and non-recurring or to the fixed overhead fee chargeable by an
operator of oil and gas wells including the fixed overhead fee chargeable under
an Operating Agreement by Mewbourne Oil Company with respect to the oil and gas
wells operated by Mewbourne Oil Company.
Administrative Costs incurred by the managing partner and the drilling
program manager in respectively managing and conducting the business and
affairs of a partnership and the related drilling program will be allocated 60%
to the investor partners and 40% to the managing partner. The managing partner
anticipates that the amount of Administrative Costs allocated to a partnership
in 1999 will range between $15,000 to $25,000. These expenses are only
estimates and they may vary due to the amount of capital raised, the date a
partnership is funded, the costs actually incurred in the operation of a
partnership and the related drilling program, and inflationary trends. Such
amount includes Administrative Costs that the managing partner or its
affiliates have incurred or which it is estimated they will incur on behalf of
a partnership, including those relating to a partnership's interest in the
related drilling program, in the calendar year in which investor partners are
first admitted to the partnership, but before investor partners are admitted to
the partnership.
Reporting and Legal Expenses will be allocated 60% to the investor
partners in the partnership and 40% to the managing partner. Reporting and
Legal Expenses are estimated to be $15,000 for a partnership for the first year
following the year in which investor partners are first admitted to the
partnership.
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<PAGE> 56
ESTIMATED DRILLING PROGRAM EXPENSES
The managing partner estimates that Direct Costs that are in the
nature of Reporting and Legal Expenses and Administrative Costs allocable to a
partnership for the first twelve months of operation will be approximately
$66,000. The managing partner estimates that the components of such allocable
amounts will be as follows:
<TABLE>
<CAPTION>
Administrative Costs:
<S> <C>
Legal..................................................... $ 1,000
Accounting................................................ 12,000
Geological................................................ 3,000
Secretarial............................................... 12,000
Travel.................................................... 2,000
Office Rent............................................... 5,000
Telephone................................................. 3,000
Data Processing........................................... 5,000
Other .................................................... 6,000
Other Direct Costs:
External Legal............................................ $ 5,000
Audit Fees................................................ 7,000
Independent Engineering Reports(1)........................ 5,000
TOTAL................................................ $66,000
</TABLE>
(1) Depending upon the timing of the funding and operation of a 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 a partnership is funded, the costs actually incurred
in the operation of that partnership and the related drilling program, and
inflationary trends.
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<PAGE> 57
PRIOR PARTNERSHIPS
In the past 7 years, the managing partner has sponsored 12
partnerships. The total amount of Administrative Costs incurred by those
partnerships through December 31, 1998, 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.
<TABLE>
<CAPTION>
Other Costs(1) Administrative Costs
--------------------------------- -------------------------------
Percentage of Percentage of
Partnership(3) Amount Subscriptions Amount Subscriptions
-------------- ------ ------------- ------ -------------
<S> <C> <C> <C> <C>
Mewbourne Development Partners 92 GP.................. $1,169,060 99.87% $38,747 3.31%
Mewbourne Development Partners 93-A LP................ 1,335,276 95.73% 32,409 2.32%
Mewbourne Development Partners 93-B LP................ 1,323,201 100.93% 38,290 2.92%
Mewbourne Development Partners 94-A LP................ 1,227,804 101.89% 36,061 2.99%
Mewbourne Development Partners 94-B LP................ 1,087,194 106.60% 44,514 4.37%
Mewbourne Development Partners 94-C LP................ 1,091,590 105.01% 44,816 4.31%
Mewbourne Energy Partners 1994 Private LP............. 1,548,693 104.30% 991 .07%
Mewbourne Energy Partners 95-A, L.P................... 1,650,964 100.95% 77,210 4.72%
Mewbourne Energy Partners 95-B, L.P................... 2,032,593 100.06% 23,605 1.16%
Mewbourne Energy Partners 96-A, L.P................... 3,929,041 100.46% 63,601 1.63%
Mewbourne Energy Partners 97-A, L.P................... 3,486,035 109.88% 44,747 1.41%
Mewbourne Energy Partners 98-A, L.P................... 1,470,889 39.38% 33 0.0%(2)
</TABLE>
- -----------------------
(1) Includes Lease Acquisition Costs, and all Direct Costs.
(2) Represents less than .01%.
(3) All partnerships are currently operating.
CONTRACTS WITH MEWBOURNE AND ITS AFFILIATES
Neither the managing partner nor its affiliates owns any drilling rigs
or service companies, and except for the providing of gas compressors from an
affiliate of the managing partner, the managing partner currently does not
anticipate that it or its affiliates will enter into contracts with a
partnership for the rendering of services or the sale or lease of supplies and
equipment other than the Operating Agreement discussed below. Nevertheless, the
managing partner and its affiliates are permitted under the terms of the
partnership agreement to enter into contracts with a partnership for such
purposes and for the lending of money to the partnership under the limitations
established in the partnership agreement. The partnership agreement, however,
provides limitations on the circumstances under which such services may be
rendered and such sales may occur and the prices and rates that can be charged
therefor and for loans of money by the managing partner or its affiliates as
discussed in "Conflicts of Interest -- Contracts with Mewbourne and
affiliates."
COMPENSATION AS OPERATOR
Except for limited instances described in the drilling program
agreement, the drilling program manager has agreed to act as operator with
respect to drilling and production operations to be conducted on program wells.
The drilling program manager will be entitled to be reimbursed for such
services in an amount equal to all charges, including overhead charges, which
constitute direct and indirect charges under an Operating Agreement or other
applicable operating agreement, including, for each program well, an initial
fixed rate overhead charge for each producing well of $780 per month and a
fixed rate overhead charge for each drilling well of $7,420 per month. However,
any charges by the drilling program manager or its affiliates to a partnership
under an Operating Agreement
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<PAGE> 58
or other applicable agreement for the use of the drilling program manager's or
the affiliate's personnel, properties, and equipment, as well as the pricing of
materials purchased by a partnership from the drilling program manager or the
affiliates or by the drilling program manager or the affiliates from a
partnership, will be subject to limitations imposed in the partnership
agreement. The drilling program manager'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 drilling program agreement.
PAST COMPENSATION
In connection with a series of five private limited partnerships
sponsored by an affiliate of the managing partner during 1977-1980 and two
private limited partnerships and a series of ten public limited partnerships
sponsored by the managing partner since December 1992, such partnerships have
made the following payments to the managing partner and its affiliates.
PAYMENTS MADE TO THE MANAGING PARTNER AND AFFILIATES
December 31, 1998
<TABLE>
<CAPTION>
Nonrecurring Administrative
Management and Lease Operating Cost
Partnership Organization FeeAcquisition (1) Equipment Fees Reimbursement
============================================== =============== ============== ============ ============= ===============
<S> <C> <C> <C> <C> <C>
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 2,239,443 4,102,725 1,970,798
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).......... 63,162 266,980 205,381 147,631 38,747
Mewbourne Development Partners 93-A, L.P.(4)..... 61,568 107,881 285,182 341,615 32,409
Mewbourne Development Partners 93-B, L.P.(4)..... 57,870 170,310 264,104 278,174 38,290
Mewbourne Development Partners 94-A, L.P.(4)..... 53,193 226,381 211,057 159,388 36,061
Mewbourne Development Partners 94-B, L.P.(4)..... 44,996 86,100 210,163 167,138 44,514
Mewbourne Development Partners 94-C, L.P.(4)..... 45,887 95,606 207,516 164,653 44,816
Mewbourne Energy Partners 1994 Private L.P.(4)... 0 224,920 187,265 144,036 991
Mewbourne Energy Partners 95-A, L.P.(4).......... 73,943 315,281 289,184 223,335 77,210
Mewbourne Energy Partners 95-B, L.P.(4).......... 19,909 518,013 220,969 146,285 23,605
Mewbourne Energy Partners 96-A, L.P.(4).......... 122,692 936,817 721,183 252,491 63,601
Mewbourne Energy Partners 97-A, L.P. (4)......... 65,309 743,466 603,811 21,328 44,747
Mewbourne Energy Partners 98-A, L.P.(4).......... 36,610 321,353 123,469 17,132 33
</TABLE>
- ------------------
(1) Interests in oil and gas properties were acquired at cost from
Mewbourne Oil Company.
(2) This partnership was terminated on November 30, 1994.
(3) This partnership was terminated on September 1, 1996.
(4) This partnership is currently operating.
MANAGEMENT
Mewbourne Development Corporation was originally incorporated in 1982
as Caliche Pipeline Company in the state of Texas. The company was formed to
facilitate the gathering, transporting and marketing of natural gas. In 1990,
Caliche Pipeline Company was merged into a newly incorporated Caliche Pipeline
Company, a Delaware corporation. In 1992, Caliche Pipeline Company sold all its
remaining interest in gas gathering and marketing activities to an affiliated
company, and changed its name to Mewbourne Development Corporation. Mewbourne
Development Corporation will serve as the managing partner of each partnership
and in such capacity will have the sole power and authority to act on behalf of
the partnerships with respect to the management, control, and
50
<PAGE> 59
administration of the properties, business, and affairs of each partnership.
The managing partner was organized for the purpose, among other things, of
engaging in any and all phases of the oil and gas business, including
sponsoring and forming limited or general partnerships for the purpose of
acquiring and owning working interests in oil and gas properties and offering
limited or general partner interests therein to investors.
Mewbourne Oil Company, a Delaware corporation, was incorporated in
1967 and is a wholly owned indirect subsidiary of Mewbourne Holdings, Inc. The
drilling program manager provides management and technical services and serves
as operator for ventures of Mewbourne Holdings, Inc., the managing partner and
Mr. Mewbourne. In this connection, the drilling program manager develops oil
and gas prospects, acquires leasehold interests, and serves as the operator in
the drilling, completion, and production of oil and gas wells. Mewbourne Oil
Company will also conduct the administration of the business, and affairs of
each drilling program. Mewbourne Oil Company maintains offices in Tyler,
Perryton, Midland and Amarillo, Texas; Hobbs, New Mexico; and Oklahoma City and
Woodward, Oklahoma. The general offices are located at 3901 South Broadway,
Tyler, Texas 75701. Mewbourne Oil Company employs approximately 97 persons
including 15 engineers, 8 geologists, 7 landmen, 8 accountants, and 11 other
degreed administrative professionals.
Mewbourne Holdings, Inc., a Texas corporation, was founded by Mr.
Mewbourne in 1965 and is a privately owned corporation which serves as the
parent company for both the managing partner and the drilling program manager
and their affiliates.
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<PAGE> 60
OWNERSHIP STRUCTURE OF MEWBOURNE COMPANIES
[Corporate Structure]
[CHART]
Both the managing partner and the drilling program manager are
directly or indirectly wholly owned subsidiaries of Mewbourne Holdings, Inc.
The following table provides information as to the beneficial ownership of
Mewbourne Holdings, Inc., as of December 31, 1998 by each person who, to their
knowledge, beneficially owned 5% or more of their respective outstanding
capital stock.
<TABLE>
<CAPTION>
Number and
Class of percent of Percent of
Owner Security Share Voting Rights
----- -------- ----------- -------------
<S> <C> <C> <C>
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
</TABLE>
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<PAGE> 61
OFFICERS, DIRECTORS AND KEY EMPLOYEES OF THE MANAGING PARTNER AND THE DRILLING
PROGRAM MANAGER
Set forth below are the names, ages and positions of the officers,
directors and key employees of the managing partner and the drilling program
manager. Directors are elected to serve until the next annual meeting of
shareholders or until their successors are elected and qualified, and officers
serve at the discretion of the Board of Directors.
Officers and Directors of the Managing Partner
<TABLE>
<CAPTION>
Name Position
---- --------
<S> <C>
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
</TABLE>
Officers and Directors of the Drilling Program Manager
<TABLE>
<CAPTION>
Name Position
---- --------
<S> <C>
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
Monty L. Whetstone................................................... Vice President-Production
Kenneth S. Waits..................................................... Vice President-Exploration
Ruth M. Buckley...................................................... Assistant Secretary and Director
Julie M. Greene...................................................... Assistant Secretary and Director
</TABLE>
Curtis W. Mewbourne, age 63, formed Mewbourne Holdings, Inc. in 1965
and serves as Chairman of the Board and President of Mewbourne Holdings, Inc.,
Mewbourne Oil Company and Mewbourne Development Corporation. He has operated as
an independent oil and gas producer for the past 34 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 60, joined Mewbourne Oil Company as Manager,
Administration and Personnel of Mewbourne Oil Company in November, 1981, and
was elected Vice President of Administration and Personnel in March, 1993.
Prior to joining Mewbourne Oil Company, Mr. Odom was employed in personnel
management positions with Delta Drilling Company from 1980 to 1981, with Great
Lakes Chemicals from 1978 to 1980 and with Air Products and Chemicals from 1963
to 1978. Mr. Odom received a Bachelor of Science in Management from the
University of West Florida.
J. Roe Buckley, age 37, joined Mewbourne Holdings, Inc. in July, 1990
and serves as Treasurer and Chief Financial Officer of both Mewbourne
Development Corporation and Mewbourne Oil Company. Mr. Buckley was employed by
Mbank Dallas from 1985-1990 where he served as a commercial loan officer. He
received a Bachelor of Arts in Economics from Sewanee in 1984. Mr. Buckley is
the son-in-law of Curtis W. Mewbourne and is married to Ruth M. Buckley. He is
also the brother-in-law of Dorothy M. Cuenod and Julie M. Greene.
Michael F. Shepard, age 53, joined Mewbourne Oil Company in 1986 and
serves as Secretary and General Counsel of Mewbourne Development Corporation.
He has practiced law exclusively in the oil and gas industry since 1979 and
formerly was counsel with Parker Drilling Company and its Perry Gas subsidiary
for seven years. Mr.
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<PAGE> 62
Shepard holds the Juris Doctor degree from the University of Tulsa where he
received the National Energy Law and Policy Institute award as the outstanding
graduate in the Energy Law curriculum. He received the B.A. degree, magna cum
laude, from the University of Massachusetts in 1976. Mr. Shepard is a member of
the bar in Texas and Oklahoma.
Dorothy Mewbourne Cuenod, age 39, received a B.A. Degree in Art
History from the University of Texas and a Masters of Business Administration
Degree from Southern Methodist University. Since 1984 she has served as a
Director and Assistant Secretary of both Mewbourne Development Corporation and
Mewbourne Oil Company. Ms. Cuenod is the daughter of Curtis W. Mewbourne and is
the sister of Ruth M. Buckley and Julie M. Greene. She is also the
sister-in-law of J. Roe Buckley.
Ruth Mewbourne Buckley, age 37, received a Bachelor of Science Degrees
in both Engineering and Geology from Vanderbilt University. Since 1987 she has
served as a Director and Assistant Secretary of both Mewbourne Development
Corporation and Mewbourne Oil Company. Ms. Buckley is the daughter of Curtis W.
Mewbourne and is the sister of Dorothy M. Cuenod and Julie M. Greene. She is
also the wife of J. Roe Buckley.
Julie Mewbourne Greene, age 35, received a B.A. in Business
Administration from the University of Oklahoma. Since 1988 she has served as a
Director and Assistant Secretary of both Mewbourne Development Corporation and
Mewbourne Oil Company. Prior to that time she was employed by Rauscher, Pierce,
Refsnes, Inc. Ms. Greene is the daughter of Curtis W. Mewbourne and is the
sister of Dorothy M. Cuenod and Ruth M. Buckley. She is also the sister-in-law
of J. Roe Buckley.
KEY EMPLOYEES
J. Allen Brinson - Mr. Brinson, age 48, Administrative Land Manager
and Assistant Secretary, has been with Mewbourne Oil Company since January,
1979. Previously, he was employed for two years by Gulf Oil Corporation in its
Land Department. Mr. Brinson received a Bachelor of Business Administration
from Angelo State University in 1973 and a Master of Business Administration
from the University of Texas-Permian Basin in 1977.
B. Alan Clark - Mr. Clark, age 46, Controller and drilling program
Administrator, joined Mewbourne Oil Company May, 1979. Prior to joining
Mewbourne Oil Company, Mr. Clark was employed by Texas Oil and Gas Corporation
as Assistant Supervisor of Joint interest Accounting from 1976 to 1979. Mr.
Clark has served in several accounting/financial positions with Mewbourne Oil
Company prior to his current position. Mr. Clark received a Bachelor of
Business Administration in Accounting from the University of Texas at
Arlington.
W. Ronald Howell - Mr. Howell, age 45, District Manager-Woodward,
Oklahoma District, joined Mewbourne Oil Company in July, 1979. Previously, he
was employed by AMOCO Production Company in production assignments. Mr. Howell
received a Bachelor of Science in Engineering from Texas Tech University in
1975.
A. Wayne Jones - Mr. Jones, age 43, Manager-Oil and Gas Marketing,
joined Mewbourne Oil Company in April, 1984. He was previously employed by
Crystal Oil Company as Manager of Natural Gas Sales Administration. Mr. Jones
received a Bachelor of Business Administration in 1978 and a Master of Business
Administration in Marketing in 1980 from Louisiana Tech University.
Bryan M. Montgomery - Mr. Montgomery, age 39, Manager-Economics and
Evaluation, joined Mewbourne Oil Company upon his graduation from the
University of Oklahoma in August, 1984, where he received a Bachelor of Science
in Petroleum Engineering. Mr. Montgomery has previously served in operations
and reservoir engineering positions.
Ralph P. Moore - Mr. Moore, age 48, District Exploration Manager,
joined Mewbourne Oil Company 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 Mewbourne Oil Company, Mr. Moore served as Regional
Exploration Manager for Pacific Enterprises Oil Company.
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<PAGE> 63
Roy L. Hunter - Mr. Hunter, age 51, has been with Mewbourne Oil
Company since January 1998 and is District Manager Exploration office-Amarillo,
Texas. He graduated from the University of Texas at Austin with a B.A. in 1972.
Prior to joining MOC, Mr. Hunter was the Senior Land Manager with Maxus Energy.
Jarold W. Elgin - Mr. Elgin, age 39, District Manager-Hobbs, New
Mexico, joined Mewbourne Oil Company in February, 1998. After graduating from
Mississippi State in 1983 with a Bachelor of Science in Petroleum Engineering,
Mr. Elgin worked with Crow Interest in operations. He joined Mewbourne from
Crow.
Tony D. Phillips - Mr. Phillips, age 41, District Exploration Manager
for Oklahoma City, joined Mewbourne Oil Company in August, 1980 upon his
graduation from the University of Oklahoma where he received a Bachelor of
Science in Petroleum Land Management. Previously, Mr. Phillips has served as
Landman and District Landman. Mr. Phillips manages exploration efforts in the
Anadarko Basin in Western Oklahoma.
Brent R. Thurman - Mr. Thurman, age 39, District Manager-Perryton,
Texas District, joined Mewbourne Oil Company in January 1983. Prior to his
present assignment, he served in various supervisory positions in production
and completions at both Hobbs, New Mexico and Perryton, Texas. Mr. Thurman
received a Bachelor of Science in Petroleum Engineering from Texas Tech
University in 1982.
Kenneth S. Waits - Mr. Waits, age 38, Vice President of Exploration,
has been with Mewbourne Oil Company since February, 1984. He joined the company
following his graduation from the University of Oklahoma where he received a
Bachelor of Science in Petroleum Engineering in December, 1983. He currently
manages all of Mewbourne Oil Company's exploration efforts. He has also served
as Exploration Manager for Western Oklahoma.
Previously, he held positions in Operations and in Reservoir/Evaluations.
Monty L. Whetstone - Mr. Whetstone, age 37, Vice President of
Production, joined Mewbourne Oil Company in June, 1985 after graduating from
Texas Tech University with a Bachelor of Science in Petroleum Engineering. Mr.
Whetstone served as a District Superintendent - Woodard, Oklahoma, Unit
Engineer and as the Drilling/Production Engineering Supervisor prior to
assuming his present position.
COMPENSATION
None of the officers or directors of the managing partner or the
drilling program manager will receive remuneration directly from the
partnerships or the drilling programs, but will continue to be compensated by
their present employers. Each partnership and each drilling program will
reimburse the managing partner, the drilling program manager, and their
affiliates for costs of overhead falling within the definition of
Administrative Costs, including without limitation, salaries of the officers
and employees of the managing partner or drilling program manager; provided
that no portion of the salaries of the directors or of the executive officer of
the managing partner or drilling program manager may be reimbursed as
Administrative Costs.
EXECUTIVE OFFICER
Mr. Mewbourne directly controls and directs all key policy decisions
of the management group of the managing partner and the drilling program
manager and is the only executive officer of both the managing partner and the
drilling program manager.
Cash Compensation to Executive Officer. The cash compensation paid by
the managing partner and the drilling program manager for services rendered
during the year ended December 31, 1998 to Mr. Mewbourne was $124,800. As of
the date of this prospectus, members of the respective boards of directors of
the managing partner and the drilling program manager do not receive any
special compensation for serving as director.
Executive Officer Compensation Pursuant to Plans. Mewbourne Oil
Company 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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<PAGE> 64
The following table sets forth the Plan benefits at various years of service
and salary levels.
<TABLE>
<CAPTION>
=================================================================================================
PENSION TABLE
Years of Service (1)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SALARY 10 15 20 25 30
120,000 20,000 30,000 40,000 50,000 60,000
100,000 16,666 25,000 33,333 41,666 50,000
75,000 12,500 18,750 25,000 31,250 37,500
50,000 8,333 12,500 16,666 20,833 25,000
=================================================================================================
</TABLE>
(1) Assumes a Lifetime Only Benefit (benefits cease upon employees death).
Under the Plan, Mr. Mewbourne would have a lifetime benefit of $5,200 per month
based on his current base salary of $124,800 and assuming he works until age 65
at which time he would have 36 years of employment.
Mewbourne Holdings, Inc. maintains an incentive compensation plan for
key personnel, which is funded by overriding royalty interests burdening
prospects developed by the drilling program manager. Payments to employees are
discretionary and are made net of expenses. Gross payments from the plan to
employees were approximately $544,600 for the fiscal year ended June 30, 1998.
The interests in the oil and gas leases to be acquired by the drilling program
will not be burdened by plan royalties and the partnerships will not bear any
costs or expenses attributable to the plan.
Non-Cash Compensation of Executive Officer. Mr. Mewbourne, as the sole
executive officer of the managing partner and the drilling program manager, was
provided club memberships for use in performing his assigned duties and from
time to time used such memberships for personal purposes. To the extent any
club membership was used for non-reimbursed, non-job related purposes, a
proportionate part of the cost of providing such use would have constituted
remuneration to the user. The managing partner and the drilling program manager
are unable without unreasonable effort to determine the extent of such
non-reimbursed, non-job related use, but believes that during the year ended
December 31, 1998 the amounts of such benefits received by such officer did not
exceed 10% of such officer's cash compensation for the year.
CERTAIN TRANSACTIONS
Participation in Drilling Program Activities. Mr. Mewbourne and/or his
affiliates (other than Affiliated Programs) have historically invested directly
in the exploration and development activities of Mewbourne Oil Company during
the past 34 years. In addition, he and/or his affiliates (other than Affiliated
Programs) have been an investor in the joint ventures and drilling agreements
through which, other investors participated in various Mewbourne Oil Company
managed programs. Mr. Mewbourne's and his affiliates (other than Affiliated
Programs) annual participation varied considerably both in level of investment
and form, but in general approximated 25% to 50% of the annual expenditures.
Mr. Mewbourne intends to invest directly and/or indirectly alongside
each partnership in the activities of each drilling program, however, we cannot
assure that the amount of Mr. Mewbourne's participation will be in accordance
with his historical custom. The amount of such investment will be subject to
many variables, including the availability of working interests in the oil and
gas leases, the amount of capital available to each partnership from
subscriptions, the timing of the drilling activities, and other such matters.
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<PAGE> 65
CONFLICTS OF INTEREST
o The managing partner currently manages and in the future will sponsor
and manage other partnerships similar to the partnerships in which
interests are being offered.
o The managing partner will decide which prospects each partnership will
acquire.
o The drilling program manager will act as the operator for program
wells, 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 contribute oil and gas
leases and sell other property to the drilling program and related
partnerships.
o The managing partner is a general partner of numerous other
partnerships and owes duties of good faith and fair dealing to such
other partnerships.
o The managing partner and its affiliates engage in significant
drilling, operating, and producing activities for other partnerships.
o Affiliates of the managing partner are eligible to purchase interests,
and subject to limitations, interests purchased by an affiliate will
have voting rights under the partnership agreement.
FIDUCIARY RESPONSIBILITY OF THE MANAGING PARTNER
The contemplated activities of each partnership will involve decisions
by the managing partner, on behalf of each partnership, and the drilling
program manager, on behalf of the related drilling program, and transactions
between the partnership, the related drilling program, the managing partner, or
affiliates thereof. Because of the common control of each partnership, each
drilling program, the managing partner, the drilling program manager, and other
affiliates thereof, any such decisions or transactions will lack the benefits
of arm's-length bargaining and will necessarily involve conflicts of interest.
The managing partner is accountable to each partnership as a fiduciary and is
required to act in good faith in the best interests of each partnership at all
times. The managing partner will attempt, in good faith, to resolve all
conflicts of interest in a fair and equitable manner with respect to all
persons affected by those conflicts of interest. Nevertheless, the actions of
the managing partner may not be the most advantageous to a partnership and
could fall short of the full exercise of such fiduciary duty. No provision has
been made for an independent review of conflicts of interest.
The partnerships are organized under Delaware law, and under Delaware
law the general partner of a partnership owes a fiduciary duty to the
partnership and to its partners. Under Delaware law, the managing partner will
owe the general and limited partners a duty of good faith, fairness, and
loyalty. In this regard, the managing partner is required to supervise and
direct the activities of each partnership prudently and with that degree of
care, including acting on an informed basis, which an ordinarily prudent person
in a like position would use under similar circumstances. Moreover, the
managing partner must act at all times in the best interests of each
partnership and the general and limited partners. Since the law in this area is
rapidly developing and changing, investors who have questions concerning the
responsibilities of the managing partner should consult their own counsel.
Limitations on the Fiduciary Obligations of the Managing Partner and
the Managing Partner's Responsibility to Determine the Application of the
Limitations. The partnership agreement contains provisions which modify what
would otherwise be the applicable Delaware law relating to the fiduciary
standards of the managing partner to the general and limited partners. The
fiduciary standards in the partnership agreement could be less advantageous to
the general and limited partners and more advantageous to the managing partner
than the corresponding fiduciary standards otherwise applicable under Delaware
law, specifically:
o a partnership may indemnify and hold harmless the managing
partner and its affiliates,
o the managing partner is required to devote only so much of
its time as is necessary to manage the affairs of the
partnership,
57
<PAGE> 66
o the managing partner and its affiliates may conduct business
with a partnership in a capacity other than as a Sponsor,
o the managing partner and any of its affiliates may pursue
business opportunities that are consistent with a
partnership's investment objectives for their own account,
and
o the managing partner may manage multiple programs
simultaneously.
As summarized above the partnership agreement contains provisions
which are intended to limit the liability of the managing partner or any
affiliate of the managing partner for any act or omission within the scope of
authority conferred upon them under the partnership agreement or drilling
program agreement if the managing partner has determined in good faith, as of
the time of the conduct or omission, that such conduct or omission was in the
best interest of a partnership and that it did not constitute negligence or
misconduct. The managing partner would be subject to a conflict of interest in
making any such determination. The limitation upon the fiduciary standards in
the partnership agreement could be less advantageous to the general and limited
partners and more advantageous to the managing partner than the corresponding
fiduciary standards otherwise applicable under Delaware law. The purchase of
interests may be deemed as consent to the fiduciary standards set forth in the
partnership agreement. As a result of these provisions in the partnership
agreement, the general and limited partners may find it more difficult to hold
the managing partner responsible for acting in the best interests of a
partnership and its general and limited partners than if the fiduciary
standards of the otherwise applicable Delaware law governed the situation.
The partnership agreement and drilling program agreement provide for
indemnification of the managing partner, the drilling program manager and
affiliates of the drilling program manager and their respective officers and
directors against claims arising from conduct or omission on behalf of a
partnership or a drilling program. Such indemnification will be available if
the managing partner determines in good faith, as of the time of the conduct or
omission, that the conduct or omission was in the best interest of the related
partnership and that it did not constitute negligence or misconduct. The
managing partner would be subject to a conflict of interest in making any such
determination as to whether the managing partner or its affiliates should be
indemnified, and the general and limited partners must rely upon the integrity
of the managing partner in making such determination.
Where the question has arisen, courts have held that an investor
partner may institute legal action on behalf of himself and all other similarly
investor 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, investor
partners may have the right, subject to procedural and jurisdictional
requirements, to bring partnership class actions in federal courts to enforce
their rights under the federal securities laws. Further, investor partners who
have suffered losses in connection with the purchase or sale of their interests
in a partnership may be able to recover such losses from a general partner
where the losses result from a violation by the general partner of the
antifraud provisions of the federal securities laws. The burden of proving such
a breach, and all or a portion of the expense of such lawsuit, would have to be
borne by the investor partner bringing such action. In the event of a lawsuit
for a breach of its fiduciary duty to a partnership and/or the general and
limited partners, the managing partner, depending upon the particular
circumstances involved, might be able to avail itself under Delaware law of
various defenses to the lawsuit, including statute of limitations, estoppel,
laches, and doctrines such as the "clean hands" doctrine.
In various instances, the managing partner and the drilling program
manager will be held to a prudent operator standard pursuant to the partnership
agreement and the drilling 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 the
managing partner as a fiduciary. Conduct under the prudent operator standard
may not necessarily be the most advantageous to a partnership and under such
standard it would be more difficult to hold the managing partner responsible
for acts or omissions than if the fiduciary duty standard were otherwise
applicable.
58
<PAGE> 67
FARMOUTS
Any farmout or similar agreement pertaining to a partnership's oil and
gas leases must comply with the rules, restrictions, and guidelines described
in this prospectus and the limitations set forth in the partnership agreement,
and will be subject to the following conditions:
o the managing partner, exercising the standard of a prudent
operator, must determine that the farmout or similar
agreement is in the best interests of the partnership,
o the terms of the farmout or similar agreement must be
consistent with, and in any case no less favorable to the
partnership than, those utilized in the same geographic area
for similar arrangements, and
o if the assignee under the farmout is the managing partner or
its affiliate then, the farmout is subject to the same
restrictions as applicable to a purchase of undeveloped
property from the partnership. See "Proposed Activities --
Transactions with Affiliates -- Purchase of Leases from the
Partnership."
The decision of the managing partner with respect to making a farmout
and the terms of a farmout to an affiliate may involve conflicts of interest,
as the managing partner or the affiliate may benefit from cost savings and
reduction of risk, and in the event of a farmout to an affiliate, the managing
partner will represent both the partnership and the affiliate. For a discussion
of the prudent operator standard of conduct, see "Conflicts of Interest --
Fiduciary Responsibility of the Managing Partner."
None of a partnership's oil and gas leases will be farmed out unless
the managing partner, exercising the standard of a prudent operator, determines
that:
o the partnership lacks sufficient funds to drill on the oil
and gas lease and cannot obtain suitable alternative
financing for such drilling,
o the value of the oil and gas lease has been reduced by events
occurring or information disclosed to such managing partner
after assignment of the oil and gas lease to the partnership
so that drilling would no longer be desirable for the
partnership,
o drilling on the oil and gas lease would result in an
excessive concentration of the partnership's funds creating,
in the managing partner's opinion, undue risk to the
partnership, or
o the best interests of the partnership would be served by the
farmout.
A partnership will acquire only those oil and gas leases that are
reasonably required for the stated purpose of the partnership, and no oil and
gas leases will be acquired for the purpose of subsequent sale or farmout,
unless the acquisition of the oil and gas leases by that partnership is made
after a well has been drilled to a depth sufficient to indicate that the
acquisition is believed to be in the best interest of the partnership. The
managing partner is not permitted to farmout a property for the primary purpose
of avoiding payment of the costs relating to drilling on the property that
would otherwise be allocable to the managing partner. See "Proposed Activities
- -- Farmouts," and "Conflicts of Interest -- Sale of Leases to a Partnership"
and "Purchase of Leases from a Partnership."
PURCHASE OF LEASES FROM A PARTNERSHIP
Neither the managing partner nor its affiliate, including an
Affiliated Program, may purchase or acquire any oil and gas lease from a
partnership, directly or indirectly, except pursuant to transactions that are
fair and reasonable to the partnership and then subject to the following
conditions:
o a sale, transfer or conveyance, including a farmout, of an
undeveloped oil and gas lease (i.e. an oil and gas lease not
having any Proved Developed Reserves attributable to it) from
a partnership to the
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<PAGE> 68
managing partner, or its affiliate, other than an Affiliated
Program, must be made at the higher of the Lease Acquisition
Costs or fair market value,
o a sale, transfer or conveyance of a developed oil and gas
lease (i.e. a lease having Proved Developed Reserves
attributable to it) from the partnership to the managing
partner or its affiliate, other than an Affiliated Program in
which the interest of the managing partner or its affiliate
is substantially similar to or less than its interest in the
partnership, is not permitted except in connection with the
liquidation of the partnership and then only at fair market
value,
o except in connection with farmouts or joint ventures made in
compliance with the partnership agreement. which is
summarized in the final paragraph of the subsection entitled
"Sale of Lease to the partnership" below, a transfer of an
undeveloped oil and gas lease from the partnership to an
Affiliated Program must be made at fair market value if the
oil and gas lease has been held for more than two years;
otherwise, if the managing partner deems it to be in the best
interest of the partnership, the transfer may be made at the
Lease Acquisition Costs, and
o except in connection with farmouts made in compliance with
the restrictions described in the partnership agreement, a
transfer of any oil and gas lease from the partnership to an
Affiliated Program, whose investment obligation is to
directly acquire, hold, operate and/or dispose of producing
oil and gas properties, must be made at fair market value if
the oil and gas lease has been held for more than six months
or there have been significant expenditures made in
connection with the oil and gas lease; otherwise, if the
managing partner deems it to be in the best interest of the
partnership, the transfer may be made at the Lease
Acquisition Costs as adjusted for intervening operations.
A determination of fair market value must be supported by an appraisal from an
Independent Expert. Such opinion and any associated supporting information must
be maintained in a drilling program's records for at least six years.
SALE OF LEASES TO A PARTNERSHIP
The managing partner has discretion in selecting the oil and gas
leases to be contributed to a partnership by the managing partner and the
location and type of operations that a partnership will conduct on the
contributed oil and gas leases. A portion of such oil and gas leases may be
part of the managing partner's existing inventory. In determining which oil and
gas leases should be contributed to a partnership, if the managing partner or
its affiliates has oil and gas leases in its own inventory at the time, the
managing partner would be subject to a conflict of interest in selecting
properties for the partnership out of its or an affiliate's inventory or from
third party sellers.
ADJACENT ACREAGE
A drilling program may not drill any well for the purpose of proving
or disproving the existence of oil or gas on any adjacent acreage held by the
managing partner or an affiliate of the managing partner. Nevertheless, such
drilling activities may incidentally develop information valuable to the
managing partner or affiliates of the managing partner in evaluating their
nearby acreage at no cost to them. Mewbourne Oil Company or its affiliates also
may retain an ownership interest in an oil and gas lease contributed by the
managing partner to a drilling program and the use of drilling program funds to
drill a well on such oil and gas lease will reduce the cost and risk to the
managing partner or its affiliates of drilling on such oil and gas lease.
Accordingly, a conflict of interest will exist between the interest of the
partnership and the interest of the managing partner in selecting the location
and type of operations which the related drilling program will conduct on
drilling program leases where the managing partner or affiliates of the
managing partner own oil and gas leases in the vicinity of the drilling program
leases or retain an ownership interest in the drilling program leases. In
addition, the liability of the managing partner and its affiliates to the
partnerships is limited as set forth under "-- Fiduciary Responsibility of the
Managing Partner" and such limitations significantly increase the potential
conflicts that may arise with regard to the acquisition and operation of
adjacent acreage.
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<PAGE> 69
OTHER ACTIVITIES
As summarized in "Risk Factors -- Particular Risks Relating to the
Interests -- Limitations on the Fiduciary Obligations of the Managing Partner
and the Managing Partner's Responsibility to Determine the Application of the
Limitations," the partnership agreement modifies the fiduciary duties owed by
the managing partner or its affiliates to a partnership and the general and
limited partners by specifically modifying the duties otherwise owed under
Delaware law. The partnership agreement specifically permits the managing
partner and its affiliates to engage in and possess interests in other business
ventures of any and every type and description, independently or with others,
including without limitation the acquisition, ownership, exploration,
development, operation, and management of oil and gas properties for themselves
and other persons, and the organization and management of other partnerships
and joint ventures similar to the partnerships; provided, however, except as
otherwise set forth in the partnership agreement and as described in "Proposed
Activities -- Transactions with Affiliates," the managing partner and its
affiliates may pursue business opportunities that are consistent with the
partnerships' investment objectives for their own account only after they have
determined that such opportunity either cannot be pursued by a partnership
because of insufficient funds or because it is not appropriate for a
partnership under the existing circumstances. The managing partner and its
affiliates currently act as the managing general partner of several other oil
and gas drilling partnerships. See "Prior Activities." The business of these
partnerships may be considered competitive with the business of the
partnerships in areas such as markets for production, use of equipment, and
access to the time and financial resources of management, as well as in other
areas. In addition, the managing partner or its affiliates may sponsor
additional drilling partnerships and other oil and gas partnerships in the
future. Therefore, the managing partner will be acting on behalf of each
partnership as managing partner, on behalf of existing partnerships, and on
behalf of other partnerships and joint ventures which the managing partner or
its affiliates may sponsor in the future. As a result of these activities of
the managing partner and its affiliates, circumstances may arise where the
interest of the managing partner or of its affiliates in such independent
ventures will conflict with those of the general and limited partners with
respect to the acquisition of prospects, the utilization of available drilling
services and similar matters. A conflict of interest may arise, for example,
when a partnership, the managing partner and other prior or future oil and gas
partnerships in which the managing partner or its affiliate has an interest
will have an opportunity to acquire the same oil and gas leases. In these
situations, it may be expedient for the managing partner to favor one
partnership or venture over another. It is possible that the managing partner
or its affiliates will be in the process of acquiring oil and gas leases for
inclusion in other drilling partnerships at the same time that they are
acquiring oil and gas leases for inclusion in a drilling program.
CONTRACTS WITH MEWBOURNE AND AFFILIATES
The managing partner and its affiliates do not own any drilling rigs
or service companies, and except for the providing of gas compressors from an
affiliate of the managing partner and for the Operating Agreement, the managing
partner currently does not anticipate that it will enter into contracts and
agreements with either partnership for the rendering of services or the sale
and lease of supplies and equipment. However, the partnership agreement
specifically permits a partnership and the managing partner to enter into
agreements for such purposes and for the lending of money to a partnership.
Neither the managing partner nor any affiliate of the managing partner will
enter into any agreement with a partnership to provide services, supplies and
equipment unless:
(a) the managing partner or such affiliate is engaged
independently of the partnership as an ordinary and ongoing
business in the business of rendering such services or
selling or leasing such equipment and supplies to a
substantial extent to other persons in the oil and gas
industry in addition to partnerships or drilling programs in
which the managing partner or such affiliate has an interest,
(b) the compensation, price, or rental is competitive, determined
as of the time that the contract is entered into, with the
compensation, price, or rental of other persons in the area
engaged in the business of rendering comparable services or
selling or leasing comparable equipment and supplies which
could reasonably be made available to the partnership, and
(c) if the managing partner or such affiliate is not engaged in a
business within the meaning of clause (a) above, then such
compensation, price, or rental is the lesser of the cost of
such services, equipment, or supplies to the managing partner
or such affiliate or the competitive rate which could be
obtained in the area. Any loan of money to a partnership by
the managing partner or its affiliate
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<PAGE> 70
may not bear interest in excess of the lesser of the rate the
managing partner or such affiliate is required to pay on
similar borrowings or the highest lawful rate, or in any
event at a rate in excess of the amount which would be
charged to the partnership by independent third parties for
the same purpose. See "Additional Financing."
All contracts between a partnership and the managing partner or its
affiliate may be terminated upon the vote or written consent of more than 50%
of the interest of the general and limited partners without penalty on 60 days'
advance written notice. Notwithstanding any provision to the contrary, the
managing partner and its affiliates may not profit by drilling in contravention
of their fiduciary obligations to the general and limited partners. In
addition, no rebates 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.
MEWBOURNE OIL COMPANY AS OPERATOR
Under the terms of each drilling program agreement, the drilling
program manager has agreed to serve as operator of program wells. Each drilling
program agreement specifically provides that any operating agreement pertaining
to the drilling program manager's acting as an operator of program wells will
be subject to the limitations set forth in the related partnership agreement
with respect to contracts for the rendering of services and the sale and lease
of supplies and equipment, which limitations are described in the preceding
paragraph. In the event that non-affiliated parties do not participate, or have
a small interest, in a drilling program's prospects there will be no
independent oversight with respect to the competitiveness of the operating
agreements entered into with the drilling program manager. See "Proposed
Activities -- Operations" and "Compensation and Reimbursement -- Compensation
as Operator."
OWNERSHIP OF INTERESTS BY THE MANAGING PARTNER 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 of the managing partner will subscribe for
such number of interests as may be necessary for each 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 a partnership that may be
purchased by the managing partner and/or its affiliates is not subject to any
specific maximum limitations but instead 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 Mewbourne Development Corporation or its affiliate is
serving as the managing partner of a 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 general and limited partners in
that 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 Mewbourne Development Corporation or its affiliate is serving
as the managing partner of a 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 the
partnership agreement concerning the removal of the managing partner or any
transaction between that 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 a
partnership are acquired by the managing partner or its affiliates, such
ownership interests has the effect of diluting the voting power of the other
general and limited partners in that 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 the managing partner and the
investor general and limited partners.
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<PAGE> 71
PRIOR ACTIVITIES
PRIOR PARTNERSHIPS
The managing partner has historically originated and managed drilling
and development activities through which a limited number of qualified
participants, including other oil and gas companies, acquired individual
working interests in leases by means of joint ventures and drilling agreements.
The structure of such transactions, including the manner in which costs and
revenues are shared varied considerably and in each case are substantially
different from those of an investor partner investing in a partnership.
During the period 1977-1980, affiliates of the general partner
sponsored a series of five private limited partnerships. The general partner
has also sponsored ten public partnerships, Mewbourne Development Partners
93-A, L.P., Mewbourne Development Partners 93-B, L.P., Mewbourne Development
Partners 94-A, L.P., Mewbourne Development Partners 94-B, L.P., Mewbourne
Development partners 94-C, L.P., Mewbourne Energy Partners 95-A, L.P.,
Mewbourne Energy Partners 95-B, L.P., Mewbourne Energy Partners 96-A, L.P.,
Mewbourne Energy Partners 97-A, L.P., and Mewbourne Energy Partners 98-A, L.P.
and two private partnerships, Mewbourne Development Partners 1992 GP and
Mewbourne Energy Partners 1994 Private L.P. Except for the above described
partnerships, neither the general partner nor any of its affiliates have
sponsored any private or public partnerships within the past ten years. The
financial disclosure provided below is presented on a tax basis of accounting.
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<PAGE> 72
The following table is presented to indicate certain sale distribution
characteristics concerning partnerships sponsored by the managing partner or
its affiliates.
PRIOR PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS
EXPERIENCE IN RAISING FUNDS
<TABLE>
<CAPTION>
Date of First
Revenue Number of Contributions
Partnership Funding Date Distribution Units Sold Price Per Unit From Investors(4)
===============================================================================================================================
<S> <C> <C> <C> <C> <C>
Mewbourne Oil, Ltd. 1977(1)........................ 8/25/77 6/27/78(2)(3) 193.0 $10,000 $2,891,000
Mewbourne Oil, Ltd. 1978A(8)....................... 5/4/78 2/24/84(2)(3) 288.0 10,000 3,456,000
Mewbourne Oil, Ltd. 1978B (7)...................... 12/6/78 12/31/80(2)(3) 286.5 10,000 3,581,250
Mewbourne Oil, Ltd. 1979(1)........................ 7/10/79 12/8/80(2)(3) 312.5 10,000 3,906,250
Mewbourne Oil, Ltd. 1980(5)(1)..................... 5/22/80 -- (2)(3) 147.0 10,000 1,837,500
Mewbourne Development Partners 92 GP(8)............ 12/31/92 5/18/93(3) 116.0 10,000 1,160,000
Mewbourne Development Partners 93-A, L.P.(8)....... 10/11/93 2/21/94 1,382 1,000(6) 1,382,000
Mewbourne Development Partners 93-B, L.P.(8)....... 12/31/93 4/25/94 1,299 1,000(6) 1,299,000
Mewbourne Development Partners 94-A, L.P.(8)....... 6/30/94 10/24/94 1,194 1,000(6) 1,194,000
Mewbourne Development Partners 94-B, L.P.(8)....... 11/4/94 3/21/95 1,100 1,000(6) 1,010,000
Mewbourne Development Partners 94-C, L.P.(8)....... 12/30/94 4/28/95 1,030 1,000(6) 1,030,000
Mewbourne Energy Partners 1994 Private L.P.(8)..... 12/30/94 4/28/95 73.5 20,000 1,470,000
Mewbourne Energy Partners 95-A, L.P.(8)............ 10/11/95 2/19/96 1,619 1,000(6) 1,619,000
Mewbourne Energy Partners 95-B, L.P.(8)............ 12/29/95 5/20/96 2,011 1,000(6) 2,011,000
Mewbourne Energy Partners 96-A, L.P.(8)............ 11/7/96 3/20/97 3,872 1,000(6) 3,872,000
Mewbourne Energy Partners 97-A, L.P.(8)............ 11/9/97 11/20/98 3,141 1,000(6) 3,141,000
Mewbourne Energy Partners 98-A, L.P.(8)............ 11/20/98 N/A 3,698 1000(6) 3,698,000
</TABLE>
- ------------------
(1) This partnership was terminated on November 30, 1994.
(2) Cash Distributions reflect the policy to retain initial revenues to
reinvest in additional wells. Retention of revenues delayed the
commencement of distributions to the participants.
(3) The 1977 partnership retained $553,549 of distributable operating cash
flow to reinvest in additional drilling. The 1978A, 1978B, 1979 and
1980 partnerships retained $1,836,329, $3,580,177, $2,326,134 and
$223,343 of distributable operating cash flow to reinvest in
additional drilling, respectively, and $5,391,821, $30,072, $125,133
and $732,939 of distributable operating cash flow was used to repay
borrowings of the partnership, respectively. The 92 GP, 93-A, 93-B,
94-A, 94-B, 94-C and MEP 94-Private partnerships retained $64,165,
$24,614, $76,838, $82,864, $124,975, $111,208, $25,852, respectively
of distributable operating cash flow to complete drilling operations.
(4) Includes initial subscriptions plus additional assessments, if any,
under the provisions of each offering. Also includes contributions by
the managing partner and its affiliates in each of public programs
previously sponsored by the managing partner. Such contributions were
in the amounts of $480,000, $400,000, $366,000, $437,500 and $660,000
in each of Mewbourne Development partners 93-A, L.P., Mewbourne
Development partners 93-B, L.P., Mewbourne Development partners 94-A,
L.P., Mewbourne Development partners 94-B, L.P., Mewbourne Development
partners 94-C, L.P., respectively.
(5) The activities of this partnership consisted solely of exploratory
drilling.
(6) Each partnership required a minimum investment of five units or
$5,000.
(7) This partnership was terminated September 1, 1996.
(8) This partnership is currently operating.
64
<PAGE> 73
PREVIOUS DRILLING ACTIVITIES
The following table reflects the previous drilling activity of
partnerships sponsored by the managing partner or its affiliates.
PRIOR PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS
DRILLING RESULTS
Inception Through December 31, 1998
<TABLE>
<CAPTION>
Gross(1) Net(2)
--------------------------- ----------------------------------------
Percent
Partnership Completed Dry Completed Dry Completed
========================================================================================================================
<S> <C> <C> <C> <C> <C>
Mewbourne Oil Ltd., 1977-A(3) ......................... 15 4 8.00 2.33 77%
Mewbourne Oil Ltd., 1978A(7) .......................... 35 11 20.68 6.58 76%
Mewbourne Oil Ltd., 1978B (6) ......................... 31 8 15.66 4.10 79%
Mewbourne Oil Ltd., 1979(3) ........................... 27 12 13.60 5.62 71%
Mewbourne Oil Ltd., 1980(3)(4) ........................ 34 11 3.31 0.96 78%
--- --- ----- ----- ---
Total ........................................... 142 46 61.25 19.59 76%
=== === ===== ===== ===
Mewbourne Development Partners 92 GP(7) ............... 6 4 0.73 0.56 56%
Mewbourne Development Partners 93-A, L.P.(7) .......... 9 0 2.57 0 100%
Mewbourne Development Partners 93-B, L.P.(7) .......... 14 0 2.09 0 100%
Mewbourne Development Partners 94-A, L.P.(7) .......... 8 1 1.19 0.14 89%
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) ............... 6 3 2.03 .74 73%
Mewbourne Energy Partners 96-A, L.P.(7) ............... 14 3 4.75 .73 87%
Mewbourne Energy Partners 97-A, L.P.(7) ............... 14 3 2.67 .45 86%
Mewbourne Energy Partners 98-A, L.P.(5)(7) ............ 6 1 1.41 .18 88%
--- --- ----- ----- ---
Total ........................................... 98 16 25.76 3.13 89%
=== === ===== ===== ===
</TABLE>
- ----------------------
(1) Gross wells include all wells in which investors owned a working
interest.
(2) Net wells is the total percentage of working interest owned by the
partnership in the wells.
(3) This partnership was terminated on November 30, 1994.
(4) The activities of this partnership consisted solely of exploratory
drilling.
(5) As of December 31, 1998, this partnership was engaged in drilling
and completion activities.
(6) This partnership was terminated September 1, 1996.
(7) This partnership is currently operating.
PAYOUT AND NET CASH TABLES
The following tables provide information concerning the operating
results of partnerships sponsored by the managing partner or its affiliates.
65
<PAGE> 74
PRIOR PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS
INVESTORS' PAYOUT TABLE
December 31, 1998
<TABLE>
<CAPTION>
Total Expenditures Revenues Before
Investors' Funds Including Operating Deducting Operating
Partnership Invested (1) Costs (2) Costs (3)
======================================================================================================================
<S> <C> <C> <C>
Mewbourne Oil, Ltd. 1977(4)(5) ........................ 2,643,700 6,269,489 6,527,236
Mewbourne Oil, Ltd. 1978A(4)(9) ....................... 3,121,150 19,613,927 22,074,592
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 1,575,787 1,067,952
Mewbourne Development Partners 93-A, L.P.(9) .......... 1,250,848 1,810,103 915,031
Mewbourne Development Partners 93-B, L.P.(9) .......... 1,175,725 1,814,930 1,066,040
Mewbourne Development Partners 94-A, L.P.(9) .......... 1,080,690 1,614,925 1,044,160
Mewbourne Development Partners 94-B, L.P.(9) .......... 914,151 1,600,052 1,254,978
Mewbourne Development Partners 94-C, L.P.(9) .......... 932,253 1,575,592 1,237,938
Mewbourne Energy Partners 1994 Private L.P.(9) ........ 1,470,000 1,709,724 751,881
Mewbourne Energy Partners 95-A, L.P.(9) ............... 1,619,000 2,113,095 2,163,893
Mewbourne Energy Partners 95-B, L.P.(9) ............... 2,011,000 2,283,788 668,733
Mewbourne Energy Partners 96-A, L.P. (9) .............. 3,872,000 4,524,499 1,893,161
Mewbourne Energy Partners 97-A, L.P.(9) ............... 3,141,000 3,754,125 1,513,880
Mewbourne Energy Partners 98-A, L.P.(7)(9) ............ 3,698,000 1,457,298 5,735
</TABLE>
(1) Total subscriptions less organization, promotion, and, if applicable,
management fees.
(2) Includes total of all subscriptions, organization, promotion, and
management fees, drilling and completion costs, and operating costs.
Assumes all investors paid cash for their interests.
(3) Represents all oil and gas revenues credited to the investors net of
royalties and other burdens. Does not include interest or other
income.
(4) The sharing of the partnership revenues and costs between the managing
partner and the investors was significantly different than the sharing
of the revenues and costs between the managing partner and the general
and limited partners in the partnership.
(5) This partnership was terminated on November 30, 1994.
(6) The activities of this partnership consisted solely of exploratory
drilling.
(7) As of December 31, 1998, this partnership was engaged in drilling
and completion activities.
(8) This partnership was terminated on September 1, 1996.
(9) This partnership is currently operating.
66
<PAGE> 75
PRIOR PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS
INVESTORS' NET CASH TABLE
December 31, 1998
<TABLE>
<CAPTION>
Total Expenditure Total Revenues After
Investors' Funds Net of Operating Deducting Operating
Partnership Invested (1) Costs (2) Costs (3) Cash Distributions(4)
==================================================================================================================================
<S> <C> <C> <C> <C>
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 11,722,902 14,138,567 6,919,320(7)
Mewbourne Oil, Ltd. 1978B(5)(10) ................... 3,247,534 7,687,559 8,420,042 4,861,930(7)
Mewbourne Oil, Ltd. 1979(5)(6) ..................... 3,541,520 7,172,702 13,654,170 11,874,362(7)
Mewbourne Oil, Ltd. 1980(5)(6)(8) .................. 1,637,969 2,895,049 985,648 0(7)
Mewbourne Development Partners 92 GP(11) ........... 1,049,800 1,369,090 861,255 659,835(7)
Mewbourne Development Partners 93-A, L.P.(11) ...... 1,250,848 1,533,054 637,982 518,760(7)
Mewbourne Development Partners 93-B, L.P.(11) ...... 1,175,715 1,516,161 767,271 604,870(7)
Mewbourne Development Partners 94-A, L.P.(11) ...... 1,080,690 1,405,913 775,148 635,580(7)
Mewbourne Development Partners 94-B, L.P.(11) ...... 914,151 1,251,236 906,162 675,150(7)
Mewbourne Development Partners 94-C, L.P.(11) ...... 932,253 1,258,458 920,804 697,950(7)
Mewbourne Energy Partners 1994 Private L.P.(11) .... 1,470,000 1,534,186 576,343 519,750(7)
Mewbourne Energy Partners 95-A, L.P.(11) ........... 1,619,000 1,768,806 1,819,604 1,566,180(7)
Mewbourne Energy Partners 95-B, L.P.(11) ........... 2,011,000 2,033,124 418,069 320,760
Mewbourne Energy Partners 96-A, L.P.(11) ........... 3,872,000 4,037,073 1,405,735 1,158,300
Mewbourne Energy Partners 97-A, L.P.(11) ........... 3,141,000 3,529,688 1,289,443 905,850
Mewbourne Energy Partners 98-A, L.P.(9)(11) ........ 3,698,000 1,456,213 4,650 0
</TABLE>
- ----------------
(1) Total subscriptions less organization, promotion, and management fees.
(2) Includes total of all subscription, organization, promotion, and
management fees, and drilling and completion costs.
(3) Represents all oil and gas revenues credited to the investors net of
royalties, other burdens and operating costs. Does not include
interest or other income.
(4) Net cash distributed to investors.
(5) The sharing of the partnership revenues and costs between the managing
partner and the investors was significantly different than the sharing
of the revenues and costs between the managing partner and the general
and limited partners in the partnership.
(6) This partnership was terminated on November 30, 1994.
(7) The 1977 partnership retained $553,549 of distributable operating cash
flow to reinvest in additional drilling. The 1978A, 1978B, 1979 and
1980 partnerships retained $1,836,329, $3,580,177, $2,326,134 and
$223,343 of distributable operating cash flow to reinvest in
additional drilling, respectively, and $5,391,821, $30,072, $125,133
and $732,939 of distributable operating cash flow was used to repay
borrowings of the partnership, respectively. The 92 GP, 93-A, 93-B,
94-A, 94-B, 94-C and MEP 94-Private partnerships retained $64,165,
$24,614, $76,838, $82,864, $124,975, $111,208, $25,852, respectively
of distributable operating cash flow to complete drilling operations.
(8) The activities of this partnership consisted solely of exploratory
drilling.
(9) As of December 31, 1998, this partnership was engaged in drilling
and completion activities.
(10) This partnership was terminated on September 1, 1996.
(11) This partnership is currently operating.
67
<PAGE> 76
PRIOR PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS
MANAGING PARTNER'S PAYOUT TABLE
December 31, 1998
<TABLE>
<CAPTION>
Total Expenditures Including Revenues Before Deducting
Partnership Operating Costs (1) Operating Costs (2)
=======================================================================================================================
<S> <C> <C>
Mewbourne Oil, Ltd. 1977(3)(4) ........................................ $1,658,587 $2,293,090
Mewbourne Oil, Ltd. 1978A(3)(8) ....................................... 5,950,994 7,706,243
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) ............................... 195,977 266,987
Mewbourne Development Partners 93-A, L.P.(8) .......................... 242,036 228,757
Mewbourne Development Partners 93-B, L.P.(8) .......................... 247,392 266,510
Mewbourne Development Partners 94-A, L.P.(8) .......................... 227,162 261,040
Mewbourne Development Partners 94-B, L.P.(8) .......................... 231,911 313,746
Mewbourne Development Partners 94-C, L.P.(8) .......................... 224,720 309,485
Mewbourne Energy Partners 1994 Private L.P.(8) ........................ 17,269 7,595
Mewbourne Energy Partners 95-A, L.P.(8) ............................... 125,395 323,341
Mewbourne Energy Partners 95-B, L.P.(8) ............................... 106,323 99,926
Mewbourne Energy Partners 96-A, L.P.(8) ............................... 217,403 282,886
Mewbourne Energy Partners 97-A, L.P.(8) ............................... 153,116 226,212
Mewbourne Energy Partners 98-A, L.P.(6)(8) ............................ 45,458 857
</TABLE>
- ----------
(1) Includes managing partner's share of drilling and completion costs.
(2) Represents all oil and gas revenues credited to the managing partner
net of royalties and other burdens. Does not include interest or other
income.
(3) The sharing of the partnership revenues and costs between the managing
partner and the investors was significantly different than the sharing
of the revenues and costs between the managing partner and the general
and limited partners in the partnership.
(4) This partnership was terminated on November 30, 1994.
(5) The activities of this partnership consisted solely of exploratory
drilling.
(6) As of December 31, 1998, this partnership was engaged in drilling and
completion activities.
(7) This partnership was terminated on September 1, 1996.
(8) This partnership is currently operating.
68
<PAGE> 77
PRIOR PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS
MANAGING PARTNER'S NET CASH TABLE
December 31 1998
<TABLE>
<CAPTION>
Total Total
Expenditures Revenues After
Net of Deducting Cash
Partnership Operating Costs (1) Operating Costs (2) Distributions(3)
===================================================================================================================
<S> <C> <C> <C>
Mewbourne Oil, Ltd. 1977(4)(5) ................... $ 762,173 $1,396,676 $1,137,362
Mewbourne Oil, Ltd. 1978A(4)(9) .................. 3,185,126 4,940,375 3,069,544
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) .......... 144,302 215,312 164,959
Mewbourne Development Partners 93-A, L.P.(9) ..... 172,772 159,493 129,690
Mewbourne Development Partners 93-B, L.P.(9) ..... 172,703 191,811 151,212
Mewbourne Development Partners 94-A, L.P.(9) ..... 159,897 193,775 158,895
Mewbourne Development Partners 94-B, L.P.(9) ..... 144,699 226,534 168,795
Mewbourne Development Partners 94-C, L.P.(9) ..... 145,435 230,200 174,487
Mewbourne Energy Partners 1994 Private L.P.(9) ... 15,498 5,824 5,250
Mewbourne Energy Partners 95-A, L.P.(9) .......... 73,950 271,896 234,027
Mewbourne Energy Partners 95-B, L.P.(9) .......... 69,136 62,839 47,930
Mewbourne Energy Partners 96-A, L.P.(9) .......... 144,567 210,050 173,079
Mewbourne Energy Partners 97-A, L.P.(9) .......... 119,583 192,679 135,357
Mewbourne Energy Partners 98-A, L.P. (7) ......... 45,296 695 0
</TABLE>
- ----------
(1) Includes managing partner's share of drilling and completion costs,
exclusive of operating costs.
(2) Represents all oil and gas revenues credited to the managing partner
net of royalties, other burdens and operating costs. Does not include
interest or other income.
(3) Net cash distributed to managing partner. May include return of
capital.
(4) The sharing of the partnership revenues and costs between the managing
partner and the investors was significantly different than the sharing
of the revenues and costs between the managing partner and the general
and limited partners in the partnership.
(5) This partnership was terminated on November 30, 1994.
(6) The activities of this partnership consisted solely of exploratory
drilling.
(7) As of December 31, 1998, this partnership was engaged in drilling and
completion activities.
(8) This partnership was terminated on September 1, 1996.
(9) This partnership is currently operating.
69
<PAGE> 78
TAX DEDUCTIONS AND TAX CREDITS
The following two tables reflect the investors' share of the following
described partnerships' available tax deductions that were reported in the
partnerships' tax returns and such share of tax deductions as a percentage of
their subscriptions. The following percentages do not reflect the effect of the
revenues from the partnership's operations and are subject to audit adjustments
by the IRS. The following tables are based on past experience and should not be
considered as necessarily indicative of the results that may be expected from
an investment in a partnership. It is suggested that prospective subscribers
consult with their tax advisors concerning the tax benefits available to them
taking into account their individual tax circumstances. The tax benefits
available to each investor may vary materially depending upon their individual
tax circumstances.
PRIOR PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS
CUMULATIVE TAX BENEFITS TO INVESTORS
PER $10,000 INVESTMENT
December 31, 1998
<TABLE>
<CAPTION>
Aggregate Cumulative Tax Benefits
First Year Tax Deductions First Year Tax Through December 31,
Partnership Deductions (1) Thereafter (1) Benefits (2) 1998 (2)
=============================================================================================================================
<S> <C> <C> <C> <C>
Mewbourne Oil, Ltd. 1977(3) ...................... $ 2,902 $ 3,326 $ 2,031 $ 4,336
Mewbourne Oil, Ltd. 1978A(7) ..................... 5,709 14,402 3,996 12,056
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 5,270 609 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 4,429 919 2,673
Mewbourne Development Partners 94-A, L.P.(7) ..... 6,065 1,218 2,402 2,884
Mewbourne Development Partners 94-B, L.P.(7) ..... 5,523 1,849 2,187 2,919
Mewbourne Development Partners 94-C, L.P.(7) ..... 4,955 2,252 1,962 2,853
Mewbourne Energy Partners 1994 Private L.P.(7) ... 5,057 2,838 2,003 3,126
Mewbourne Energy Partners 95-A, L.P.(7) .......... 5,239 626 2,075 2,320
Mewbourne Energy Partners 95-B, L.P.(7) .......... 3,716 3,630 1,472 2,909
Mewbourne Energy Partners 96-A, L.P.(7) .......... 3,479 2,795 1,378 2,485
Mewbourne Energy Partners 97-A, L.P.(7) .......... 3,781 3,430 1,497 2,855
Mewbourne Energy Partners 98-A, L.P.(5)(7) ....... 2,867 0 1,135 1,135
</TABLE>
- ----------
(1) Tax deductions include Non-Capital Expenditures.
(2) Tax benefits are tax deductions multiplied by the respective year's
maximum individual tax rate.
(3) This partnership was terminated on November 30, 1994.
(4) The activities of this partnership consisted solely of exploratory
drilling.
(5) As of December 31 1998, this partnership was engaged in drilling and
completion activities.
(6) This partnership was terminated on September 1, 1996.
(7) This partnership is currently operating.
70
<PAGE> 79
PRIOR PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS
CASH DISTRIBUTIONS AND TAX BENEFITS
AS A PERCENT OF TOTAL SUBSCRIPTIONS
December 31, 1998
(Investors' share only)
<TABLE>
<CAPTION>
Cash
Partnership Distributions (1) Tax Benefits (2) Total Return (3)
=================================================================================================================
<S> <C> <C> <C>
Mewbourne Oil, Ltd. 1977(4)(5) ..................... 111.5%(6) 43.3% 154.9%
Mewbourne Oil, Ltd. 1978A(4)(10) ................... 200.2%(6) 120.6% 320.8%
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) ........... 56.9%(6) 27.0% 83.8%
Mewbourne Development Partners 93-A, L.P.(10) ...... 37.5%(6) 25.5% 63.1%
Mewbourne Development Partners 93-B, L.P.(10) ...... 46.6%(6) 26.7% 73.3%
Mewbourne Development Partners 94-A, L.P.(10) ...... 53.2%(6) 28.8% 82.1%
Mewbourne Partners 94-B, L.P.(10) .................. 66.9%(6) 29.2% 96.0%
Mewbourne Development Partners 94-C, L.P.(10) ...... 67.8%(6) 28.5% 96.3%
Mewbourne Energy Partners 1994 Private L.P.(10) .... 35.4%(6) 31.3% 66.6%
Mewbourne Energy Partners 95-A, L.P.(10) ........... 96.7%(6) 23.2% 119.9%
Mewbourne Energy Partners 95-B, L.P.(10) ........... 16.0%(6) 29.1% 45.0%
Mewbourne Energy Partners 96-A, L.P.(10) ........... 29.9%(6) 24.9% 54.8%
Mewbourne Energy Partners 97-A, L.P.(10) ........... 28.8%(6) 28.6% 57.4%
Mewbourne Energy Partners 98-A, L.P.(8)(10) ........ 0.0% 11.4% 11.4%
</TABLE>
- ----------
(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 general
and limited partners in the partnership.
(5) This partnership was terminated on November 30, 1994.
(6) The 1977 partnership retained $553,549 of distributable operating cash
flow to reinvest in additional drilling. The 1978A, 1978B, 1979 and
1980 partnerships retained $1,836,329, $3,580,177, $2,326,134 and
$223,343 of distributable operating cash flow to reinvest in
additional drilling, respectively, and $5,391,821, $30,072, $125,133
and $732,939 of distributable operating cash flow was used to repay
borrowings of the partnership, respectively. The 92 GP, 93-A, 93-B,
94-A, 94-B, 94-C and MEP 94-Private partnerships retained $65,165,
$24,614, $76,838, $82,864, $124,975, $111,208, and $25,852,
respectively of distributable operating cash flow to complete drilling
operations.
(7) The activities of this partnership consisted solely of exploratory
drilling.
(8) As of December 31, 1998, this partnership was engaged in drilling and
completion activities.
(9) This partnership was terminated on September 1, 1996.
(10) This partnership is currently operating.
71
<PAGE> 80
FOR PURPOSES OF MAKING AN INVESTMENT DECISION, THE STRUCTURE AND
ACTIVITIES OF THE FIVE PRIVATE LIMITED PARTNERSHIPS SPONSORED DURING THE YEARS
1977 THROUGH 1980 ARE NOT COMPARABLE TO THE PARTNERSHIPS. IN PARTICULAR, THE
FIVE PRIVATE LIMITED PARTNERSHIPS WERE STRUCTURED TO INCLUDE ONE OR MORE OF THE
FOLLOWING ATTRIBUTES:
o ADDITIONAL ASSESSMENTS WERE REQUIRED FROM THE INVESTORS AS
CONTRASTED TO THE CURRENT OFFERING WHICH DOES NOT ALLOW FOR
ANY ADDITIONAL ASSESSMENTS,
o SIGNIFICANT INDEBTEDNESS WAS INCURRED AS CONTRASTED TO THE
CURRENT OFFERING WHICH CONTEMPLATES ONLY LIMITED BORROWINGS
AND IN LIMITED CIRCUMSTANCES,
o EXCESS INCOME WAS REINVESTED IN ADDITIONAL DRILLING
ACTIVITIES AS CONTRASTED TO THE PROPOSED OFFERING WHICH DOES
NOT CONTEMPLATE SIGNIFICANT REINVESTMENT OF EXCESS INCOME,
o ACTIVITIES WERE ENGAGED IN THAT ARE NOT COMPARABLE TO THE
ACTIVITIES PROPOSED TO BE ENGAGED IN BY THE CURRENT OFFERING,
INCLUDING DRILLING EXPLORATORY WELLS, AS CONTRASTED TO THE
CURRENT OFFERING WHICH CONTEMPLATES THE DRILLING OF PRIMARILY
DEVELOPMENT WELLS, AND/OR
o THE SHARING OF PARTNERSHIP'S REVENUES AND COSTS BETWEEN THE
MANAGING PARTNER AND THE INVESTORS WAS MADE IN A
SIGNIFICANTLY DIFFERENT METHOD AS CONTRASTED TO THE CURRENT
OFFERING.
DUE TO THESE SIGNIFICANT DIFFERENCES, THE DISCLOSURE REGARDING THE PRIOR
ACTIVITIES OF THE FIVE PRIVATE LIMITED PARTNERSHIPS MAY NOT BE RELEVANT TO A
PROSPECTIVE SUBSCRIBER MAKING AN INVESTMENT DECISION WITH RESPECT TO A
PARTNERSHIP AND ARE NOT INDICATIVE OF THE RESULTS THAT MAY BE ACHIEVED BY
EITHER PARTNERSHIP.
RESERVES AND FUTURE NET REVENUES OF PRIOR PROGRAMS
The following table summarizes as of December 31, 1998, 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., Mewbourne Energy Partners 96-A, L.P., Mewbourne Energy
Partners 97-A, L.P. and Mewbourne Energy Partners 94 Private, the future net
revenues attributable to such reserves, and the present value of such future
net revenues based on a constant unescalated price of oil and gas and
discounted at 10% per annum. The following table also summarizes as of December
31, 1998, the estimates of the Proved Undeveloped Reserves of Mewbourne Energy
Partners 95-B, L.P., Mewbourne Energy Partners 96-A, L.P. and Mewbourne Energy
Partners 97-A, L.P., 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, 1998, by Forrest A. Garb & Associates, Inc., the
partnerships' Independent Expert. Current reserve information is not maintained
by the managing partner or its affiliates for the five private limited
partnerships sponsored during the years 1977 through 1980 and therefore the
reserves of such partnerships is not included in the following table. Likewise,
insufficient reserve information currently exists for Mewbourne Energy Partners
98-A, L.P., which is currently engaged in drilling and completion activities,
for the reserves of that partnership to be included in the following table.
THE RESULTS OF PRIOR OPERATIONS SHOULD NOT BE CONSTRUED AS BEING
INDICATIVE OF THE RESULTS TO BE EXPECTED FROM AN INVESTMENT IN A PARTNERSHIP OR
QUANTITIES OF OIL AND GAS WHICH MAY BE DERIVED FROM WELLS TO BE DRILLED BY A
PARTNERSHIP, BUT MERELY SERVE AS ESTIMATES OF PROVED RESERVES FOR A PRIOR
PROGRAM, THE ESTIMATED FUTURE NET REVENUES OF SUCH PROGRAM BASED ON SUCH
RESERVES AND THE PRESENT VALUE OF THE ESTIMATED DISCOUNTED FUTURE NET REVENUES
OF SUCH PROGRAM.
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<PAGE> 81
PRIOR PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS
<TABLE>
<CAPTION>
Proved Reserves and Future Net Revenues
as of December 31, 1998
- -------------------------------------------------------------------------------------------------------------------------
Present
Value
Net Oil Net Gas Estimated Discounted
Category of Proved Reserves Reserves Future Net at 10% Per
Partnership Reserves (BBLS) (MCF) Revenues Annum
- ------------------------------------------------- ------------------ ----------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Mewbourne Development Partners 92 GP (1)......... Proved Developed 545 56,804 77,150 63,533
Mewbourne Development Partners 93-A, L.P. (1).... Proved Developed 4,024 359,468 314,028 200,005
Mewbourne Development Partners 93-B, L.P. (1).... Proved Developed 17,397 433,334 502,773 292,210
Mewbourne Development Partners 94-A, L.P. (1).... Proved Developed 30,447 388,938 536,534 300,175
Mewbourne Development Partners 94-B, L.P. (1).... Proved Developed 49,047 431,003 586,378 372,033
Mewbourne Development Partners 94-C, L.P. (1).... Proved Developed 40,217 493,714 695,282 445,356
Mewbourne Energy Partners 94 Private L.P. (1).... Proved Developed 13,310 893,841 895,357 480,801
Mewbourne Energy Partners 95-A, L.P. (2)......... Proved Developed 31,089 783,195 889,994 547,661
Mewbourne Energy Partners 95-B, L.P. (2)......... Proved Developed 6,940 490,956 546,545 329,717
Proved Undeveloped 244 40,858 66,693 39,483
Total Proved (3) 7,184 531,814 613,238 369,200
Mewbourne Energy Partners 96-A, L.P. (2)......... Proved Developed 27,952 2,552,765 3,415,599 2,075,210
Proved Undeveloped 1,741 289,982 359,333 194,882
Total Proved(3) 29,693 2,842,747 3,774,932 2,270,092
Mewbourne Energy Partners 97-A, L.P. (2)......... Proved Developed 9,725 2,965,142 4,286,668 2,359,442
Proved Undeveloped -- 206,693 284,543 145,110
Total Proved(3) 9,725 3,171,835 4,571,211 2,504,552
</TABLE>
- ----------
(1) Includes the partnership's 80.808081% ownership interest and the
managing partner's 19.191919% ownership interest arising under
drilling program agreement between the managing partner and such
partnership.
(2) Includes the partnership's 87.878788% ownership interest and the
managing partner's 12.121212% ownership interest arising under the
drilling program agreement between the managing partner and such
partnership.
(3) Total Proved Reserves is the sum of Proved Developed Reserves and
Proved Undeveloped Reserves.
Reserve estimates and future net cash flow attributable to such
reserves were prepared using an unescalated price for oil and gas. The price
used was the price being received as of December 31, 1998 which on a weighted
average basis was $9.66 per barrel of oil and $2.04 per mcf of gas. In arriving
at estimated future net revenues, lease operating costs (including overhead
charges under operating agreements), transportation costs, costs of producing,
severance taxes, ad valorem taxes and estimated future capital expenditures
were deducted from revenue anticipated to be received and were not increased to
reflect the anticipated effects of inflation. No deduction was made for
partnership or program overhead expenses, federal income taxes, depletion,
depreciation or amortization or other indirect costs.
There are numerous uncertainties inherent in estimating quantities of
Proved Reserves and in projecting the future rates of production and the timing
of development expenditures. The reserve data represents estimates only.
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<PAGE> 82
Estimates of economically recoverable oil and gas reserves and of the future
net revenues from such reserves are based on a number of factors and
assumptions, such as historical production of the properties as compared with
similar producing properties, the assumed effects of regulation by governmental
agencies, taxes, development costs and workover and remedial costs, all of
which may vary considerably from actual results.
FOR THE FOREGOING REASONS, ESTIMATES OF THE ECONOMICALLY RECOVERABLE
RESERVES OF OIL AND GAS ATTRIBUTABLE TO ANY PARTICULAR GROUP OF PROPERTIES, THE
CLASSIFICATION OF SUCH RESERVES AND ESTIMATES OF THE FUTURE NET REVENUES
EXPECTED THEREFROM, PREPARED AT DIFFERENT TIMES OR PREPARED BY DIFFERENT
ENGINEERS, MAY VARY CONSIDERABLY. THE FUTURE NET REVENUES SHOWN ON THE TABLE
SET FORTH ABOVE SHOULD NOT BE TAKEN AS THE FAIR MARKET VALUE OF THE ESTIMATED
OIL AND GAS RESERVES.
TAX ASPECTS
The following discussion is a general summary only of the United
States federal income and various other tax aspects of partnerships engaged in
oil and gas operations and the tax effects on their partners. It is impractical
to comment on all of the tax consequences of an investment in a partnership or
of the contemplated operations of the partnerships and the drilling programs.
Such consequences may vary depending on an investor partner's particular
circumstances. The discussion is directed primarily to individuals who are
citizens of the United States. Persons who are not individual U.S. citizens,
such as partnerships, corporations, trusts, 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 various facts and circumstances that are
applicable only to him and that may give rise to additional considerations. The
following discussion generally does not address any of those additional
considerations. In addition, an investment in interests may have state and
local tax consequences to a particular investor that are not discussed below.
Accordingly, each potential investor is urged to consult his tax advisor prior
to purchasing interests, with specific reference to the effect of his
particular facts and circumstances on the matters discussed in this prospectus.
See "-- General Tax Provisions" and "Terms of the Offering -- Suitability
Standards."
The tax considerations and opinions of counsel discussed herein are
based on existing provisions of the Internal Revenue Code of 1986, as amended
(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 or become inapplicable at any time. Any new legislation,
judicial decisions, regulations, or other pronouncements may apply
retroactively to transactions prior to the date of such changes and could
significantly modify the statements made and tax considerations discussed in
this prospectus.
A portion of the following discussion focuses on the characterization
of income or losses under various rules as ordinary income or loss or capital
gain or loss. At the present time, the marginal rate of federal income tax
applicable to long-term capital gains may be significantly more favorable for
an individual taxpayer, depending upon income level, than the rate on ordinary
income. Corporations, on the other hand, are taxable at the same rate on
ordinary income and capital gains.
OPINION OF COUNSEL
Vinson & Elkins L.L.P., counsel to the managing partner, has rendered
an opinion that addresses the material federal income tax consequences of an
investment in interests from the perspective of an individual investor who is a
U.S. citizen. The opinion of counsel states the following conclusions:
o At the time of its formation, a partnership and the related drilling
program will each be classified as a partnership for federal income tax
purposes.
o A partnership will not be classified as a corporation pursuant to
the "publicly traded partnership" rules of Section 7704 of the Code.
o Except as noted below, the allocation of income, gains, losses, and
deductions between the general and limited partners and the managing partner
under the partnership agreement, and between a partnership and the
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<PAGE> 83
managing partner as participants in the related drilling program and Mewbourne
Oil Company as drilling program manager under the drilling program agreement,
will be respected for federal income tax purposes.
o The allocation provisions of the partnership agreement and the
program agreement should be in compliance with Section 704(c) of the Code with
respect to property contributed to a drilling program by the managing partner
o The passive activity loss limitations of Section 469 of the Code
will not limit deductions available to a general partner in a partnership
(prior to any conversion of his general partner interest in the partnership to
a limited partner interest) in respect of the partnership's drilling and
operating of wells pursuant to working interests.
o A partnership will not be treated as a "publicly traded partnership"
for purposes of the application of the passive activity loss limitations of
Section 469 of the Code.
o The conversion of a general partner interest to a limited partner
interest will be nontaxable, provided, however, that any reduction in a
partner's share of partnership debt resulting from such conversion will be
treated as a cash distribution which could result in recognition of income.
For the reasons hereinafter described, counsel is unable to render an
opinion with respect to the following specific federal income tax issues:
o The validity of any special allocation of an item that is dependent
on a partner's basis in an oil and gas property (see "-- Partnership Taxation
- -- Allocations").
o The amount, if any, of the Organization and Offering Expenses that
will be deductible or amortizable (see "-- Partnership Taxation -- Organization
and Offering Expenses Sales Commissions and Due Diligence Fees").
o The amount, if any, of the initial Administrative Costs that will be
deductible or amortizable (see "-- Partnership Taxation -- Management Fee,"
- --Partnership Taxation -- Administrative Costs").
o The deductibility in a given year of any Intangible Drilling Costs
incurred in a year prior to the drilling of the wells to which such costs
relate (see "-- Special Features of Oil and Gas Taxation -- Intangible Drilling
Costs").
o The availability or extent of percentage depletion deductions to the
partners (see "-- Special Features of Oil and Gas Taxation -- Depletion").
o Compliance of the allocations under the partnership agreement and
the drilling 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").
o 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 of such regulations and
addresses fairly the principal aspects of each material federal income tax
issue relating to an investment in interests by an individual citizen of the
United States. Finally, in light of the various opinions and assumptions
described above, but subject to the qualifications 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
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<PAGE> 84
share of any partnership deductions and losses. For a discussion of the timing
of the realization of such tax benefits, see "-- Special Features of Oil and Gas
Taxation -- Basis and At Risk Limitations."
The opinion of counsel is based on the facts described in this
prospectus and on representations made by the managing partner, which
representations are described in the following discussion. Any alterations of
the facts or representations may adversely affect the opinion rendered. An
opinion of counsel is not binding on the IRS. No rulings will be requested from
the IRS with respect to the tax consequences of ownership of interests in a
partnership, and no assurance can be given that the 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 a partnership or the
actual amount of an investor partner's share of allowable deductions or losses
from the activities of a partnership.
EACH PROSPECTIVE INVESTOR PARTNER IS ADVISED TO CONSULT HIS TAX
ADVISOR WITH RESPECT TO THE UNITED STATES FEDERAL AND STATE INCOME TAX
CONSEQUENCES OF PARTICIPATION IN A PARTNERSHIP.
EXCEPT AS EXPRESSLY PROVIDED OTHERWISE, THE FOLLOWING DISCUSSION
RELATES TO THE PARTNERSHIPS AND THE DRILLING PROGRAMS SEPARATELY.
PARTNERSHIP TAXATION
General. A partnership is not a taxable entity under federal income
tax laws. Instead, each partner reports on his federal income tax return for
the taxable year in which the partnership's taxable year ends his distributive
share of the income, gains, losses, deductions, and credits of the partnership,
irrespective of any actual cash distributions made to such partner during his
taxable year. For example, a partner will be required to report his share of
partnership income as determined under the partnership's method of accounting,
notwithstanding that the revenues resulting in such income are retained in
whole or in part by the partnership for payment of any partnership expenses or
debt service or for working capital. A partner's share of any partnership
losses in a taxable year may be applied against his income from other sources
only to the extent of the tax basis of his interest in the partnership and to
the extent permitted under the "passive activity" and "at risk" limitations.
See "-- Special Features of Oil and Gas Taxation -- Passive Activity Loss
Limitations" and "-- Special Features of Oil and Gas Taxation -- Basis and At
Risk Limitations."
Partnership Classification. Each partnership will invest in the
related drilling program, which will be a joint operation of that partnership,
the managing partner and the drilling program manager. Each drilling program is
intended to constitute a partnership for tax purposes only; it is not intended
to be a partnership under state law and will not be subject to state law
provisions comparable to those applicable to the partnerships. Expected tax
consequences resulting from an investment in interests are dependent upon the
classification of the partnerships and the drilling programs as partnerships
for federal income tax purposes. The expenditures made and income received by a
drilling program will, if the drilling program is classified as a partnership
for federal income tax purposes, flow through to the related partnership and,
if the partnership is classified as a partnership for federal income tax
purposes, ultimately to the partners in amounts equal to their respective
distributive shares of income, gain, loss, deduction and credit. In order for
the anticipated tax consequences of an investment in interests to materialize,
however, the partnerships and the drilling programs must be classified as
partnerships for federal income tax purposes and not as associations or
"publicly traded partnerships" taxable as corporations. Any references in the
following discussion to partnerships relate only to organizations treated as
partnerships for federal income tax purposes and do not imply that the drilling
program is a partnership for any other purpose.
Treasury Regulations under Section 7701 of the Code provide that a
domestic business entity other than a "corporation" (including a "publicly
traded partnership") may elect whether to be treated as a partnership or an
association for federal income tax purposes. Treasury Regulation Section
301.7701-2 defines "corporations" to include corporations denominated as such
under applicable law, associations, joint stock companies, insurance companies
and other entities distinguishable from the partnerships and the drilling
programs. Under a default rule in the Treasury Regulations, partnerships formed
under a state statute, such as the partnerships, and joint ventures, such
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<PAGE> 85
as the drilling programs, are treated as partnerships for federal income tax
purposes, unless such entities affirmatively elect to be treated as
associations taxable as corporations. The partnerships and the drilling
programs will not elect to be treated as associations taxable as corporations
for federal income tax purposes.
Counsel to the managing partner is of the opinion that, at the time of
formation, each partnership and each drilling program will be treated as a
partnership for federal income tax purposes. Such opinion is based on the
following representations made by the managing partner:
o A partnership will be organized and operated in accordance
with all applicable state statutes and the partnership
agreement and the related drilling program will be organized
and operated in accordance with all applicable state statutes
and the drilling program agreement.
o No participant in a drilling program will elect to be
excluded from the provisions of Subchapter K of Chapter 1 of
Subtitle A of the Code.
o The partnerships and the drilling programs will not elect to
be treated as corporations under the Section 7701 Treasury
Regulations.
No assurance can be given that a partnership or a drilling program
will not lose partnership status as a result of future changes in the law, or
other facts upon which the opinion of counsel is based.
The classification of a partnership or a drilling program as an
association taxable as a corporation for federal income tax purposes would have
a material adverse effect on the general and limited partners. If a drilling
program were determined to be taxable as a corporation, its income, deductions,
and credits would be reported by the drilling program and not its participants,
including the partnership, and the drilling program would be taxed directly on
its taxable income. Distributions by that drilling program to the related
partnership would be treated as taxable dividends to the extent of current and
accumulated earnings and profits of the drilling program. If a partnership were
determined to be taxable as a corporation, its income, deductions, and credits
would be reported by the partnership and not by its general and limited
partners, the partnership would be taxed directly on any net income, and
distributions to its general and limited partners would be treated as taxable
dividends to the extent of current and accumulated earnings and profits of the
partnership. Thus, any tax benefits anticipated from investment in a
partnership would be adversely affected or eliminated if either the partnership
or the related drilling program were treated as a corporation.
Section 7704 of the Code treats certain "publicly traded partnerships"
as corporations for federal income tax purposes. Section 7704 defines a
publicly traded partnership as a partnership in which the partnership interests
are traded on an established securities market or are readily tradable on a
secondary market or the substantial equivalent of a secondary market. The rule
taxing publicly traded partnerships as corporations, however, is specifically
inapplicable to a partnership for any year if at least 90% of the partnership
gross income for such year and all preceding years consists of, among other
things, interest or income from the exploration, development, production,
processing, refining, transportation, or marketing of oil and gas and gains
from the sale of assets used to generate that income. Counsel to the managing
partner is of the opinion that neither partnership will be taxable as a
corporation pursuant to the "publicly traded partnership" rules of Section 7704
of the Code. Such opinion is based on the following representations made by the
managing partner:
o At least 90% of the gross income of each partnership in each
taxable year will consist of interest or income from the exploration,
development, production, processing, refining, transportation, or marketing of
oil and gas or gains from the sale of assets used to generate that income.
o The managing partner does not plan to list interests with, or
trade interests on, an established securities exchange or to
itself make a secondary market in interests.
o The sum of the percentage interests in the capital or profits
of a partnership sold or otherwise disposed of (including
redemptions or repurchases other than repurchases made
pursuant to the Right of Presentment) during any taxable year
will not exceed 2% of the total interests in the
partnership's capital or profits.
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<PAGE> 86
o The managing partner 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.
o The managing partner will enforce the restriction on
transfers in the partnership agreement to prevent the
partnership from qualifying as a "publicly traded
partnership."
Such opinion is not binding on the IRS, and there can be no assurance that the
IRS will not assert that a partnership is a "publicly traded partnership"
subject to treatment as a corporation pursuant to Section 7704 of the Code.
THE FOLLOWING DISCUSSION IS PREDICATED ON THE ASSUMPTION THAT THE
PARTNERSHIPS AND THE DRILLING PROGRAMS WILL BE CLASSIFIED AS PARTNERSHIPS FOR
FEDERAL INCOME TAX PURPOSES AND WILL NOT BE CLASSIFIED AS "PUBLICLY TRADED
PARTNERSHIPS."
Taxation of Partners. For each taxable year, each investor partner
will be required to report on his individual federal income tax return his
share of partnership income, gain, loss, deduction, and credit for such taxable
year. Each investor partner is required to take his share into account in
computing his federal income tax liability regardless of whether he has
received or will receive any cash distributions from a partnership. Therefore,
he may be required to report and pay tax on income that the partnership has
earned but that has not been distributed to him. This may occur, for example,
when a partnership uses revenues to repay partnership borrowings or to pay
nondeductible expenditures.
A distribution of cash to an investor partner generally is not taxable
to such investor partner unless the amount of the distribution exceeds the
investor partner's basis in his interests. Any such excess generally should be
taxable as capital gain, assuming those interests are held as a capital asset.
If, however, any portion of the distribution is considered to be in exchange
for the investor partner's interest in ordinary income items (including
potential recapture of intangible drilling cost, depletion, and depreciation
deductions), that portion will be taxed as ordinary income even if the amount
of the distribution did not exceed the investor partner's tax basis in his
interests. In addition, an investor partner could recognize income if cash
distributions made to him cause his at risk amount to be reduced below zero.
See "Tax Aspects -- Special Features of Oil & Gas Taxation -- Basis and At Risk
Limitations."
The partnerships and the drilling programs will use the calendar year
and the accrual method of accounting for federal income tax purposes. The IRS,
however, could require a partnership or a drilling program to treat particular
items of income, gain, loss, or deduction under a different method of
accounting if it determines that the use of the accrual method with respect to
that item does not clearly reflect income. A change in the method of accounting
could defer deductions or accelerate income.
Allocations. Pursuant to the partnership agreement, all items of
partnership income, gain, loss, deduction, and credit are allocated 100% to the
general and limited partners and 0% to the managing partner.
Each partnership and the related drilling program will maintain a
capital account for each partner or participant in the drilling program which
will be credited (increased) by his or its contributions to the partnership or
drilling program and all items of income and gain allocated to such partner or
participant. Such capital account will be debited (reduced) by all
distributions and all deductions and losses allocated to such partner or
participant. On dissolution and liquidation of a partnership or drilling
program, each partner or participant will be entitled, after payment or
provision for debts and liabilities and adjustment of the partners' or
participants' capital accounts for any unrealized gain or loss in properties to
be distributed in kind, to receive assets equal in value to his or its
respective positive capital account balance (if any), as so adjusted.
Partners are not obligated to restore deficit capital account balances
following the liquidation of their respective interests in a partnership. As
discussed under "Participation in Costs and Revenues," the partnership
agreement provides for modifications in the allocations described above if
necessary to prevent or eliminate any deficit capital account balance for any
partner (taking into account reasonably expected deductions and distributions
in subsequent years).
The manner in which the drilling program agreement allocates among the
participants therein items of cost and revenue and items of income, gain, loss,
deduction, and credit for income tax purposes is discussed under
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<PAGE> 87
"Participation in Costs and Revenues." The drilling program agreement requires
any participant with a deficit capital account balance following the
distribution of liquidation proceeds to restore such deficit to the drilling
program.
Partnership allocations of income, gain, loss, deduction, and credit
among partners are governed generally by Section 704(b) of the Code. Section
704(b) provides that partnership allocations will be recognized for federal
income tax purposes if such allocations either have "substantial economic
effect" or are made (or deemed made) in accordance with the partners'
respective interests in the partnership, determined by taking into account all
relevant facts and circumstances. If an allocation of an item does not have
substantial economic effect, such item will be reallocated among the partners
in accordance with their interests in the partnership.
Treasury Regulations section 1.704-1(b) indicates that allocations
will have economic effect if, throughout the term of the partnership:
(a) they are reflected in the partners' capital accounts,
(b) such capital accounts are respected upon liquidation of
the partnership, and
(c) a partner with a deficit in his capital account following
the distribution of liquidation proceeds is required to restore the
amount of such deficit to the partnership.
If requirements (a) and (b) are satisfied, but requirement (c) is not,
an allocation may nevertheless be considered to have economic effect if the
allocation does not cause or increase a deficit in the recipient partner's
capital account balance (determined after taking into account certain
reasonably anticipated deductions and distributions) and the partnership
agreement contains a "qualified income offset" which provides that a partner
who unexpectedly receives an adjustment, allocation or distribution which
causes or increases a deficit balance will be allocated items of income and
gain in an amount and manner sufficient to eliminate such deficit balance as
quickly as possible. Since:
o the allocations of items of income, gain, loss, and deduction
under the partnership agreement and the drilling program
agreement are reflected in the partners' and participants'
capital accounts,
o those capital accounts will be recognized upon liquidation of
a partnership,
o the drilling program agreement requires a participant with a
deficit capital account balance after the distribution of
liquidation proceeds to restore the amount of such deficit to
the drilling program, and
o 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 drilling program agreement should be considered
to be substantial under Section 704(b) and regulations promulgated thereunder.
Counsel to the managing partner is of the opinion that, except as
discussed in the previous paragraph and below, the allocation of income, gains,
losses, and deductions between the general and limited partners and the
managing partner under the partnership agreement and between a partnership and
as participants under the drilling program agreement will be recognized for
federal income tax purposes.
Under Section 704(c) of the Code, income, gain, loss, and deduction
with respect to property contributed to a partnership by a partner must be
shared among its partners in a manner that takes into account the variation
between
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the partnership's adjusted tax basis in such property and the fair market value
of the property at the time of contribution. It is not expected that property
will be contributed to a partnership by an investor partner but property will
be contributed to the drilling program by the managing partner. Under the
drilling program agreement, the adjusted tax basis with respect to such
contributed property will be allocated to the managing partner and only the
managing partner will be entitled to claim cost depletion with respect to such
property. Accordingly, counsel to the managing partner is of the opinion that
the allocation provisions of the partnership agreement and the drilling program
agreement should be in compliance with Section 704(c) with respect to property
contributed or deemed contributed to a partnership or a drilling program.
Elections and Returns. Each partnership and each drilling program will
be subject to the partnership provisions of the Code and to similar provisions
of any applicable state income tax laws. Each partnership and each drilling
program will adopt the accrual method of accounting and calendar year as its
taxable year for income tax purposes. By March 15 of each year or as soon
thereafter as reasonably possible, each investor partner will receive a report
showing his distributive share of items of income, gain, loss, deduction, and
credit for the preceding year.
The Taxpayer Relief Act of 1997 alters the tax reporting system and
the deficiency collection system applicable to large partnerships and would
make certain additional changes to the treatment of large partnerships which
elect to be subject to such provisions. These provisions are intended to
simplify the administration of the tax rules governing large partnerships which
both partnerships are expected to be eligible to elect to be the subject to
these provisions, the managing partner, as the tax matters partner, has not
determined whether either partnership will elect to have these provisions apply
to such partnership and the partners.
While no federal income tax is required to be paid by an organization
classified as a partnership for federal income tax purposes, a partnership must
file federal income tax information returns which are subject to audit by the
IRS. Any such audit may lead to adjustments, in which event the general and
limited partners may be required to file amended personal federal income tax
returns. Any such audit also may lead to an audit of an investor partner's
individual tax return and adjustments to items unrelated to an investment in
interests.
Determinations of Partnership Items at Partnership Level. For purposes
of reporting, audit, and assessment of additional federal income tax, the tax
treatment of "partnership items" is determined at the partnership level. Each
partner must report such items on his individual tax return in a manner
consistent with the partnership determination. The IRS generally cannot
initiate deficiency proceedings against an individual partner with respect to
partnership items without first conducting an administrative proceeding at the
partnership level as to the correctness of the partnership's treatment of the
item. An individual partner may not file suit for a credit or a refund arising
out of a partnership item without first filing a request for an administrative
proceeding by the IRS at the partnership level. Individual partners are
entitled to notice of such administrative proceedings and decisions 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 general and limited partners, whether or not entitled to
notice, are entitled to participate in the administrative proceedings at the
partnership level, although the partnership agreement provides for waiver of
certain of these rights by the general and limited partners. All general and
limited partners in a partnership, including those not entitled to notice, may
be bound by a settlement reached by the partnership's "tax matters partner,"
which will be the managing partner. If a proposed tax deficiency is contested
in any court by any investor partner of a partnership or by the managing
partner, all general and limited partners of that partnership may be deemed
parties to such litigation and bound by the result reached therein.
Administrative Costs. The managing partner intends to take the
position that Administrative Costs reimbursed to the managing partner or the
drilling program manager by a partnership are deductible in the year of
payment. To the extent that Administrative Costs are determined to constitute
an organization or syndication cost or some other nondeductible cost, such
amount will not give rise to any deduction in the year of payment but, rather,
will be deductible (if at all) only over some period of time. The determination
of the portion (if any) of the Administrative Cost that is deductible and the
timing of any such deduction are factual issues. Therefore, counsel to the
managing partner is unable to render any opinion as to the amount, if any, of
the Administrative Cost reimbursement that will be deductible or amortizable.
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Conversion of General Partner Interests. As discussed under "Terms of
the Offering -- Conversion of General Partner Interests," the general partner
interests in a partnership may be converted to limited partner interests
following the completion of the partnership's drilling activities. Such
conversion will not constitute a sale or exchange. Accordingly, a partner will
not recognize any gain or loss as a result of a conversion of a general partner
interest in a partnership into a limited partner interest in the partnership,
unless the converting general partner's relative share of any partnership
liabilities is reduced as a result of such conversion. Such a reduction would
be treated as a constructive distribution of cash to that general partner,
which would reduce the basis of his interests and would be taxable to the
extent it exceeds his basis or at risk amount. See "Tax Aspects -- Special
Features of Partnership Taxation -- Basis and At Risk Limitations."
A partnership will constructively terminate for federal income tax
purposes if 50% or more of the interests in profits and capital of the
partnership are sold or exchanged in any consecutive 12-month period. The IRS
has ruled that a conversion of a general partner interest to a limited partner
interest in the same partnership does not result in a deemed sale or exchange
of the converted interests and therefore is not taken into account in
determining whether a constructive termination has occurred. Assuming this
ruling is not revoked or modified, constructive termination of a partnership or
a drilling program is unlikely to occur by reason of the conversion of the
interests held by general partners to limited partner interests.
If a constructive termination of a partnership or a drilling program
occurred, the partnership or the drilling program would be treated as
transferring all of its assets and liabilities to a new partnership in exchange
for an interest in the new partnership and, immediately thereafter, the
partnership or the drilling program would be treated as distributing its
interest in the new partnership to the partners or the participants in
liquidation of the partnership or the drilling program. Such a constructive
termination could have adverse federal income tax consequences, such as the
bunching of taxable income within one taxable period with respect to any
investor partner whose taxable year differs from the partnership's, the
recognition of taxable income by any investor partner who is deemed to receive
a constructive distribution of cash in excess of his basis in interests or his
"at risk" amount at the time of the constructive termination, or the loss of
elections made by the partnership. For additional discussion of the tax
consequences of the conversion, see "-- Special Features of Oil and Gas
Taxation -- Passive Activity Loss Limitations."
SPECIAL FEATURES OF OIL AND GAS TAXATION
Following is a summary of some of the principal features of United
States federal income taxation of oil and gas operations which may apply to the
partnerships and the drilling programs.
Lease Acquisition Costs. The cost of acquiring oil and gas leasehold
or similar property interests is a capital expenditure which must be recovered
through depletion deductions if the lease is productive. See "-- Special
Features of Oil and Gas Taxation -- Depletion" below. If a lease is proved
worthless and abandoned, the cost of acquisition less any depletion claimed may
be deducted as an ordinary loss in the year the lease becomes worthless. See
"-- Special Features of Oil and Gas Taxation -- Depreciation" below.
Geophysical Costs. The cost of geophysical exploration must be
capitalized as a Lease Acquisition Cost if a property is (or may be) acquired
or retained on the basis of data from such exploration. Otherwise, such costs
generally may be deducted as ordinary expenses.
Operating and Administrative Costs. Amounts paid for operating a
producing well are deductible as ordinary business expenses, as are
Administrative Costs to the extent they constitute ordinary and necessary
business expenses which are reasonable in amount.
Intangible Drilling Costs. Owners of working interests in oil and gas
properties may elect to deduct Intangible Drilling Costs they incur, such as
expenditures for drilling, labor, wages, hauling, fuel, supplies, and other
costs incident to and necessary for the drilling and preparation of wells for
production. The partnerships and the drilling programs will elect to deduct all
Intangible Drilling Costs. Assuming proper elections, each investor partner
will be entitled to deduct his distributive share of the Intangible Drilling
Costs incurred by or allocable to a partnership, subject to the basis, at risk
and passive activity loss limitations discussed below. See "-- Special Features
of Oil and Gas Taxation -- Basis and At Risk Limitations" and "-- Special
Features of Oil and Gas Taxation -- Passive
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Activity Loss Limitations." Any Intangible Drilling Costs allocable to a
partnership which are incurred prior to the formation of the partnership are
not deductible by the partners even if paid by the partnership. Such costs must
be capitalized as Lease Acquisition Costs. See "-- Special Features of Oil and
Gas Taxation -- Lease Acquisition Costs."
Some capital contributions to a partnership may be expended through
the related drilling program in one year as required under drilling contracts
for services to be performed in the following year. A partnership may deduct
such expenses in the year incurred only if "economic performance" with respect
thereto occurs in such year or, subject to limitations, within 90 days after
the close of such year, and all other requirements for deductions by accrual
basis taxpayers are met. In the case of the drilling of an oil and gas well by
an entity such as a partnership, "economic performance" is generally deemed to
occur when the well is spudded (i.e., boring is commenced). Even if all of
these requirements are met, general and limited partners will be entitled to
deduct their share of any such prepayments only to the extent of the "cash
basis" of their interests, determined without regard to any liability of the
partnership and any amount borrowed by an investor partner with respect to the
partnership. If any of these requirements are not satisfied in the year the
expense is incurred, any deductions attributable to such expense would be
deferred to the subsequent year in which the contract to which such expense
relates is performed and subject to tax law in effect at such time. The
deductibility of any Intangible Drilling Costs by a partnership in the year
incurred is an inherently factual determination predicated largely on future
events. Accordingly, counsel to the managing partner is unable to express any
opinion as to the deductibility in a given year of any Intangible Drilling
Costs paid or incurred in a year prior to the performance of the drilling
activities to which such costs relate. If general and limited partners are
admitted to a partnership late in a calendar year and the partnership expends a
substantial portion of its capital or contracts for required prepayments in
such year which do not meet the requirements discussed above, a significant
portion of any material tax benefits associated with an investment in that
partnership that would otherwise be realized in the year of admission would be
deferred to a subsequent year or years and subject to the tax law in effect at
such time.
Subject to the limitations discussed above, an investor partner who
qualifies as an "independent producer" (see -- Special Features of Oil and Gas
Taxation -- Depletion) will be entitled to deduct his full share of domestic
Intangible Drilling Costs for federal income tax purposes. An investor partner
who does not qualify as an "independent producer" may currently deduct 70% of
the Intangible Drilling Costs and may amortize the remaining 30% of such costs
over a period of 60 months, except that all costs of dry holes may be deducted
in the year the drilling is completed.
Previously deducted Intangible Drilling Costs will be recaptured as
ordinary income upon the disposition by a partnership of property to which such
deductions relate (to the extent of the gain recognized) or upon the
disposition by an investor partner of interests. See "-- Special Features of
Oil and Gas Taxation -- Sale of Gas Property" and "-- Special Features of Oil
and Gas Taxation -- Sale of interests."
Depreciation. The cost of equipment such as casing, tubing, tanks,
pumping units, and other similar property may not be deducted currently. Such
costs must be capitalized and recovered through depreciation. The depreciation
deduction for most equipment used in domestic oil and gas exploration and
production is calculated using an accelerated recovery method and a seven-year
recovery period. Each investor partner will be entitled to his distributive
share of a partnership's depreciation deductions, subject to the general
restrictions discussed in this prospectus.
Depletion. Except as discussed below, an investor partner may deduct a
depletion for percentage depletion with respect to each oil and gas property of
a partnership. General and limited partners must compute their own depletion
allowance and maintain records of the adjusted basis of property for depletion
and other purposes. While a partnership will furnish its general and limited
partners with information relating to this computation, these requirements may
impose an administrative burden on an investor partner.
Percentage depletion is calculated by the owner of an economic
interest in an oil or gas property, or a partner in a partnership (such as the
partnerships and the drilling programs) which holds such an economic interest
as an amount equal to 15% (and in the case of marginal production an additional
1%, subject to a maximum increase of 10%, for each whole dollar by which $20
exceeds the average domestic wellhead price for crude oil for the immediately
preceding fiscal year) of his gross income from the depletable property for the
taxable year. The percentage depletion deduction is limited, however, to 100%
of the taxable income of the owner (or partner) from the
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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, or the natural gas
equivalent, does not exceed 1,000 barrels. This depletable amount may be
allocated between crude oil and natural gas production, with 6,000 cubic feet
of domestic natural gas production regarded as equivalent to one barrel of
crude oil. The 1,000 barrel limitation must be allocated among the independent
producer and controlled or related persons and family members in proportion to
the respective production by such persons during the period in question.
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 excess of the basis of the property). See "-- Special Features of
Oil and Gas Taxation -- Sale of Property" and "-- Special Features of Oil and
Gas Taxation -- Sale of interests."
Because depletion will be computed separately by each investor partner
and not at the partnership level, no assurance can be given, and counsel to the
managing partner is unable to express any opinion, as to the availability or
extent of percentage depletion deductions to the general and limited partners.
Each prospective investor partner should consult his personal tax advisor to
determine whether percentage depletion would be available to him.
Passive Activity Loss Limitations. Generally, a taxpayer can deduct
losses from "passive activities" only against income from passive activities
and can utilize passive activity tax credits only to offset the tax
attributable to passive activity income. The taxpayer cannot use passive
activity losses to offset personal earnings, active business income, or
investment or portfolio income (such as interest, dividends, royalties, or
gains from the sale of assets that generate investment or portfolio income) and
cannot reduce his tax liability attributable to those items with passive
activity credits.
A passive activity is generally defined as any activity that involves
the conduct of a trade or business in which the taxpayer does not materially
participate. Ownership of limited partner interests will be a passive activity
and a limited partner will be subject to the passive activity loss limitations
with respect to his share of partnership losses and deductions. Consequently, a
limited partner's share of partnership losses and deductions may be deducted
only to the extent of his share of partnership income and any income from other
passive activities. Passive activity losses that may not be utilized because of
the passive activity loss limitations may be carried forward to offset passive
activity income in subsequent years.
Interest income (including interest from any production payments
treated as loans for federal income tax purposes and interest from the
investment of a partnership's working capital or other funds) and royalty
income are treated as portfolio income under the passive activity rules and are
not considered to be income from a passive activity. The Treasury Department
also has the authority to prescribe Regulations "requiring net income or gain
from a limited partnership or other passive activity to be treated as not from
a passive activity." No such Regulations have been issued to date, and the
Treasury Department has indicated that any subsequent Regulations on this
subject would be prospective only. No assurance can be given, however, that
subsequent Regulations will not retroactively characterize various items of
partnership income as non-passive.
When a limited partnership disposes of an activity, the limited
partners can deduct their suspended passive activity losses attributable to
that activity. Although unclear, each oil or gas property may constitute a
separate
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activity for purposes of the passive activity rules. Assuming that each oil or
gas property is a separate activity, whenever a partnership sells an oil or gas
property to an unrelated party or abandons it, each limited partner in that
partnership will then be able to deduct any suspended passive activity losses
attributable to that property. If a partnership disposes of only part of its
interest in a property, however, limited partners will 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 that 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 the managing partner is of the
opinion that the passive activity loss limitations will not apply to general
partners in a partnership (prior to any conversion of their general partner
interests to limited partner interests) to the extent that the partnership
drills or operates wells pursuant to working interests. Consequently, each
general partner should be entitled to deduct currently his share of Intangible
Drilling Costs and other deductible expenses allocable to the drilling or
operation of wells pursuant to working interests without regard to the passive
activity loss limitations (but subject to the basis and at risk limitations
discussed below). A general partner's share of partnership income will be
non-passive income, however, that may not be offset by losses from any passive
activities. As discussed below, this rule continues to apply to income
attributable to a general partner's interests that have been converted. The
exception for working interests would not be applicable to any operations of a
partnership other than the drilling and operation of wells pursuant to working
interests. Therefore, if a partnership acquires an interest or participates in
other activities, such activities will be treated as passive activities to the
general partners of that partnership and any losses derived by those general
partners with respect to such activities will be passive activity losses
allowable only to the extent discussed above.
It should be noted that if a general partner is an S corporation, a
limited partnership, a limited liability company, or a trust, the working
interest exception will not apply to the shareholders, limited partners, or
beneficiaries thereof because that form of ownership limits the liability of
the ultimate owners.
As discussed under "Terms of the Offering -- Conversion of General
Partner Interests," the general partner interests in a partnership may be
converted to limited partner interests following the completion of the
partnership's drilling activities. So long as such conversion does not occur
until that time, the interests of the general partners will not be treated as a
passive activity during the drilling period. If, however, a general partner
claims any loss that is treated as an active loss under the working interest
exception, any net income in succeeding taxable years attributable to the
working interest (and any other properties the value of which is enhanced by
drilling, logging, seismic testing, or other activities any part of the costs
of which were borne by the taxpayer as a result of owning such working
interest) will be treated as active income. Thus, if a partnership incurs net
losses during its initial taxable years, any subsequent net income from the
partnership will generally be treated as active income to an investor partner
who acquires general partner interests even after those interests have been
converted to limited partner interests.
If the general partners of a partnership deduct losses under the
working interest exception and their interests are then converted to limited
partner interests during a taxable year, deductions with respect to net loss
wells that are incurred in the year of conversion but after the date of the
conversion are considered passive activity deductions, even if the converted
partners have net income for the taxable year. If the general partner interests
in a partnership are converted to limited partner interests during a taxable
year, this rule may increase both the active income and the passive loss
allocable for such year to the general and limited partners holding those
interests. If the conversion occurs at the beginning of a taxable year, any net
losses of the converted partners for such year will be passive.
The passive activity rules do not apply to corporations, other than S
corporations, personal service corporations, and closely held C corporations. A
closely held C corporation is a corporation in which not more than five
individuals own, directly or indirectly, more than 50% of the value of the
outstanding stock during the last half of the year. An additional exception
from the passive activity rules applies to closely held C corporations that are
not
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personal service corporations. Such closely held C corporations may deduct
passive activity losses against all of their income except portfolio income.
A special provision of the passive activity rules applies to publicly
traded partnerships. If this special provision were to apply to a partnership,
additional limitations would apply, the most significant of which is that a
limited partner could only deduct his share of partnership losses and
deductions against his share of passive activity income from the partnership.
The definition of "publicly traded partnership" for purposes of this special
provision is the same as the definition of "publicly traded partnership" in
section 7704 of the Code, except that this special provision does not include
the 90% gross income exception. See "Tax Aspects -- Partnership Taxation --
Partnership Classification." Based on representations of the managing partner
concerning the anticipated lack of public trading or public markets for the
interests, counsel to the managing partner is of the opinion that the
partnership will not be treated as "publicly traded partnership" for purposes
of the application of the passive activity loss limitations.
Limitations on Interest Deductions. Generally, a taxpayer may deduct
"investment interest" only to the extent of his "net investment income." The
taxpayer may carry forward any unused investment interest to later years when
he has additional net investment income. Investment interest is interest paid
on debt incurred or continued to acquire or carry property held for investment.
Net investment income includes gross income and gains from property held for
investment reduced by any expenses directly connected with the production of
such income and gains. To the extent that interest is attributable to a passive
activity, it is treated as a passive activity deduction and is subject to
limitation under the passive activity rules and not under the investment
interest limitation rules.
Consequently, if a general partner borrows money to purchase
interests, the investment interest limitation may apply to the interest on the
debt. In addition, a general partner's share of partnership income and losses
will be considered investment income and losses for purposes of the investment
interest limitation, and his share of partnership losses will therefore reduce
his net investment income and may affect the deductibility of his other
investment interest, whether or not he borrows to purchase interests.
Interest expense on debt used by a taxpayer to purchase or carry an
interest in a passive activity will be taken into account in computing the
taxpayer's income or loss from the passive activity. There are detailed tracing
and allocation rules with respect to the allocation of interest expense to 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 a partnership to limited partner interests, interest on
debt incurred by a general partner to purchase his interests will be treated as
investment interest or will be taken into account in computing such partner's
income or loss as a limited partner.
Interest on indebtedness incurred or continued to purchase or carry
tax-exempt securities is not deductible. Investors who currently own or
anticipate acquiring tax-exempt securities and contemplate purchasing interests
with borrowed funds are urged to consult their tax advisors.
Because the deductibility of any interest expense by an investor
partner will depend on such investor partner's personal tax situation, counsel
to the managing partner is unable to express any opinion regarding the federal
income tax treatment of interest expense on indebtedness incurred by an
investor partner to acquire his interests.
For Profit Limitation. In addition to the passive activity limitations
discussed above, an individual who engages in an activity without the intent to
make an economic profit therefrom aside from federal income tax benefits may
not take deductions attributable to such activity in excess of the gross income
he derives from the activity (except for deductions allowable without regard to
profit motive). Thus, in any taxable year in which the deductions of a
partnership exceed its gross income, any investor partner who invested in the
partnership without the requisite economic profit motive may be unable to
deduct substantially all of his distributive share of such excess.
Basis and At Risk Limitations. A partner may not deduct in any year any
amount attributable to his share of partnership losses, if any, which is in
excess of his adjusted tax basis in his interest in the partnership at the end
of the
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partnership tax year. An investor partner's initial adjusted tax basis in his
interest in a partnership will equal his cash contributions to the partnership.
It will be increased by any additional cash contributions when made, by his
distributive share of partnership income and gain and by his share of certain
borrowings of the partnership. It will be decreased (but not below zero) by
distributions from the partnership, his distributive share of partnership
losses, depletion deductions on his share of partnership oil and gas income and
any decrease in his share of borrowings of the partnership. Decreases in an
investor partner's share of liabilities that have given rise to a basis
increase will be treated as distributions of cash and, thus, will reduce basis.
In addition to the limitation of losses to an investor partner's
adjusted tax basis, losses allocable to such investor partner in excess of
allocable income during a taxable year may be deducted only to the extent of
the amount with respect to which such investor partner is "at risk" at the
close of the taxable year. An investor partner will be at risk as to the amount
of money contributed, assuming such investor partner uses his personal funds to
make such contribution or borrows the funds on a recourse basis from a lender
unrelated to the partnership, and amounts borrowed for use in the partnership
for which the investor partner is personally liable. The at risk amount will be
increased by such investor partner's share of partnership income and gains and
the amount by which such investor partner's percentage depletion deductions
with respect to partnership property exceed such investor partner's share of
the basis of such property. An investor partner will not be at risk with
respect to amounts protected against loss through nonrecourse financings,
guarantees, stop loss agreements, or "other similar arrangements" (which would
include the managing partner's indemnification obligation to general partners
for liabilities in excess of their capital contributions) or with respect to
amounts borrowed from other parties having an interest in the partnership,
family members or other related parties. The at risk amount is reduced by the
amount of the allowable losses for the taxable year, the amount of
distributions made to the investor partner and such investor partner's
depletion deductions, and the reduced amount determines the extent to which
losses sustained in future years will be deductible. Any loss disallowed as a
result of the application of the at risk provisions may be deducted in future
years to the extent the taxpayer increases his amount at risk. Losses deducted
in a year are subject to recapture in a later year at ordinary income rates in
the event, and to the extent, a taxpayer's adjusted amount at risk falls below
zero.
The at risk limitation applies on an activity-by-activity basis, and
in the case of oil and gas properties, each property is treated as a separate
activity. Thus, an investor's interest in each oil or gas property is treated
separately so that a loss from any one property is limited to the at risk
amount for that property and not the at risk amount for all the investor's oil
and gas properties. It is uncertain how this rule is implemented in the case of
multiple oil and gas properties owned by a single partnership. However, for
taxable years ending on or before the date on which further guidance is
published, the IRS will permit aggregation of properties owned by a partnership
in computing a partner's at risk limitation with respect to such partnership.
If an investor partner must compute his at risk amount separately with respect
to each property owned by the partnership, he may not be allowed to utilize his
share of losses or deductions attributable to a particular property even though
he has a positive at risk amount with respect to the partnership as a whole.
Sale of Property. When a partnership sells property, it will recognize
gain to the extent that the amount realized on the sale exceeds its basis in
the property and will recognize loss to the extent that its basis exceeds the
amount realized. In the case of a sale of an oil or gas property, each investor
partner will compute his gain or loss individually based on his share of the
amount realized (as allocated to him pursuant to the partnership agreement and
the drilling program agreement) and his share of the basis in such property.
The amount realized will include the amount of money received and the fair
market value of any other property received. If the purchaser assumes a
liability in connection with the sale or takes the property subject to a
liability, the amount realized will include the amount of such liability.
If gain is recognized on such sale, the portion of the gain that is
treated as recapture of Intangible Drilling Cost, depletion, or depreciation
deductions will be treated as ordinary income and the remainder generally will
constitute "Section 1231 gain." If loss is recognized on such sale, such loss
generally will constitute "Section 1231 loss."
Each investor partner will be required to report his share of the
portion of the gain that constitutes recapture as ordinary income and must also
take into account his share of the Section 1231 gains and losses along with his
Section 1231 gains and losses from other sources. The characterization of the
investor partner's share of the Section 1231 gains and Section 1231 losses
attributable to partnership properties as either ordinary or capital will
depend on
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the total amount of the investor partner's Section 1231 gains and the total
amount of his Section 1231 losses from all sources for the year. Generally, if
the total amount of the gains exceeds the total amount of the losses, all such
gains and losses will be treated as capital gains and losses, and if the total
amount of the losses exceeds the total amount of the gains, all such gains and
losses will be treated as ordinary income and losses. An investor partner's net
Section 1231 gains, however, will be treated as ordinary income to the extent
of the investor partner's net Section 1231 losses during the immediately
preceding five years, reduced by the Section 1231 losses previously recaptured
under this rule.
Termination of a Partnership. When a partnership is terminated, each
investor partner in that partnership will be taxable, in the taxable year in
which the termination occurs, on his share of partnership income, gain, loss,
and deduction arising prior to the date of termination. General and limited
partners must also take into account their shares of gains or losses resulting
from the sale or other disposition of partnership assets in liquidation of the
partnership.
Upon the termination of a partnership, each investor partner in the
partnership will be required to recognize gain to the extent that the amount of
money distributed to him exceeds the basis of his interests or his amount at
risk with respect to the partnership. See "Tax Aspects -- Special Features of
Oil & Gas Taxation -- Basis and At Risk Limitations." An investor partner will
recognize no loss unless he receives only money, unrealized receivables, and
inventory. In such a case, the investor partner could recognize loss to the
extent that the basis of his interests exceeds the aggregate of the money and
the partnership basis of the property received. If, however, an investor
partner receives more or less than his share of ordinary income items
(including potential recapture of Intangible Drilling Cost, depletion, and
depreciation deductions), the investor partner will be required to recognize
ordinary income or loss to that extent.
An investor partner's basis in any distributed property will be equal
to the basis of his interests, reduced by any money received. The investor
partner's basis will first be allocated to ordinary income assets in an amount
equal to the partnership basis in such assets (which generally will be zero).
Any remaining basis will be allocated, in general, to other properties to the
extent of the partnership's basis in those properties. After this amount, basis
increases are allocated first to properties with unrealized appreciation. A
decrease in basis is required if the partner does not have sufficient basis to
allocate the partnership's full basis in the properties. The basis decrease is
first allocated to property with unrealized depreciation to the extent of the
unrealized depreciation in each property. If insufficient basis is available to
decrease the partner's basis by the full amount of depreciation in each
property, the available basis is allocated to the properties in proportion to
their respective amounts of unrealized depreciation. Any remaining decrease is
allocated to the properties in proportion to their respective adjusted bases.
The decrease made in proportion to the properties' bases is calculated taking
into account any basis decreases made to depreciated property. Any basis
adjustment remaining after the partnership's basis has been fully carried over
is first allocated among those properties with unrealized appreciation to the
full extent of each property's unrealized appreciation. To the extent that the
increase is not fully allocated at this point, it is allocated in proportion to
the properties' respective fair market values.
Sale of Interests. When an investor partner sells an interest
(including 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
ordinary income items (including potential recapture of Intangible Drilling
Cost, depletion, and depreciation deductions) exceeds the portion of the basis
allocable to such items (which generally will be zero), the gain will be
ordinary income. Therefore, a substantial portion of any gain realized upon the
sale of interests may constitute ordinary income. So long as the investor
partner holds his interests as a capital asset (generally, an asset held as an
investment), the remainder of the gain will be capital gain and any loss will
be capital loss. The investor partner will be required to recognize the full
amount of the ordinary income portion even if it exceeds the overall gain on
the sale (in which event the investor partner will also recognize capital loss
to the extent the ordinary income exceeds the overall gain) or there is an
overall loss on the sale (in which event the investor partner will recognize an
offsetting capital loss equal to the ordinary income portion and an additional
capital loss equal to the overall loss on the sale). Gain or loss realized by a
general partner upon the sale of interests will generally constitute active
income or loss, while gain or loss realized by a limited partner upon such a
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sale will constitute passive income or loss (which passive loss may be used to
offset active income only upon a complete disposition of interests) except in
circumstances where a limited partner has received his interest in a
conversion. See "Tax Aspects -- Special Features of Oil & Gas Taxation --
Passive Activity Loss Limitations."
Net capital gains of individual taxpayers currently are taxed at a
minimum statutory rate (20% for capital assets held for more than 18 months)
which is less than the maximum statutory rate applicable to other income
(39.6%). Net capital gains means the excess of net long-term capital gain over
net short-term capital loss.
Generally, the sale of an interest in a partnership has no effect on
the partnership's basis in its assets. If, however, the partnership has made an
election under Section 754 of the 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, the managing partner does not currently intend to make this election
on behalf of either partnership. Under the partnership agreement, such election
may be made only with the consent of the managing partner. The absence of any
such election and of the power to compel the making of such an election may
reduce the value of interests to a potential transferee and may be an
additional impediment to the transferability of interests.
An investor partner who sells interests must notify that partnership
of the transaction and must attach a statement to his federal income tax return
reciting certain facts regarding the sale. Such notice must be given in writing
within 30 days of the sale (or, if earlier, by January 15 of the year following
the year in which the sale occurs) and must include the names and addresses of
the buyer and seller, the taxpayer identification numbers of the buyer and
seller (if known), and the date of the sale. An investor partner who fails to
furnish the relevant information to the partnership may be penalized $50 for
each such failure, unless it is shown that such failure was due to reasonable
cause and not willful neglect. In addition, the partnership will be required to
notify the IRS of any sale of an interest of which it has notice or knowledge
and to report the names, addresses, and taxpayer identification numbers of the
buyer and seller, along with other required information. The partnership is
also required to provide copies of the information it provides to the IRS to
the buyer and seller.
Section 1060 of the 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 a partnership
(through the drilling program) may acquire oil and gas lease is discussed above
under "Proposed Activities -- Farmouts." Some farmouts may be characterized for
tax purposes as partnerships entered into by the related drilling program and
the other party to the farmout. The manner in which the parties to these
farmouts agree to allocate income, gain, loss, deduction, and credit (or any
item 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 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 that partnership
would be adversely affected, or eliminated See -- "Partnership Taxation --
Partnership Classification." One type of farmout in which a drilling program
might be involved is a transaction in which, in exchange for the drilling of a
well on a particular drill site, the drilling party becomes entitled to an
assignment of 100% of the leasehold interest in the drill site acreage (until
such time as his or its drilling, completion and production costs are recovered
out of production therefrom, with a lesser percentage thereafter) and a lesser
fractional interest in the portion of the tract exclusive of the drill site
acreage. The IRS has ruled, in Revenue Ruling 77-176, 1977-1 C.B. 77, that any
transfer of rights in property other than the drill site acreage in this type
of transaction would be deemed a sale of such other property by the party
transferring the property on which gain or loss is realized. The IRS further
ruled that, while the party receiving the acreage and incurring the cost of
drilling the well on the drill site may elect to deduct such costs as
intangible drilling and development costs, such party would realize ordinary
income equal to the value of the acreage earned exclusive of the drill site
acreage.
The managing partner will attempt to structure any farmout or similar
transaction in a way which either eliminates or minimizes to the fullest extent
possible the tax consequences set forth in this ruling and the other adverse
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tax consequences described above. Nonetheless, the ruling may have adverse tax
implications for a drilling program and the related partnership if and when a
drilling program enters into such Farmouts, since such drilling program may
recognize gain or loss upon the transfer or receipt of an interest in the
property.
GENERAL TAX PROVISIONS
Following is a brief summary of some additional federal income tax laws which
may impact upon an investor partner.
OTHER TAX CONSEQUENCES
Alternative Minimum Tax. The individual alternative minimum tax is
imposed at graduated rates of 26% and 28% on "alternative minimum taxable
income" in excess of exemption amounts. The tax thus computed is reduced by the
taxpayer's regular tax liability.
Alternative minimum taxable income is computed by increasing regular
taxable income by tax preference items and recomputing certain items. For an
individual taxpayer, adjustments include such items as the difference between
accelerated depreciation deductions and depreciation deductions under the
alternative system of Section 168(g) of the 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.
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 partnerships. The managing partner will apply for
and obtain a tax shelter registration number with respect to each partnership.
The registration number of a partnership will be furnished to its general and
limited partners, who must include the number on their tax returns for any year
in which any deduction, loss, credit, other tax benefit or any income
attributable to the partnership is claimed or reported, and must furnish the
number to any transferee of their interests (together with other required
information). The managing partner also must maintain lists of investors in the
partnerships and make such lists available to the IRS on request.
ISSUANCE OF A REGISTRATION NUMBER DOES NOT INDICATE THAT THIS
INVESTMENT OR THE CLAIMED TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED OR APPROVED
BY THE INTERNAL REVENUE SERVICE.
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
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required to be shown on the return or (b) $5,000 ($10,000 for a corporation
other than an S corporation or a personal holding company).
Except in the case of understatements attributable to "tax shelter"
items, an item of understatement will not give rise to the penalty if (a) there
is or was "substantial authority" for the taxpayer's treatment of the item or
(b) all facts relevant to the tax treatment of the item are disclosed on the
return or on a statement attached to the return. In the case of partnerships,
the disclosure is to be made on the return of the partnership. However, an
individual partner may make adequate disclosure with respect to partnership
items if specific conditions are met.
In the case of understatements attributable to "tax shelter" items,
the substantial understatement penalty may be avoided only if the taxpayer
establishes that, in addition to having substantial authority for his position,
he reasonably believed the treatment claimed was more likely than not the
proper treatment of the item. A "tax shelter" item is one that arises from a
partnership (or other form of investment) a significant purpose of which is the
avoidance or evasion of federal income tax. An entity should not be considered
to have a significant purpose of avoidance or evasion of federal income tax
merely because it affords itself of percentage depletion allowances, Intangible
Drilling Cost deductions, or certain other deductions. The managing partner
does not believe that tax avoidance is a significant purpose of either
partnership and does not anticipate that these provisions would apply to any
understatement attributable to the disallowance of a partnership item.
Investors are cautioned, however, to consult their tax advisors with respect to
the possible application of the substantial understatement penalty.
Consistency Requirements. General and limited partners must generally
treat partnership items on their federal income tax returns consistently with
the treatment of such items on the partnership information return, unless an
investor partner files a statement with the IRS identifying the inconsistency
or otherwise satisfies the requirements for waiver of the consistency
requirement. Failure to satisfy this requirement will result in an adjustment
to conform the investor partner's treatment of the item with the treatment of
the item on the partnership return. Intentional or negligent disregard of the
consistency requirement may subject an investor partner to substantial
penalties.
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 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 a
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, it is expected that substantially all the income of the partnerships
will constitute UBTI.
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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 a
partnership exceeding $1,000. Although the UBTI rules generally permit a
tax-exempt investor to offset any loss from a 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 a partnership only against passive income from other
unrelated trades or businesses. Tax-exempt investors also should consider
whether investment in a 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 required standards, including,
among other things:
o the exclusive purpose rule of Section 404(a)(1)(A) of ERISA,
o the prudence requirements of Section 404(a)(1)(B) of ERISA,
o the diversification requirements of Section 404(a)(1)(C) of
ERISA, and
o 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 a partnership, unless the
partnership satisfies one of the exceptions set forth in such regulations. It
is anticipated that each partnership will qualify for the "publicly offered
security" exception and that the underlying assets of a partnership should not
be considered "plan assets" for purposes of these regulations. Such issue
involves questions of fact, however, and counsel to the managing partner is not
rendering 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 of interests under these
rules.
State Law Tax Aspects. A partnership, through the related drilling
program, will operate in states and localities which impose taxes on the
partnership's assets or income or on each investor partner based upon his share
of any income derived from partnership activities in such jurisdictions.
Depending upon the location of the partnership's properties and applicable
state and local laws, deductions or credits available to an investor partner
for federal income tax purposes may not be available for state or local income
tax purposes.
It is anticipated that a significant portion of the partnerships'
activities will be in Texas, which imposes a franchise tax on corporations and
limited liability companies "doing business" in that state. General partners
which are corporations or limited liability companies not otherwise considered
to be doing business in Texas which invest through a partnership may be deemed
to be doing business in Texas for purposes of this tax.
To the extent a partnership operates in certain jurisdictions, estate
or inheritance taxes may be payable therein upon the death of an investor
partner. Therefore, an investor partner may be subject to income taxes, estate
or inheritance taxes or both in states or localities in which the partnership
does business as well as in his own state and domicile.
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ANTICIPATED FEDERAL INCOME TAX DEDUCTIONS
The managing partner expects that approximately 75% to 85% of an
investor partner's capital contribution to a partnership will be deductible or
eligible for deduction for federal tax purposes either in the tax year in which
such capital contribution is made or in the subsequent tax year. Due to the
application of the passive activity loss limitations, the percentages of
capital contributions of limited partners that will be deductible will depend
largely upon each such limited partner's tax situation independent of his
investment in interests, and are thus impossible to estimate. These estimates
are based upon the managing partner's assumptions concerning the offering
termination dates for the partnerships and the managing partner's previous
experience concerning the deductibility of the costs of drilling and completing
wells and current federal income tax law. Further, the estimates are based upon
a number of factual assumptions, including an assumption that contracts calling
for the expenditure of a substantial portion of the capital of each partnership
will be entered into in such year and that such expenditures will meet
applicable statutory and judicial requirements for deductibility in that year.
See "Risk Factors -- Tax Risks -- Current Tax Deductions." ACCORDINGLY, THERE
CAN BE NO ASSURANCE THAT THESE ESTIMATED PERCENTAGES OF CAPITAL CONTRIBUTIONS
WILL BE DEDUCTIBLE OR ELIGIBLE FOR DEDUCTIBILITY IN THE YEAR IN WHICH THE
CAPITAL CONTRIBUTION IS MADE.
INDIVIDUAL TAX ADVICE SHOULD BE SOUGHT
THE TAX CONSIDERATIONS ATTENDANT TO AN INVESTMENT IN A PARTNERSHIP ARE
COMPLEX AND VARY WITH INDIVIDUAL CIRCUMSTANCES. EACH PROSPECTIVE INVESTOR
PARTNER SHOULD REVIEW SUCH TAX CONSEQUENCES WITH HIS TAX ADVISOR.
COMPETITION, MARKETS AND REGULATION
COMPETITION
There are a large number of companies and individuals engaged in
exploration for oil and gas and development of oil and gas properties.
Accordingly, the partnerships will encounter strong competition from
independent operators and major oil companies in acquiring oil and gas leases
suitable for development by the partnerships and the related drilling programs.
Many of the companies so engaged have financial resources and staffs
considerably larger than those available to the partnerships.
MARKETS FOR SALE OF PRODUCTION
The ability of a partnership to market oil and natural gas found and
produced, if any, will depend on numerous factors beyond the control of the
partnership, the effect of which factors cannot be accurately predicted or
anticipated. Some of these factors include, without limitation the availability
of other domestic and foreign production, the marketing of competitive fuels,
the proximity and capacity of pipelines, fluctuations in supply and demand, the
availability of a ready market, the effect of United States federal and state
regulation of production, refining, transportation and sales and general
national and worldwide economic conditions. 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 a partnership will be able to market any
oil or natural gas produced by it, or, if such oil or natural gas is marketed,
that favorable prices can be obtained by the partnership. See "Risk Factors --
General Risks Relating to Oil and Natural Gas -- Dependence on Future Prices,
Supply and Demand for Oil and Gas."
The United States natural gas market has undergone several significant
changes over the past few years. The majority of federal price ceilings were
removed in 1985 and the remainder were lifted by the Natural Gas Wellhead
Decontrol Act of 1989. Thus 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.
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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 6.4 million barrels in 1998. 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 621 rigs as of the end of 1998. 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 1998 imports averaged approximately 55% of the
United States' consumption.
In view of the many uncertainties affecting the supply and demand for
oil, gas, and refined petroleum products, the managing partner is unable to
predict future oil and gas prices or the overall effect, if any, that the
decline in demand for and the oversupply of such products will have on a
partnership.
REGULATION OF PRODUCTION
The production of oil and gas found by a drilling program, if any,
will be subject to United States federal and state laws and regulations (and
orders of regulatory bodies 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 oil and gas
lease.
NATURAL GAS PRICES
The Natural Gas Wellhead Decontrol Act of 1989 was enacted on July 26,
1989, and provides that all gas prices are decontrolled at the wellhead
effective January 1, 1993. Accordingly, sales of natural gas by a partnership
generally will not be subject to the maximum lawful price ceilings set by the
Natural Gas Policy Act of 1978, as amended. Thus, market conditions will
determine the prices that a partnership receives from the sale of natural gas
produced from program wells.
OIL AND LIQUID HYDROCARBON PRICE CONTROLS
There are currently no federal price controls on oil production, and
sales of oil, condensate, and natural gas liquids by a partnership can be made
at uncontrolled market prices. However, there can be no assurance that Congress
will not enact controls at any time.
State statutory provisions relating to oil and gas generally require
permits for the drilling of wells and also cover the spacing of wells, the
prevention of waste, the rate of production, the prevention and clean-up of
pollution,
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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 a partnership. No prediction can be made as
to what additional energy legislation may be proposed, if any, nor which bills
may be enacted nor when any such bills, if enacted, would become effective.
REGULATION OF THE ENVIRONMENT
The exploration, development, and production of oil and gas is subject
to various federal and state laws and regulations to protect the environment.
Various states and governmental agencies are considering, and some have
adopted, other laws and regulations regarding environmental control which could
adversely affect the business of a partnership. Compliance with such
legislation and regulations, together with any penalties resulting from
noncompliance therewith, will increase the cost of oil and gas development and
production. All or a portion of these costs may ultimately be borne by a
partnership.
The preceding discussion of regulation of the oil and gas industry is
necessarily brief, and is not intended to constitute a complete discussion of
the various statutes, rules, regulations, or governmental orders to which the
partnerships' and the drilling programs' operations may be subject.
LIABILITY OF GENERAL AND LIMITED PARTNERS
GENERAL PARTNERS
By law, each general partner in a 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 an entire partnership. Furthermore, under some
circumstances, joint working interest owners may be jointly and severally
liable for obligations arising in connection with the development and operation
of the oil and gas lease in which they jointly own an interest. See "Risk
Factors -- Particular Risks Relating to the Interests -- Liability of Joint
Working Interest Owners." Because a partnership will own a working interest in
leases in which the participants in the drilling program, and likely others,
own working interests, the partnership, and therefore the general partners of
that partnership, could be liable for obligations of all such joint working
interest owners.
Pursuant to the terms of the partnership agreements, the general
partners and the managing partner of each partnership will agree that, as among
themselves, each general partner and the managing partner will be responsible
only to pay his pro rata share of that partnership's liabilities and
obligations, and will be entitled to contribution from other general partners
and the managing partner of a partnership if he incurs liability in excess of
his pro rata share. Furthermore, the managing partner will indemnify each
general partner of the partnership. The managing partner will undertake to
indemnify each general partner for any and all partnership-related obligations
and liabilities otherwise allocable to or paid by such general partner which
are in excess of such general partner's share of the partnership's
undistributed assets. However, such contribution rights and indemnity do not
legally negate a general partner's liability for a partnership's obligations,
and a general partner still could be subject to liability in excess of the
amount of his capital contribution if the managing partner should become
bankrupt or for any other reason are unable to meet the financial commitments
of the indemnity. This liability could result in the necessity for a general
partner to make additional payments to the partnership. Due to the uncertain
nature of any such liability, it is not possible to determine the amount of any
such liability.
The managing partner will conduct the operations of each partnership in
a manner designed to reduce the risk that a general partner could be required to
make such additional payments. See "Insurance."
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LIMITED PARTNERS
Under Delaware law, a limited partner is not liable for the
obligations of a limited partnership unless he is also a general partner or, in
addition to the exercise of his rights and powers as a limited partner, he
participates in the control of the partnership's business, and then only to
persons who transact business with the limited partnership reasonably
believing, based upon the limited partner's conduct, that the limited partner
is a general partner. Delaware law provides that certain acts, including the
exercise of the right to vote on matters specified in the partnership
agreement, do not constitute participation by a limited partner in the control
of a limited partnership's business. Assuming that a limited partner does not
take part in the control of a partnership's business and that he otherwise acts
in conformity with the provisions of the partnership agreement, his liability
under Delaware law will be limited, subject to possible exceptions, generally
to the amount of capital he has contributed to the partnership. Under Delaware
law (i) a limited partner is obligated to a partnership to perform any promise
to contribute cash or property or perform services, even if he is unable to
perform because of death, disability, or other reason, and such obligation may
be enforced by a third party creditor of the partnership and (ii) a limited
partner may be liable to the extent of prohibited distributions (as described
below) made to the limited partner, if he knew, at the time of the
distribution, that it was prohibited. A limited partner's liability for the
return of any distribution terminates, however, after the expiration of three
years from the date of the distribution. Under Delaware law, a limited partner
may not receive a distribution from a partnership to the extent that at the
time of and after giving effect to the distribution, all liabilities of the
partnership, other than liabilities to limited partners on account of their
interests, exceed the fair value of the partnership's assets. Under Delaware
law, an assignee who becomes a substituted limited partner of a partnership is
liable for the obligation of his assignor to make capital contributions, except
that the assignee is not obligated for liabilities unknown to him at the time
he became a limited partner and that could not be ascertained from the
partnership agreement.
It is currently anticipated that the partnerships will conduct
substantially all of their business in the states of Texas, Oklahoma, Kansas
and New Mexico, where each partnership will register to do business as a
foreign limited partnership. A partnership may also be deemed to be conducting
business in various states, other than Texas, Oklahoma, Kansas and New Mexico,
in which the partnership acquires and operates properties. The applicability of
state laws to limited partners of a limited partnership such as a partnership
in such a situation and limitations of the liability of limited partners for
the obligations of the limited partnership have not been clearly established in
many jurisdictions. If it were determined that the right or exercise of the
right by the limited partners as a group to remove or replace the managing
partner, to make certain amendments to the partnership agreement, or to take
other action pursuant to the partnership agreement, constitute "control" of a
partnership's business for the purposes of the statutes of any relevant
jurisdiction, a limited partner might be held personally liable for a
partnership's obligations under the laws of such jurisdiction. Further, under
the laws of certain jurisdictions, a limited partner might be liable for other
amounts, such as the amount of any undistributed profits to which such limited
partner is entitled, with interest, or interest on the amount of capital
contributions rightfully returned to him. Maintenance of limited liability will
require compliance with legal requirements in such jurisdictions. The
partnerships and the drilling programs will operate in such a manner as its
managing partner deems reasonable, necessary and appropriate to preserve the
limited liability of limited partners.
SUMMARY OF PARTNERSHIP AGREEMENT AND DRILLING PROGRAM AGREEMENT
The following is a summary of the provisions of the partnership
agreements and the drilling program agreements. This summary is qualified in all
respects by reference to the full text of the Form of Partnership Agreement,
which appears as Exhibit A to this prospectus; and the Form of Drilling Program
Agreement, which appears as Exhibit B to this prospectus. Each prospective
purchaser is urged to review, and be advised with respect to the effect of, the
provisions of the partnership agreement and the drilling program agreement.
TERM
Each partnership will be organized under the Delaware Revised Uniform
Limited Partnership Act. Each drilling program will be a partnership for income
tax purposes only and, for all other purposes, is intended to be an agreement
among Mewbourne Oil Company, as drilling program manager, and the managing
partner and a partnership as joint owners or tenants-in-common of undivided
working interests in the drilling program's oil and gas properties. Each
partnership and the related drilling program will continue until terminated as
provided for in the partnership agreement and the drilling program agreement.
See "-- Dissolution, Liquidation and Termination" below.
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RIGHTS AND POWERS OF PARTNERS
General and Limited Partners. Pursuant to the terms of the partnership
agreements, general and limited partners will have the following rights and
powers with respect to their respective partnership:
(a) to share all charges, credits, and distributions in
accordance with the partnership agreement and share all charges,
credits, and distributions of the related drilling program through the
partnership as discussed under "Participation in Costs and Revenues",
(b) to inspect at their expense books and records relating to
the activities of the partnership through the drilling program, upon
adequate notice and at all reasonable times, other than geophysical,
geological and other similar data and information and studies, maps,
evaluations, and reports derived therefrom which for a reasonable
period of time may be kept confidential because the managing partner
has agreed to keep such matters confidential or has determined in good
faith that such matters should be kept confidential considering the
interests of the partnership and each of its partners, and upon
written request at their expense to have a copy of a list of names and
addresses of all partners mailed to them,
(c) to have on demand true and full information of all
activities of the partnership, through the drilling program, and a
formal account of affairs whenever circumstances render it just and
reasonable,
(d) to have dissolution and winding up of the partnership by
decree of court as provided under Delaware law,
(e) to reconstitute the partnership with a new managing
partner upon the withdrawal or retirement of the managing partner from
the partnership, directly or as a result of a bankruptcy, dissolution,
or similar event that would dissolve the partnership, which causes the
dissolution of the partnership upon the election of a majority in
interest of the general and limited partners,
(f) to terminate any contract between the partnership and the
managing partner or any affiliate of the managing partner by a vote or
written consent of a majority in interest of the general and limited
partners, without penalty upon 60 days' written notice,
(g) to approve the sale of all or substantially all of the
assets of the partnership, except upon liquidation of the partnership,
by the affirmative vote of a majority in interest of the general and
limited partners, except in connection with a Roll-Up transaction
which requires the affirmative vote of at least 66% in interest of the
general and limited partners,
(h) to dissolve the partnership at any time upon the election
of a majority in interest of the general and limited partners,
(i) to permit the assignment by the partnership or the
managing partner of their obligations under the drilling program
agreement, if such permission is required under the drilling program
agreement, by the affirmative vote of a majority in interest of the
general and limited partners,
(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 general and limited
partners, of the drilling program agreement or the waiver of any
rights of the partnership under the drilling program agreement by the
affirmative vote of a majority in interest of the general and limited
partners,
(k) to remove the managing partner and substitute a new
managing partner to operate and carry on the business of the
partnership or, to remove the drilling program manager and substitute
a successor to act in such capacity by the affirmative vote of a
majority in interest of the general and limited partners, and
(l) to propose and vote on certain matters affecting the
partnership as provided in the partnership agreement.
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Limited Partners. Limited partners of a partnership will take no part
in the control of the business or affairs of the partnership or the related
drilling program and will have no voice in the management or operations of that
partnership or drilling program. This lack of management and control is
necessary to insulate the limited partners from liability in excess of their
investment in the partnership and their share of undistributed profits from the
partnership. See "Risk Factors -- Particular Risks Relating to the Interests --
Liability of Limited Partners" and "Liability of General and Limited Partners
- -- Limited Partners." Notwithstanding the foregoing, limited partners shall:
o have the rights described in paragraphs (a) through (l) under
the caption "general and limited partners" above, and
o have their liability for operations of the partnership and
the drilling program limited to the amount of their capital
contributions and to their shares of partnership capital and
undistributed net revenues of the partnership, if any;
provided, however, that under Delaware law the limited
partners may under certain circumstances be required to repay
the partnership amounts previously distributed to them by the
partnership if the partnership does not have sufficient other
assets to satisfy the claims of creditors.
General Partners. The general partners will delegate to the managing
partner the responsibility for the day-to-day operations of the partnerships.
In addition, the general partners will covenant not to exercise the following
rights granted to them under Delaware law:
o the right to withdraw from the partnership,
o the right to act as agent of the partnership or to execute
documents on behalf of the partnership, and
o the right to act other than together with other general
partners constituting a majority in interest of the general
and limited partners to cause the managing partner on behalf
of the partnership to convey partnership property or take any
other action binding on the partnership.
A general partner who violates such covenants is obligated to indemnify the
partnership and the other partners for any loss or liability caused by such
violation. Furthermore, in the event of a dissolution caused by a withdrawing
general partner, upon reconstitution of the partnership, the withdrawing
general partner shall remain subject as a general partner to any liabilities or
obligations of the partnership arising prior to such withdrawal. Upon
withdrawal from the partnership, a general partner is entitled to continue to
receive any distributions to which he is otherwise entitled under the
partnership agreement for the period prior to his withdrawal; however, such
general partner shall not be entitled to receive the fair value of his interest
in the partnership as of the date of such withdrawal based upon his right to
share in distributions from the partnership, and neither the partnership nor
the managing partner has any obligation to repurchase any interest in the
partnership from the withdrawing general partner. The withdrawing general
partner will no longer be entitled to receive any distributions nor shall such
general partner have any rights as an investor partner under the partnership
agreement. The Sharing Ratios will be recalculated among the general and
limited partners without regard to the withdrawing general partner's capital
contribution. See "-- Reconstitution of the Partnership" below.
RIGHTS AND POWERS OF THE MANAGING PARTNER
The managing partner has full and exclusive power, except as limited
by the partnership agreement and applicable law, to manage, control,
administer, and operate the properties, business, and affairs of a partnership.
The managing partner has the authority to enter into a drilling program
agreement on behalf of a partnership. Under the drilling program agreements,
Mewbourne Oil Company as drilling program manager will have the power and
authority to act on behalf of a partnership with respect to the management,
control, and administration of the business and affairs of the related drilling
program and the properties subject to the drilling program agreement.
Under the partnership agreements, the managing partner is required to
devote only such time and effort to the business of the partnership as may be
necessary to promote adequately the interests of that partnership and the
mutual interests of the partners. The managing partner is permitted to engage
in any other business ventures, including the
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ownership and management of oil and gas properties and the organization and
management of other drilling programs. See "Conflicts of Interest."
INDEMNIFICATION OF THE MANAGING PARTNER AND ITS AFFILIATES
Generally, the managing partner must act in good faith and for the
benefit of a 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 a
partnership or the general and limited partners for any loss suffered by the
partnership which arises out of any action or inaction performed or omitted by
the managing partner or such affiliate, if the managing partner in good faith
has determined, as of the time of the conduct or omission, that the course of
conduct or omission was in the best interest of the partnership, the managing
partner or such affiliate was acting on behalf of or performing services for
the partnership, and that such conduct or omission did not constitute
negligence or misconduct. Investors who have questions concerning the duties
and liabilities of the managing partner should consult their own counsel. The
drilling program manager and its affiliates, under the drilling program
agreement, have similar liability.
The partnership agreements also provide that the managing partner and
its affiliates shall be indemnified by a partnership, only from the tangible
net assets of the partnership and not from other assets of the partners, from
and against all losses, judgments, liabilities, expenses, and settlements
sustained by them in connection with acts performed or omitted by the managing
partner or affiliates acting on behalf of or performing services for that
partnership or the related drilling program; provided that, unless otherwise
ordered by a court, the managing partner has determined in good faith, as of
time of the conduct or omission, that the course of conduct or omission was in
the best interests of the partnership and that the conduct or omission did not
constitute negligence or misconduct. Each partnership is authorized to purchase
insurance against liabilities asserted against and expenses incurred by such
persons in connection with the partnership's activities, provided that the
partnership will not bear the cost of that portion of any insurance, other than
insurance customary for the partnership's business, which insures the managing
partner for any liability for which the managing partner may not be indemnified
as discussed above. The drilling program manager has similar rights with
respect to insurance, and the drilling program manager and its affiliates are
entitled to similar indemnification under the drilling program agreement.
The partnership agreements further limit indemnification of the
managing partner by providing that the managing partner, its affiliates and any
Person acting as a broker-dealer will not be indemnified for any losses,
liabilities or expenses arising from or out of a violation of federal or state
securities laws unless:
o there has been a successful adjudication on the merits of
each count involving alleged securities law violations as to
the particular indemnitee and the court approves
indemnification of the litigation costs,
o such claims have been dismissed with prejudice on the merits
by a court of competent jurisdiction as to the particular
indemnitee and the court approves indemnification of the
litigation costs, or
o a court of competent jurisdiction approves a settlement of
the claims against a particular indemnitee and finds that
indemnification of the settlement and related costs should be
made.
Insofar as indemnification for liabilities under the Securities Act of
1933 may be permitted to the managing partner by a partnership agreement, the
partnership has been advised that in the opinion of the Securities and Exchange
Commission and certain state securities authorities such indemnification is
against public policy as expressed in the Securities Act of 1933, and is
therefore unenforceable.
RIGHT OF PRESENTMENT
Each investor partner in a partnership may request that the managing
partner purchase for cash all, but not less than all, of that investor
partner's interests subject to certain limitations. The managing partner may
also cause its affiliate to fulfill its obligation to purchase such investor's
interests. Partners in a partnership formed in 1999 may make such requests in
each of the years 2003 through 2008 and partners in a partnership formed in
2000 may make such request in each of the years 2004 through 2008. If the
interests are subsequently listed on a national securities
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exchange or are traded through the National Association of Securities Dealer's
Automated Quotation System or in the over-the-counter market, the Right of
Presentment may be terminated at the option of the managing partner. Any such
listing could have an adverse effect on the tax consequences of an investment
in interests. See "Tax Aspects Classification of a Partnership for Tax
Purposes" and "Tax Aspects - General Features of Partnership Taxation Passive
Activity Loss Limitations." If the obligation of the managing partner or its
purchaser designee to purchase interests from general and limited partners is
determined to violate any existing or future laws, such obligation will be
eliminated or modified appropriately. See "Terms of the Offering -- Right of
Presentment."
ASSIGNABILITY OF INTERESTS
Assignability of interests is limited. Except by gift or operation of
law or when consented to by the managing partner, an investor partner in a
partnership may assign only whole interests unless the investor partner owns
less than a whole interest and transfers all his interests to one person or
unless such assignment is to the partnership, the managing partner, an
affiliate of the managing partner, or a third person specified by the managing
partner, and an investor partner must retain at least a whole interest in the
event fewer than all of his interests are assigned to any person other than the
partnership, the managing partner, an affiliate of the managing partner, or a
third person specified by the managing partner. In addition, general and
limited partners who are residents of either the State of California, 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
that 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 1933 or would
result in the violation of any applicable state securities laws. A partnership
will not be required to recognize any assignment until the instrument of
assignment has been delivered to the managing partner. In the case of a mere
assignee of interests, the transferring general partner or limited partner
retains all rights other than the right to receive distributions as a general
partner or limited partner. However, an assignee of interests may become a
substituted general partner or limited partner, as the case may be, and thus be
entitled to all of the rights of a general partner or limited partner, only
upon meeting certain conditions, including:
o obtaining the consent of the assignor and the
managing partner to such substitution,
o paying all costs and expenses incurred in connection
with such substitution,
o making certain representations to the managing
partner, and
o executing appropriate documents to evidence its
agreement to be bound by all of the terms and
provisions of the applicable partnership agreement.
A partnership will amend its records at least once each calendar
quarter to effect the substitution of substituted partners. In the case of
assignments, where the assignee does not become a substituted partner, a
partnership shall recognize the assignment not later than the last day of the
calendar month following receipt of notice of assignment and required
documentation. The restrictions on transfer contained in the partnership
agreement of a partnership may have the effect of reducing interest in the
partnership as a potential acquisition target or encouraging persons
considering an acquisition or takeover of the partnership to negotiate with the
partnership's managing partner rather than pursue non-negotiated acquisition or
takeover attempts, although no assurance can be given that they will have that
effect.
The interest of the managing partner in a partnership may not be
assigned except in limited circumstances set forth in the partnership
agreement, including without limitation assignments to affiliates of the
managing partner that agree to assume a proportionate share of the obligations
of the assigning managing partner, dispositions arising out of the merger,
consolidation, reorganization, or similar transaction of the managing partner,
and any pledge by the managing partner. The rights and obligations of the
managing partner and its affiliates with respect to a drilling program under
the drilling program agreement may be assigned to affiliates and successors in
interest by reason of
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merger, consolidation, reorganization, or similar transaction, without the
consent of a majority in interest of the general and limited partners of the
partnership, subject to limitations set forth in the drilling program
agreement, and the managing partner and its affiliates will have the right at
any time to mortgage or pledge its interest in properties of the drilling
program.
REMOVAL OR WITHDRAWAL
A majority in interest of the general and limited partners shall have
the right to remove the managing partner and to elect and substitute a new
managing partner. In such event, the removed managing partner shall be required
to offer to sell a minimum of 20% of, and shall have the right to offer to sell
the remaining 80% of such managing partner's interest in the partnership to the
new managing partner at a price and method of payment mutually agreeable to the
removed managing partner and the new managing partner. If the new managing
partner and the removed managing partner are unable to agree within 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
general and limited partners shall have the right to remove Mewbourne Oil
Company as the drilling program manager. In such event, Mewbourne Oil Company
and its affiliates shall have the right to offer to sell up to 100% of their
collective ownership interests in oil and gas leases subject to the drilling
program agreement to the new drilling program manager. The method of payment
for the removed managing partner's and Mewbourne Oil Company's interest must be
fair and must protect the solvency and liquidity of the partnership.
In the event the managing partner withdraws or retires from a
partnership and such withdrawal or retirement causes dissolution of the
partnership, a majority in interest of the general and limited partners shall
be entitled to reconstitute the partnership and elect and substitute a new
managing partner. Such new managing partner shall be entitled to acquire the
partnership interest of the retiring managing partner on the same basis and in
the same manner as set forth above. The managing partner may not voluntarily
withdraw from a partnership prior to the later to occur of:
o the completion of the partnership's primary drilling
activities under the related drilling program, and
o the fifth anniversary of the date that general and limited
partners were admitted to the partnership.
In order to exercise its right of withdrawal, the managing partner
must give the general and limited partners at least 120 days' advance written
notice.
DISSOLUTION, LIQUIDATION AND TERMINATION
A partnership shall be dissolved upon:
o the occurrence of December 31, 2049,
o the vote or consent in writing of a majority in
interest of the general and limited partners at any
time,
o the sale, disposition, or termination of all or
substantially all of the oil and gas leases then
owned by the partnership,
o the withdrawal, bankruptcy, insolvency, or
dissolution in certain circumstances of the managing
partner, the occurrence of any other event which
would permit a trustee or receiver to acquire
control of the property or affairs of the managing
partner or any other event of withdrawal from the
partnership by the managing partner as provided for
by law; provided that neither the dissolution of the
managing partner as a consequence of merger,
consolidation, recapitalization, or other corporate
reorganization effected under the partnership
agreement shall cause dissolution of the
partnership,
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o the adjudication of insolvency or bankruptcy of the
partnership, or an assignment by the partnership for
the benefit of creditors,
o the withdrawal or retirement of the managing partner,
or
o the occurrence of any other event which, under
applicable law, causes the dissolution of the
partnership.
If dissolution of a partnership occurs due to the withdrawal or
bankruptcy of a general partner, the partnership shall not be terminated but
shall automatically be reconstituted. Upon dissolution of a partnership for any
reason other than bankruptcy or withdrawal of a general partner, unless it is
reconstituted as provided under "-- Rights and Powers of Partners" above, the
managing partner or a liquidator appointed by the managing partner shall wind
up the affairs of the partnership and make final distribution of its assets. In
the event the managing partner is unable to serve as liquidator, the liquidator
shall be appointed by a majority in interest of the general and limited
partners.
After making a proper accounting and paying or making provision for
the payment of existing and contingent liabilities, the liquidator of a
partnership shall sell all remaining assets of the partnership for cash at the
best price available therefor and distribute the proceeds of such sales to the
partners. In the case of a sale in liquidation, the liquidator shall adjust the
capital accounts of the partners 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 a partnership will not be
obligated to restore any negative balance in their capital accounts after the
liquidation of their interests in a partnership. The distribution of cash or
properties to the partners will constitute a complete distribution to the
partners of their respective interests in that partnership and its property.
In the event of a dissolution and liquidation of a partnership
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 a partnership or is otherwise binding on the partners, the liquidator shall
distribute all securities or other assets received from the sale of the
partnership assets to the partners proportionately based on the partners'
positive capital account balances, as so adjusted. In the event of an exchange
offer that is not binding upon all partners, the liquidator shall then exchange
for securities offered in the exchange or tender offer partnership oil and gas
properties having a fair market value equal to the sum of the positive balances
in the capital accounts, as so adjusted, of the partners who elect to accept
the exchange or tender offer. The liquidator shall distribute such securities
to such accepting partners on a basis reflecting the partners' respective
positive capital account balances, adjusted as provided above.
RECONSTITUTION OF A PARTNERSHIP
In the event the managing partner of a partnership withdraws or
retires from the partnership, directly or as a result of a bankruptcy,
dissolution, or similar event that would dissolve the partnership, a majority
in interest of general and limited partners, acting at a meeting to be held
within 90 days following receipt of written notice of such event from the
managing partner, shall be entitled to reconstitute the partnership and elect
and substitute a new managing partner, which may be the retiring managing
partner.
In the event a majority in interest but less than all of the general
and limited partners in a partnership elect to reconstitute the partnership,
the partners' capital accounts shall be adjusted by assuming the sale of all
assets of the partnership for cash at the respective fair market values of such
assets as of the date of dissolution of the partnership and debiting or
crediting each partner's capital account with its respective share of the
hypothetical gains or losses resulting from such assumed sales in the same
manner as such capital account would be debited or credited on the actual sales
of such assets.
The new managing partner shall then sell for cash partnership oil and
gas properties having a fair market value equal to the fair market value of all
partnership oil and gas properties times the ratio of the aggregate of the
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positive balances in the capital accounts, as so adjusted, of the general and
limited partners that have not elected to reconstitute the partnership and the
retiring managing partner, to the extent the retiring managing partner's
aggregate partnership interest was not purchased by the new managing partner,
to the positive balances of all partners. The new managing partner shall then
distribute such cash to the general and limited partners that have elected not
to reconstitute the partnership and to the managing partner, to such extent, in
proportion to the positive balances of their respective capital accounts.
The new managing partner, on behalf of the partners that have elected
not to form the reconstituted partnership, shall retain for the benefit of the
reconstituted partnership an undivided interest in all oil and gas properties
of the partnership remaining after the distributions provided for above.
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 a partnership will covenant not to cause a
dissolution of that partnership by voluntary withdrawal or other voluntary act.
In the event of such a dissolution, however, upon reconstitution of the
partnership, the withdrawing general partner shall remain subject as a general
partner with respect to any liabilities or obligations of the partnership
arising prior to such withdrawal. Upon withdrawal from the partnership, a
general partner is entitled to continue to receive any distributions to which
he is otherwise entitled under the partnership agreement for the period prior
to his withdrawal; however, such general partner shall not be entitled to
receive the fair value of his interest in the partnership as of the date of
such withdrawal based upon his right to share in distributions from the
partnership, and neither the partnership nor the managing partner has any
obligation to repurchase any interest in the partnership from the withdrawing
general partner. The withdrawing general partner will not be entitled to
receive any distributions for the period subsequent to his withdrawal nor shall
such general partner have any rights as an investor partner under the
partnership agreement. The Sharing Ratios will be recalculated among the
general and limited partners without regard to the withdrawing general
partner's capital contribution. If the partnership is reconstituted due to the
bankruptcy of a general partner, the trustee, receiver, or other successor in
interest of the bankrupt general partner shall become liable for all of the
debts and obligations of the bankrupt general partner.
AMENDMENTS
A majority in interest of the general and limited partners of a
partnership may require the amendment of the partnership agreement without the
consent of the managing partner, except that any amendment which would increase
the liability or duties of any partner, change the contributions required of a
partner, provide for the reallocation of profits, losses, or deductions to the
detriment of a partner, establish any new priority in one or more partners as
to the return of capital contributions or as to profits, losses, deductions, or
distributions to the detriment of a partner or cause the partnership to be
taxed as a corporation, must be approved by such partner before it will be
binding upon him. Minor and conformatory amendments and amendments that do not
adversely affect the general and limited partners in any material respect may
be made by the managing partner without the consent of the general and limited
partners.
REPORTS TO PARTNERS
The managing partner will furnish to the general and limited partners
of each partnership semi-annual and annual reports which will contain financial
statements, including a balance sheet and statements of income, partners'
equity and cash flows, all of which shall be prepared in accordance with
generally accepted accounting principles, which statements at fiscal year end
will be audited by an independent certified public accountant. Financial
statements furnished in a partnership's semi-annual reports will not be
audited. Semi-annually, all general and limited partners will also receive a
summary itemization of the transactions between the managing partner or any
affiliate of the managing partner and the partnership showing all items of
compensation received by the managing partner and its affiliates, including
without limitation the average price paid by any affiliate of the managing
partner during the two most recent calendar quarters for oil and gas produced
by program wells purchased by such affiliate and the highest average price paid
by any other substantial purchaser of comparable oil or gas produced in the
field where such program wells are located. Annually beginning with the fiscal
year ending December 31, 2000, as to a partnership formed in 1999, and ending
December 2001, as to a partnership formed in 2000, oil and gas reserve
estimates
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prepared by an independent petroleum engineer will also be furnished to the
general and limited partners. Annual reports will be provided to the general
and limited partners within 120 days after the close of the partnership fiscal
year, and semi-annual reports will be provided within 75 days after the close
of the first six months of the partnership fiscal year. In addition, the
general and limited partners in a partnership shall receive on a monthly basis
while the partnership is participating in the drilling and completion
activities of a drilling program, reports containing a description of the
partnership's acquisition of interests in prospects, including farmins and
farmouts, and the drilling, completion and abandonment of wells thereon. All
general and limited partners will receive a report containing information
necessary for the preparation of their federal income tax returns and any
required state income tax returns by March 15 of each calendar year or as soon
as practicable thereafter. The managing partner will furnish to the general and
limited partners information regarding differences between tax basis of
accounting and the basis of generally accepted accounting principles in
accordance with generally accepted accounting principles. 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 general and
limited partners within 45 days after the close of each quarterly fiscal
period. General and limited partners in a partnership will also receive in such
monthly reports a summary of the status of wells drilled by the partnership.
The managing partner may provide such other reports and financial statements as
it deems necessary or desirable.
ACCESS TO LIST OF GENERAL AND LIMITED PARTNERS
An alphabetical list of the names, addresses and business telephone
numbers of the general and limited partners in a partnership identified as
general partners or limited partners along with the number of interests held by
each of them (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
general and limited partners or his or her designated agent at the principal
office of the partnership upon the request of an investor partner. The Investor
List will be updated at least quarterly to reflect changes in the information
contained in such list. A copy of the Investor List for a partnership will be
mailed to any investor partner in the partnership requesting the Investor List
within ten (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 general and limited partners' voting rights under the partnership
agreement and the exercise of general and limited partners' rights under
federal proxy laws. If the managing partner neglects or refuses to exhibit,
produce, or mail a copy of the Investor List as requested, the managing partner
will be liable to any investor partner requesting the list for the costs,
including attorneys fees, incurred by that investor partner for compelling the
production of the Investor List, and for actual damages suffered by any
investor partner by reason of such refusal or neglect. It shall be a defense
that the actual purpose and reason for the requests for inspection or for a
copy of the Investor List is to secure the list of general and limited partners
or other information for the purpose of selling such list or information or
copies of such list, or of using the same for a commercial purpose other than
in the interest of the applicant as an investor partner relative to the affairs
of the partnership. The managing partner may require the investor partner
requesting the Investor List to represent that the list is not requested for a
commercial purpose unrelated to the investor partner's interest in the
partnership. The above remedies in favor of an investor partner requesting
copies of the Investor List are in addition to, and shall not in any way limit,
other remedies available to general and limited partners under federal law, or
the laws of any state.
103
<PAGE> 112
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 representations and warranties contained in the
partnership agreement, and makes the power of attorney set forth in Section
10.3 of the partnership agreement. Pursuant to the partnership agreement, each
investor partner of a partnership will appoint the managing partner as his
attorney-in-fact, on his behalf and in his name, to execute, swear to and file
all documents or instruments necessary or desirable:
o to comply with the laws of any state in which the
partnership does business,
o to amend the partnership agreement to admit a new or
substituted general partner or limited partner or
make changes required by amendments thereto adopted
by the general and limited partners,
o to amend the partnership agreement to effect the
conversion of the general partners to limited
partners,
o to conduct the business and affairs of the
partnership,
o to reflect the agreement of all of the general and
limited partners if the required majority in
interest of the general and limited partners has
approved any action under the partnership agreement
and amendments to the partnership agreement to
implement such action, and
o to perform other ministerial acts in connection with
the partnership and its operations, all subject to
compliance with the partnership agreement.
Such appointment shall constitute a power coupled with an interest,
shall not be revocable and shall be effectuated 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 by this prospectus and federal
income tax matters as discussed under "Tax Aspects" in this prospectus has been
passed upon by Vinson & Elkins L.L.P., 3700 Trammel Crow Center, 2001 Ross
Avenue, Dallas, Texas 75201-2975.
EXPERTS
The balance sheet of Mewbourne Development Corporation as of June 30,
1998 and the balance sheet of Mewbourne Energy Partners 99-A, L.P. as of April
9, 1999, included in this Registration Statement on Form S-1, have been
included in reliance on the reports of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
The information included in this Registration Statement on Form S-1
regarding the summary of the reserve report as of January 1, 1999, for
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 94 Private L.P., Mewbourne
Energy Partners 95-A, L.P., Mewbourne Energy Partners 95-B, L.P., Mewbourne
Energy Partners 96-A, L.P. and Mewbourne Energy Partners 97-A, L.P. was audited
by Forrest A. Garb & Associates, Inc. and is included in this prospectus in
reliance upon the report of such firm as experts with respect to the matters
covered by its report and the giving of its report.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a Registration Statement on behalf of the partnerships
with the Securities and Exchange Commission under the Securities Act of 1933
relating to the interests being offered by this prospectus. This prospectus
does not contain all of the information set forth in the Registration
Statement, certain portions of which have been omitted pursuant to the rules
and regulations of the Securities and Exchange Commission.
104
<PAGE> 113
For further information about us, the partnerships and the interests
being offered, please review the Registration Statement, including the exhibits
that are filed with it. Statements made in the Registration Statement that
describe documents may not necessarily be complete. We recommend that you also
review the documents that we have filed with the Registration Statement to
obtain a more complete understanding of those documents. A copy of the
Registration Statement is available for inspection without charge at the public
reference facilities maintained by the Securities and Exchange Commission at
450 Fifth Street, N.W., Washington, D.C., 20549, 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 Securities and Exchange Commission at
http://www.sec.gov. Copies of any materials filed as a part of the Registration
Statement may be obtained for a fee from the Public Reference Section of the
Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C.,
20549.
The delivery of this prospectus at any time does not imply that the
information contained in this prospectus is correct as of any time subsequent
to the date of this prospectus.
105
<PAGE> 114
INDEX TO FINANCIAL STATEMENTS
Financial Statement of Mewbourne Development Corporation:
Report of Independent Accountants................................... F1-1
Balance Sheet as of June 30, 1998................................... F1-2
Notes to Balance Sheet.............................................. F1-3
Unaudited Financial Statement of Mewbourne Development Corporation:
Unaudited Balance Sheet as of December 31, 1998..................... F2-1
Notes to Unaudited Balance Sheet.................................... F2-2
Financial Statement of Mewbourne Energy Partners 99-A, L.P.:
Report of Independent Accounts...................................... F3-1
Balance Sheet as of April 9, 1999................................... F3-2
Note to Balance Sheet............................................... F3-3
THE FOLLOWING FINANCIAL STATEMENTS INCLUDE THOSE OF THE MANAGING
PARTNER, MEWBOURNE DEVELOPMENT CORPORATION, IN WHICH THE GENERAL AND LIMITED
PARTNERS WILL ACQUIRE NO INTEREST.
<PAGE> 115
MEWBOURNE DEVELOPMENT CORPORATION
BALANCE SHEET WITH REPORT
OF INDEPENDENT ACCOUNTANTS
JUNE 30, 1998
<PAGE> 116
REPORT OF INDEPENDENT ACCOUNTANTS
September 3, 1998
To the Board of Directors
of Mewbourne Development Corporation
In our opinion, the accompanying balance sheet presents fairly, in all material
respects, the financial position of Mewbourne Development Corporation as of
June 30, 1998 in conformity with generally accepted accounting principles. This
balance sheet is the responsibility of the Company's management; our
responsibility is to express an opinion on this balance sheet based on our
audit. We conducted our audit of this balance sheet in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the balance sheet is
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the balance sheet, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall balance sheet presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Dallas, Texas
F1 - 1
<PAGE> 117
MEWBOURNE DEVELOPMENT CORPORATION
BALANCE SHEET
JUNE 30, 1998
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $1,935,421
Accounts receivable, related party 369,831
----------
Total current assets 2,305,252
Marketable securities available for sale 1,267,181
Investments in partnerships 124,007
Oil and gas properties - full-cost method, net 3,381,179
----------
Total assets $7,077,619
==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable, related party $ 68,718
----------
Deferred income taxes 1,059,882
----------
Stockholder's equity:
Common stock, $1 par value, 1,000 shares authorized,
issued and outstanding 1,000
Paid-in capital in excess of par value of common stock 1,190,262
Retained earnings 4,546,947
Net unrealized gain on marketable securities available for sale 210,810
----------
Total stockholder's equity 5,949,019
----------
Total liabilities and stockholder's equity $7,077,619
==========
</TABLE>
The accompanying notes are an intergral part of this balance sheet
F1 - 2
<PAGE> 118
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. At June 30, 1998, all capitalized costs were subject
to amortization. Gains and losses on the sale or other disposition of
properties are not recognized unless such adjustments would
significantly alter the relationship between capitalized costs and
proved reserves of oil and gas.
Capitalized costs are subject to a ceiling test that limits such costs
to the aggregate of the present value of future net revenues of proved
reserves discounted at 10%, based on current economic and operating
conditions, and the lower of cost or fair value of unproved properties.
REVENUE RECOGNITION
Revenue is normally recognized from jointly owned properties as oil and
gas is produced and sold for the Company's account, although the various
interest owners may take more or less than their proportionate ownership
of the production. The Company uses the entitlements method of
accounting for imbalances. There are no material imbalances at June 30,
1998.
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
<PAGE> 119
MEWBOURNE DEVELOPMENT CORPORATION
NOTES TO BALANCE SHEET
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SECURITIES
All securities are intended to be held for investment purposes and are
therefore classified as "available for sale" which requires that such
securities be carried at fair value with unrealized holding gains or
losses, net of related income tax effects, recorded as a separate
component of stockholder's equity. Realized gains and losses on sales of
securities are determined utilizing the specific identification method.
INVESTMENTS IN PARTNERSHIPS
The Company is managing partner of several oil and gas partnerships. The
Company accounts for its investment in partnerships using the equity
method of accounting.
2. MARKETABLE SECURITIES
Reconciliation of cost to market value as of June 30, 1998 is as
follows:
<TABLE>
<CAPTION>
GROSS UNREALIZED
-------------------------- MARKET
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury Bonds $ 908,613 $ 328,447 $ -- $1,237,060
Equity Securities 18,552 11,569 -- 30,121
---------- ---------- ---------- ----------
$ 927,165 $ 340,016 $ -- $1,267,181
========== ========== ========== ==========
</TABLE>
As of June 30, 1998, the cost of U.S. Treasury Bonds includes $501,614 of
accrued interest income.
Included in the Company's securities portfolio as of June 30, 1998 are
debt securities with a market value of $1,237,060 with scheduled
maturities as follows:
<TABLE>
<S> <C>
Six to ten years $ 684,850
More than ten years 552,210
-------------
$ 1,237,060
=============
</TABLE>
F1 - 4
<PAGE> 120
MEWBOURNE DEVELOPMENT CORPORATION
NOTES TO BALANCE SHEET
3. OIL AND GAS PROPERTIES
Oil and gas properties consist of the following as of June 30, 1998:
<TABLE>
<S> <C>
Proved oil and gas properties $ 6,652,618
Accumulated depreciation, depletion and amortization (3,271,439)
-------------
Net proved oil and gas properties $ 3,381,179
=============
</TABLE>
4. INCOME TAXES
Federal income tax expense is calculated on a current basis at the
Stockholder (consolidated) level and is allocated to its subsidiaries
based on their respective taxable income or loss, and a payable or
receivable is established with the Stockholder. As of June 30, 1998,
federal income tax payable to the Stockholder was $3,692.
In accordance with Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes, the Company calculates its deferred tax
liability as if it were a separate tax paying entity. Deferred income
taxes are recognized for the tax consequences in future years of
differences between the tax basis of assets and liabilities and their
financial reporting amounts at the balance sheet date based on enacted
tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances
are established when necessary to reduce deferred tax assets to the
amount expected to be realized.
The deferred tax liability is comprised of the following temporary
differences as of June 30, 1998:
<TABLE>
<S> <C>
Oil and gas properties $ 930,676
Unrealized gain on marketable securities 129,206
-------------
$ 1,059,882
=============
</TABLE>
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. 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.
F1 - 5
<PAGE> 121
MEWBOURNE DEVELOPMENT CORPORATION
NOTES TO BALANCE SHEET
6. SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED) (CONTINUED)
As of June 30, 1998, the Company had proved oil reserves of 67,279
barrels, and proved gas reserves of 3,621,738 thousand cubic feet (mcf).
Future net cash flows from these reserves are as follows as of June 30,
1998:
<TABLE>
<S> <C>
Future cash inflows $ 9,239,128
Future production costs (3,608,739)
Future development costs (83,051)
Future income tax expense (1,194,189)
-----------
4,353,149
Discount at 10% (1,475,969)
-----------
Standard measure of discounted future net cash flows from estimated
production of proved oil and gas reserves after
income taxes $ 2,877,180
===========
</TABLE>
F1 - 6
<PAGE> 122
MEWBOURNE DEVELOPMENT CORPORATION
BALANCE SHEET (UNAUDITED)
DECEMBER 31, 1998
<PAGE> 123
MEWBOURNE DEVELOPMENT CORPORATION
BALANCE SHEET
(UNAUDITED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents $1,699,594
Accounts receivable, related party 293,398
----------
Total current assets 1,992,992
Marketable securities available for sale 1,359,750
Investment in partnerships 118,886
Oil and gas properties-full-cost method, net 3,999,390
----------
Total assets $7,471,018
==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable, related party $ 3
----------
Deferred income taxes 1,187,432
Stockholder's equity:
Common stock, $1.00 par value, 1,000 shares authorized, 1,000
issued and outstanding
Paid-in capital in excess of par value of common stock 1,190,262
Retained earnings 4,851,050
Net unrealized gain on marketable securities available for sale 241,271
----------
Total stockholder's equity 6,293,583
Total liabilities and stockholder's equity $7,471,018
==========
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F2 - 1
<PAGE> 124
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. At December 31, 1998,
$684,115 of unevaluated cost were excluded from amortization. Gains
and losses on the sale or other disposition of properties are not
recognized unless such adjustments would significantly alter the
relationship between capitalized costs and proved reserves of oil and
gas.
Capitalized costs are subject to a ceiling test that limits such costs
to the aggregate of the present value of future net revenues of proved
reserves discounted at 10% based on current economic and operating
conditions and the lower of cost or fair value of unproved properties.
REVENUE RECOGNITION
Revenue is normally recognized from jointly owned properties as oil
and gas is produced and sold for the Company's account, although the
various interest owners may take more or less than their proportionate
ownership of the production. The Company uses the entitlements method
of accounting for imbalances. There are no material imbalances at
December 31, 1998.
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
<PAGE> 125
MEWBOURNE DEVELOPMENT CORPORATION
NOTES TO UNAUDITED BALANCE SHEET
----------
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SECURITIES
All securities are intended to be held for investment purposes and are
therefore classified as "available for sale" which requires that such
securities be carried at fair value with unrealized holding gains or
losses, net of related income tax effects, recorded as a separate
component of stockholder's equity. Realized gains and losses on sales
of securities are determined utilizing the specific identification
method.
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 investments in partnerships
using the equity method of accounting.
2. MARKETABLE SECURITIES
Reconciliation of cost to market value as of December 31, 1998 is as
follows:
<TABLE>
<CAPTION>
GROSS UNREALIZED
-------------------------- MARKET
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury Bonds $ 948,849 $ 378,771 $ -- $1,327,620
Equity securities 21,756 10,374 -- 32,130
---------- ---------- ---------- ----------
$ 970,605 $ 389,145 $ 0 $1,359,750
========== ========== ========== ==========
</TABLE>
The cost of U.S. Treasury Bonds includes $541,849 of accrued interest
income. All U.S. Treasury Bonds have maturity dates between five to
twenty years.
3. OIL AND GAS PROPERTIES
Oil and gas properties consist of the following as of December 31,
1998:
<TABLE>
<S> <C>
Unproved oil and gas properties $ 684,115
Proved oil and gas properties 6,937,716
Accumulated depreciation, depletion, and amortization (3,622,441)
-----------
Net oil and gas properties $ 3,999,390
===========
</TABLE>
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 December 31, 1998,
federal income tax payable to shareholders was zero.
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
F2 - 3
<PAGE> 126
MEWBOURNE DEVELOPMENT CORPORATION
NOTES TO UNAUDITED BALANCE SHEET
----------
4. INCOME TAXES (CONTINUED)
tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount
expected to be realized.
As of December 31, 1998, the Company's deferred tax liability is
comprised of the following temporary differences:
<TABLE>
<S> <C>
Oil and gas properties $1,039,557
Unrealized gain on marketable securities 147,875
----------
$1,187,432
==========
</TABLE>
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. 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 December 31, 1998, the Company had proved oil reserves of 96,000
barrels and proved gas reserves of 3,983,400 thousand cubic feet
(mcf). Future net revenues and the present value of these reserves as
of December 31, 1998 are as follows:
<TABLE>
<S> <C>
Future cash inflows $ 8,747,100
Future production costs (4,225,836)
Future development costs (187,180)
Future income tax expense (613,983)
-----------
3,720,101
Discount at 10% 1,393,587)
-----------
Standard measure of discounted future net cash flows
from estimated production of proved oil and gas
reserves after income taxes $ 2,326,514
===========
</TABLE>
F2 - 4
<PAGE> 127
MEWBOURNE ENERGY
PARTNERS 99-A, L.P.
BALANCE SHEET WITH REPORT OF
INDEPENDENT ACCOUNTANTS
APRIL 9, 1999 (DATE OF INCEPTION)
<PAGE> 128
REPORT OF INDEPENDENT ACCOUNTANTS
April 12, 1999
To the Board of Directors
Mewbourne Development Corporation
In our opinion, the accompanying balance sheet presents fairly, in all material
respects, the financial position of Mewbourne Energy Partners 99-A, L.P. as of
April 9, 1999 (date of inception) in conformity with generally accepted
accounting principles. This balance sheet is the responsibility of the
Company's management; our responsibility is to express an opinion on this
balance sheet based on our audit. We conducted our audit in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the balance sheet is
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the balance sheet, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall balance sheet presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Dallas, Texas
F3 - 1
<PAGE> 129
MEWBORNE ENERGY PARTNERS 99-A, L.P.
BALANCE SHEET
APRIL 9, 1999
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Cash $ 100
------
Total assets $ 100
------
PARTNER'S CAPITAL
Partner's capital $ 100
------
Total partner's capital $ 100
------
</TABLE>
The accompanying note is an integral part of this balance sheet.
F3 - 2
<PAGE> 130
MEWBOURNE ENERGY PARTNERS 99-A, L.P.
NOTE TO BALANCE SHEET
1. ORGANIZATION
Mewbourne Energy Partners 99-A, L.P. (the "Partnership") was formed on
April 9, 1999. The Partnership 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 interest has not begun; as such, the Partnership's
operations have not commenced. Mewbourne Development Corporation ("MDC")
serves as managing partner.
F3 - 3
<PAGE> 131
EXHIBIT A
AGREEMENT OF PARTNERSHIP
---------------------
MEWBOURNE ENERGY PARTNERS -A, L.P.
---------------------
-------------------------
<PAGE> 132
AGREEMENT OF PARTNERSHIP
MEWBOURNE ENERGY PARTNERS -A, L.P.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
ARTICLE I
FORMATION OF PARTNERSHIP
<S> <C> <C>
SECTION 1.1 Formation.......................................................................A-1
SECTION 1.2 Name............................................................................A-1
SECTION 1.3 Business........................................................................A-1
SECTION 1.4 Principal Office................................................................A-1
SECTION 1.5 Names and Addresses of Partners.................................................A-1
SECTION 1.6 Term............................................................................A-2
SECTION 1.7 Filings.........................................................................A-2
SECTION 1.8 Title to Partnership Property...................................................A-2
SECTION 1.9 Conversion of General Partner Interests into Limited Partner Interests..........A-2
ARTICLE II
DEFINITIONS AND REFERENCES
SECTION 2.1 Defined Terms...................................................................A-3
SECTION 2.2 References and Titles...........................................................A-9
ARTICLE III
CAPITALIZATION
SECTION 3.1 Capital Contributions of Investor Partners......................................A-9
SECTION 3.2 Contributions of Managing Partner...............................................A-9
SECTION 3.3 Return of Contributions.........................................................A-9
SECTION 3.4 Additional Contributions........................................................A-9
ARTICLE IV
ALLOCATIONS AND DISTRIBUTIONS
SECTION 4.1 Allocation Among Partners......................................................A-10
SECTION 4.2 Allocations....................................................................A-10
SECTION 4.3 Distributions..................................................................A-11
SECTION 4.4 Allocations on Transfers.......................................................A-12
ARTICLE V
MANAGEMENT
SECTION 5.1 Power and Authority of Managing Partner........................................A-12
SECTION 5.2 Certain Restrictions on Managing Partner's Power and Authority.................A-14
SECTION 5.3 Services of Managing Partner...................................................A-15
SECTION 5.4 Liability of Managing Partner and Its Affiliates...............................A-16
SECTION 5.5 Indemnification of Managing Partner and Its Affiliates.........................A-16
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SECTION 5.6 Reporting and Legal Expenses...................................................A-17
SECTION 5.7 Administrative Costs...........................................................A-17
SECTION 5.8 Restrictions on Certain Transactions...........................................A-18
SECTION 5.9 Restriction on Voting Interests Held by Managing Partner.......................A-22
SECTION 5.10 Tax Elections..................................................................A-23
SECTION 5.11 Tax Matters Partner............................................................A-23
ARTICLE VI
RIGHTS AND OBLIGATIONS OF INVESTOR PARTNERS
SECTION 6.1 Rights of Investor Partners....................................................A-23
SECTION 6.2 Access of Investor Partners to Geophysical Data................................A-23
SECTION 6.3 Return of Capital Contribution.................................................A-24
SECTION 6.4 Meetings.......................................................................A-24
SECTION 6.5 Voting Rights of Investor Partners.............................................A-24
SECTION 6.6 Conduct of Meeting.............................................................A-24
SECTION 6.7 General Partners Not Agents....................................................A-24
SECTION 6.8 Liabilities of Partners........................................................A-25
ARTICLE VII
BOOKS, RECORDS, CAPITAL ACCOUNTS, REPORTS, AND BANK ACCOUNTS
SECTION 7.1 Books, Records, and Capital Accounts...........................................A-25
SECTION 7.2 Reports........................................................................A-27
SECTION 7.3 Bank Accounts..................................................................A-28
ARTICLE VIII
ASSIGNMENT AND PURCHASE OF INTERESTS;
SUBSTITUTION
SECTION 8.1 Assignments by Investor Partners...............................................A-29
SECTION 8.2 Assignment by Managing Partner.................................................A-30
SECTION 8.3 Right of Presentment...........................................................A-31
SECTION 8.4 Notices of and Limitations on Right of Presentment.............................A-32
SECTION 8.5 Cessation of Right of Presentment..............................................A-33
SECTION 8.6 Removal of Managing Partner....................................................A-33
ARTICLE IX
DISSOLUTION, RECONSTITUTION, LIQUIDATION, AND TERMINATION
SECTION 9.1 Dissolution....................................................................A-34
SECTION 9.2 Covenant Not to Withdraw.......................................................A-35
SECTION 9.3 Reconstitution.................................................................A-35
SECTION 9.4 Liquidation and Termination....................................................A-37
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ARTICLE X
REPRESENTATIONS AND WARRANTIES OF THE MANAGING PARTNER AND POWER OF ATTORNEY
SECTION 10.1 Representations and Warranties of the Managing Partner.........................A-39
SECTION 10.2 Power of Attorney..............................................................A-39
ARTICLE XI
MISCELLANEOUS
SECTION 11.1 Notices........................................................................A-40
SECTION 11.2 Amendment......................................................................A-40
SECTION 11.3 Partition......................................................................A-41
SECTION 11.4 Entire Agreement...............................................................A-41
SECTION 11.5 Severability...................................................................A-41
SECTION 11.6 No Waiver......................................................................A-41
SECTION 11.7 Evidence of Interest...........................................................A-41
SECTION 11.8 Applicable Law.................................................................A-41
SECTION 11.9 Successors and Assigns.........................................................A-41
SECTION 11.10 Counterparts...................................................................A-41
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EXHIBIT A
AGREEMENT OF PARTNERSHIP
MEWBOURNE ENERGY PARTNERS -A, L.P.
THIS AGREEMENT OF PARTNERSHIP (herein called this "Agreement") dated
, , is made by and among Mewbourne Development Corporation, a Delaware
corporation ("MD" and also herein called the "Managing Partner" when acting in
its capacity as Managing Partner of the Partnership), Curtis W. Mewbourne, a
resident of Tyler, Texas (the "Organizational Partner"), and those persons who
execute or adopt this Agreement or counterparts hereof as Investor Partners and
become such (herein called the "Investor Partners"). In consideration of the
mutual covenants and agreements contained herein, the parties hereto do hereby
agree as follows:
ARTICLE I
FORMATION OF PARTNERSHIP
SECTION 1.1 Formation. Subject to the provisions of this Agreement, the
parties hereto do hereby form a limited partnership (herein called the
"Partnership") pursuant to the provisions of the Delaware Act.
SECTION 1.2 Name. The name of the Partnership shall be Mewbourne Energy
Partners__-A, L.P. Subject to all applicable laws, the business of the
Partnership may be conducted under such other name or names (including the name
of the Managing Partner) as the Managing Partner shall determine to be necessary
or desirable. The Managing Partner shall cause to be filed on behalf of the
Partnership such partnership or assumed or fictitious name certificate or
certificates or similar instruments as may from time to time be required by law.
SECTION 1.3 Business. The business of the Partnership shall be the
following: (a) to become a party to the Program Agreement; (b) to acquire Leases
from MOC and its Affiliates and from third parties in accordance with the terms
of the Program Agreement; (c) to explore, drill, develop, operate, and dispose
of such Leases; (d) to produce, collect, store, treat, deliver, market, sell, or
otherwise dispose of oil, gas, and related minerals from such Leases; and (e) to
take all such actions which may be incidental thereto as the Managing Partner
may determine. The Partnership may also purchase or acquire equipment,
processing facilities, and other property associated with such Leases and
acquire interests in and invest in joint ventures and other partnerships
(including affiliated joint ventures or affiliated partnerships) or other
entities (including corporations) that hold or are formed to acquire Leases in
Prospects if, in the judgment of the Managing Partner, such acquisitions or
investments are necessary or desirable to the acquisition by the Partnership of
Leases in Prospects or the drilling and completion of wells thereon. In
addition, the Partnership may participate in any other type of transaction
relating to Leases or Prospects or the drilling and completion of wells thereon
if the economic effect of such transactions is the same as the ownership of such
Leases or Prospects by the Partnership.
SECTION 1.4 Principal Office. The location of the principal place of
business of the Partnership shall be 3901 South Broadway, Tyler, Texas 75701.
The Managing Partner, at any time and from time to time, may change the location
of the Partnership's principal place of business and may establish such
additional place or places of business of the Partnership as the 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,
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the Organizational Partner will withdraw from the Partnership and his
contribution to the capital of the Partnership will be returned without
interest. The name and business, residence, or mailing address of each Investor
Partner will be maintained in the Partnership records. The date upon which each
such person became an Investor Partner shall be the date set forth in
Partnership records. The address of each Investor Partner for the purpose of
receiving notices and all other communications hereunder shall be the address
shown in the Subscription Agreement executed by such Investor Partner or such
other address as may be supplied by such Investor Partner to the Managing
Partner in the manner specified in Section 11.1.
SECTION 1.6 Term. The Partnership shall commence upon the completion of
filing for record of an initial Certificate of Limited Partnership for the
Partnership in accordance with the Delaware Act and shall continue until
terminated in accordance with Article IX.
SECTION 1.7 Filings. Upon the request of the Managing Partner, the
parties hereto shall immediately execute and deliver all such certificates and
other instruments conforming hereto as shall be necessary for the Managing
Partner to accomplish all filing, recording, publishing, and other acts
appropriate to comply with all requirements for the formation and operation of a
limited partnership under the laws of the State of Delaware and for the
formation, qualification, and operation of a limited partnership (or a
partnership in which the Investor Partners have limited liability) in all other
jurisdictions where the Partnership shall propose to conduct business.
SECTION 1.8 Title to Partnership Property. All property owned by the
Partnership, whether real or personal, tangible or intangible, shall be deemed
to be owned by the Partnership as an entity, and no Partner, individually, shall
have any ownership of such property. The Partnership shall hold its assets in
its own name, except that its interests in Leases may be held in the name of the
Program Manager as contemplated by the Program Agreement.
SECTION 1.9 Conversion of General Partner Interests into Limited
Partner Interests. As soon as practicable after the completion of the
Partnership's drilling activities, the Interests held by the General Partners
will be converted to Limited Partner Interests. In order to accomplish such
conversion, the Managing Partner will (a) file an amended certificate of limited
partnership with the Secretary of State of the State of Delaware removing the
General Partners as general partners of the Partnership and (b) take such other
actions as are necessary or appropriate to accomplish conversion of the General
Partner Interests held by the General Partners to Limited Partner Interests.
Notwithstanding the foregoing, the Managing Partner shall not be obligated to
cause the conversion of the General Partner Interests held by the General
Partners to Limited 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.
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ARTICLE II
DEFINITIONS AND REFERENCES
SECTION 2.1 Defined Terms. When used in this Agreement and unless the
context otherwise requires, the following terms shall have the respective
meanings set forth below:
"Administrative Costs" shall mean all customary and routine expenses
incurred by the Managing Partner or its Affiliates for the conduct of the
administration of the Partnership or the Drilling Program, including: legal,
finance, accounting, secretarial, travel, office rent, telephone, data
processing, and other items of a similar nature.
"Adjusted Capital Account" shall mean the capital account maintained
for each Partner as provided in Section 7.1(c) as of the end of each fiscal
year, (a) increased by (i) an amount equal to such Partner's allocable share of
the Partnership's Minimum Gain, as computed on the last day of such fiscal year
in accordance with Treasury Regulation 1.704-2(g), and (ii) the amount of
Partnership indebtedness allocable to such Partner under Section 752 of the Code
with respect to which such Partner is personally liable, and (b) reduced by (i)
depletion deductions reasonably expected to be allocated to such Partner in
subsequent years and charged to such Partner's capital account as provided in
Section 7.1(c), (ii) the amount of all losses and deductions reasonably expected
to be allocated to such Partner in subsequent years under Section 704(e)(2) or
706(d) of the Code and Treasury regulation 1.751-1(b)(2)(ii), and (iii) the
amount of all distributions reasonably expected to be made to such Partner to
the extent that they exceed offsetting increases in such Partner's capital
account that are reasonably expected to occur during (or prior to) the year in
which such distributions are reasonably expected to be made.
"Affiliate" shall mean with respect to another person, (a) any person
directly or indirectly owning, controlling, or holding with power to vote 10% or
more of the outstanding voting securities of or equity interests in such other
person; (b) any person 10% or more of whose outstanding voting securities or
equity interests are directly or indirectly owned, controlled, or held with
power to vote by such other person; (c) any person directly or indirectly
controlling, 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.
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"Capital Expenditures" shall mean those costs associated with property
acquisition and the drilling and completion of oil and gas wells which are
generally accepted as capital expenditures pursuant to the provisions of the
Code.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Delaware Act" shall mean the Delaware Revised Uniform Limited
Partnership Act, as amended from time to time, and any successor to such act.
"Direct Costs" shall mean all actual and necessary costs directly
incurred for the benefit of the Drilling Program and generally attributable to
the goods and services provided to the Drilling Program by parties other than
the Managing Partner or its Affiliates. Direct costs shall not include any cost
otherwise classified as Organization and Offering Expenses, Administrative
Costs, Operating Costs, or Lease Acquisition Costs. Direct Costs include
Reporting and Legal Expenses and may include the cost of services provided by
the Managing Partner or its Affiliates if such services are provided pursuant to
written contracts and in compliance with the terms set forth under Section 5.10
hereof.
"Drilling Program" shall mean the drilling program to be conducted by
the Partnership, MOC, and MD pursuant to the Program Agreement and the rights,
interests, and properties of MD and the Partnership under or subject to the
Program Agreement.
A "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
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related hydrocarbons (or a contractual right to acquire or earn such an
interest) or an undivided interest therein or portion thereof (including those
covering only certain Horizons or depths), together with all easements, permits,
licenses, servitudes, and rights-of-way situated upon or used or held for future
use in connection with the exploration, development, or operation of such
interest.
"Lease Acquisition Costs" shall mean, when used to describe the costs
of any Lease, the sum of (a) all monetary consideration paid or given for such
Lease to a non-Affiliate of the Managing Partner, including but not limited to
lease bonuses and advance rentals paid to a non-Affiliate of the Managing
Partner, (b) all costs of lease acquisition and title examination, including but
not limited to curing or defending title, title insurance or examination costs,
brokerage commissions, the fees and wages of landmen and lease brokers and their
expenses, filing fees, recording costs, transfer taxes, and like charges paid in
connection with the acquisition of such Lease, (c) all delay rentals and other
similar payments and ad valorem taxes paid with respect to such Lease, (d) such
portion as may be allocated to such Lease in accordance with generally accepted
accounting principles and industry standards of all reasonable, necessary, and
actual costs and expenses of MD or its Affiliates for geological, geophysical,
seismic, land, engineering, drafting, accounting, legal, and other like services
together with related administrative and general overhead costs involved in
lease acquisition and Prospect evaluation including such costs and expenses
which could otherwise be classified hereunder as Administrative Costs, (e) such
portion as may be allocated to such Lease in accordance with generally accepted
accounting principles and industry standards of all costs and expenses incurred
in the acquisition of farmouts, subleases, pooling orders, or other oil and gas
interests, (f) interest and points actually incurred on funds borrowed to pay
any of the costs and expenses described in clauses (a) through (e) above
calculated from the date of their incurrence until the date of their
reimbursement by the Drilling Program at the time a Lease is acquired by the
Drilling Program, and (g) with respect to Leases held on the date hereof by or
acquired thereafter by MD or an Affiliate thereof, in which an interest is
transferred to the Participants pursuant to the Program Agreement, the costs of
such transfer; provided that the expenses described in clauses (c), (d), (e),
and (f) shall have been incurred by MOC or its Affiliates not more than 36
months prior to the acquisition by the Drilling Program of such Lease; and
provided further, that such time limitation shall not be applicable to Leases
having a primary term of five or more years. Lease Acquisition Costs of a Lease
shall not include any costs or expenses otherwise allocable herein to such Lease
and which represent costs or expenses incurred in connection with the past
drilling of wells which are not producers of sufficient quantities of oil or
natural gas to make commercially reasonable their continued operation.
"Limited Partner" shall mean each person who executes or adopts this
Agreement or a counterpart hereof as a Limited Partner and is accepted by the
Managing Partner as such and any person who becomes a substituted Limited
Partner in accordance with the terms hereof. Limited Partner shall not including
the Managing Partner, except to the extent that the Managing Partner owns
Limited Partner Interests.
"Limited Partner Interest" shall mean a Limited Partner's unit of
interest in the Partnership representing a $1,000 Capital Contribution.
"Majority in Interest" shall mean, with respect to any agreement or
vote of the Investor Partners, Investor Partners whose combined Interests, at
the time of determination thereof, exceed 50% of the total Interests held of
record by Investor Partners who are eligible to participate in such agreement or
vote.
"Managing Partner" shall mean MD which will serve as the initial
managing partner of the Partnership, and any person who becomes a substituted
Managing Partner in accordance with the terms hereof.
"Minimum Gain" shall mean the amount of gain that would be realized by
the Partnership if it disposed of (in a taxable transaction) all Partnership
properties which are subject to non-recourse liabilities of the Partnership in
full satisfaction of such liabilities, computed in accordance with the
provisions of Treasury regulation 1.704-2(b)(2).
"MOC" shall mean Mewbourne Oil Company, a Delaware corporation.
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"Operating Agreement" shall mean a Model Form Operating Agreement based
upon the American Association of Petroleum Landmen Form 610-1989 and among the
other attached exhibits thereto, an accounting procedure for joint operations
issued by the Council of Petroleum Accountants Societies of North America, each
of which containing modifications that are customary and usual for the
geographic area in which the Partnership intends to conduct operations.
"Operating Costs" shall mean all expenditures made and costs incurred
in producing and marketing oil and gas from completed wells, including, in
addition to labor, fuel, repairs, hauling, materials, supplies, utility charges,
and other costs incident to or therefrom, ad valorem and severance taxes,
insurance and casualty loss expense, and compensation to well operators or
others for services rendered in conducting such operations.
"Organizational Partner" shall mean Curtis W. Mewbourne, a resident of
Tyler, Texas, who has agreed to serve as an initial limited partner.
"Overriding Royalty Interest" shall mean an interest in the oil and gas
produced pursuant to a specified Lease or Leases, or the proceeds from the sale
thereof, carved out of the Working Interest, to be received free and clear of
all costs of development, operation, or maintenance.
"Partners" shall mean the Managing Partner and the Investor Partners.
"Partnership" shall have the meaning assigned to such term in Section
1.1.
"Partnership Year" shall mean a period of one year with the first
Partnership Year commencing as of the date the Investor Partners are first
admitted to the Partnership and ending immediately prior to the anniversary of
such date and with each succeeding Partnership Year commencing as of the
anniversary of such date and ending immediately prior to the next succeeding
anniversary date.
"person" shall refer to any natural person, partnership, corporation,
association, trust, or other legal entity.
"Production Purchase or Income Program" shall mean any program whose
investment objective is to directly acquire, hold, operate, and/or dispose of
producing oil and gas properties. Such a program may acquire any type of
ownership interest in a producing property, including but not limited to,
Working Interests, royalties, or production payments. A program which spends at
least 90% of Capital Contributions and funds borrowed (excluding Organization
and Offering Expenses) in the above described activities is presumed to be a
Production Purchase or Income Program.
"Program Agreement" shall mean the Program Agreement by and among the
Partnership, MD, and MOC.
"Program Manager" shall mean MOC and any person who becomes the
successor Program Manager in accordance with the Program Agreement.
"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.
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"Proved Reserves" shall mean those quantities of crude oil, natural
gas, and natural gas liquids which, upon analysis of geological and engineering
data, appear with reasonable certainty to be recoverable in future years from
known oil and gas reservoirs under existing economic and operating conditions.
Proved Reserves are limited to those quantities of oil and gas which can be
expected, with little doubt, to be recoverable commercially at current prices
and costs, under existing regulatory practices and with existing conventional
equipment and operating methods. Depending upon their status or development,
Proved Reserves will be subdivided into the following classifications and have
the following definitions.
(a) "Proved Developed Reserves" shall mean Proved Reserves which can be
expected to be recovered through existing wells with existing equipment and
operating methods. This classification shall include:
(i) "Proved Developed Producing Reserves," which are Proved
Developed Reserves which are expected to be produced from existing
completion intervals now open for production in existing wells; and
(ii) "Proved Developed Non-Producing Reserves," which are
Proved Developed Reserves which exist behind the casing of existing
wells, or at minor depths below the present bottom of such wells, which
are expected to be produced through these wells in the predictable
future, where the cost of making oil and gas available for production
is relatively small compared to the cost of a new well.
Additional oil and gas expected to be obtained through the
application of improved recovery techniques are included as Proved
Developed Reserves only after testing by a pilot project or after the
operation of an installed program has confirmed through production that
increased recovery will be achieved.
(b) "Proved Undeveloped Reserves" shall mean all reserves which are
expected to be recovered from additional wells on undrilled acreage or from
existing wells where a relatively major expenditure is required for
recompletion. Such reserves on undrilled acreage are limited to those drilling
units offsetting productive units which are reasonably certain of production
when drilled. Proved Reserves for other undrilled units are claimed only where
it can be demonstrated with reasonable certainty, based on accepted geological,
geophysical, and engineering studies and data, that there is continuity of
reservoir from an existing productive formation. No estimates for Proved
Undeveloped Reserves are attributable to any improved recovery technique
contemplated for any acreage, unless the techniques to be employed have been
proved effective by actual tests in the same areas and reservoir.
"Reconstituted Partnership" shall mean the Partnership, as
reconstituted by a Majority in Interest of the Investor Partners pursuant to
Section 9.3.
"Reporting and Legal Expenses" shall mean all third party accounting
fees, costs, and expenses associated with obtaining audits of books and records,
third party engineering fees, costs, and expenses associated with annual reserve
reports and third party attorney's fees and other legal fees, costs, and
expenses associated with matters that are attributable to the Drilling Program's
or the Partnership's business.
"Right of Presentment" shall mean the right of Investor Partners to
request the Managing Partner to purchase for cash all of that Investor Partner's
Interests, subject to certain conditions.
"Roll-Up" shall mean a transaction involving the acquisition, merger,
conversion, or consolidation, either directly or indirectly, of the Partnership
and the issuance of securities of a Roll-Up Entity. Such term does not include a
transaction involving securities of any Partnership that have been listed for at
least 12 months on a national exchange or traded through the National
Association of Securities Dealers Automated Quotation National Market System or
a
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transaction involving the conversion to corporate, trust, or association form of
only the Partnership if, as a consequence of the transaction, there will be no
significant adverse change in any of the following:
(i) voting rights;
(ii) the term of existence of the Partnership;
(iii) Sponsor compensation; or
(iv) the Partnership's investment objectives.
"Roll-Up Entity" shall mean a partnership, trust, corporation, or other
entity that would be created or survive after the successful completion of a
proposed Roll-Up transaction.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Sharing Ratio" shall mean for any Partner the proportion obtained by
dividing (i) the amount of such Partner's Capital Contribution to the
Partnership by (ii) the sum of all Capital Contributions paid by the Partners to
the Partnership; provided that in the event of an assignment (voluntarily, by
operation of law or this Agreement, or otherwise) by an Investor Partner of
Interests in the Partnership (other than an assignment solely of an interest in
distributions of Partnership revenues), the Sharing Ratio of such Investor
Partner shall be proportionately reduced, based upon the number of Interests
assigned compared to the total number of Interests owned by such Investor
Partner prior to such assignment, and the assignee of such Interests shall
succeed to a proportionate share of the Sharing Ratio of his assignor that is
attributable to the Interests transferred to such assignee.
"Simulated Basis" shall have the meaning assigned to such term in
Section 7.1(c).
"Simulated Depletion" shall have the meaning assigned to such term in
Section 7.1(c).
"Simulated Gain" shall have the meaning assigned to such term in
Section 7.1(c).
"Simulated Loss" shall have the meaning assigned to such term in
Section 7.1(c).
"Sponsor" shall mean any person directly or indirectly instrumental in
organizing, wholly or in part, the Partnership, or any person who will manage or
is entitled to manage or participate in the management or control of the
Partnership. "Sponsor" includes the Managing Partner and any other person who
actually controls or selects any person who controls 25% or more of the
exploratory, developmental, or producing activities of the Partnership, or any
segment thereof, even if that person had not entered into a contract at the time
of formation of the Partnership. "Sponsor" does not include wholly independent
third parties such as attorneys, accountants, and underwriters whose only
compensation is for professional services rendered in connection with the
offering of the Interests. Whenever the context of this Agreement so requires,
the term "Sponsor" shall be deemed to include Affiliates of the person deemed to
be a Sponsor.
"Subscription Agreement" shall mean, with respect to an Investor
Partner, the subscription agreement executed and delivered by such Investor
Partner in connection with his subscription to purchase Interests and containing
certain representations, warranties, covenants, and agreements of such Investor
Partner.
"Super Majority in Interest" shall mean, with respect to any agreement
or vote of Investor Partners, Investor Partners whose combined Interests, at the
time of the determination thereof, exceed 66% of the total Interests held by
Investor Partners who are eligible to participate in such agreement or vote.
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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. The Managing Partner
shall not be required to make any contribution to the capital of the
Partnership. Although the Managing Partner is personally liable under applicable
laws for the debts and obligations of the Partnership, all such debts and
obligations shall be paid or discharged first with Partnership assets (including
insurance proceeds) before the Managing Partner shall be obligated to pay or
discharge any such debt or obligation with its personal assets.
SECTION 3.3 Return of Contributions. Except as otherwise provided in
this Agreement, no interest shall accrue on any Capital Contributions to the
Partnership. No Partner shall have the right to withdraw or to be repaid any
capital contributed by such Partner except as otherwise specifically provided in
this Agreement or required by law.
SECTION 3.4 Additional Contributions. No Investor Partner shall be
required or obligated (a) to contribute any capital to the Partnership other
than as provided in Section 3.1 hereof or (b) to lend any funds to the
Partnership. The Interests are nonassessable; however, General Partners are
liable, in addition to their Capital Contributions, for Partnership obligations
and liabilities represented by their ownership of interests as general partners,
in accordance with the Delaware Act.
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ARTICLE IV
ALLOCATIONS AND DISTRIBUTIONS
SECTION 4.1 Allocation Among Partners. Except as provided in Section
4.2 below, each Partner shall share Partnership items of costs, expenditures,
deductions (other than depletion), credits, income, revenues, gain, loss, and
distributions allocated, charged, or credited to the Partners hereunder in
accordance with the proportion that the Sharing Ratio of such Investor Partner
bears to the aggregate Sharing Ratios of all Partners.
SECTION 4.2 Allocations.
(a) Except as provided in subsections (b) through (f) below, all costs
and revenues (including without limitation, revenues derived by the Partnership
from, and distributed to the Partnership by, the Drilling Program) of the
Partnership and all items of income, gain, amount realized, loss, deduction,
recapture, and credit for purposes of any applicable federal, state, or local
income tax law, rule, or regulation shall be allocated to the Partners in
accordance with their respective Sharing Ratio.
(b) All costs incurred by the Partnership in connection with the
performance of any special services requested by a Partner and any tax
deductions relating thereto shall be allocated 100% to the Partner requesting
such services.
(c) All interest income directly or indirectly resulting from the
investment of the Investor Partners' Capital Contributions following the payment
thereof to the Partnership shall be allocated 100% to the Investor Partners, and
shall be allocated among such Investor Partners proportionately based on each
Investor Partner's respective cash contributions actually paid to the
Partnership.
(d) Cost and percentage depletion deductions and the gain or loss on
the sale or other disposition of property the production from which is or would
be (in the case of nonproducing properties) subject to depletion (herein
sometimes called "depletable property") shall be computed separately by the
Partners rather than the Partnership. For purposes of making such computations
the Partnership's adjusted basis in each depletable property shall be allocated
under Section 613A(c)(7)(D) of the Code to the Partners in accordance with their
respective Sharing Ratio. The amount realized on the sale or other disposition
of each such property shall be allocated to the Partners in proportion to each
Partner's respective share of the revenues from the sale or other disposition of
such property provided for in Section 4.2(a). For purposes of allocating amounts
realized upon any such sale or disposition which are deemed to be received for
federal income tax purposes and which are attributable to Partnership
indebtedness or indebtedness to which the depletable property is subject at the
time of such sale or disposition, such amounts shall be allocated in the same
manner as Partnership revenues used for the repayment of such indebtedness would
have been allocated under Section 4.2(f).
(e) Notwithstanding any other provision of this Section 4.2 to the
contrary, if during any taxable year of the Partnership the allocation of any
loss or deduction (net of any income or gain) to any Partner (the "Deficit
Partner") would cause or increase a deficit balance in the Deficit Partner's
Adjusted Capital Account as of the end of such taxable year, only the amount of
such loss or deduction that reduces the balance to zero shall be allocated to
the Deficit Partner and the remaining loss or deduction shall be allocated to
the Partners whose Adjusted Capital Accounts have positive balances remaining at
such time in proportion to such positive balances. After any such allocation,
any Partnership income or gain (or amount realized in excess of Simulated Basis)
that would otherwise be allocated to the Deficit Partner for any fiscal year
under this Section 4.2 which is in excess of the cash distributions to the
Deficit Partner for such fiscal year shall be allocated instead to the Partners
to whom the Deficit Partner's share of losses and deductions were allocated
under the preceding sentence until the amount of such income or gain (or amount
realized) so allocated equals the amount of loss or deduction previously so
allocated to such other Partner.
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(f) Notwithstanding the foregoing provisions of this Section 4.2, prior
to making any other allocation under this Section 4.2, the Partnership shall
allocate the following items of income to the Partners:
(i) Pursuant to section 1.704-2(f) of the Treasury
Regulations (relating to minimum gain chargebacks), if there is a net decrease
in Minimum Gain for such year (or if there was a net decrease in Minimum Gain
for a prior fiscal year and the Partnership did not have sufficient amounts of
profit during prior years to allocate among the Partners under this Section
4.2(f)(1), then items of Partnership income or revenue shall be allocated,
before any other allocation is made pursuant to the 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).
(ii) Pursuant to section 1.704-1(b)(2)(ii)(d) of the Treasury
Regulations (relating to "qualified income offsets"), items of Partnership
income or revenue shall be allocated, before any other allocation is made
pursuant to the 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(f)(1) hereof and as increased by any
amounts which such Partner is deemed obligated to restore under sections 1.704-1
and 1.704-2 of the Treasury Regulations but before giving effect to any
adjustment attributable to other allocations provided for in succeeding
provisions of this Section 4.2) in amounts and the manner sufficient to
eliminate such deficit balances as quickly as possible.
SECTION 4.3 Distributions.
(a) All interest earned by the Partnership as the result of the
investment of the Partners' Capital Contributions following the payment thereof
to the Partnership shall be distributed periodically to the Partners at such
time or times as the Managing Partner shall in its discretion determine.
(b) At least quarterly, all cash funds of the Partnership (other than
interest as described in Section 4.3(a) above, borrowed funds, if any, and
Capital Contributions) which the Managing Partner reasonably determines are not
needed for the payment of existing or anticipated Partnership obligations and
expenditures shall be distributed to the Partners. All cash funds of the
Partnership to be distributed to the Partners shall be distributed to the
Partners in the same respective percentages as the revenues from which such cash
funds are derived are allocated to such Partners pursuant to Section 4.2 (after
deducting therefrom the costs charged to such Partners pursuant to Section 4.2).
In addition to restrictions set forth in Section 5.2(a), in no event, shall
funds be advanced or borrowed for purposes of distributions, if the amount of
such distributions would exceed the Partnership's accrued and received revenues
for the previous four quarters, less paid and accrued operating costs with
respect to such revenues. The determinations of such revenues and costs shall be
made in accordance with generally accepted accounting principles consistently
applied. Cash distributions from the Partnership to the Managing Partner shall
only be made in conjunction with distributions to Investor Partners and only out
of funds properly allocated to the Managing Partner's account.
(c) Any distribution in liquidation of a Partner's interest in the
Partnership other than pursuant to Section 8.3, Section 8.6, Section 9.3, or
Section 9.4 shall be in an amount of cash or fair market value of property equal
to the positive capital account balance of such Partner at the time his interest
is liquidated, after such capital account balance has been adjusted in
accordance with Section 7.1(c) and the applicable Treasury Regulations under
Section 704(b) of the Internal Revenue Code and shall be made by the later of
(i) the end of the Partnership taxable year in which such liquidation occurs or
(ii) 90 days after the date of such liquidation. No Partner with a deficit
balance in his or its capital account after a distribution in liquidation of
such Partner's interest in the Partnership shall be liable to the Partnership
for such deficit balance.
(d) In the event an amount of Partnership funds equal to the total
Capital Contributions of the Partners has not been expended or committed for
expenditure within 12 months after the admission of the Investor Partners to
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the Partnership, the Managing Partner shall distribute, as a return of capital,
to the Partners, proportionately in accordance with their respective Sharing
Ratios as of the date of the Investor Partners' admission to the Partnership,
the amount of such unexpended and uncommitted Partnership funds (together with a
proportionate amount of the Management Fees), after deducting therefrom an
amount that the Managing Partner reasonably determines will be equal to the
operating capital to be required by the Partnership that will not be provided by
anticipated revenues from Partnership operations.
SECTION 4.4 Allocations on Transfers. In the event of an assignment of
a Partner's interest in the Partnership pursuant to Article VIII, deductions,
credits, and income of the Partnership for federal, state, and local income tax
purposes shall, unless otherwise required by applicable Treasury Regulations, be
allocated between the assignor and assignee based on the number of days of the
year during which each party owned such interest.
ARTICLE V
MANAGEMENT
SECTION 5.1 Power and Authority of Managing Partner. The Partners
hereby designate MD as the Managing Partner of the Partnership and, except as
provided by Section 5.2 and elsewhere in this Agreement and except as otherwise
provided by applicable law, hereby delegate to the Managing Partner full and
exclusive power and authority on behalf of the Partnership to manage, control,
administer, and operate the properties, business, and affairs of the Partnership
and to do or cause to be done any and all acts deemed by the Managing Partner to
be necessary or appropriate thereto. The scope of such power and authority shall
encompass all matters in any way connected with such business or incident
thereto, including without limitation, the power and authority:
(a) To enter into the Program Agreement and to purchase or otherwise
acquire on behalf of the Partnership Leases as provided in the Program
Agreement;
(b) To purchase or otherwise acquire other real or personal property of
every nature considered necessary or appropriate to carry on and conduct the
business of the Partnership;
(c) To borrow monies for the business of the Partnership and from time
to time to draw, make, execute, and issue promissory notes and other negotiable
or nonnegotiable instruments and evidences of indebtedness; to secure the
payment of the sums so borrowed and to mortgage, pledge, or assign in trust all
or any part of the property of the Partnership; to assign any monies owing or to
be owing to the Partnership; and to engage in any other means of financing
customary in the oil and gas industry; provided that any such financing shall
provide that the lender has recourse only against Partnership assets and not
against any Investor Partner individually;
(d) To enter into any agreement for the sharing of profits, joint
venture, or partnership with any person, firm, corporation, or government or
agency thereof engaged in any business or transaction in which the Partnership
is authorized to engage, or any business or transaction capable of being
conducted, so as to directly or indirectly benefit the Partnership, and to cause
the obligations of the Partnership thereunder to be performed;
(e) To explore and prospect by geological, geophysical, or other
methods for the location of anomalies or other indications favorable to the
accumulation of oil and gas, including specifically the power to contract with
third parties for such purposes;
(f) To maintain, explore, develop, operate, manage, and defend
Partnership property and to drill, test, plug and abandon or complete and equip,
rework, and recomplete any number of wells on Partnership Leases for the
production of oil and gas located thereunder, and to contract with third parties
for such purposes, to carry out a program or programs of secondary recovery on
Partnership property, and to do any and all other things necessary or
appropriate
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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 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;
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(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;
(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
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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
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against a particular indemnitee and finds that indemnification of the settlement
and related costs should be made, and the court considering the request for
indemnification has been advised of the position of the Securities and Exchange
Commission, and all state securities regulatory authorities in which Interests
in the Partnership were offered or sold as to indemnification for violations of
securities laws.
(c) The Partnership may purchase and maintain insurance on behalf of
the Managing Partner and its Affiliates against any liabilities asserted against
or expenses incurred by the Managing Partner and its Affiliates in connection
with Partnership or Drilling Program activities, provided that the Partnership
shall not incur the cost of that portion of any insurance, which insures the
Managing Partner or its Affiliates against any liability with respect to which
the Managing Partner and its Affiliates are denied indemnification under the
provisions of Sections 5.4 and 5.5; provided, however, that nothing contained
herein shall preclude the Partnership from purchasing and paying for such types
of insurance including extended coverage liability and casualty and workers'
compensation, as would be customary for any person owning comparable assets and
engaged in a similar business, or from naming the Managing Partner and its
Affiliates as additional insured parties thereunder, provided, that the naming
of such additional insured parties does not add to premiums payable by the
Partnership.
(d) The termination of any claim, action, suit, or proceeding by
judgment, order, settlement, conviction, or a plea of nolo contendere or its
equivalent does not alone establish that a person seeking indemnification under
this Section 5.5 is disqualified. Any person who is determined to be not
entitled to indemnification under this Section 5.5 may petition a court of
competent jurisdiction for a determination that in view of all facts and
circumstances that such person is fairly and equitably entitled to indemnity and
the Partnership shall provide such indemnity as may be determined proper by such
court; provided, however, that the court has determined that such person has met
the standard set forth in Section 5.5(a) above.
(e) Legal fees and expenses and other costs incurred as a result of a
claim described in this Section 5.5(a) shall be paid by the Partnership from
time to time in advance of the final disposition of such claim if: (i) the claim
relates to the performance or non-performance of duties or services by the
Managing Partner or its Affiliates on behalf of the Partnership; (ii) the claim
is initiated by a third party who is not an Investor Partner, or the claim is
initiated by an Investor Partner and a court of competent jurisdiction
specifically approves such advancement; and (iii) the Managing Partner or such
Affiliate undertakes to repay the advanced funds to the Partnership, together
with the applicable legal rate of interest thereon, in the event it is later
determined that the Managing Partner or such Affiliate is not entitled to
indemnification under the provisions of this Section 5.5(a).
(f) To the extent that the Managing Partner or its Affiliates are
successful on the merits or in defense of any claim, issue, or matter therein,
the Partnership shall indemnify the Managing Partner or its Affiliates, against
the expenses, including attorneys' fees, actually incurred by the Managing
Partner or such Affiliate in connection therewith.
(g) The indemnification provided by this Section 5.5 shall continue as
to the Managing Partner and its Affiliates in the event it ceases to be a
managing partner of the Partnership with respect to claims relating to the
period in which the Managing Partner was a managing partner of the Partnership
and such indemnification shall inure to the benefit of the successors and
assigns of the Managing Partner and such Affiliates.
(h) The indemnification provided by this Section 5.5 shall be made, and
shall be recoverable by the Managing Partner or its Affiliates, only out of the
tangible net assets of the Partnership and not from the Investor Partners.
SECTION 5.6 Reporting and Legal Expenses. The Partnership shall
reimburse the Program Manager and the Managing Partner and its Affiliates for
its share of the Reporting and Legal Expenses incurred by the Program Manager,
the Managing Partner, or any Affiliate thereof in managing and conducting the
business and affairs of the Drilling Program or of the Partnership, as
applicable. The Reporting and Legal Expenses reimbursed by the Partnership shall
be determined by the party seeking reimbursement in good faith and as being
reasonable for such party. Such reimbursements shall be made periodically
throughout the term of the Partnership.
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SECTION 5.7 Administrative Costs. The Partnership shall reimburse the
Program Manager and the Managing Partner and its Affiliates for all
Administrative Costs and other costs and expenses incurred by the Program
Manager, the Managing Partner, or any Affiliate thereof in managing and
conducting the business and affairs relating to the Partnership's interest in
the Drilling Program or of the Partnership, as applicable, including expenses
incurred in providing or obtaining such professional, technical, administrative,
and other services and advice as the Program Manager, the Managing Partner, or
such Affiliates may deem necessary or desirable. The general, administrative,
and other costs reimbursed by the Partnership shall be determined by the party
seeking reimbursement in good faith and as being reasonable for such party. The
amount of Administrative Costs that are to be reimbursed by the Partnership
shall be determined and allocated to the Partnership and its Drilling Program on
a basis conforming with generally accepted accounting principles and must be
supported in writing as to the application thereof and as to the amount charged.
Such reimbursements shall be made periodically throughout the term of the
Partnership. Such reimbursement obligation shall also apply to all
Administrative Costs incurred by the Program Manager, the Managing Partner or
any of its Affiliates on behalf of the Partnership or the Drilling Program from
the beginning of the calendar year in which the Partnership is formed to the
date of the admission of the Investor Partners. Regardless of the actual amount
of Administrative Costs incurred by the Managing Partner or Program Manager in
connection with the affairs of a Partnership, during any particular calendar
year the total amount of Administrative Costs allocable to the Partnership shall
not exceed the greater of (a) 3.5% of the Partnership's gross revenues from the
sale of oil and natural gas production during such year (calculated without any
deduction for Operating Costs or other costs and expenses) or (b) the sum of
$50,000 plus .25% of the Capital Contributions of the Investor Partners to the
Partnership. The above limitation on Administrative Costs shall not be
applicable to Administrative Costs otherwise allocable to the Partnership which
are extraordinary and non-recurring or to the fixed overhead fee chargeable by
an operator of Program Wells including the fixed overhead fee chargeable under
the Operating Agreement by MOC with respect to the Program Wells operated by the
Program Manager. No portion of the salaries of the directors or of the executive
officers of MOC or MD may be reimbursed as Administrative Costs.
An independent certified public accountant shall provide annually to the
Investor Partners, a written attestation to be included as part of the annual
report required pursuant to Section 7.2 wherein such accountant shall verify
that the method used to make the allocations was consistent with the method
described in this Agreement and that the total amount of costs allocated to the
Investor Partners does not materially exceed amounts actually incurred by the
Managing Partner.
SECTION 5.8 Restrictions on Certain Transactions.
(a) The Partnership may enter into contracts and agreements with the
Managing Partner and its Affiliates for the rendering of services and the sale,
rental, or lease of supplies and equipment, provided that (i) such entity is
engaged, independently of the Drilling Program and as an ordinary and ongoing
business, in the business of rendering such services or selling or leasing such
equipment and supplies to a substantial extent to other persons in the industry
in addition to programs in which the Managing Partner or its Affiliates have an
interest and (ii) the amount of the compensation, price, or rental that can be
charged to the Partnership therefor must be no less favorable to the Partnership
than that generally available (at the time the relevant contract or agreement
was entered into) from unrelated third parties in the area engaged in the
business of rendering comparable services or selling, renting, or leasing
comparable equipment and supplies which could reasonably be made available to
the Partnership. If the Managing Partner or its Affiliate is not engaged in the
business as required by clause (i) of this 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
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contracts which precisely describe the services to be rendered and all
compensation to be paid. Advance payments to the Managing Partner are
prohibited, except where necessary to secure tax benefits of prepaid drilling
costs. All contracts between the Partnership and the Managing Partner or its
Affiliates shall be terminable by the Partnership (by a vote or written consent
of a Majority in Interest of the Investor Partners) without penalty upon 60
days' written notice.
(b) The Partnership may borrow money on a non-recourse basis from the
Managing Partner or any of its Affiliates, provided that on any loans made
available by the Managing Partner or any of its Affiliates to the Partnership,
the Managing Partner or such Affiliate shall not receive interest in excess of
the lesser of (i) the maximum rate permitted by applicable law or (ii) the
effective interest rate then being paid by the Managing Partner or such
Affiliate for similar type borrowings. In no event shall any such loan bear
interest in excess of the amount which would be charged to the Partnership
(without reference to the Managing Partner's financial abilities or guaranties)
by independent third parties for the same purpose. In connection with any loans
to the Partnership by the Managing Partner or its Affiliates, the Managing
Partner or its Affiliates shall not receive points or other financing charges or
fees, regardless of the amount.
(c) The Partnership shall acquire in certain instances interests in
Prospects from the Managing Partner or its Affiliates on the terms and
conditions set forth in the Program Agreement.
(d) No Partnership Leases shall be farmed out by the Partnership unless
the Managing Partner, exercising the standard of care of a normal and prudent
operator in the management of its own property, shall determine that either (i)
the Partnership lacks sufficient funds for the drilling of a well on such Lease
and cannot obtain suitable alternative financing for such drilling, (ii) the
Lease has been downgraded by events occurring after the acquisition thereof by
the Partnership pursuant to the Program Agreement so that the drilling of a well
on such Lease would no longer be desirable for the Partnership, (iii) drilling
on such Lease would result in an excessive concentration of Partnership funds,
creating in the opinion of the Managing Partner undue risk to the Partnership
and the Investor Partners, or (iv) the best interests of the Partnership would
be served by such farmout or other disposition. The Partnership may enter into a
farmout agreement (in the capacity as either farmor or farmee) with the Managing
Partner, any of its Affiliates, provided that the Managing Partner, exercising
the standards of a normal and prudent operator in the management of its own
property, shall determine that the farmout is in the best interests of the
Partnership and that the terms of any such farmout are consistent with and in
any case no less favorable to the Partnership than those utilized in the same
geographic area for similar arrangements. The Partnership's ability to enter
into a farmout agreement with the Managing Partner or an Affiliate thereof is
subject to the same restrictions as its ability to purchase property from or
sell property to the Managing Partner or an Affiliate thereof as provided in
Section 5.8(c) and Section 5.8(f), respectively.
(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.
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(iii) Except in connection with farmouts or joint ventures
made in compliance with the restrictions described in Section 5.8(d), a
transfer of an undeveloped Lease from the Partnership to an Affiliated
Program must be made at fair market value if the Lease has been held
for more than two years; otherwise, if the Managing Partner deems it to
be in the best interests of the Partnership, the transfer may be made
at the Lease Acquisition Costs.
(iv) Except in connection with farmouts or joint ventures
made in compliance with the restrictions described in Section 5.8(d)
above, a transfer of any Lease from the Partnership to an Affiliated
Production Purchase or Income Program must be made at fair market value
if the Lease has been held for more than six months or there have been
significant expenditures made in connection with the Lease; otherwise,
if the Managing Partner deems it to be in the best interests of the
Partnership, the transfer may be made at the Lease Acquisition Costs as
adjusted for intervening operations.
A determination of fair market value as required by this paragraph (f) must be
supported by an appraisal from an Independent Expert. Such opinion and any
associated supporting information will be maintained in the Partnership's
records for at least six years.
(g) No rebates or give-ups may be received by the Managing Partner or
any Affiliate, nor may the Managing Partner or any Affiliate participate in any
reciprocal business arrangements which do not primarily benefit the Partnership.
The Partnership will acquire only Leases that are reasonably required
for the stated purpose of the Partnership, and no Leases will be acquired for
the purpose of subsequent sale or farmout, unless the acquisition of such
property by the Partnership is made after a well has been drilled to a depth
sufficient to indicate that such an acquisition is believed to be in the best
interests of the Partnership.
(h) Neither the Managing Partner, nor any Affiliate thereof, including
an Affiliated Program, shall be permitted to sell, transfer, or convey any Lease
to the Partnership, directly or indirectly, except pursuant to a transaction
which is fair and reasonable to the Partnership and in accordance with the
following restrictions:
(i) The Managing Partner and its Affiliates may only sell a
Lease to the Partnership at a price equal to its Lease Acquisition
Costs unless the transferor has cause to believe that the Lease
Acquisition Costs are materially more than the fair market value of
such Lease, in which case such sale must be made at a price not in
excess of its fair market value; provided, however, that if the sale is
from an Affiliated Program that has held the Lease for more than two
years and in which Affiliated Program the interest of the Managing
Partner or its Affiliate is substantially similar to, or less than, its
interest in the Partnership, the sale may be made at fair market value.
(ii) If the Managing Partner, or an Affiliate thereof, sells
any Lease within a Prospect to the Partnership, it must, at the same
time, sell to the Partnership an equal proportionate interest in all
other Leases that it owns in the same Prospect.
(iii) If at any time within a period of five years from the
creation of the Partnership, the Managing Partner or an Affiliate
thereof proposes to acquire an interest from a non-Affiliated person in
a Prospect in which the Partnership possesses an interest or in a
Prospect in which the Partnership's interest has been terminated
without compensation within one year preceding such proposed
acquisition, the following conditions will apply: (A) if the Managing
Partner or any Affiliate thereof does not currently own property in the
Prospect separately from the Partnership, then neither the Managing
Partner nor any Affiliate thereof will be permitted to purchase an
interest in the Prospect and (B) if the Managing Partner or any
Affiliate thereof currently owns a proportionate interest in the
Prospect separately from the Partnership, then the interest to be
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acquired will be divided between the Partnership and the Managing
Partner, or an Affiliate thereof in the same proportion as is the other
property in the Prospect; provided, however, if cash or financing is
not available to the Partnership to enable it to consummate a purchase
of the additional interest to which it is entitled, then neither the
Managing Partner, nor any Affiliate thereof may purchase any additional
interest in the Prospect during such five year period.
(iv) If the area constituting a Partnership's Prospect is
subsequently enlarged to encompass any area wherein the Managing
Partner or any Affiliate thereof owns a separate Lease, such separate
Lease or a portion thereof must be sold, transferred, or conveyed to
the Partnership, in accordance with the provisions described in this
Section 5.8(h), if the activities of the Partnership were material in
establishing the existence of Proved Undeveloped Reserves which are
attributable to such Lease.
(v) Except for the carried interests created by the Program
Agreement, a sale, transfer, or conveyance to the Partnership of less
than all of the ownership of the Managing Partner or any Affiliate
thereof in any Lease is prohibited unless the interest retained by the
Managing Partner or such Affiliate is a proportionate Working Interest,
the respective obligations of the Managing Partner, or such Affiliate
and the Partnership are substantially the same after the sale of the
interest by the Managing Partner or such Affiliate and its interest in
revenues does not exceed the amount proportionate to its retained
Working Interest. Except for the carried interests created by the
Program Agreement, neither the Managing Partner nor any Affiliate
thereof may retain any Overriding Royalty Interest or other burden on
an interest conveyed to the Partnership.
(vi) For the purposes of the preceding four paragraphs, the
term "Affiliate" does not include an Affiliated Program in which the
interest of the Managing Partner or an Affiliate thereof is
substantially similar to or less than its interest in the Partnership.
(vii) If the Partnership acquires a Lease pursuant to a
farmout or joint venture from an Affiliated Program, the Managing
Partner's, and any Affiliate's thereof aggregate compensation
associated with the property and any direct or indirect ownership
interest in the property may not exceed the lower of the compensation
and ownership interest the Managing Partner, and such Affiliates could
receive if the property were separately owned or retained by either the
Partnership or such other Affiliated Program.
A determination of fair market value as required by this paragraph (h) must be
supported by an appraisal from an Independent Expert. Such opinion and any
associated supporting information will be maintained in the Partnership's
records for at least six years.
(i) If the Partnership participates in other partnerships or joint
ventures (multi-tier arrangements), the terms of any such arrangements shall not
result in the circumvention of any of the requirements or prohibitions contained
in this Partnership Agreement, including the following:
(i) there will be no duplication or increase in the Managing
Partner's compensation, Partnership expenses, or other fees and costs;
(ii) there will be no substantive alteration in the fiduciary
and contractual relationship between the Managing Partner and the
Investor Partners; and
(iii) there will be no diminishment in the voting rights of
the Investor Partners.
(j) In connection with a proposed Roll-Up, the following shall apply:
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(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.
(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 5.8 of the Partnership Agreement, the
Managing Partner and its Affiliates may
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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 5.9 Restriction on Voting Interests Held by Managing Partner.
Interests owned by the Managing Partner or its Affiliates shall have full voting
rights under this Agreement, provided that during the time period that MD or an
Affiliate thereof is serving as the Managing Partner of the Partnership any
Interests owned by MD or its Affiliates which in the aggregate represent more
than 20% of the total Interests held by Investor Partners shall not have any
voting rights under this Agreement and shall not be counted for voting purposes
or for purposes of determining a quorum. In addition, none of the Interests
owned by the Managing Partner or its Affiliates shall be counted for voting
purposes or for purposes of determining a quorum or have any voting rights under
this Agreement concerning the removal of the Managing Partner or any transaction
between the Partnership and the Managing Partner or its Affiliates.
SECTION 5.10 Tax Elections. The Managing Partner shall make the
following elections on behalf of the Partnership:
(a) to elect, in accordance with Section 263(c) of the Code and
applicable regulations and comparable state law provisions, to deduct as an
expense all intangible drilling and development costs with respect to productive
and nonproductive wells and the preparation of wells for the production of oil
or gas;
(b) to elect the calendar year as the Partnership's fiscal year;
(c) to elect the accrual method of accounting;
(d) to elect, in accordance with Section 709(b) of the Code and
applicable regulations and comparable state law provisions, to amortize and
deduct organization expenses (as such term is defined in Section 709 of the
Code) over a period of 60 months beginning with the month in which the
Partnership begins business; and
(e) to elect with respect to such other federal, state, and local tax
matters as the Managing Partner deems advantageous to the Partnership; provided
that no election shall be made by the Partnership in accordance with Section 754
of the Code and applicable regulations and comparable state law provisions
without the consent of the Managing Partner, the granting or denying of which
consent shall be in its sole and absolute discretion.
SECTION 5.11 Tax Matters Partner. The Managing Partner shall be
designated the tax matters partner (in this Section 5.11 called the "TMP") as
defined in Section 6231(a)(7) of the Code with respect to operations conducted
by the Partners pursuant to this Agreement. The TMP is authorized to take such
actions and to execute and file all statements and forms on behalf of the
Partnership which may be permitted or required by the applicable provisions of
the Code or Treasury Regulations issued thereunder, and the Investor Partners
will take all other action that may be necessary or appropriate to effect the
designation of the Managing Partner as the TMP. In the event of an audit of the
Partnership's income tax returns by the Internal Revenue Service, the TMP may,
at the expense of the Partnership, retain accountants and other professionals to
participate in the audit. All expenses incurred by the TMP in its capacity as
such shall be expenses of the Partnership and shall be paid by or reimbursed to
the TMP from Partnership funds.
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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 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.
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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
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by such Partner's allocable share of expenditures of the Partnership
not deductible in computing the Partnership's taxable income and not
properly chargeable as Capital Expenditures, including any
non-deductible book amortizations of capitalized costs, and (H) debited
by the amount of cash or the fair market value of any property
distributed to such Partner (net of liabilities secured by such
distributed property that such Partner is considered to assume or take
subject to under Section 752 of the Code). Immediately prior to any
distribution of property by the Partnership that is not pursuant to a
liquidation of the Partnership, the Partners' capital accounts shall be
adjusted by (A) assuming that the distributed assets were sold by the
Partnership for cash at their respective fair market values as of the
date of distribution by the Partnership and (B) crediting or debiting
each Partner's capital account with its respective share of the
hypothetical gains or losses resulting from such assumed sales
determined in the same manner as gains or losses provided for under
Sections 4.2 and 7.1(c)(ii) for actual sales of such properties.
(ii) The allocation of basis prescribed by Section
613A(c)(7)(D) of the Code and provided for in Section 4.2(g) and each
Partner's separately computed depletion 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).
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(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, 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).
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(e) Monthly within 30 days after the end of each calendar month while
the Partnership is participating in the drilling and completion of wells in
which it has an interest until the end of such activity, and thereafter for a
period of three years semiannually within 75 days after the end of the first six
months of each fiscal year and annually within 120 days after the end of each
fiscal year, (i) a description of each Prospect or field in which the
Partnership owns Leases (provided that after the initial description of each
such Prospect or field has been provided to the Investor Partners only material
changes, if any, with respect to such Prospect or field need be described), (ii)
a description of all farmouts entered into by the Partnership since the date of
the last such report, including the reason therefor, the location and timing
thereof, the parties to the farmout and the terms thereof, and (iii) a summary
of the wells drilled by the Partnership and the status thereof, indicating
whether each of such wells is being drilled or has been completed or plugged and
abandoned, a statement of the cost of each well completed or abandoned, and the
reason for abandoning any well after commencement of production. Each report
delivered by the Managing Partner may contain summary estimates of the
information described in clause (iii) of this Section 7.2(e).
(f) Such other reports and financial statements as the Managing Partner
shall determine from time to time.
The cost of such reporting shall be paid by the Partnership as a
Partnership expense.
SECTION 7.3 Bank Accounts. The Managing Partner shall cause one or more
accounts to be maintained in a state or federally chartered bank or savings and
loan association, which accounts shall be used for the payment of the
expenditures incurred by the Managing Partner in connection with the business of
the Partnership, and in which shall be deposited any and all receipts of the
Partnership. All such amounts shall be and remain the property of the
Partnership and shall be received, held, and disbursed by the Managing Partner
for the purposes specified in this Agreement. There shall not be deposited in
any of said accounts any funds other than funds belonging to the Partnership,
and no other funds shall in any way be commingled with such funds. The Managing
Partner may invest Partnership funds which they deem untimely or inappropriate
to use or commit for Partnership purposes or to distribute to the Partners in
such United States Treasury Bills, other short-term governmental obligations or
bank certificates of deposit or other certificates, securities or evidences of
indebtedness on such terms and for such security, if any, as they may deem
necessary or desirable. The Managing Partner shall have a fiduciary
responsibility for the safekeeping and use of all funds and assets of the
Partnership, whether or not in the Managing Partner's possession or control, and
shall not employ or permit another to employ such funds or assets in any manner
except for the benefit of the Partnership.
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;
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(ii) The Partnership shall not be required to recognize any
such assignment until the instrument conveying such interest has been
delivered to the Managing Partner for recordation on the books of the
Partnership;
(iii) Unless an assignee becomes a substituted Investor
Partner in accordance with the provisions set forth below, such
assignee shall not be entitled to any of the rights granted to an
Investor Partner hereunder, other than the right to receive all or part
of the share of the profits, losses, cash distributions, or returns of
capital to which his assignor would otherwise be entitled;
(iv) Except by will, intestate succession, or gift or, in
unusual circumstances when consented to by the Managing Partner, the
assigning Investor Partner (A) may not assign fewer than a whole
Interest (five Interests for Investor Partners who are residents of
either the States of California, Iowa, or Minnesota) to any person
other than the Partnership, the Managing Partner, an Affiliate thereof,
or a third person designated by the Managing Partner in its sole
discretion, unless such Investor Partner owns less than a whole
Interest (less than five Interests for Investor Partners who are
residents of either the States of California, Iowa, or Minnesota) and
transfers all his Interest to one person, and (B) must retain at least
a whole Interest (five Interests for Investor Partners who are
residents of either the States of California, Iowa, or Minnesota), in
the event fewer than all such Investor Partner's Interests are assigned
to any person other than the Partnership, Managing Partner, an
Affiliate thereof, or a third person designated by the Managing Partner
in its sole discretion; and
(v) The assignor shall notify the Managing Partner of such
assignment and provide the Managing Partner with such information
regarding the transferee and the transfer (including without
limitation, the name, address, and taxpayer identification number of
the transferor and transferee and the date of the transfer) as is
required under Section 6050K of the Code (if the transfer is a sale or
exchange described in Section 751(a) of the Code) and Section 6112 of
the Code (relating to tax shelter investor lists) and Treasury
Regulations promulgated thereunder by the Internal Revenue Service in
the manner and at the time prescribed by law.
An assignment by an Investor Partner in violation of clause (i) or clause (ii)
of this Section 8.1(a) shall be void and ineffectual and shall not bind the
Partnership or any other Partner. The assignee of an Investor Partner's interest
in the Partnership shall pay all costs and expenses incurred by the Partnership
in connection with such assignment, which costs and expenses shall 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
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(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 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.
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(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 through , an Investor Partner may request in writing that the
Managing Partner repurchase all, but not less than all, of his Interests (the
"Right of Presentment"). The repurchase price to be paid upon any repurchase of
an Investor Partner's Interests will be the pro rata share represented by his
Interests of:
(a) 100% of the sum of
(i) 65% of the unescalated value as of such Valuation
Date of the future net revenues attributable to the Partnership's
Proved Developed Producing Reserves, as estimated by the Independent
Expert retained by the Managing Partner to prepare the most recent
engineering report furnished to the Investor Partners pursuant to
Section 7.2(c);
(ii) 50% of the unescalated value as of such Valuation
Date of the future net revenues attributable to the Partnership's
Proved Developed Non-Producing Reserves, as estimated by the
Independent Expert retained by the Managing Partner to prepare the most
recent engineering report furnished to the Investor Partners pursuant
to Section 7.2(c);
provided that prior to the calculation of the value of such future net revenues,
that value (A) shall be adjusted by the Independent Expert to reflect the risks
of production and development of such reserves and any other economic
contingencies that would normally be considered by a purchaser of Proved
Reserves and (B) shall be discounted to present value at a rate equal to 10%;
MINUS
(b) the amount of all liabilities, indebtedness, expenses, and
obligations of the Partnership as of the Valuation Date as shown on the
Partnership's most recent audited financial statements furnished to the Investor
Partners pursuant to Section 7.2(a) that were allocable as of the end of such
fiscal year to the Investor Partners; and
(c) any distributions made to Investor Partners between the Valuation
Date and the date of payment of the repurchase attributable to the Interests
being repurchased shall be deducted from the repurchase price. The effective
date of any such sale for purposes of determining such deduction will be deemed
to be the day on which payment of the repurchase price is transmitted.
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SECTION 8.4 Notices of and Limitations on Right of Presentment.
(a) Prior to May 31 of each year in which the Right of Presentment
exists, the Managing Partner shall notify each Investor Partner requesting
repurchase under Section 8.3 of the amount that will be paid to repurchase each
Interest and the method by which that repurchase price was calculated. Upon
their receipt of such notification, the requesting Investor Partners who wish to
present their Interests for repurchase shall do so by properly completing and
executing the form of assignment that will accompany the Managing Partner's
notification and returning it to the Managing Partner within 20 calendar days
after the date of the notification. Such presentment by an Investor Partner
shall constitute his acceptance of the repurchase offer of the Managing Partner,
subject to the terms of this Article 8. Payment for Interests presented for
repurchase during a year will be made in cash not less than 60 nor more than 75
calendar days after receipt by the Managing Partner of the assignments of the
Interests so repurchased.
(b) The maximum number of Interests that the Managing Partner (or an
Affiliate thereof) shall be required to purchase during any calendar year in
which the right to present Interests exists shall not exceed 5% of the total
number of Interests outstanding at the beginning of such calendar year.
(c) In addition to the limitation imposed by subsection (b) above, the
obligation of the Managing Partner or Affiliates thereof, to purchase Interests
and to purchase interests in Affiliated Programs previously or subsequently
organized by the Managing Partner or Affiliates thereof shall not exceed
$500,000 in any calendar year, and such persons may elect not to purchase the
excess. If a greater number of Interests and interests in such previously or
subsequently organized Affiliated Programs are presented for repurchase than are
required to be accepted under this subsection (c), those Interests and interests
will be accepted for repurchase in the following manner: (i) all required
repurchases will be allocated among the other affected partnerships (adjusted to
reflect repurchases within the previous twelve months) pro rata based on their
initial subscribed capital, (ii) to the extent that the amount allocated to any
partnership described in clause (i) exceeds the repurchase price of interests in
that partnership presented for repurchase, such amount shall be allocated among
the other of those partnerships in the manner described in clause (i) until the
entire $500,000 limitation (as adjusted) has been allocated, and (iii) interests
in each partnership described in clause (i) shall be accepted for repurchase in
amounts equal to the portion of the $500,000 limitation allocated to each such
partnership.
(d) In determining if the required number of the outstanding Interests
pursuant to subsection (c) above have been repurchased during any calendar year,
all purchases by the Managing Partner or Affiliates thereof of Interests and
interests in Affiliated Programs previously or subsequently organized by the
Managing Partner or Affiliates thereof, which purchases have been made at any
time during the twelve-month period ending on the date on which such persons are
to purchase Interests hereunder shall be included in the calculation of the
Interests and other interests repurchased. If a greater number of Interests are
presented for repurchase than those persons are required to repurchase, the
Interests to be repurchased will be selected by lot or by such other method as
the Managing Partner deems reasonable. Participation by Investor Partners in any
such lottery shall be determined by calculating the proportion that the number
of Interests presented for repurchase by each Investor Partner bears to the
total number of Interests presented for repurchase at that time. If any
Interests presented for repurchase are not purchased, they will be returned to
the record owners thereof and will be eligible for repurchase during succeeding
years only if new repurchase requests are made and the Interests are again
presented for repurchase. Interests not repurchased in the year presented for
repurchase will have no priority with respect to repurchase in subsequent years.
(e) If, prior to 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
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to purchase Interests is discharged. In such event, the Managing Partner shall
notify the presenting Investor Partners of the Managing Partner's election not
to repurchase any of the Interests presented for repurchase and the basis for
such refusal and shall provide to any presenting Investor Partner who so
requests access to such books and records of the Partnership as shall be
reasonably necessary for such Investor Partner to verify the basis for such
refusal.
(f) For purposes of this Agreement, Interests repurchased and held by
the Managing Partner or an Affiliate thereof shall continue to be outstanding.
SECTION 8.5 Cessation of Right of Presentment. In the event the
obligation of the Managing Partner or any Affiliate thereof to repurchase
Interests from Investor Partners pursuant to their Right of Presentment is
determined by counsel to the Partnership to be in violation of any existing or
future laws or to expose the Partnership or the Investor Partners to material
adverse federal income tax consequences, such obligation shall become null and
void and of no further force or effect, but only to the extent necessary in the
opinion of counsel to the Partnership to comply with such laws or to avoid such
consequences.
SECTION 8.6 Removal of Managing Partner.
(a) A Majority in Interest of the Investor Partners shall have the
right to remove the Managing Partner and to elect and substitute a new Managing
Partner. In such event, the removed Managing Partner shall be required to offer
to sell a minimum of 20% of, and shall have the right to offer to sell up to the
remaining 80% of, its interest in the Partnership to the new Managing Partner at
a price, Method of Payment (as determined pursuant to this section), and on such
other terms and conditions as are mutually agreeable to the new Managing
Partner. If after the new Managing Partner and the removed Managing Partner have
agreed on the amount of the removed Managing Partner's Partnership interest that
is to be sold to and purchased by the new Managing Partner (which agreement must
be reached within 10 days of the removal of the Managing Partner), such parties
are unable to agree within 10 days on the purchase price of such interest, the
new Managing Partner and the removed Managing Partner shall select a mutually
agreeable Independent Expert to determine such purchase price. Such Independent
Expert, in determining such price, shall take into account appropriate discount
factors in light of the risk of recovery of the oil and gas reserves
attributable to the Partnership. The closing of the purchase of such Partnership
interest shall take place at the office of the removed Managing Partner within
15 days following the agreement upon or determination of the purchase price for
the interest to be acquired by the new Managing Partner, or at such other time
or place as the removed Managing Partner and the new Managing Partner may agree
upon in writing. In the event the new Managing Partner agrees to purchase less
than all of the offered interest of the removed Managing Partner in the
Partnership, the removed Managing Partner shall have the right to have
distributed to it in kind such Partnership assets and properties attributable to
the Partnership interest not purchased by the new Managing Partner as it would
have been entitled to receive if the Partnership were dissolved and terminated
pursuant to Section 9.4 at such time. The removed Managing Partner shall cause,
to the extent legally possible, all of its contractual rights, obligations, and
duties as Managing Partner of the Partnership to be assigned to the new Managing
Partner, and the new Managing Partner shall continue the business of the
Partnership 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
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person who hereafter becomes a substituted Investor Partner by his execution,
adoption, or acceptance of this Agreement) hereby consents to the continuation
or reconstitution of the Partnership pursuant to this Section 8.6(a) and
authorizes the substituted Managing Partner to certify on his behalf pursuant to
the power of attorney granted in Section 10.2, such Investor Partner's consent
to the continuation or reconstitution of the Partnership and to execute any
amendments to this Agreement required for such purpose.
The "Method of Payment" by the new Managing Partner for the removed
Managing Partner's interest must be fair and must protect the solvency and
liquidity of the Partnership. Where the termination is voluntary, the method of
payment will be deemed presumptively fair where it provides for a non-interest
bearing unsecured promissory note with principal payable, if at all, from
distributions which the terminated Managing Partner otherwise would have
received under the Partnership Agreement had the Managing Partner not been
terminated. Where the termination is involuntary, the method of payment will be
deemed presumptively fair where it provides for an interest bearing promissory
note coming due in no less than five years with equal installments each year.
(b) The Partnership, acting in accordance with a vote or consent of a
Majority in Interest of the Investor Partners, shall have the right pursuant to
Section 7 of the Program Agreement to remove MOC as Program Manager and
substitute a successor to act in such capacity.
ARTICLE IX
DISSOLUTION, RECONSTITUTION, LIQUIDATION, AND TERMINATION
SECTION 9.1 Dissolution. The Partnership shall be dissolved upon the
occurrence of any of the following:
(a) December 31, 20 ;
(b) the vote at a duly held meeting or consent in writing of a Majority
in Interest of the Investor Partners at any time;
(c) the sale, disposition, or termination of all or substantially all
of the Leases then owned by the Partnership;
(d) the bankruptcy, insolvency, or dissolution (except dissolution as a
consequence of merger, consolidation, recapitalization, or other reorganization
effected in accordance with Section 8.2) of the Managing Partner or the
occurrence of any other event which would permit a trustee or receiver to
acquire control of the property or affairs of the Managing Partner; provided
that neither the Managing Partner's filing of a voluntary petition or answer
seeking reorganization or similar relief under bankruptcy law, nor the Managing
Partner's reorganization or obtaining similar relief under such law shall cause
the dissolution of the Partnership;
(e) the adjudication of insolvency or bankruptcy of the Partnership, or
an assignment by the Partnership for the benefit of creditors;
(f) the withdrawal or retirement of the Managing Partner; or
(g) except as otherwise provided in this Section 9.1, the occurrence of
any other event which, under the laws of the State of Delaware, causes the
dissolution of a limited partnership.
The death, retirement, insanity, legal disability, insolvency, dissolution, or
withdrawal of any Investor Partner will not result in the dissolution or
termination of the Partnership, and, upon the occurrence of any such event, the
estate, personal representative, guardian, or other successor in interest of any
such Investor Partner or the Investor Partner, as the case may be, (i) will
continue to be liable for all of the debts and obligations of such Investor
Partner pursuant to
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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.
(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
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(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.
(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
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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:
(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.
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(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 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.
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(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 evidencing the
dissolution or termination of the Partnership when such
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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
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respect, and any change, modification, or amendment which the Managing Partner
believes is necessary or advisable to ensure that the Partnership is not and
will not be treated as an association taxable as a corporation for federal
income tax purposes or to conform with changes in applicable tax law (provided
such changes do not have a material adverse effect on the Investor Partners),
and any other changes, modifications, or amendments similar to any one or more
of the foregoing, such change, modification, or amendment may be contained in a
written instrument executed solely by the Managing Partner, provided that the
Managing Partner notifies the Investor Partners of such change, modification, or
amendment.
SECTION 11.3 Partition. Each of the Partners hereby irrevocably waives
for the term of the Partnership any right that such Partner may have to maintain
any action for partition with respect to Partnership property.
SECTION 11.4 Entire Agreement. This Agreement, the Program Agreement,
and the Subscription Documents executed by the Investor Partners constitute the
full and complete agreement of the parties hereto with respect to the subject
matter hereof, and supersedes all previous oral and written and all
contemporaneous oral negotiations, commitments, writings, and understandings.
SECTION 11.5 Severability. Every provision in this Agreement is
intended to be severable. If any term or provision hereof is determined to be
invalid, illegal, or unenforceable for any reason whatsoever, such invalidity,
illegality, or unenforceability shall not affect the validity, legality, and
enforceability of the remainder of this Agreement.
SECTION 11.6 No Waiver. The failure of any Partner to insist upon
strict performance of a covenant hereunder or of any obligation hereunder,
irrespective of the length of time for which such failure continues, shall not
be a waiver of such Partner's right to demand strict compliance in the future.
No consent or waiver, express or implied, to or of any breach or default in the
performance of any obligation hereunder shall constitute a consent or waiver to
or of any other breach or default in the performance of the same or any other
obligation hereunder.
SECTION 11.7 Evidence of Interest. At the sole option of the Managing
Partner, an Interest may be evidenced by a certificate in a form approved by the
Managing Partner. The Managing Partner shall not be required to issue any such
certificates, and, if such certificates are issued to any Investor Partner, the
Managing Partner shall not be required to issue similar certificates to all
Investor Partners.
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:
---------------------------------------
Its: Chief Financial Officer and Treasurer
ORGANIZATIONAL PARTNER
--------------------------------------------
Curtis W. Mewbourne
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<PAGE> 178
EXHIBIT B
DRILLING PROGRAM AGREEMENT
among
MEWBOURNE OIL COMPANY
MEWBOURNE DEVELOPMENT CORPORATION
and
MEWBOURNE ENERGY PARTNERS , L.P.
Dated as of
, 199
<PAGE> 179
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Section 1. Certain Defined Terms and References................................................................B-1
Section 2. Acquisition of Interests in Prospects...............................................................B-4
Section 3. Allocation of Costs.................................................................................B-5
Section 4. Allocation of Revenues..............................................................................B-6
Section 5. Ownership of Production.............................................................................B-7
Section 6. Management of Program...............................................................................B-7
Section 7. Removal of the Program Manager......................................................................B-9
Section 8. Reimbursement of the Program Manager...............................................................B-10
Section 9. Tax Partnership....................................................................................B-10
Section 10. Sales of Interests by MD..........................................................................B-10
Section 11. Assignment........................................................................................B-10
Section 12. Term and Amendment of Agreement...................................................................B-11
Section 13. Insurance.........................................................................................B-11
Section 14. Partnership Agreement.............................................................................B-11
Section 15. Entire Agreement..................................................................................B-11
Section 16. Headings..........................................................................................B-12
Section 17. Governing Law.....................................................................................B-12
Section 18. Attachments.......................................................................................B-12
Section 19. Counterparts......................................................................................B-12
</TABLE>
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.
<PAGE> 180
DRILLING PROGRAM AGREEMENT
THIS DRILLING PROGRAM AGREEMENT (this "Agreement"), dated as of ,
___ is made by and among Mewbourne Oil Company, a Delaware corporation ("MOC"),
Mewbourne Development Corporation, a Delaware corporation ("MD"), and Mewbourne
Energy Partners , 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:
"Affiliate" shall mean, with respect to another person,
(a) any person directly or indirectly owning,
controlling or holding with power to vote 10% or
more of the outstanding voting securities of or
equity interests in such other person,
(b) any person 10% or more of whose outstanding voting
securities or equity interests are directly or
indirectly owned, controlled, or held with power to
vote by such other person,
(c) any person directly or indirectly controlling,
controlled by, or under common control with such
other person,
(d) any officer, director, or partner of such other
person, and
(e) any company for which any such officer, director, or
partner acts in any such capacity. For purposes of
this Agreement, unless otherwise indicated, an
affiliate of MD shall include Affiliated Programs.
"Affiliated Program" shall mean a drilling, producing
property, income, royalty, or other program (whether in the form of a
partnership, joint venture, or otherwise), including the Partnership,
for or of which the Managing Partner or an Affiliate thereof serves as
manager or managing partner or acts in a similar capacity.
"Agreement" shall mean this Drilling Program Agreement, as
amended from time to time.
"Code" shall mean the Internal Revenue Code of 1986, as
amended.
"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.
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<PAGE> 181
"Lease Acquisition Cost" shall mean, when used to describe
the costs of any Lease, the sum of (a) all monetary consideration paid
or given for such Lease to a non-Affiliate of the Managing Partner,
including but not limited to lease bonuses and advance rentals paid to
a non-Affiliate of the Managing Partner, (b) all costs of lease
acquisition and title examination including but not limited to curing
or defending title, title insurance or examination costs, brokerage
commissions, the fees and wages of landmen and lease brokers and their
expenses, filing fees, recording costs, transfer taxes, and like
charges paid in connection with the acquisition of such Lease, (c) all
delay rentals and other similar payments and ad valorem taxes paid by
the seller with respect to such Lease, (d) such portion as may be
allocated to such Lease in accordance with generally accepted
accounting principles and industry standards of all reasonable,
necessary, and actual costs and expenses of MD or its Affiliates for
geological, geophysical, seismic, land, engineering, drafting,
accounting, legal, and other like services together with related
administrative and general overhead costs involved in lease
acquisition and Prospect evaluation including such costs and expenses
which could otherwise be classified hereunder as Administrative Costs,
(e) such portion as may be allocated to such Lease in accordance with
generally accepted accounting principles and industry standards of all
costs and expenses incurred in the acquisition of farmouts, subleases,
pooling orders, or other oil and gas interests, (f) interest and
points actually incurred on funds borrowed to pay any of the costs and
expenses described in clauses (a) through (e) above calculated from
the date of their incurrence until the date of their reimbursement by
the Drilling Program at the time a Lease is acquired by the Drilling
Program, and (g) with respect to Leases held on the date hereof by or
acquired thereafter by MD or an Affiliate thereof, an interest in
which is transferred to the Participants pursuant to this Agreement,
the costs of such transfer; provided that the expenses described in
clauses (c), (d), (e), and (f) shall have been incurred by MOC or its
Affiliates not more than 36 months prior to the acquisition by the
Drilling Program of such Lease; and provided further, that such time
limitation shall not be applicable to Leases having a primary term of
five or more years. Lease Acquisition Costs of a Lease shall not
include any costs or expenses otherwise allocable herein to such Lease
and which represent costs or expenses incurred in connection with the
past drilling of wells which are not producers of sufficient
quantities of oil or natural gas to make commercially reasonable their
continued operation.
"Managing Partner" shall mean Mewbourne Development
Corporation, a Delaware corporation, and any person who becomes a
substituted managing partner of a Partnership, in accordance with the
terms of the Partnership Agreement.
"Operating Agreement" shall mean a Model Form Operating
Agreement based upon the American Association of Petroleum Landmen
Form 610-1989 and, among the other attached exhibits thereto, an
accounting procedure for joint operations issued by the Council of
Petroleum Accountants Societies of North America, each of which
containing modifications that are customary and usual for the
geographic area in which the Partnership intends to conduct
operations.
"Operating Costs" shall mean all expenditures made and costs
incurred in producing and marketing oil and gas from completed wells,
including, in addition to labor, fuel, repairs, hauling, materials,
supplies, utility charges, and other costs incident to or therefrom,
ad valorem and severance taxes, insurance and casualty loss expense,
and compensation to well operators or others for services rendered in
conducting such operations.
"Participants" shall mean MD and the Partnership, and
"Participant" shall mean MD or the Partnership, individually.
"Partners" shall mean the partners of the Partnership.
"Partnership" shall have the meaning assigned to such term in
the preamble to this Agreement.
"Partnership Agreement" shall mean the Agreement of
Partnership dated , creating the Partnership and
designating MD as the Managing Partner of the Partnership.
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<PAGE> 182
A "person" shall mean any natural person, partnership,
corporation, association, trust, or other legal entity.
"Program" shall have the meaning assigned to such term in the
preamble to this Agreement.
"Program Manager" shall mean MOC and any person who becomes
the manager of the business and affairs of the Program in accordance
with Section 7 of this Program Agreement.
"Program Well" shall mean any well in which the Participants
have an interest pursuant hereto.
"Prospect" shall mean an area covering lands which, in the
opinion of the Program Manager, contains subsurface structural or
stratigraphic conditions making it susceptible to the accumulation of
oil or gas in commercially productive quantities at one or more zones
or horizons. The area, which may be different for different Horizons,
shall be designated by the Program Manager in writing prior to the
date on which a well is spudded (i.e. boring is commenced) thereon and
shall be enlarged or contracted from time to time on the basis of
subsequently acquired information to define the anticipated limits of
the associated oil and gas reserves and to include all acreage
encompassed therein. A "Prospect" with respect to a particular Horizon
may be limited to the minimum area permitted by state law or local
practice, whichever is applicable, to protect against drainage from
adjacent wells if the well to be drilled by the Partnership is to a
Horizon containing Proved Reserves.
"Prospectus" shall mean the Prospectus dated , , as amended
or supplemented from time to time, describing the offer and sale of
interests in the Partnership.
"Reporting and Legal Expenses" shall mean all third party
accounting fees, costs, and expenses associated with obtaining audits
of books and records, third party engineering fees, costs, and
expenses associated with annual reserve reports, and third party
attorney's fees and other legal fees, costs, and expenses associated
with matters that are attributable to the Drilling Program's or the
Partnership's business.
"Working Interest" shall mean an interest in an oil and gas
lease which is subject to some portion of the costs of development,
operation, or maintenance.
(b) Other Defined Terms. The following terms shall have the respective
meanings assigned to them in the Prospectus:
"Administrative Costs"
"Due Diligence Fees"
"Intangible Drilling Costs"
"Organization and Offering Expenses"
"Proved Reserves"
"Sales Commissions"
"Tangible Costs"
(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.
B-3
<PAGE> 183
Section 2. Acquisition of Interests in Prospects.
(a) Prospects Subject to this Agreement. Subject to the terms and
conditions hereof, the Participants shall acquire undivided interests in Leases
within Prospects selected by the Program Manager in its sole discretion from
time to time. At the time any Lease within a Prospect is acquired, the Program
Manager shall designate the area comprising the Prospect in the manner provided
in the definition of such term (if the Prospect has not been previously so
designated). Prospects may be limited to certain stated depths and may include
areas in which Leases may or may not have been acquired. The Program Manager
shall maintain records showing the Prospects (and depths if limited by depth)
so designated. In the case of certain Prospects, the designation of Prospects
may conform generally to the geographic limits of individual Leases. In some
cases, where known reservoirs cover large geographic areas and subsequent
drilling does not depend directly on results obtained by the Program Wells,
Prospects may be directly adjacent or in close proximity to other Prospects.
Leases on lands which are contiguous or in the vicinity of each other may
constitute more than one Prospect, and a zone or horizon under an area may
constitute a Prospect separate and apart from another zone or horizon which
lies in whole or in part under the same area. With respect to any Prospect that
is not limited to a particular zone or horizon and which is in any large
continuous known stratigraphic trend or formation which could be defined as a
continuous reservoir, the Program Manager may reduce the areal extent included
in such Prospect to that area which covers the spacing unit or proration unit
prescribed by the appropriate regulatory authority on such Prospect or
permitted by local practice, whichever is applicable, and such additional area,
if any, as the Program Manager determines reasonable. A Prospect which is
limited to a particular zone or horizon may be limited to that area which
covers the spacing unit or proration unit prescribed by the appropriate
regulatory authority on such Prospect or permitted by local practice, whichever
is applicable, to protect against drainage from adjacent wells if the well to
be drilled by the Program is to a horizon containing Proved Reserves. The area
of a Prospect may be enlarged or contracted from time to time by the Program
Manager in the reasonable exercise of its judgment. The Program Manager and its
Affiliates shall have no obligation to assign to any of the Participants any
Lease held as of the date hereof by the Program Manager or any such Affiliate
or any Lease acquired by the Program Manager or any such Affiliate after the
date hereof.
The amount of the undivided interest in Leases to be assigned to the
Participants by the Program Manager shall be determined solely by the Program
Manager and the Managing Partner of the Partnership, taking into account the
nature of the risks associated with the drilling of wells on such Leases, the
estimated costs of such drilling, the amount of funds available from the
Partnership for such drilling and such other factors as the Program Manager and
the Managing Partner shall in good faith determine. The Program shall have no
right to acquire the entire interest in any such Lease, and the Program Manager
and Affiliates thereof shall have the right to acquire or retain a portion of
such interest in their own name, for their own account, or for the account of
others. Any such interest so acquired or retained by the Program Manager or
such Affiliate shall be held independently and not as a part of the Program and
shall not be subject to the terms and provisions of this Agreement.
The undivided interests in all Leases acquired by the Program shall be
acquired and held by the Program Manager for the benefit of the Participants
hereto as follows: the Partnership 60% and MD 40%. Following commencement of
production from a Program Well, the Program Manager shall assign and convey to
the Partnership and MD the above-described undivided interests in the Leases
proportionally reduced as to the interest acquired by the Program insofar as
such Leases pertain to the spacing or proration unit prescribed by regulatory
authority for such productive Program Well.
(b) Sales of Leases to the Program. Any sale, transfer, or conveyance
of a Lease to the Program by the Managing Partner or any Affiliate thereof,
including an Affiliated Program, shall be subject to the restrictions contained
in Section 5.10(h) of the Partnership Agreement.
(c) Acquisition Price. The price to be paid by the Participants with
respect to their acquisition of an interest in a Lease pursuant to this Section
2 shall be an amount equal to the Participants' respective shares, as set forth
in Section 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.
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<PAGE> 184
(d) Conveyance. With respect to the Leases within Prospects that are
acquired by the Participants hereunder, the interests in such Leases so
acquired shall cover all depths and horizons designated by the Program Manager
as comprising such Prospect and as contemplated in Section 2(a) such interests
shall be assigned, conveyed and transferred by the Program Manager or an
Affiliate thereof pursuant to a special warranty deed. Further, any such
assignment by the Program Manager or an Affiliate thereof shall be made with
full substitution and subrogation in and to all rights and actions of warranty
which the Program Manager or such Affiliate may have against all former owners.
(e) Assignments of Record. Following commencement of production from a
Program Well, as contemplated in Section 2(a) the Program Manager shall cause
record title to the Participants' respective interests in such Program Well to
be placed in the names of MD and the Partnership (or its designated nominee),
except (i) where record title is held in the name of a third party (as in the
case where pursuant to industry practice record title is held by a third party,
such as a pooled operating interest), in which event the Program Manager shall
place of record MD's and the Partnership's interests promptly following the
receipt by the Program Manager or an Affiliate thereof of an assignment from
such third party, (ii) in the case of a federal, state, or other Lease where an
approval to the transfer is required, in which event the Program Manager shall
take steps to obtain approval from appropriate authorities of the assignment of
MD's and the Partnership's interests in any such Lease as promptly as possible
following the time that such assignment is to be made hereunder (iii) in the
case where delays in the recording of assignments occur because of the
practices of the recording office or officers, (iv) in the case of Indian or
other Leases where the royalty interest or other term of any such Lease is
required to be renegotiated as a condition to the lessor's consent to the
assignment of MD's and the Partnership's interests, in which event MD's and the
Partnership's interests in such Lease shall be held in the name of the Program
Manager as nominee for MD and the Partnership so long as any such arrangement
does not jeopardize the validity or substance of such Lease or subject it to
forfeiture or other penalty, or (v) where the interests in the Lease to be
assigned to MD and the Partnership cannot be exactly determined because of
pooling or unitization laws, rules or regulations or agreements, the rights of
third parties under area of mutual interest or other agreements, or other
similar circumstances, in which event the Program Manager shall promptly
proceed to determine such interests and shall place them of record as promptly
as possible.
(f) Title Examination. Prior to drilling a Program Well on a Prospect,
the Program Manager shall cause to be done or be satisfied that there has been
done such title examination and other title curative work as the Program
Manager, in its sole discretion, shall determine to be necessary or appropriate
in accordance with general industry standards.
Section 3. Allocation of Costs. The costs of activities and operations
conducted pursuant to this Agreement shall be allocated to and paid by the
parties hereto as follows:
(a) Organization and Offering Expenses, Sales Commissions and Due
Diligence Fees. All Organization and Offering Expenses, Sales Commissions and
due Diligence Fees attributable to the Partnership shall be allocated entirely
to MD.
(b) Lease Acquisition Costs. MD shall contribute or cause to be
contributed to the Program all Leases to be acquired by the Program and shall
receive a contribution credit in respect of the contributed Leases equal to the
acquisition costs of the contributed Leases (which shall be determined in
accordance with Section 2(c)).
(c) Intangible Drilling Costs. All Intangible Drilling Costs shall be
allocated entirely to the Partnership.
(d) Tangible Costs. All Tangible Costs shall be allocated entirely to
the Partnership; provided, however, that to the extent, if any, that the total
costs allocated to MD pursuant to paragraphs (a) and (b) above are less than an
amount equal to 40% of the aggregate capital contributions initially made by
investor partners to the Partnership ("Deficit Amount"), then MD shall be
allocated an amount of Tangible Costs equal to the Deficit Amount.
(e) Operating Costs and Reporting and Legal Expenses. All Operating
Costs and Reporting and Legal Expenses incurred with respect to Program Wells
shall be allocated 40% to MD and 60% to the Partnership.
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<PAGE> 185
(f) Administrative Costs. All Administrative Costs incurred by the
Program Manager or any of its Affiliates in managing and conducting the
business and affairs of the Partnership or the Program, including expenses
incurred in providing or obtaining such professional, technical, administrative
and other services and advice as the Program Manager may deem necessary or
desirable shall be allocated 40% to MD and 60% to the Partnership and shall be
reimbursed by the Participants pursuant to Section 8.
(g) Other Costs. All other costs incurred shall be allocated 40% to MD
and 60% to the Partnership.
Section 4. Allocation of Revenues. Except as provided in Attachment A
attached hereto, all revenues attributable to the activities and operations
conducted pursuant to this Agreement shall be allocated to and received by the
parties hereto as follows:
(a) Revenues from Program Operations. Subject to subparagraph (b)
below, all revenues from Program operations, including without limitation, all
revenues directly or indirectly resulting from the investment of revenues from
Program operations, shall be allocated 40% to MD and 60% to the Partnership.
(b) Revenues from Disposition of Program Assets.
(i) Revenues resulting from the sale or other taxable
disposition of an oil and gas property (as such term is defined in
Section 614 of the Code) shall be allocated, (A) to the extent such
revenues constitute a recovery of the Program's simulated tax basis in
such property, to the parties in the same percentages as the simulated
tax basis of the property sold was allocated up to an amount equal to
the Program's simulated tax basis in such property at the time of such
sale, and (B) thereafter, to the parties in a manner which will cause
the aggregate of all revenues allocated to the parties from such sale
or disposition and from all prior sales (to the extent possible) to
equal the amounts which would have been allocated to the parties if
all such revenues had been allocated 40% to MD and 60% to the
Partnership. For purposes of computing the simulated tax basis of any
such property, depletion deductions shall be computed as provided in
paragraph 4(c) of Attachment A without regard to depletion deductions
actually claimed by the parties under paragraph 6(d) of Attachment A.
(ii) All revenues resulting from the rental, sale or other
disposition of any item of depreciable property shall be allocated (A)
to the extent such revenues constitute a recovery of the Program's
adjusted tax basis in such property, to the parties in the same
percentages as the adjusted tax basis of the property sold was
allocated up to an amount equal to the Program's adjusted tax basis in
such property at the time of such sale, and (B) thereafter, to the
parties in a manner which will cause the aggregate of all revenues
allocated to the parties from such rental, sale or other disposition
and from all prior rentals or sales (to the extent possible) to equal
the amounts which would have been allocated to the parties if all such
revenues had been allocated 40% to MD and 60% to the Partnership.
(iii) All revenues resulting from the disposition of any
other property shall be allocated 40% to MD and 60% to the
Partnership.
(iv) All dry hole and bottom hole and similar contributions
shall not be considered to be revenues hereunder but shall be applied
to reduce the Intangible Drilling Costs of the respective Program
Wells to which they relate.
Section 5. Ownership of Production.
Each Participant shall have the right to take in kind or separately
dispose of its proportionate share of all oil and gas produced from any Lease
subject to the Program pursuant to the terms of this Agreement. Any extra
expenditure incurred in the taking in kind or separate disposition by any party
hereto of its proportionate share of production shall be borne by such party.
Each party shall execute such division orders and contracts as may be necessary
for the sale of its interest in production from any such Lease. The proceeds
from the sale of all production produced, saved, and sold
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<PAGE> 186
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.
(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.
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(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 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
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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.
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.
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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
(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.
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(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.
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.
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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 , 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. Elections with Respect to Tax Status. 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 any
status under Treasury Regulation Section 301.7701-3 other than as a partnership
for federal tax purposes, (b) 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 (c) 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 income and not properly chargeable as capital
expenditures, including any non-deductible book amortizations of
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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.
(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:
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(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 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).
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(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.
(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
B-A4
<PAGE> 197
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
<PAGE> 198
EXHIBIT C
SPECIAL SUBSCRIPTION INSTRUCTIONS
MEWBOURNE ENERGY 99-00 DRILLING PROGRAMS
<PAGE> 199
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 200
SPECIAL SUBSCRIPTION INSTRUCTIONS
Mewbourne Energy 99-00 Drilling Programs
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 ALABAMA, ARIZONA, IOWA, KANSAS, MICHIGAN,
MINNESOTA, MISSISSIPPI, MISSOURI, NORTH CAROLINA, OHIO,
OREGON, PENNSYLVANIA, SOUTH CAROLINA, SOUTH DAKOTA, TENNESSEE,
TEXAS, UTAH, VIRGINIA, WASHINGTON OR WEST VIRGINIA, and
investing as a General Partner of the Partnership, I have
either (a) a minimum net worth of $225,000 without regard to
the investment in a Partnership (exclusive of home, home
furnishings and automobiles) and as to the residents of
Alabama, Minnesota, North Carolina, Pennsylvania, South
Carolina, Tennessee, Texas, Utah, Virginia, Washington and
West Virginia a minimum annual gross income of $100,000 for
the current year and for the two previous years and as to
residents of Arizona, Iowa, Kansas, Michigan, Mississippi,
Missouri, Ohio, Oregon and South Dakota income of $60,000 or
more for the previous year and the expectation of an annual
taxable income of $60,000 or more for the current year and for
the next succeeding year); or (b) a minimum net worth in
excess of $1,000,000, inclusive of home, home furnishings and
automobiles; or (c) a minimum net worth of $500,000 (exclusive
of home, home furnishings and automobiles) or (d) a minimum
annual gross income of $200,000 in the current year and the
two previous years.
C-1
<PAGE> 201
ATTENTION PENNSYLVANIA RESIDENTS
o Because the minimum closing amount is less than $2,000,000,
you are cautioned to carefully evaluate the Partnership's
ability to fully accomplish its stated objectives and to
inquire as to the current dollar volume of program
subscriptions.
ATTENTION CALIFORNIA INVESTORS
o Subscriptions for Limited Partner Interests: If a resident of
CALIFORNIa and subscribing for Limited Partner Interests, I
have either (a) a net worth of at least $250,000 or more
(exclusive of home, home furnishings and automobiles) and had
during the last tax year or estimates that he/she will have
during the current tax year, a gross annual income of $65,000
or more, or (b) a net worth of $500,000 or more (exclusive of
home, home furnishings and automobiles).
o Subscriptions for General Partner Interests: If a resident of
CALIFORNIa and subscribing for General Partner Interests, I
have either (a) a net worth of at least $250,000 or more
(exclusive of home, home furnishings and automobiles) and had
during the last tax year, or estimates that he/she will have
during the current tax year, a gross annual income of $120,000
or more, or (b) a net worth of $500,000 or more (exclusive of
home, home furnishings and automobiles), or (c) a net worth of
$1,000,000 or more (inclusive of home, home furnishings and
automobiles), or (d) had during the last tax year, or
estimates that he/she will have during the current tax year, a
gross annual income of $200,000 or more.
o As a condition of qualification of the Interests for sale in
the State of CALIFORNIa, each California subscriber, through
the execution of the Subscription Agreement, acknowledges
his/her understanding that the California Department of
Corporations has adopted certain regulations and guidelines
which apply to oil and gas interests to the public in the
State of California and that the offering may not comply with
all of the rules set forth in Title 10 of the California
Administrative Code, including rules pertaining to
compensation, democracy rights and reports. Even in light of
such non-compliance, I affirmatively state that I still want
to invest in the Partnership.
o Assignability or transfer of Interests must be limited so that
no assignee or assignor, transferee or transferor may hold
less than $5,000 in Interests.
o A RESIDENT OF CALIFORNIA SHOULD BE AWARE THAT IT IS UNLAWFUL
TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY
INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR,
WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF
CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED
IN THE COMMISSIONER'S RULES. CERTIFICATES REPRESENTING
INTERESTS IN THE MEWBOURNE DEVELOPMENT 98 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;
C-2
<PAGE> 202
(3) to any person described in subdivision (i) of Section
25102 of the Code or Section 260.105.14 of these rules;
(4) to the transferor's ancestors, descendants or spouse, or
any custodian or trustee for the account of the transferor or the
transferor's ancestors, descendants, or spouse; or to a transferee by a
trustee or custodian for the account of the transferee or the
transferee's ancestors, descendants or spouse;
(5) to the holders of securities of the same class of the same
issuer;
(6) by way of gift or donation inter vivos or on death;
(7) by or through a broker-dealer licensed under the Code
(either acting as such or as a finder) to a resident of a foreign
state, territory or country who is neither domiciled in this state to
the knowledge of the broker-dealer, nor actually present in this state
if the sale of such securities is not in violation of any securities
law of the foreign state, territory or country concerned;
(8) to a broker-dealer licensed under the Code in a principal
transaction, or as an underwriter or member of an underwriting
syndicate or selling group;
(9) if the interest sold or transferred is a pledge or other
lien given by the purchaser to the seller upon a sale of the security
for which the Commissioner's written consent is obtained or under this
rule not required;
(10) by way of a sale qualified under Section 25111, 25112,
25113 or 25121 of the Code, of the securities to be transferred,
provided that no order under Section 25140 or subdivision (a) of
Section 25143 is in effect with respect to such qualification:
(11) by a corporation to a wholly-owned subsidiary of such
corporation, or by a wholly-owned subsidiary of a corporation to such
corporation;
(12) by way of an exchange qualified under Section 25111,25112
or 25113 of the Code, provided that no order under Section 25140 or
subdivision (a) of Section 25143 is in effect with respect to such
qualification;
(13) between residents of foreign states, territories or
countries who are neither domiciled nor actually present in this state;
(14) to the State Controller pursuant to the Unclaimed
Property Law or to the administrator of the unclaimed property law of
another state;
(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:
C-3
<PAGE> 203
"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-4
<PAGE> 204
EXHIBIT D
SUBSCRIPTION AGREEMENT
MEWBOURNE ENERGY 99-00 DRILLING PROGRAMS
<PAGE> 205
SUBSCRIPTION AGREEMENT
Mewbourne Energy 99-00 Drilling Programs
The undersigned hereby subscribes for, and if accepted by Mewbourne
Development Corporation (the "Managing Partner"), in its capacity as managing
general partner of the limited partnership indicated below (the "Partnership"),
agrees to purchase that certain dollar amount indicated below of Interests at
$1,000 per Interest. Enclosed please find my check in the amount of $___ made
payable to "NationsBank, Escrow Agent for Mewbourne." Defined terms used and
not defined herein shall have the meaning assigned to such terms in the
Agreement of Partnership for the Partnership, dated , 1999 (the "Agreement of
Partnership"). With respect to this purchase, being aware that a broker may
sell to me only if I qualify according to the express standards stated herein
in the Special Subscription Instructions attached as Exhibit C to the
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 ALABAMA, ARIZONA,
CALIFORNIA, IOWA, KANSAS, MICHIGAN, MINNESOTA, MISSISSIPPI,
MISSOURI, NORTH CAROLINA, OHIO, OREGON, PENNSYLVANIA, SOUTH
CAROLINA, SOUTH DAKOTA, TENNESSEE, TEXAS, UTAH, VIRGINIA,
WASHINGTON OR WEST VIRGINIA, represent that I am aware of and
satisfy the additional suitability and other requirements
stated in Exhibit C to the Prospectus.
_____ (d) Represent that I am an "Eligible Citizen" as
defined in the Prospectus.
_____ (e) Represent that (i) if an individual, I am
over 21 years of age, (ii) if an association, all of the
members are of such age, (iii) if a corporation, it is
authorized and otherwise duly qualified to hold an interest in
the Partnership and to hold Leases and interests therein and
is (or at the request of the Managing Partner will promptly
become) qualified to do business in each jurisdiction in which
the business or activities of the Partnership necessitate such
qualification, and (iv) if a fiduciary, I would qualify under
clauses (i), (ii) or (iii) of this Section (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.
_____ (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.
D-1
<PAGE> 206
_____ (l) Make the Power of Attorney set forth in
Section 10.2 of the Agreement of Partnership of the
Partnership.
_____ (m) Unless it is indicated on the next page that
I am a foreign person or foreign entity, (i) certify that, if
the subscriber is an individual, the subscriber is not a
nonresident alien for the purposes of United States federal
income taxation or, if the subscriber is a corporation,
partnership, trust, or estate, the subscriber is not a foreign
corporation, foreign partnership, foreign trust, or foreign
estate (as those terms are defined in the Code and regulations
promulgated thereunder), (ii) declare under penalties of
perjury that the foregoing certification and the name,
identifying number, home address (in the case of an
individual) or office address (in the case of an entity), and
place of incorporation (in the case of a corporation) of the
subscriber is to the best of my knowledge and belief true,
correct, and complete, and (iii) agree to inform the Managing
Partner if the subscriber becomes a nonresident alien or a
foreign person at any time during the three year period
immediately following the date of this Subscription Agreement.
_____ (n) Agree not to file the statement described in
Section 6224(c)(3)(B) of the Internal Revenue Code prohibiting
the Managing Partner, as the tax matters partner for the
Partnership, from entering into a settlement on his behalf
with respect to partnership items (as such term is defined in
Code Section 6231(a)(3)) of the Partnership.
_____ (o) Agree that the Managing Partner is
authorized to file a copy of this Subscription Agreement (or
pertinent portions hereof) with the Internal Revenue Service
pursuant to Section 6224(b) of the Code if necessary to
perfect my waiver of rights under this Subscription Agreement.
_____ (p) Agree that the foregoing representations,
warranties and agreements shall remain true and accurate
during the term of the Partnership, and I will neither take
action nor permit action to be taken which would cause any of
them to become untrue or inaccurate. In the event that I
become aware that any such representation, warranty or
agreement has become untrue or inaccurate at any time, I shall
immediately notify the Managing Partner and provide the
Managing Partner with such other information and statements
and grant to the Managing Partner such power of attorney as
the Managing Partner may request.
_____ (q) Acknowledge that 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.
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.
D-2
<PAGE> 207
SEND SUBSCRIPTION AND CHECK TO:
BANK OF AMERICA TEXAS, N.A., ESCROW AGENT
3301 GOLDEN ROAD
TYLER, TEXAS 75701
(903) 510-5041
D-3
<PAGE> 208
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
____-A, L.P.
<TABLE>
<S> <C> <C>
Type of Interests Purchased [ ] General Partner Interests IF NO SELECTION IS MADE, THE PARTNERSHIP CANNOT ACCEPT YOUR
SUBSCRIPTION AND WILL HAVE TO RETURN THIS SUBSCRIPTION
[ ] Limited Partner Interests AGREEMENT AND YOUR MONEY TO YOU.
Check one:
__ Individual __ Employee Benefit Plan as defined in Section __ Keogh Plan (HR-10)
__ Community Property 3(3) of ERISA __ IRA, IRA Rollover or SEP
__ Tenants in Common __ Tax/Partnership __ Other Qualified Plan
__ Joint tenants with right __ Corporation ________________________ __ Tax-exempt under 501(c)(3)
of survivorship (Place of Incorporation) __ Other (________________) please specify
__ Foreign person or entity
</TABLE>
- --------------------------------------------------------------------------------
Print Name(s) in which Interests should be registered
- --------------------------------------------------------------------------------
Print Name(s) in which Interests should be registered
- --------------------------------------------------------------------------------
Mailing Address
- ---------------------------------- --------- ---------
City State Investor's State of Residence
- --------- ---------------------- ---------------------------------
Zip Code SS#/Tax ID# Phone No.
- ------------------------------
Account Number (if applicable)
CUSTODIAN OR CHECKS PAYABLE TO OTHERS (OPTIONAL)
Checks will be payable to the registration name and address shown above, unless
otherwise specified below.
- --------------------------------------------------------------------------------
Person/Entity
- --------------------------------------------------------------------------------
For the Benefit of
- --------------------------------------------------------------------------------
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
<PAGE> 209
FOR SOLICITING DEALER USE ONLY
- -------------------------------------------------------------------------------
Firm
- ----------------------------------------------- --------------------------
Branch Office Address Phone No.
- --------------------------------------- -------------- --------------
City State Zip Code
- -----------------------------------------------------------
Representative's Number
- -----------------------------------------------------------
Signature of Registered Representative
- ----------------------------------------- -------------------------------
Print Name of Registered Representative Authorized Signature for
Branch Manager+
+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
<PAGE> 210
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
<TABLE>
<CAPTION>
Page
----
<S> <C>
SUMMARY OF OFFERING............................................................1
RISK FACTORS...................................................................6
DEFINITIONS...................................................................19
TERMS OF THE OFFERING.........................................................24
ADDITIONAL FINANCING..........................................................31
PLAN OF DISTRIBUTION..........................................................32
INVESTMENT OBJECTIVES.........................................................32
PROPOSED ACTIVITIES...........................................................33
APPLICATION OF PROCEEDS.......................................................42
PARTICIPATION IN COSTS AND REVENUES...........................................44
COMPENSATION AND REIMBURSEMENT................................................46
ESTIMATED DRILLING PROGRAM EXPENSES...........................................48
MANAGEMENT....................................................................50
OWNERSHIP STRUCTURE OF MEWBOURNE
COMPANIES................................................................52
CONFLICTS OF INTEREST.........................................................57
PRIOR ACTIVITIES..............................................................63
TAX ASPECTS...................................................................74
COMPETITION, MARKETS AND REGULATION...........................................92
LIABILITY OF GENERAL AND LIMITED
PARTNERS.................................................................94
SUMMARY OF PARTNERSHIP AGREEMENT AND
DRILLING PROGRAM AGREEMENT...............................................95
LEGAL OPINIONS...............................................................104
EXPERTS......................................................................104
WHERE YOU CAN FIND MORE INFORMATION..........................................104
INDEX TO FINANCIAL STATEMENTS................................................106
</TABLE>
Exhibit A: Form of Agreement of Partnership
Exhibit B: Form of Drilling Program Agreement
Exhibit C: Form of Special Subscription Instructions
Exhibit D: Form of Subscription Agreement
----------
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS, AS AMENDED OR
SUPPLEMENTED, ALL DEALERS EFFECTING TRANSACTIONS IN THESE SECURITIES, WHETHER
OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
================================================================================
MEWBOURNE
ENERGY 99-00
DRILLING PROGRAMS
(PER PARTNERSHIP MINIMUM OFFERING AMOUNT)
1,000 LIMITED PARTNER INTERESTS
AT $1,000 PER INTEREST
MINIMUM PURCHASE OF
FIVE LIMITED PARTNER INTERESTS
1,000 GENERAL PARTNER INTERESTS
AT $1,000 PER INTEREST
MINIMUM PURCHASE OF
FIVE GENERAL PARTNER INTERESTS
----------
PROSPECTUS
----------
, 1999
================================================================================
<PAGE> 211
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
4,000 Limited Partner Interests and 16,000 General Partner Interests are sold.
Costs of Offering:
<TABLE>
<S> <C>
Securities Act of 1933 Registration Fee.................................... $ 5,560
National Association of Securities Dealers, Inc. Filing Fee................ 2,500
Blue Sky Qualification Fees and Expenses................................... 26,000*
Printing................................................................... 75,000*
Legal Fees and Expenses.................................................... 250,000*
Accounting Fees and Expenses............................................... 10,000*
Expenses of Mewbourne Development Corporation Incurred in Connection
With the Distribution..................................................... 50,000*
Miscellaneous.............................................................. 50,000*
Total...................................................................... $ 469,060
=======
* Estimated
</TABLE>
- -------------------
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 5.4 of the partnership agreement provide that neither Mewbourne
Development Corporation nor any of its affiliate shall have any liability to a
partnership or to any partner thereof for any loss suffered by the partnership
that arises out of any action or inaction performed or omitted by Mewbourne
Development Corporation or such affiliate, unless the managing partner in good
faith has determined that such course of conduct or omission was not intended to
further the best interest of the partnership or that such course of conduct
constituted negligence or misconduct on the part of Mewbourne Development
Corporation or such affiliate. Section 6(f) of the drilling program agreements
provides parallel protection from liability to Mewbourne Oil Company, in its
individual capacity as the program manager, and affiliates of the program
manager.
Section 5.5 of the partnership agreements and Section 6(f) of the
drilling program agreements provides, subject to various conditions, for
indemnification of Mewbourne Development Corporation and its affiliates, and
each permit, subject to certain conditions, for insurance to be purchased and
maintained on behalf of Mewbourne Development Corporation and its affiliates
against any liabilities asserted against or expenses incurred by Mewbourne
Development Corporation and its affiliates in connection with activities of a
partnership or drilling program, as the case may be.
Section 17-108 of the Delaware Act provides that a Delaware limited
partnership may indemnify and hold harmless any partner or other person from and
against any and all claims and demands whatsoever.
Section 9 of the soliciting dealer agreements provide that the
partnerships and Mewbourne Development Corporation have agreed to indemnify the
soliciting dealers against certain liabilities, including certain liabilities
under the Securities Act of 1933. In addition, Mewbourne Development Corporation
may enter into similar agreements with
II-1
<PAGE> 212
certain soliciting dealers on behalf of the partnerships under which Mewbourne
Development Corporation and the partnerships will indemnify those soliciting
dealers against certain liabilities, including certain liabilities under the
Securities Act of 1933.
As permitted by Section 102(b)(7) of the Delaware General Corporation
Law, Article 10 of each of Mewbourne Development Corporation's and Mewbourne Oil
Company's Certification of Incorporation contains a limitation of liability
provision under which a director will not be personally liable to Mewbourne
Development Corporation, Mewbourne Oil Company or their respective stockholders
for monetary damages resulting from breaches of his fiduciary duty of care as a
director, subject to certain limitations.
Article 7, Section 7 of each of Mewbourne Development Corporation's and
Mewbourne Oil Company's By-laws provides that Mewbourne Development Corporation
or Mewbourne Oil Company, as the case may be, shall indemnify its officer or
director to the fullest extent permitted under the Delaware General Corporation
Law. Section 145 thereof permits indemnification of an officer or director upon
a determination that such officer or director has met the applicable standard of
conduct. Under Section 145, such officer or director is required to have acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of Mewbourne Development Corporation and, with respect to any
criminal action, without reasonable cause to believe his conduct was unlawful.
Section 145 does not authorize indemnification, in actions brought by or in the
right of a corporation, against judgments, fines or amounts paid in settlement,
nor does it provide for indemnification of expenses incurred in the defense or
settlement of claims as to which a director or officer is adjudged to be liable
to Mewbourne Development Corporation or Mewbourne Oil Company, as the case may
be, unless specifically authorized by the Delaware Court of Chancery or the
court in which such action is brought.
The above discussion of the provisions of Section 5.5 of the
Partnership Agreement, Section 6(f) of the drilling program agreement, Section
17-108 of the Delaware Act, Sections 102(b)(7) and 145 of the Delaware General
Corporation Law, Article 10 of each of Mewbourne Development Corporation's and
Mewbourne Oil Company's Certificate of Incorporation, Article 7, Section 7 of
each of Mewbourne Development Corporation's and Mewbourne Oil Company's By-laws,
and the soliciting dealer agreements is not intended to be exhaustive and is
respectively qualified in its entirety by the applicable provisions of the
partnership agreements and drilling program agreements, the forms of which are
included as Exhibits A and B to the Prospectus forming a part of this
Registration Statement and are hereby incorporated herein by reference, the
Delaware Act and the Delaware General Corporation Law, Article 10 of each of
Mewbourne Development Corporation's and Mewbourne Oil Company's Certificate of
Incorporation , which are included as Exhibits 3.3 and 3.5, respectively, to
this Registration Statement and hereby incorporated herein by reference, Article
7, Section 7 of each of Mewbourne Development Corporation's and Mewbourne Oil
Company's By-laws, which are included as Exhibits 3.4 and 3.6, respectively, to
this Registration Statement and hereby are incorporated herein by reference, and
by the soliciting dealer agreements, the form of which is set forth as Exhibit
1.1 to the Registration Statement and is hereby incorporated herein by
reference.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In connection with the formation of a partnership, the organizational
partner of such partnership will contribute $100 to the partnership's capital.
Upon the initial admission of general and limited partners to that partnership,
the subscription of the organizational partner in the partnership will be
terminated and the $100 contribution will be returned to him. The partnerships
have not otherwise sold or issued within the past three years any securities
which were not registered under the Securities Act of 1933.
II-2
<PAGE> 213
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<S> <C> <C>
1.1 -- Form of Soliciting Dealer Agreement to be entered into between
Mewbourne Development Corporation and the Soliciting Dealers.**
1.2 -- Form of Dealer Manager Agreement.**
3.1 -- Certificate of Limited Partnership of Mewbourne Energy Partners
99-A, L.P.**
3.2 -- Form of Amendment to Certificate of Limited Partnership of
Mewbourne Energy Partners 99-A, L.P.**
3.3 -- Certificate of Incorporation of Mewbourne Development
Corporation.+
3.4 -- Bylaws of Mewbourne Development Corporation.+
3.5 -- Certificate of Incorporation of Mewbourne Oil Company.+
3.6 -- Bylaws of Mewbourne Oil Company.+
4.1 -- Form of Agreement of Partnership of Mewbourne Energy Partners
-A, L.P. (filed as Exhibit A to the Prospectus forming a part
of this Registration Statement).**
4.2 -- Form of Subscription Agreement (filed as Exhibit D to the
Prospectus forming a part of this Registration Statement).**
4.3 -- Form of Special Subscription Instructions (filed as Exhibit C
to the Prospectus forming a part of this Registration
Statement).**
4.4 -- Form of Certificate of Limited Partner Interest.**
4.5 -- Form of Certificate of General Partner Interest.**
5.1 -- Opinion of Vinson & Elkins L.L.P., as to the legality of the
securities registered hereby.*
8.1 -- Opinion of Vinson & Elkins L.L.P., as to certain tax matters
arising in connection with the securities registered hereby.*
10.1 -- Form of Drilling Program Agreement among Mewbourne Development
Corporation, Mewbourne Oil Company and Mewbourne Energy
Partners -A, L.P. (filed as Exhibit B to the Prospectus forming
a part of this Registration Statement).**
10.2 -- Form of Escrow Agreement between Mewbourne Development
Corporation and Bank of America Texas, N.A.**
10.3 -- Form of Operating Agreement between Mewbourne Energy Partners
-A, L.P., Mewbourne Development Corporation and Mewbourne Oil
Company.**
23.1 -- Consent dated April 21, 1999 of PricewaterhouseCoopers LLP,
independent accountants.**
23.2 -- Consent of Vinson & Elkins L.L.P. (included as part of Exhibits
5.1).*
23.3 -- Consent dated April 21, 1999 of Forrest A. Garb & Associates,
Inc., independent engineers.**
</TABLE>
II-3
<PAGE> 214
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<S> <C> <C>
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**
</TABLE>
- -------------------
* To be filed by Amendment
** Filed herewith
+ Incorporated by reference from Mewbourne Energy Partners 97-A, L.P.
registration statement on Form S-1, SEC File No. 353-22829
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes as follows:
(1) to file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement: (i) to include any
prospectus required by Section 10(a)(3) of the Securities Act; (ii) to reflect
in the prospectus any facts or events arising after the effective date of the
Registration Statement (or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement; and (iii) to include any
material information with respect to the plan of distribution not previously
disclosed in the Registration Statement or any material change to such
information in the Registration Statement; provided, however, that subparagraphs
(1)(i) and (1)(ii) above do not apply if the Registration Statement is on Form
S-3 or Form S-8, and the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed by the
Registrant pursuant to section 13 or section 15(d) of the Securities Exchange
Act of 1934 that are incorporated by reference in the Registration Statement.
(2) that, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) that all post-effective amendments will comply with the applicable
forms, rules and regulations of the Securities and Exchange Commission in effect
at the time such post-effective amendments are filed.
(4) to remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(5) to not identify to any third party any prospects that will be, or
are likely to be, purchased by a partnership with the proceeds from the sale of
the securities offered hereby or are representative of prospects which may be
purchased by the partnership with the proceeds from the sale of the securities
offered hereby, whether such third party is a soliciting dealer or other party
involved in making or directing investment decisions regarding the purchase of
the securities offered hereby, except to the extent such prospects have been
identified in the prospectus or an amendment thereto.
To the extent a review of prospects or lease inventory is permitted to
third parties:
(a) it will be incidental to a soliciting dealer's due
diligence examination;
(b) no reference to any specific prospect, unless such
prospect is described in the prospectus or an amendment to the
prospectus, will appear in any analysis or report on the securities
offered hereby prepared by such third party; and
II-4
<PAGE> 215
(c) any third party, prior to receiving permission to examine
prospects, will agree to the above conditions, and the Registrant will
file a copy of such agreement(s) as an exhibit to the Registration
Statement.
No prospective investors or their representative will be permitted to
examine any prospects or inventory or data related thereto that are not
described or set forth in the prospectus or an amendment to the
prospectus.
(6) to provide to the partners of a partnership the financial
statements required by Form 10-K for the first full fiscal year of operations of
the partnership.
(7) to send to each purchaser of the securities offered hereby, on at
least an annual basis, a detailed statement of any transactions by the
Partnership to which that purchaser has been admitted as a partner with the
Managing Partner or its affiliates and fees, commissions, compensation, and
other benefits paid or accrued to the Managing Partner or its affiliates for the
fiscal year completed, showing the amount paid or accrued to each recipient and
the services performed.
(8) to file a sticker supplement pursuant to Rule 424(c) under the
Securities Act of 1933 during the distribution period for the partnerships
describing each property not identified in the Prospectus at such time as there
arises a reasonable probability that such property will be acquired by such
Partnership and to consolidate all such stickers into a post-effective amendment
filed at least once every three months, with the information contained in such
amendment provided simultaneously to any existing general and limited partners
of such partnership. Each sticker supplement should disclose all compensation
and fees received by the Managing Partner and its affiliates in connection with
any such acquisition. The post-effective amendment shall include audited
financial statements meeting the requirements of Rule 3-05 of Regulation S-X
only for properties acquired during such distribution period.
(9) to file, after the end of the end of the distribution period, a
current report on Form 8-K containing the financial statements and any
additional information required by Rule 3-05 of Regulation S-X as such is
required under Item 7 of Form 8-K, to reflect each commitment (i.e., the signing
of a binding purchase agreement) made after the end of the distribution period
involving the use of 10% or more (on a cumulative basis) of the net proceeds of
the offering and to provide the information contained in such report to the
limited partners at least once each quarter after the distribution period of the
offering has ended.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
Mewbourne Development Corporation pursuant to the foregoing provisions, or
otherwise, Mewbourne Development Corporation has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by Mewbourne Development Corporation of
expenses incurred or paid by a director, officer or person controlling Mewbourne
Development Corporation in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, Mewbourne Development
Corporation will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
II-5
<PAGE> 216
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Tyler,
State of Texas, on April 23, 1999.
MEWBOURNE ENERGY 99-00 DRILLING PROGRAMS,
consisting of Mewbourne Energy Partners
99-A, L.P., a Delaware limited partnership
and Mewbourne Energy Partners 00-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. Each person whose signature appears below
hereby authorizes and appoints J. Roe Buckley as their attorney-in-fact to sign
on their behalf individually and in the capacity stated below all amendments and
post-effective amendments to this Registration Statement as such
attorney-in-fact may deem necessary or appropriate.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Curtis W. Mewbourne President and Director April 23, 1999
- ----------------------- (Principal Executive Officer)
CURTIS W. MEWBOURNE
/s/ J. Roe Buckley Treasurer April 23, 1999
- ------------------ (Principal Financial and
J. ROE BUCKLEY Accounting Officer)
/s/ Dorothy M. Cuenod Director April 23, 1999
- ---------------------
DOROTHY M. CUENOD
/s/ Ruth M. Buckley Director April 23, 1999
- -------------------
RUTH M. BUCKLEY
/s/ Julie M. Greene Director April 23, 1999
- --------------------
JULIE M. GREENE
</TABLE>
II-6
<PAGE> 217
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------ -------
<S> <C>
1.1 -- Form of Soliciting Dealer Agreement to be entered into between
Mewbourne Development Corporation and the Soliciting Dealers.**
1.2 -- Form of Dealer Manager Agreement.**
3.1 -- Certificate of Limited Partnership of Mewbourne Energy Partners
99-A, L.P.**
3.2 -- Form of Amendment to Certificate of Limited Partnership of
Mewbourne Energy Partners 99-A, L.P.**
3.3 -- Certificate of Incorporation of Mewbourne Development Corporation.+
3.4 -- Bylaws of Mewbourne Development Corporation.+
3.5 -- Certificate of Incorporation of Mewbourne Oil Company.+
3.6 -- Bylaws of Mewbourne Oil Company.+
4.1 -- Form of Agreement of Partnership of Mewbourne Energy Partners -A,
L.P. (filed as Exhibit A to the Prospectus forming a part of this
Registration Statement).**
4.2 -- Form of Subscription Agreement (filed as Exhibit D to the
Prospectus forming a part of this Registration Statement).**
4.3 -- Form of Special Subscription Instructions (filed as Exhibit C to
the Prospectus forming a part of this Registration Statement).**
4.4 -- Form of Certificate of Limited Partner Interest.**
4.5 -- Form of Certificate of General Partner Interest.**
5.1 -- Opinion of Vinson & Elkins L.L.P., as to the legality of the
securities registered hereby.*
8.1 -- Opinion of Vinson & Elkins L.L.P., as to certain tax matters
arising in connection with the securities registered hereby.*
10.1 -- Form of Drilling Program Agreement among Mewbourne Development
Corporation, Mewbourne Oil Company and Mewbourne Energy Partners-A,
L.P. (filed as Exhibit B to the Prospectus forming a part of this
Registration Statement).**
10.2 -- Form of Escrow Agreement between Mewbourne Development Corporation
and Bank of America Texas, N.A.**
10.3 -- Form of Operating Agreement between Mewbourne Energy Partners -A,
L.P., Mewbourne Development Corporation and Mewbourne Oil
Company.**
23.1 -- Consent dated April 21, 1999 of PricewaterhouseCoopers LLP,
independent accountants.**
23.2 -- Consent of Vinson & Elkins L.L.P. (included as part of Exhibits
5.1).*
23.3 -- Consent dated April 21, 1999 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**
</TABLE>
* To be filed by Amendment
** Filed herewith
+ Incorporated by reference from Mewbourne Energy Partners 97-A, L.P.
registration statement on Form S-1, SEC File No. 353-22829
<PAGE> 1
EXHIBIT 1.1
SOLICITING DEALER AGREEMENT
Mewbourne Energy 99-00 Drilling Programs
, 1999
Mewbourne Securities, Inc.
3901 S. Broadway
Tyler, Texas 75701
Gentlemen:
Mewbourne Development Corporation, a Delaware corporation ("MD"), is
or proposes to be the sole managing general partner (in such capacity the
"Managing Partner") in a series of two limited partnerships (the
"Partnerships") formed pursuant to the Delaware Revised Uniform Limited
Partnership Act (the "Delaware Act"). MD intends to name the Partnerships as
follows: Mewbourne Energy Partners 99-A, L.P. and Mewbourne Energy Partners
00-A, L.P. Each Partnership will participate in a program, governed by a
Drilling Program Agreement (the "Program Agreement") among Mewbourne Oil
Company, a Delaware corporation ("MOC"), MD and such Partnership, the primary
purpose of which will be to drill Developmental Wells (as such term is defined
in the Prospectus referred to below).
On behalf of each Partnership and MD, a Registration Statement on Form
S-1 (Registration No. ) dated , 1999, relating to the offer and
sale of the Interests (hereinafter defined) was filed with the Securities and
Exchange Commission (the "Commission") under the Securities Act of 1933, (the
"Act"). On , 1999, MD filed with the Commission on behalf of the
Partnerships Amendment No. 1 to the Registration Statement. The Registration
Statement was declared effective by the Commission on , 1999. MD, the
Partnerships and the Interests are described in the Prospectus dated ,
1999 (the "Prospectus") that forms a part of the Registration Statement. As
used in this Soliciting Dealer Agreement (this "Agreement"), the terms
"Prospectus" and "Registration Statement" refer solely to the Prospectus and
Registration Statement, as amended, described above, except that (i) from and
after the date on which any post-effective amendment to the Registration
Statement is declared effective by the Commission, the term "Registration
Statement" shall refer to the Registration Statement as amended by that
post-effective amendment, and the term "Prospectus" shall refer to the
Prospectus then forming a part of the Registration Statement, and (ii) if the
Prospectus filed by MD pursuant to Rule 424(b) or (c) promulgated by the
Commission under the Act differs from the Prospectus on file with the
Commission at the time the Registration Statement or any post-effective
amendment thereto shall have become effective, the term "Prospectus" shall
refer to the Prospectus filed pursuant thereto from and after the date on which
it was filed. Terms defined in the Prospectus and not otherwise defined herein
will have the meanings set forth in the Prospectus.
MD desires to raise a minimum of $1,000,000 and a maximum of
$10,000,000 in capital for each Partnership by the sale of up to 4,000
($4,000,000) limited partner interests (the "Limited Partner Interests") and up
to 16,000 ($16,000,000) general partner interests (the "General Partner
Interests") in the Partnerships (the Limited Partner Interests and the General
Partner Interests are collectively referred to as the "Interests"). The
Interests will be offered in $1,000 increments, with a minimum purchase of five
Interests ($5,000).
Mewbourne Securities, Inc., a Texas corporation (the "Dealer Manager")
has entered into a Dealer Manager Agreement with the Managing Partner under
which the Dealer Manager is appointed the exclusive agent of the Managing
Partner and of the Partnerships to form a group of National Association of
Securities Dealers, Inc. member firms who will solicit subscribers for the
purchase of Interests.
The following are the terms on which the Managing Partner, on behalf
of the Partnerships, and the Dealer Manager appoint you and you agree to such
appointment to solicit subscribers for the purchase of Interests:
<PAGE> 2
Mewbourne Development 99-00 Drilling Program
Soliciting Dealer Agreement
, 1999
Page 2
Section 1. Appointment as Soliciting Dealer. On the basis of the
representations, warranties and covenants contained in this Agreement, but
subject to the terms and conditions set forth herein, you are hereby appointed
to serve as a soliciting dealer ("Soliciting Dealer") during the Offering
Period (as defined below) for Interests in both Partnerships for the purpose of
finding subscribers for the Interests through a public offering, at the price
of $1,000 per Interest, with a minimum subscription of five Interests ($5,000),
as described in the Prospectus. The "Offering Period" (as such term is used in
this Agreement) for Interests in Mewbourne Energy Partners 99-A, L.P. will
commence on or about the date on which the Registration Statement is declared
effective and will end no later than November 5, 1999. The Offering Period for
Interests in Mewbourne Energy Partners 00-A, L.P. will commence on ,1999
and will end no later than December 31, 2000. MD has the right in its sole and
absolute discretion to terminate the offering of Interests and end an Offering
Period at any time. You hereby accept appointment as a Soliciting Dealer and
agree on the terms and conditions set forth in this Agreement to use your
reasonable efforts to solicit subscriptions for the Interests during each
Offering Period and until the earlier of (i) the termination of an Offering
Period or (ii) the Closing (as hereinafter defined) with respect to that
Partnership. Neither your acceptance of that appointment nor this Agreement
shall constitute you and MD or a Partnership as an association, partnership,
unincorporated business or other separate entity. If an offering for Interests
in a Partnership is commenced and subscriptions funds of $1,000,000 or more are
not received by the termination of that Partnership's Offering Period with
respect to Interests in that Partnership, all subscription funds received by
the termination of such Offering Period with respect to Interests in that
Partnership shall be returned in full to the subscribers, together with any
interest earned thereon, if any (as provided in the Prospectus), and this
Agreement as to that Partnership will terminate without obligation on your part
or on the part of MD, except that (a) you will promptly, upon notice, transmit
to MD any sales commissions and due diligence fees received by you pursuant to
Section 6(b) hereof, and (b) the indemnification and contribution provisions of
Section 9 hereof shall continue after such termination of this Agreement. In
the event that you violate the terms, conditions, agreements or warranties
herein, the Managing Partner or the Dealer Manager, in their sole and absolute
discretion, may terminate this Agreement.
Section 2. Representations and Warranties of MD and the Dealer
Manager. MD, in its individual capacity and in its capacity as Managing
Partner, and the Dealer Manager, jointly and severally, hereby represent and
warrant to you that:
(a) In the name and on behalf of the Partnerships, MD has prepared and
filed with the Commission the Registration Statement (including the Prospectus)
for the registration of the offering and sale of the Interests under the Act.
The Registration Statement has become and is effective under the Act. Copies of
the Registration Statement and the Prospectus have been or will be delivered to
you.
(b) On the Closing Date (as hereinafter defined) for the sale of
Interests in a Partnership, the related Partnership will be a limited
partnership duly formed and validly existing under the laws of the State of
Delaware and will be duly qualified or registered as a foreign limited
partnership or otherwise qualified as a limited partnership in each
jurisdiction in which the nature of the activities conducted by it or the
nature of the assets owned by it make such qualification necessary (except
where the failure to so qualify or register would not have a material adverse
effect on the Partnership or the rights or liabilities of its General or
Limited Partners). In addition, such Partnership shall have full and adequate
partnership power and partnership authority to enter into and perform this
Agreement and the related Program Agreement and to own its properties and to
conduct its business as proposed in the Prospectus.
(c) MD is, and at all times through the last Closing Date will be, a
corporation, validly existing and in good standing under the laws of the State
of Delaware with full and adequate corporate power and corporate authority to
enter into and perform this Agreement and the Agreements of Partnership and to
own its properties and to conduct its business as presently conducted and as
proposed in the Prospectus to be conducted.
(d) Each subscriber for Limited Partner Interests will become a
Limited Partner of a Partnership entitled to all the rights of a Limited
Partner under the Agreement of Partnership for that Partnership and the
Delaware Act upon (i) payment of the consideration for those Limited Partner
Interests specified in that subscriber's Subscription Agreement
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and (ii) acceptance by the Managing Partner of that subscriber as a Limited
Partner. Each subscriber for General Partnership Interests will become a
General Partner of a Partnership entitled to all the rights of a General
Partner under the Agreement of Partnership for that Partnership and the
Delaware Act upon (i) payment of the consideration for those General Partner
Interests specified in that subscriber's Subscription Agreement and (ii)
acceptance by the Managing Partner of that subscriber as a General Partner. The
Interests, when sold and paid for as contemplated by the Prospectus, will
represent validly authorized and duly issued Interests and those Interests will
conform in all material respects to the statements relating thereto contained
in the Prospectus, including the Form of Agreement of Partnership attached as
Exhibit A thereto.
(e) This Agreement has been duly and validly authorized by MD and the
Dealer Manager. MD and the Dealer Manager have duly executed and delivered this
Agreement, which constitutes a valid and binding agreement of MD and the Dealer
Manager enforceable in accordance with its terms (except to the extent that the
enforceability of the indemnification provisions of Section 9 hereof may be
limited under federal securities laws or to the extent the enforceability of
this Agreement may be limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting the right of creditors generally).
(f) The Commission has not issued any order preventing or suspending
the use of the Prospectus.
(g) From the time the Registration Statement initially became
effective through the last Closing Date, the Registration Statement and the
Prospectus did and will comply in all material respects with the provisions of
the Act, and neither the Registration Statement and the Prospectus nor any
Sales Literature (as hereinafter defined) contains or will contain any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading; provided, however, that the representations and
warranties contained in this subsection (g) shall not apply to statements in,
or omissions from, the Registration Statement, the Prospectus or the Sales
Literature based upon and in conformity with information furnished to MD or a
Partnership by you in writing specifically for use in the Registration
Statement, the Prospectus or Sales Literature.
(h) Based upon the opinion of Vinson & Elkins L.L.P., counsel for MD,
and subject to the assumptions and representations expressed therein, under
existing federal income tax laws and regulations each Partnership, upon its
formation, will be classified as a partnership for federal income tax purposes.
A Partnership, at the related Closing, will be classified as a partnership for
federal income tax purposes, and at all times subsequent hereto, MD will use
its best efforts to maintain the status of the Partnership as a partnership for
federal income tax purposes.
(i) Except as disclosed in the Prospectus, there is no litigation or
governmental proceeding pending or, to the best knowledge of MD, threatened
that involves the offering of the Interests or any of the properties or
businesses of MD that would, if adversely decided, materially and adversely
affect (financially or otherwise) the operation of the business of a
Partnership, MD or the offering.
(j) MD is not in violation of the Agreements of Partnership or in
material default in the performance of any obligation, agreement or condition
contained in any agreement by which a Partnership is bound. The execution and
delivery of this Agreement and the Agreements of Partnership, the fulfillment
of the terms set forth herein and therein and the consummation of the
transactions contemplated herein and therein and in the Prospectus will not
conflict with or constitute a breach of or material default under the
Agreements of Partnership or under the certificate of incorporation or bylaws
of MD or under any other agreement, indenture or instrument by which a
Partnership or MD is bound or, to the best knowledge of MD, any law, rule,
regulation, order or decree of any court or any governmental body or
administrative agency applicable to MD or a Partnership.
(k) The financial information (including without limitation the
balance sheets and any accompanying notes and schedules) presented in the
Prospectus concerning MD presents fairly MD's financial position as of the
dates thereof
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in accordance with generally accepted accounting principles, and there has
been, and through the last Closing Date shall be, no material adverse change in
its financial condition since the date of that information.
(l) There has been no material adverse change in the condition,
business or properties of MD, financial or otherwise, from that on the latest
dates as of which such condition, business or properties are set forth in the
Prospectus, except as referred to therein, and such properties and business
substantially conform and shall at each Closing Date with respect to the
related Partnership substantially conform to the descriptions thereof contained
in the Prospectus.
(m) MD will timely apply, on behalf of each Partnership, to the
Internal Revenue Service for a tax shelter registration number and, if such a
number is received, will furnish such number to the General and Limited
Partners of such Partnership within a reasonable time after their admission to
that Partnership or within a reasonable time after the Partnership has received
such number, whichever occurs later.
Section 3. Covenants and Representations of Soliciting Dealer. You
covenant with and represent to MD that:
(a) You are, and at all times through the last Closing Date will be, a
corporation, validly existing and in good standing as a corporation under the
laws of the jurisdiction set forth on the signature page hereof, with full and
adequate corporate power and corporate authority to enter into and perform this
Agreement.
(b) This Agreement has been duly and validly authorized by you. You
have duly executed and delivered this Agreement, which constitutes a valid and
binding agreement of you enforceable in accordance with its terms (except to
the extent that the enforceability of the indemnification provisions of Section
9 hereof may be limited under federal securities law or to the extent the
enforceability of this Agreement may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the rights of creditors
generally).
(c) You will not offer to sell Interests to, solicit offers to buy
Interests from, or transmit Subscription Agreements to, any person on behalf of
MD that you have reasonable grounds to believe (based on information obtained
from such person or otherwise known to you) does not meet the age, net worth,
annual income or other standards applicable to that person as set forth in the
Subscription Agreement.
(d) You will deliver a copy of the Prospectus, containing such legends
as directed by MD, to each subscriber to whom you sell the Interests at or
before the completion of any sale of Interests to such subscriber (which sale
shall be deemed, for the purposes of this Agreement to occur on the date on
which that subscriber delivers subscription funds to the escrow agent), or
earlier if required by the blue sky or securities laws of any state. You have
not and will not give any information or make any representation in connection
with the offer or sale of Interests other than as contained in the Prospectus,
and will not publish, circulate or otherwise distribute without MD's approval
any solicitation material other than the Prospectus and other sales material
("Sales Literature") provided to you by MD specifically for distribution to
subscribers with the Prospectus. Any such Sales Literature, if distributed,
must have been preceded or must be accompanied by the Prospectus. You agree not
to discuss any specific oil and gas prospect or to refer to any such oil and
gas prospect in any analysis or report on the Interests prepared by you or on
your behalf.
(e) You will make offers to sell Interests to, sell to or solicit
offers to subscribe for Interests from persons in only those states or other
jurisdictions where MD represents to you in writing that such Interests may be
offered and sold and you agree to make reasonable efforts to comply with all
applicable laws, rules and regulations of those states and jurisdictions in
which you offer or sell Interests.
(f) You are and on the last Closing Date will be (i) a securities
broker-dealer registered with the Securities and Exchange Commission and any
jurisdiction where broker-dealer registration is required in order to offer and
sell the Interests and (ii) a member in good standing of the National
Association of Securities Dealers, Inc. ("NASD").
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(g) You agree to make reasonable efforts to comply with all rules of
the NASD applicable to you in connection with the offering of Interests
including, without limitation, the following provisions of Article III to the
Rules of Fair Practice:
2730. SECURITIES TAKEN IN TRADE
(a) A member engaged in a fixed price offering, who purchases
or arranges the purchase of securities taken in trade, shall purchase
the securities at a fair market price at the time of purchase or shall
act as agent in the sale of such securities and charge a normal
commission therefor.
(b) When used in this section--
(1) the term "taken in trade" means the purchase by a member
as principal, or as agent for the account of another, of a security
from a customer pursuant to an agreement or understanding that the
customer purchase securities from the member which are part of a fixed
price offering.
(2) the term "fair market price" means a price not higher
than the price at which the securities would be purchased from the
customer or from a similarly situated customer in the ordinary course
of business by a dealer in such securities in transactions of similar
size and having similar characteristics but not involving a security
taken in trade.
(3) the term "normal commission" means an amount of
commission which the member would normally charge to that customer or
a similarly situated customer in the ordinary course of business in
transactions of similar size and having similar characteristics but
not involving a security taken in trade.
(c) For purposes of this Section a member shall be
(1) deemed, with respect to securities other than common
stocks, to have taken such securities in trade at a fair market price
when the price paid is not higher than the highest independent bid for
the securities at the time of purchase, if such bid quotations for the
securities are readily available.
(2) presumed, with respect to common stocks, to have taken
such common stocks in trade at a fair market price when the price paid
is not higher than the highest independent bid for the securities at
the time of purchase, if such bid quotations for the securities are
readily available.
(3) presumed to have taken a security in trade at a price
higher than a fair market price when the price paid is higher than the
lowest independent offer for the securities at the time of purchase,
if such offer quotations for the securities are readily available.
(d) A member, in connection with every transaction subject to
this Section, shall with respect to
(1) common stocks, which are traded on a national securities
exchange or for which quotations are entered in an automated quotation
system, obtain the necessary bid and offer quotations from the
national securities exchange or from the automated quotation system;
and
(2) other securities and common stocks not included in
subparagraph (1) of this subsection (d) obtain directly or with the
assistance of an independent agent bid and offer quotations
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from two or more independent dealers relating to the securities to be
taken in trade or, if such quotations are not readily available,
exercise its best efforts to obtain such quotations with respect to
securities having similar characteristics and of similar quality as
those to be taken in trade.
(e) A member who purchases a security taken in trade shall
keep or cause to be kept adequate records to demonstrate compliance
with this Section and shall preserve the records for at least 24
months after the transaction. If an independent agent is used for the
purpose of obtaining quotations, the member must request the agent to
identify the dealers from whom the quotations were obtained and the
time and date they were obtained or request the agent to keep and
maintain for at least 24 months a record containing such information.
2740. SELLING CONCESSIONS
In connection with the sale of securities which are part of a
fixed price offering:
(a) A member may not grant or receive selling concessions,
discounts, or other allowances except as consideration for services
rendered in distribution and may not grant such concessions, discounts
or other allowances to anyone other than a broker or dealer actually
engaged in the investment banking or securities business; provided,
however, that nothing in this Section shall prevent any member from
(1) selling any such securities to any person, or account managed by
any person, to whom it has provided or will provide bona fide
research, if the stated public offering price for such securities is
paid by the purchaser; or (2) selling any such securities owned by him
to any person at any net price which may be fixed by him unless
prevented therefrom by agreement.
(b) The term "bona fide research," when used in this Section,
means advice, rendered either directly or through publications or
writings, as to the value of securities, the advisability of investing
in, purchasing, or selling securities, and the availability of
securities or purchasers or sellers of securities, or analyses and
reports concerning issuers, industries, securities, economic factors
and trends, portfolio strategy, and performance of accounts; provided,
however, that investment management or investment discretionary
services are not bona fide research.
(c) A member who grants a selling concession, discount or
other allowance to another person shall obtain a written agreement
from that person that he will comply with the provisions of this
Section, and a member who grants such selling concession, discount or
other allowance to a nonmember broker or dealer in a foreign country
shall also obtain from such broker or dealer a written agreement to
comply, as though such broker or dealer were a member, with the
provisions of Section 8 and 36 of this Article and to comply with
Section 25 of this Article as that Section applies to a nonmember
broker/dealer in a foreign country.
(d) A member who receives an order from any person
designating another broker or dealer to receive credit for the sale
shall, within 30 days after the end of each calendar quarter, file
reports with the Association containing the following information with
respect to each fixed price offering which terminated during that
calendar quarter: the name of the person making the designation; the
identity of the brokers or dealers designated; the identity and amount
of securities for which each broker or dealer was designated; the date
of the commencement and termination of the offering and such other
information as the Association shall deem pertinent.
(e) A member who is designated by its customer for the sale
of securities shall keep, and maintain for a period of 24 months,
records in such form and manner to show the following
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information: name of customer making the designation; the identity and
amount of securities for which the member was designated; the identity
of the manager or managers of the offering, if any; the date of the
commencement of the offering and such other information as the
Association shall deem pertinent.
2420. DEALING WITH NON-MEMBERS
(a) No member shall deal with any non-member broker or dealer
except at the same prices, for the same commissions or fees, and on
the same terms and conditions as are by such member accorded to the
general public.
(b) Without limiting the generality of the foregoing, no
member shall:
(1) in any transaction with any non-member broker or
dealer, allow or grant to such non-member broker or dealer
any selling concession, discount or other allowance allowed
by such member to a member of a registered securities
association and not allowed to a member of the general
public;
(2) join with any non-member broker or dealer in any
syndicate or group contemplating the distribution to the
public of any issue of securities or any part thereof; or
(3) sell any security to or buy any security from
any non-member broker or dealer except at the same price at
which at the time of such transaction such member would buy
or sell such security, as the case may be, from or to a
person who is a member of the general public not engaged in
the investment banking or securities business.
(c) Transaction with foreign non-members. The provisions of
paragraphs (a) and (b) of this rule shall not apply to any non-member
broker or dealer in a foreign country who is not eligible for
membership in a registered securities association, but in any
transaction with any such foreign non-member broker or dealer, where a
selling concession, discount, or other allowance is allowed, a member
shall as a condition of such transaction secure from such foreign
broker or dealer an agreement that, in making any sales to purchasers
within the United States of securities acquired as a result of such
transactions, he will conform to the provisions of paragraphs (a) and
(b) of this rule to the same extent as though he were a member of the
Corporation.
(d) "Non-member broker or dealer". For the purpose of this
rule, the term "non-member broker or dealer" shall include any broker
or dealer who makes use of the mails or of any means or
instrumentality of interstate commerce to effect any transaction in,
or to induce the purchase or sale of, any security, otherwise than on
a national securities exchange, who is not a member of any securities
association, registered with the Commission pursuant to Section 15A of
the Act, except a broker or dealer who deals exclusively in commercial
paper, bankers' acceptances or commercial bills.
(e) Nothing in this rule shall be so construed or applied as
to prevent any member of the Corporation from granting to any other
member of any registered securities association any dealer's discount,
allowance, commission, or special terms.
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2810. DIRECT PARTICIPATION PROGRAMS, (b) REQUIREMENTS (2) SUITABILITY
(B) In recommending to a participant the purchase, sale or exchange of an
interest in a direct participation program, a member or person associated with
a member shall:
(i) have reasonable grounds to believe, on the basis
of information obtained from the participant concerning his
investment objectives, other investments, financial situation
and needs, and any other information known by the member or
associated person, that:
a. the participant 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 where they are a significant aspect of the
program:
b. the participant has a fair market net
worth sufficient to sustain the risks inherent in
the program, including loss of investment and lack
of liquidity; and
c. the program is otherwise suitable for
the participant; and
(ii) maintain in the files of the member documents
disclosing the basis upon which the determination of
suitability was reached as to each participant.
(C) Notwithstanding the provisions of subsections (A) and (B)
hereof, no member shall execute any transaction in a direct
participation program in a discretionary account without prior written
approval of the transaction by the customer.
2750. TRANSACTIONS WITH RELATED PERSONS
(a) Except as otherwise provided in Subsection (d) of this
Section, no member engaged in a fixed price offering of securities
shall sell the securities to, or place the securities with, any person
or account which is a related person of the member unless such related
person is itself subject to this Section or is a non-member foreign
broker or dealer who has entered into the agreements required by
Subsection 24(c) of this Article.
(b) For purposes of this Section 36, a "related person" of a
member includes any person or account which directly or indirectly
owns, is owned by or is under common ownership with the member.
(c) A person owns another person or account for purposes of
this Section if the person directly or indirectly:
(1) has the right to participate to the extent of
more than 25 percent in the profits of the other person; or
(2) owns beneficially more than 25 percent of the
outstanding voting securities of the person.
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(d) The prohibition contained in Subsection (a) does not
apply to the sale of securities to, or the placement of securities in,
a trading or investment account of a member or a related person of a
member after termination of the fixed price offering if the member or
the related person of the member has made a bona fide public offering
of the securities. A member or a related person of a member is
presumed not to have made a bona fide public offering for the purpose
of this subsection if the securities being offered immediately trade
in the secondary market at a price or prices which are at or above the
public offering price.
(h) You shall immediately forward all Subscription Agreements received
by you, together with all checks received in payment of the purchase price for
Interests, in accordance with Section 4(b).
(i) If you have reviewed representative oil and gas properties which
have been designated by or held in the inventory of MD or its affiliates, you
will not discuss any of such oil and gas properties in connection with the sale
of Interests or otherwise indicate any facts about such properties except
those, if any, discussed in the Prospectus.
(j) Specifically, you will comply with the duties imposed by Rules
15c2-4 and 15c2-8 as promulgated by the Securities and Exchange Commission
pursuant to Section 15 of the Securities Exchange Act of 1934, as amended. You
will promptly forward all subscription checks before noon of the next business
day after their receipt for deposit in the designated Partnership escrow
account. In the event you receive a check which is not payable to the escrow
agent, you shall promptly return such check directly to the subscriber not
later than the end of the next business day following its receipt.
(k) Prior to recommending an investment in or offering or selling the
Interest to a prospective purchaser you shall have completely read the
Prospectus and related materials and have reasonable grounds to conclude that:
(1) the prospective purchaser is or will be in a financial position to realize
the benefits described in the Prospectus of an investment in the Interests; (2)
the prospective purchaser has met the suitability requirements described in the
Prospectus and has a fair market net worth sufficient to sustain the risks
inherent in an investment in the Interests specifically, including, the loss of
the entire investment and lack of liquidity; and (3) the investment is
otherwise suitable for the prospective investor.
(l) You will maintain in your files for a period of six (6) years from
the close of the last Offering Period documents which disclose the basis upon
which you determined that the prospective investor satisfied the suitability
requirements and was otherwise suitable.
(m) Notwithstanding the provisions of subsection (k) hereof, you will
not execute any transaction with respect to Interests in a Partnership on
behalf of a discretionary account without prior approval of the transactions by
the customer.
(n) In the event that you have been notified by MD that the Prospectus
becomes materially deficient, you will suspend sales until such time as the
Prospectus is appropriately amended or supplemented. You will deliver the
amended Prospectus or any supplements thereto to all prospective purchasers and
to purchasers who acquired Interests prior to the date you suspended sales.
(o) You have conducted your own independent due diligence inquiry and
have concluded that all material facts are adequately and accurately disclosed
and, prior to executing a purchase order in the Interests, will inform the
prospective purchaser of all pertinent facts relating to the liquidity of the
Interests during the life of that Partnership.
(p) Your representations, warranties and covenants as contained in
this Section 3 will continue in effect throughout the last Offering Period.
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Section 4. Subscriptions and Closing.
(a) You acknowledge and agree that MD has reserved the right to reject
or reduce any subscription and that subscriptions for Interests will be
accepted by MD only from investors who in the judgment of MD meet the
appropriate suitability standards set forth in the Prospectus and the
Subscription Agreement.
(b) All Subscription Agreements and all checks received in payment of
the purchase price for Interests received by you shall be subject to, and MD
and you hereby agree that you each shall act in accordance with, the following
provisions:
(i) Upon receipt of each Subscription Agreement and check,
you shall, by noon of the business day following your receipt thereof,
forward to NationsBank, Texas, N.A., Tyler, Texas or other escrow
agent designated by MD (the "Escrow Agent") (a) a copy of that
Subscription Agreement, retaining in your possession the original
executed Subscription Agreement, and (b) that check for deposit in a
separate escrow account with the Escrow Agent, to be held therein in
accordance with the terms of the Escrow Agreement between MD and the
Escrow Agent and to be released only in accordance with the Escrow
Agreement; and
(ii) MD shall, by noon of the second business day following
its receipt of that copy of the Subscription Agreement, advise you by
telegram, telecopy or other similar means of telecommunications or by
telephone (confirmed in writing), if MD initially accepts or rejects
the subscription evidenced by that Subscription Agreement because that
subscriber is considered not suitable for Interests, and if that
subscription has been rejected by MD, MD shall, promptly after
advising you of that rejection, direct the Escrow Agent to return to
you the subscriber's check, and you shall return the originally
executed Subscription Agreement and that check to the subscriber.
(c) MD will notify you of the closing of the offering of Interests in
a Partnership and the date as of which the Partnership is to be funded with
subscription proceeds held under the Escrow Agreement. A closing (a "Closing")
will be scheduled to be held at the offices of MD, 3901 S. Broadway, Tyler,
Texas 75701, as soon as practicable after the date on which you shall have been
notified of the closing of the offering of Interests in a Partnership, or on
such date and at such place as MD may determine (a "Closing Date").
(d) The right of a Partnership to use funds deposited in the
Partnership account for purposes other than the payment of commissions and fees
shall be subject to the accuracy of and the compliance by MD with its
representations, warranties and covenants set forth herein, to its performance
of its obligations hereunder and to the satisfaction at the Closing with
respect to the Partnership of each of the following further conditions:
(i) You shall have received a copy of the opinion of Vinson &
Elkins L.L.P., counsel to MD and the Partnership, as to certain
federal income tax matters discussed under "Tax Aspects" in the
Prospectus, which opinion shall be reasonably satisfactory to you and
your counsel as of the related Closing Date.
(ii) You shall have received a blue sky memorandum prepared
by Vinson & Elkins L.L.P. with respect to the Partnership, to the
effect that the Interests have been duly registered or qualified for
sale under the securities or blue sky laws of the states in which, in
accordance with such memorandum, offers and sales of the Interests may
be made to investors (being those states with respect to which you and
other Soliciting Dealers requested that MD use its reasonable efforts
to register or qualify the Interests for offering and sale under the
securities or blue sky laws of such states pursuant to Section 5(e)
hereof).
(iii) All proceedings and documents in connection with the
transactions contemplated by the Prospectus and this Agreement shall
be reasonably satisfactory in form and substance to you and your
counsel,
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and MD and the Partnership shall use their reasonable efforts to
ensure that you and your counsel shall have received such other
documents in connection with such transactions as you or they may
reasonably request.
(iv) You and your counsel shall have received a letter or
letters from Vinson & Elkins L.L.P. in form and scope reasonably
satisfactory to you and your counsel as to the due organization of the
Partnership under the law of Delaware, the due admission of the
Limited Partners or General Partners to the Partnership, the due
organization of MD under Delaware law, the qualification of the
Partnership and MD to conduct business in Texas as a foreign limited
partnership and corporation, respectively, the due execution of this
Agreement by the Partnership and MD and the due execution of the
Agreement of Partnership of the Partnership by MD.
Section 5. Covenants of MD. MD covenants with you that:
(a) MD will deliver to you, at MD's sole expense, such copies of the
Prospectus and related Subscription Agreements and Sales Literature as you may
reasonably request.
(b) If any event that occurs before the last Closing Date and that
relates to or affects the business or condition (financial or other) of MD or a
Partnership makes it necessary to amend or supplement the Prospectus or the
Registration Statement in order that the Prospectus or the Registration
Statement will not contain an untrue statement of a material fact or omit to
state a material fact necessary in order to make the statements therein not
misleading in light of the circumstances existing at the time it is delivered
to a subscriber, MD will (i) notify you of the occurrence of such event, (ii)
prepare, file, transmit and use its best efforts to cause to become effective
(to the extent appropriate) any such required amendments or supplements to the
Prospectus or the Registration Statement, (iii) advise you, promptly after MD
receives notice thereof, of the time when any post-effective amendment to the
Registration Statement has become effective or of the time when any amendment
or supplement to the Prospectus has been filed and (iv) promptly prepare and
furnish to you a reasonable number of copies of the amendments of, or
supplements to, the Prospectus or the Registration Statement.
(c) MD will notify you immediately and confirm the notice in writing
of the issuance by the Commission or by any state securities administrator of
any stop order suspending the effectiveness of any registration or
qualification of the Interests for sale or enjoining the sale of the Interests
or of the initiation of any proceedings for that purpose. MD will make every
reasonable effort to prevent the issuance of any such stop order and, if any
such stop order shall at any time be issued, to obtain the lifting thereof at
the earliest possible moment.
(d) As soon as practicable after the receipt of any Subscription
Agreements, MD will approve or reject such subscriptions and notify you of the
same.
(e) In addition to those jurisdictions in which the Blue Sky
Memorandum indicates that you may offer (or solicit offers) for Interests, MD
will use its reasonable efforts to register or qualify the Interests for
offering and sale under the securities or blue sky laws of such additional
jurisdictions as you may request, will furnish all such information and
documents as may be reasonably necessary for such purpose and will notify you
in writing as to the effective date of such registrations or qualifications as
soon as practicable after the receipt or confirmation thereof; provided that
you shall have specified and made such request in writing to MD and the Dealer
Manager with respect to each additional jurisdiction in which you intend to
offer any of the Interests for sale, or solicit any offers to subscribe for or
buy any of the Interests, or otherwise negotiate with any person in respect of
any of the Interests, and MD and the Dealer Manager shall have no duty,
responsibility, liability or obligation to you under this subsection (e) or any
other provision hereof with respect to any other jurisdiction. MD will
undertake to file all reports required to be filed subsequent to completion of
the offering of the Interests and otherwise to continue to comply with the
securities or blue sky laws of each such jurisdiction.
<PAGE> 12
Mewbourne Development 99-00 Drilling Program
Soliciting Dealer Agreement
, 1999
Page 12
Section 6. Payment of Expenses and Fees.
(a) Except as specifically provided elsewhere in this Agreement, you,
the Dealer Manager, MD and the Partnerships will pay their own expenses
incident to the transactions contemplated by this Agreement, including fees of
their counsel.
(b) Prior to the time that $1,000,000 or more of subscription funds
for a Partnership are received and accepted, MD may, but is not obligated to,
advance from MD's own funds the sales commissions and due diligence fees which
would otherwise be payable in connection with subscription funds received and
accepted prior to such time; provided that such advance may only be paid with
respect to subscriptions that have been accepted by MD. Any such advancement
shall be made initially to the Dealer Manager and the Dealer Manager shall
immediately reallow to you such portion of the advancement as represents sales
commissions and due diligence fees which would otherwise be payable to you. In
the event that either (i) subscription funds of $1,000,000 or more are not
received by the termination of the Offering Period with respect to Interests in
a Partnership or (ii) MD otherwise elects not to close the offering of the
Interests in a Partnership, you will promptly upon notice transmit to MD funds
in the amount of the sales commissions and due diligence fees advanced to you
by means of such reallowance.
(c) Upon the receipt and acceptance of $1,000,000 in subscriptions for
a Partnership, MD may, but is not obligated to, advance from its own funds
prior to the Closing of the offering of Interests in that Partnership sales
commissions and due diligence fees relating to subscriptions solicited by you;
provided that such advance may only be paid with respect to subscriptions that
have been accepted by MD and for which the subscription funds have cleared at
the office of the Escrow Agent. Any such advancement shall be made initially to
the Dealer Manager and the Dealer Manager shall immediately reallow to you such
advancement.
(d) In the event that MD makes an advance of sales commissions and due
diligence fees pursuant to Section 6(b) or (c) above, you hereby agree that (i)
prior to that Closing, MD retains the right in its sole discretion to refund to
any subscriber solicited by you the full amount of the subscription funds
transmitted by that subscriber and (ii) in the event that MD refunds
subscription funds to a subscriber solicited by you, you will promptly upon
receipt of notice of that refund transmit to MD funds in the amount of the
sales commissions and due diligence fees advanced to you by means of such
reallowance to the extent that such relate to your acceptance of an order for
Interests from such subscriber.
(e) If the Closing for the sale of Interests in a Partnership occurs,
as compensation for your services under this Agreement MD will pay from its own
funds at that Closing, to the Dealer Manager and the Dealer Manager shall
immediately reallow to you (i) cash sales commissions based on eight percent
(8%) of the sales price of Interests sold by you and (ii) you may also be
reimbursed up to one-half percent (1/2%) of the sales price for Interests sold
by you for actual expenses incurred in affirmatively discharging your due
diligence responsibilities pursuant to Rule 2810 of the NASD Conduct Rules and
its subsections, less any sales commissions and due diligence fees previously
reallowed to you prior to that Closing under Section 6(b) or (c) above, except
that you will receive no such sales commissions or due diligence fees for
Interests sold to (i) officers, directors or employees of MD or affiliates
thereof, (ii) affiliates of the Managing Partner or (iii) any of your officers,
directors, employees or registered representatives. No sales commissions or due
diligence fees will be paid on subscriptions returned for any reason to
subscribers prior to that Closing.
Section 7. Conditions to Obligations of Soliciting Dealer. Your
obligations under this Agreement with respect to a particular Partnership are
subject to the following:
(a) the accuracy of and compliance with the representations and
warranties of MD and the Dealer Manager made in Section 2 hereof and the
performance by MD, individually and in its capacity as Managing Partner, of all
material obligations under this Agreement; and
<PAGE> 13
Mewbourne Development 99-00 Drilling Program
Soliciting Dealer Agreement
, 1999
Page 13
(b) the absence, on the Closing Date for the sale of Interests in that
Partnership, of any stop order issued under the Act suspending the use of the
Prospectus or the sale of the Interests or of the initiation or the threatened
initiation of any proceedings therefor.
If any of the conditions specified in this Section 7 shall not have
been fulfilled, or cannot be fulfilled on or prior to the Closing Date with
respect to such Partnership, this Agreement with respect to that Partnership
and all of your obligations under it relating thereto, other than those
contained in Section 9 hereof, may be terminated by you by notifying MD of such
termination in writing or by telegram at or prior to that Closing, and any such
termination shall be without liability of any party to any other party except
as otherwise provided in Section 9 hereof.
Section 8. Conditions to Obligations of MD and the Dealer Manager. The
obligations of MD and the Dealer Manager under this Agreement with respect to a
particular Partnership are subject to the following:
(a) the accuracy of and compliance with your representations and
warranties made in Section 3 hereof and the performance by you of all material
obligations under this Agreement;
(b) the absence, on the Closing Date for the sale of Interests in that
Partnership, of any stop order issued under the Act suspending the use of the
Prospectus or the sale of the Interests or of the initiation or the threatened
initiation of any proceedings therefor; and
(c) if the Partnership elects in its discretion to offer rescission to
any subscriber because (i) any of the conditions described in this Agreement
shall not have been fulfilled or (ii) other circumstances arise subsequent to
the date hereof that in the judgment of MD require that such an offer be made,
in either case because of any action or inaction taken or failed to be taken by
you in connection with your offering or sale of the Interests, you agree to
return any sales commissions and due diligence fees received by you with
respect to any purchaser who in fact rescinds in response to such offer,
promptly upon written notice of that rescission from the Partnership.
If any of the conditions specified in this Section 8 shall not have
been fulfilled, or cannot be fulfilled on or prior to the Closing Date with
respect to such Partnership, this Agreement with respect to that Partnership
and all obligations of that Partnership and MD relating thereto, other than
those contained in Section 9 hereof, may be terminated by MD by notifying you
of that termination in writing or by telegram at or prior to that Closing and
any such termination shall be without liability of any party to any other party
except as otherwise provided in Section 9 hereof.
Section 9. Indemnification.
(a) MD will indemnify and hold you harmless against any losses,
claims, damages or liabilities, joint or several, to which you may become
subject, under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon (i)
any untrue statement of any material fact contained in the Registration
Statement, the Prospectus or any Sales Literature or any omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein in light of the circumstances under which they were made not
misleading (other than any untrue statement or omission made in reliance upon
and in conformity with information furnished to MD or a Partnership by or on
behalf of you, your officers, directors or controlling persons or at your or
their request specifically for use in the preparation of the Registration
Statement, the Prospectus or any Sales Literature or any amendment thereof or
supplement thereto); provided that the foregoing indemnity is subject to the
condition that, insofar as it relates to any untrue statement or omission made
in the Prospectus but eliminated or remedied in an amendment thereof or
supplement thereto available to you prior to delivery of written confirmation
of sale, such indemnity shall not inure to the benefit of any person from whom
the person asserting any such loss, claim, damage or liability purchased the
Interests that are the subject thereof (or to the benefit of any person who
controls any such person), if a copy of the amendment or supplement to the
Prospectus was not sent or given to that person with or prior to the written
confirmation of the sale of those Interests to that person or (ii) a breach by
MD or a Partnership of any of its
<PAGE> 14
Mewbourne Development 99-00 Drilling Program
Soliciting Dealer Agreement
, 1999
Page 14
respective representations, warranties, agreements or covenants contained in
this Agreement; and MD will reimburse you for all legal or other expenses
(including reasonable expenses of internal and outside counsel) reasonably
incurred by you in connection with defending any such action or claim. The
agreement of indemnity in this Section 9(a) and in Section 9(b) below shall be
in addition to any liability that MD or a Partnership may otherwise have and
shall extend upon the same terms and conditions to each person, if any, who
controls you and shall apply whether or not any negligent act or omission by
you is alleged or proven; provided, however, that neither MD nor a Partnership
shall be responsible under this Agreement for any losses, damages or
liabilities to the extent they are found in a final judgment of a court of
competent jurisdiction to have resulted solely from your gross negligence or
willful misconduct in performing services hereunder.
(b) A Partnership shall indemnify you for any losses, claims, damages
or liabilities relating to the Partnership and to which you may become subject
due to an alleged violation of federal or state securities laws and which arise
out of or are based upon the items set forth in Sections 9(a)(i) and (ii) above
(and are subject to the same conditions and limitations set forth in 9(a)(i)
and (ii) above) if (i) there has been a successful adjudication on the merits
of each count involving alleged securities laws violations as to you, (ii) such
claims have been dismissed with prejudice on the merits by a court of competent
jurisdiction as to you or (iii) a court of competent jurisdiction approves a
settlement of the claims against you. In connection with any claim for
indemnification for federal or state securities law violations under this
Section 9(b), you shall place before such court the positions of the Securities
and Exchange Commission, the Securities Commission of the State of Texas and
any other applicable regulatory authority with respect to such indemnification
for securities law violations.
(c) You agree to indemnify and hold harmless the Dealer Manager, MD
and the Partnerships against any losses, claims, damages or liabilities, joint
or several, to which any of them may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon (i) any untrue statement of
a material fact made by you with respect to your offering of the Interests,
(ii) any untrue statement of a material fact contained in the Registration
Statement, the Prospectus or any Sales Literature or any omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein in light of the circumstances under which they were made not
misleading, but only to the extent that such untrue statement or omission was
made in reliance upon and in conformity with information furnished to MD or a
Partnership by or on behalf of you, your officers, directors or controlling
persons or at your or their request for use in the preparation of the
Registration Statement, the Prospectus or any Sales Literature or an amendment
thereof or supplement thereto or (iii) a breach by you of any of your
representations, warranties, covenants or agreements contained in this
Agreement; and you will reimburse the Dealer Manager, MD and the Partnerships
for any legal or other expenses reasonably incurred by any of them in
connection with investigating or defending any such action or claim. The
agreement of indemnity contained in this subsection (c) shall be in addition to
any liability which you may otherwise have and shall extend, upon the same
terms and conditions, to each partner of a Partnership and to each officer,
director and other person, if any, who controls either the Dealer Manager or
MD.
(d) Within seven days after receipt by an indemnified party under
subsection (a), (b) or (c) above of notice of the commencement of any action,
that indemnified party shall, if a claim in respect thereof is to be made
against the indemnifying party under that subsection, notify the indemnifying
party in writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party otherwise than under that subsection. In case any such
action shall be brought against any indemnified party, and the indemnified
party shall notify the indemnifying party of the commencement thereof, the
indemnifying party shall be entitled to participate in, and to the extent that
it shall wish, jointly with any other indemnifying party similarly notified, to
assume the defense thereof with counsel reasonably satisfactory to such
indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof and
retention of such counsel, the indemnifying party shall not be liable to such
indemnified party under such part for any legal or other expense subsequently
incurred by such indemnified party in connection with the defense thereof other
than reasonable costs of investigation unless (i) the employment by the
indemnified party of separate counsel shall have been authorized
<PAGE> 15
Mewbourne Development 99-00 Drilling Program
Soliciting Dealer Agreement
, 1999
Page 15
in writing in advance by an indemnifying party in connection with the defense
of such action, (ii) the indemnifying parties shall not have employed counsel
to have charge of the defense of such action, (iii) such indemnified party
shall have reasonably concluded that there may be one or more defenses
available to it which are different from or additional to those available to
one or more of the indemnifying parties, or (iv) such indemnified party shall
have concluded that there is any material conflict of interest such that
representation of the indemnifying party and the indemnified party would not be
in the best interests of the indemnified party. Notwithstanding anything to the
contrary in this Section 9, the indemnifying party shall not be liable for any
settlement of a claim or action without its written consent.
(e) To provide for just and equitable contribution in any action in
which a claim for indemnification is made pursuant to this Section 9, but when
it is judicially determined (by the entry of a final judgment or decree by a
court of competent jurisdiction and the expiration of time to appeal or the
denial of the last appeal) that indemnification may not be enforced in that
case notwithstanding that this Section 9 provides for indemnification in that
case, all the parties hereto shall contribute to the aggregate losses, claims,
damages or liabilities to which they may be subject (after contribution from
others) in such proportion so that you are responsible for the portion
represented by the percentage that the sales commissions and due diligence fees
received by you bears to the gross proceeds of the offering of the Interests,
and so that the related Partnership (to the extent permitted by subsection (b)
of this Section 9) the Dealer Manager and MD are responsible for the remaining
portion; provided, however, that no person found guilty (by the entry of a
final judgment or decree by a court of competent jurisdiction) of a fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who is not similarly found guilty of
such fraudulent misrepresentation. This subsection (e) shall not be operative
as to you to the extent that a Partnership, the Dealer Manager or MD or any
person who controls a Partnership, the Dealer Manager or MD within the meaning
of the Act is entitled to receive or has received indemnification under this
Section 9.
Section 10. Representations, Warranties and Agreements to Survive
Delivery. All representations, warranties and agreements contained in this
Agreement or contained in certificates delivered pursuant to this Agreement
will remain operative and in full force and effect, regardless of any
investigation made by or on behalf of you, the Dealer Manager or MD, and will
survive the last Closing.
Section 11. Notices. All communications hereunder shall be in writing
and, if sent to you, will be mailed, delivered or telegraphed and confirmed to
you at the address set forth on the signature page hereof, or if sent to Dealer
Manager, MD or a Partnership will be mailed, delivered or telegraphed and
confirmed to the Dealer Manager, MD or the Partnership at:
Mewbourne Securities, Inc.
Mewbourne Development Corporation
3901 S. Broadway
Tyler, Texas 75701
Attention: Michael F. Shepard
with a copy to:
Vinson & Elkins L.L.P.
3700 Trammell Crow Center
2001 Ross Avenue
Dallas, Texas 75201-2975
Attention: A. Winston Oxley
<PAGE> 16
Mewbourne Development 99-00 Drilling Program
Soliciting Dealer Agreement
, 1999
Page 16
Section 12. Parties. This Agreement will inure to the benefit of and
be binding upon you, the Dealer Manager, MD, the Partnerships and your and
their respective successors, heirs and representatives. This Agreement and its
conditions and provisions are intended to be and are for the sole and exclusive
benefit of the parties to it and their respective successors, heirs and
representatives and not for the benefit of any other person, firm or
corporation unless otherwise expressly stated.
Section 13. Governing Law. This Agreement shall be governed by and
construed under the laws of the State of Texas.
Section 14. Modifications. No provision of this Agreement may be
changed or terminated except by a writing signed by the party or parties to be
charged therewith.
Section 15. Waiver. Any party to this Agreement may waive compliance
by any other party with any of the terms, provisions and conditions set forth
in this Agreement; provided, however, that any such waiver must be in a writing
specifically setting forth the provisions of this Agreement waived thereby.
Section 16. Entire Agreement. This Agreement contains the entire
agreement among the parties to it and is intended to supersede any and all
prior agreements among those parties relating to the same subject matter.
Section 17. Invalidity. In the event any provision of this Agreement
shall be held to be invalid in any circumstance, that invalidity shall not
affect any other provision of this Agreement.
Section 18. Counterparts. This Agreement may be executed
simultaneously in several counterparts, each of which will be deemed an
original, but all of which together will constitute one and the same
instrument.
Section 19. Assignment. No party may assign its rights or obligations
under this Agreement without the prior written consent of each other party
hereto, except that MD may assign its rights and obligations under this
Agreement in connection with a merger, consolidation, reorganization or other
similar transaction.
[Remainder of page intentionally left blank.]
<PAGE> 17
Mewbourne Development 99-00 Drilling Program
Soliciting Dealer Agreement
, 1999
Page 17
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to us a counterpart hereof, whereupon this
instrument, along with all counterparts, will become a binding agreement among
you, the Dealer Manager, MD and the Partnerships, all in accordance with its
terms.
Sincerely,
MEWBOURNE DEVELOPMENT CORPORATION
By:
--------------------------------------
Its:
-------------------------------------
MEWBOURNE ENERGY PARTNERS 99-A, L.P.
DRILLING PROGRAM
By: Mewbourne Development Corporation
Managing General Partner
By:
---------------------------------
Its:
--------------------------------
MEWBOURNE ENERGY PARTNERS 00-A, L.P.
DRILLING PROGRAM
By: Mewbourne Development Corporation
Managing General Partner
By:
---------------------------------
Its:
--------------------------------
MEWBOURNE SECURITIES, INC.
By:
--------------------------------------
Its:
-------------------------------------
<PAGE> 18
Mewbourne Development 99-00 Drilling Program
Soliciting Dealer Agreement
, 1999
Page 18
Confirmed, accepted and agreed to as of
the date first above written.
- -------------------------------------------------
a corporation incorporated under the laws
of the State of
----------------------------------
By:
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Name:
-----------------------------------------
Title:
----------------------------------------
Address for Notice:
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Copy to:
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<PAGE> 1
EXHIBIT 1.2
DEALER MANAGER AGREEMENT
Mewbourne Energy 99-00 Drilling Programs
, 1999
Mewbourne Securities, Inc.
3901 S. Broadway
Tyler, Texas 75701
Gentlemen:
Mewbourne Development Corporation, a Delaware corporation ("MD"), is or
proposes to be the sole managing general partner (in such capacity the "Managing
Partner') of two limited partnerships (the "Partnerships") formed pursuant to
the Delaware Revised Uniform Limited Partnership Act (the "Delaware Act"). MD
intends to name the Partnerships as follows: Mewbourne Energy Partners 99-A,
L.P. and Mewbourne Energy Partners 00-A, L.P. Each Partnership will participate
in a program, governed by a Drilling Program Agreement (a "Program Agreement")
among Mewbourne Oil Company, a Delaware corporation ("MOC"), MD and the
Partnership, the primary purpose of which will be to drill Developmental Wells
(as such term is defined in the Prospectus referred to below).
On behalf of the Partnerships and MD, a Registration Statement on Form
S-1 (Registration No.____) dated , 1999, relating to the offer and sale of the
Interests (hereinafter defined) was filed with the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended (the
"Act"). On , 1999, MD filed with the Commission on behalf of the
Partnerships Amendment No. 1 to the Registration Statement. The Registration
Statement was declared effective by the Commission on , 1999. MD, the
Partnerships and the Interests are described in the Prospectus dated , 1999
(the "Prospectus") that forms a part of the Registration Statement. As used in
this Dealer Manager Agreement (this "Agreement"), the terms "Prospectus" and
"Registration Statement" refer solely to the Prospectus and Registration
Statement, as amended, described above, except that (i) from and after the date
on which any post-effective amendment to the Registration Statement is declared
effective by the Commission, the term "Registration Statement" shall refer to
the Registration Statement as amended by that post-effective amendment, and the
term "Prospectus" shall refer to the Prospectus then forming a part of the
Registration Statement, and (ii) if the Prospectus filed by MD pursuant to Rule
424(b) or (c) promulgated by the Commission under the Act differs from the
Prospectus on file with the Commission at the time the Registration Statement or
any post-effective amendment thereto shall have become effective, the term
"Prospectus" shall refer to the Prospectus filed pursuant thereto from and after
the date on which it was filed. Terms defined in the Prospectus and not
otherwise defined herein will have the meanings set forth in the Prospectus.
MD desires to raise a minimum of $1,000,000 and a maximum of
$10,000,000 in capital for each Partnership by the sale of up to 4,000
($4,000,000) limited partner interests (the "Limited Partner Interests") and up
to 16,000 ($16,000,000) general partner interests (the "General Partner
Interests") in the Partnerships (the Limited Partner Interests and the General
Partner Interests are collectively referred to as the "Interests"). The
Interests will be offered in $1,000 increments, with a minimum purchase of five
Interests ($5,000).
The following are the terms on which the Managing Partner, on behalf of
the Partnerships, appoints you exclusive agent ("Dealer Manager") to form a
group of National Association of Securities Dealers, Inc. member firms to
solicit subscribers for the purchase of Interests:
Section 1. Appointment as Dealer Manager. On the basis of the
representations, warranties and covenants contained in this Agreement, but
subject to the terms and conditions set forth herein:
<PAGE> 2
Mewbourne Energy 99-00 Drilling Programs
Dealer Manager Agreement
, 1999
Page 2
(a) The Managing Partner hereby appoints you during the Offering Period
(as defined below) for both Partnerships as exclusive agent to form and manage a
group of securities brokers or dealers selected by you, each of which shall be
registered under the Securities Exchange Act of 1934 (the "Soliciting Dealers")
and be a member in good standing with the National Association of Securities
Dealers, Inc. to assist you in the distribution and sale of Interests. The
"Offering Period" (as such term is used in this Agreement) for Interests in
Mewbourne Energy Partners 99-A, L.P. will commence on or about the date on which
the Registration Statement is declared effective and will end no later than
November 5, 1999. The Offering Period for Interests in Mewbourne Energy Partners
00-A, L.P. will commence on , and end no later than December 31, 2000. MD has
the right in its sole and absolute discretion to terminate the offering of
Interests and end an Offering Period at any time.
(b) The Managing Partner hereby gives you, as Dealer Manager, the right
to solicit subscriptions of the Interests directly only in states where you have
registered as a broker-dealer under such states' blue sky laws. Such
subscriptions shall be evidenced by execution by the prospective investor of a
Subscription Agreement. It is understood that no sale shall be regarded as
effective unless and until accepted by the Managing Partner on behalf of a
Partnership. The Managing Partner reserves the right in its sole discretion to
refuse to sell a Interest to any person at any time for any reason, without
liability to it or to you.
(c) You hereby accept appointment as a Dealer Manager and agree on the
terms and conditions set forth in this Agreement to use your reasonable efforts
to solicit subscriptions for the Interests during each Offering Period and until
the earlier of (i) the termination of the last Offering Period or (ii) the last
Closing (as hereinafter defined). Neither your acceptance of that appointment
nor this Agreement shall constitute you and MD or a Partnership as an
association, partnership, unincorporated business or other separate entity.
(d) The price at which the Interests are to be offered shall be $1,000
per Interest payable upon the terms set forth in the Prospectus: provided,
however, that the minimum purchase shall be five (5) Interests for a
subscription price of $5,000.
(e) If an offering for Interests in a Partnership is commenced and
subscriptions funds of $1,000,000 or more are not received by the termination of
the Offering Period with respect to Interests in that Partnership, all
subscription funds received by the termination of the Offering Period with
respect to Interests in that Partnership shall be returned in full to the
subscribers, together with any interest earned thereon, if any (as provided in
the Prospectus), and this Agreement will terminate without obligation on your
part or on the part of MD, except that (a) you will promptly, upon notice,
transmit to MD any funds advanced to you by MD of any sales commissions and due
diligence fees paid pursuant to Section 6(b) hereof and which have not been
reallowed to a Soliciting Dealer, and (b) the indemnification and contribution
provisions of Section 9 hereof shall continue after such termination of this
Agreement.
Section 2. Representations and Warranties of MD. MD, in its individual
capacity and in its capacity as Managing Partner, hereby represents and warrants
to you that:
(a) In the name and on behalf of the Partnerships, MD has prepared and
filed with the Commission the Registration Statement (including the Prospectus)
for the registration of the offering and sale of the Interests under the Act.
The Registration Statement has become and is effective under the Act. Copies of
the Registration Statement and the Prospectus have been or will be delivered to
you.
(b) On the Closing Date (as hereinafter defined) for the sale of
Interests in a Partnership, that Partnership will be a limited partnership duly
formed and validly existing under the laws of the State of Delaware and will be
duly qualified or registered as a foreign limited partnership or otherwise
qualified as a limited partnership in each jurisdiction in which the nature of
the activities conducted by it or the nature of the assets owned by it make such
qualification necessary (except where the failure to so qualify or register
would not have a material adverse effect on the Partnership or the rights or
liabilities of its General and Limited Partners). In addition, the Partnerships
shall have full and adequate partnership power and partnership authority to
enter into and perform this Agreement and the related Program Agreements and to
own its properties and to conduct its business as proposed in the Prospectus.
<PAGE> 3
Mewbourne Energy 99-00 Drilling Programs
Dealer Manager Agreement
, 1999
Page 3
(c) MD is, and at all times through the last Closing Date will be, a
corporation, validly existing and in good standing under the laws of the State
of Delaware with full and adequate corporate power and corporate authority to
enter into and perform this Agreement and the Agreements of Partnership and to
own its properties and to conduct its business as presently conducted and as
proposed in the Prospectus to be conducted.
(d) Each subscriber for Limited Partner Interests will become a Limited
Partner of a Partnership entitled to all the rights of a Limited Partner under
the Agreement of Partnership for that Partnership and the Delaware Act upon (i)
payment of the consideration for those Limited Partner Interests specified in
that subscriber's Subscription Agreement and (ii) acceptance by the Managing
Partner of that subscriber as a Limited Partner. Each subscriber for General
Partnership Interests will become a General Partner of a Partnership entitled to
all the rights of a General Partner under the Agreement of Partnership for that
Partnership and the Delaware Act upon (i) payment of the consideration for those
General Partner Interests specified in that subscriber's Subscription Agreement
and (ii) acceptance by the Managing Partner of that subscriber as a General
Partner. The Interests, when sold and paid for as contemplated by the
Prospectus, will represent validly authorized and duly issued Interests and
those Interests will conform in all material respects to the statements relating
thereto contained in the Prospectus, including the Form of Agreement of
Partnership attached as Exhibit A thereto.
(e) This Agreement has been duly and validly authorized by MD. MD has
duly executed and delivered this Agreement, which constitutes a valid and
binding agreement of MD enforceable in accordance with its terms (except to the
extent that the enforceability of the indemnification provisions of Section 9
hereof may be limited under federal securities laws or to the extent the
enforceability of this Agreement may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the right of creditors
generally).
(f) The Commission has not issued any order preventing or suspending
the use of the Prospectus.
(g) From the time the Registration Statement initially became effective
through the last Closing Date, the Registration Statement and the Prospectus did
and will comply in all material respects with the provisions of the Act, and
neither the Registration Statement and the Prospectus nor any Sales Literature
(as hereinafter defined) contains or will contain any untrue statement of a
material fact or omit to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading; provided, however, that the representations and warranties
contained in this subsection (g) shall not apply to statements in, or omissions
from, the Registration Statement, the Prospectus or the Sales Literature based
upon and in conformity with information furnished to MD or a Partnership by you
in writing specifically for use in the Registration Statement, the Prospectus or
Sales Literature.
(h) Based upon the opinion of Vinson & Elkins L.L.P., counsel for MD,
and subject to the assumptions and representations expressed therein, under
existing federal income tax laws and regulations each Partnership, upon its
formation, will be classified as the partnership for federal income tax
purposes. Each Partnership, at the related Closing, will be classified as the
partnership for federal income tax purposes, and at all times subsequent hereto,
MD will use its best efforts to maintain the status of each Partnerships as a
partnership for federal income tax purposes.
(i) Except as disclosed in the Prospectus, there is no litigation or
governmental proceeding pending or, to the best knowledge of MD, threatened that
involves the offering of the Interests or any of the properties or businesses of
MD that would, if adversely decided, materially and adversely affect
(financially or otherwise) the operation of the business of a Partnership, MD or
the offering.
(j) MD is not in violation of the Agreements of Partnership or in
material default in the performance of any obligation, agreement or condition
contained in any agreement by which a Partnership is bound. The execution and
delivery of this Agreement and the Agreements of Partnership, the fulfillment of
the terms set forth herein and therein and the consummation of the transactions
contemplated herein and therein and in the Prospectus will not conflict with or
constitute a breach of or material default under the Agreements of Partnership
or under the certificate of incorporation or bylaws of MD or under any other
agreement, indenture or instrument by which a Partnership or MD is bound or, to
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the best knowledge of MD, any law, rule, regulation, order or decree of any
court or any governmental body or administrative agency applicable to MD or a
Partnership.
(k) The financial information (including without limitation the balance
sheets and any accompanying notes and schedules) presented in the Prospectus
concerning MD presents fairly MD's financial position as of the dates thereof in
accordance with generally accepted accounting principles, and there has been,
and through the last Closing Date shall be, no material adverse change in its
financial condition since the date of that information.
(l) There has been no material adverse change in the condition,
business or properties of MD, financial or otherwise, from that on the latest
dates as of which such condition, business or properties are set forth in the
Prospectus, except as referred to therein, and such properties and business
substantially conform and shall at the last Closing Date substantially conform
to the descriptions thereof contained in the Prospectus.
(m) MD will timely apply, on behalf of each Partnership, to the
Internal Revenue Service for a tax shelter registration number and, if such a
number is received, will furnish such number to the General and Limited Partners
of such Partnership within a reasonable time after their admission to a
Partnership or within a reasonable time after the Partnership has received such
number, whichever occurs later.
Section 3. Covenants and Representations of Dealer Manager. You
covenant with and represent to MD that:
(a) You are, and at all times through the last Closing Date will be, a
corporation, validly existing and in good standing as a corporation under the
laws of the jurisdiction set forth on the signature page hereof, with full and
adequate corporate power and corporate authority to enter into and perform this
Agreement.
(b) This Agreement has been duly and validly authorized by you. You
have duly executed and delivered this Agreement, which constitutes a valid and
binding agreement of you enforceable in accordance with its terms (except to the
extent that the enforceability of the indemnification provisions of Section 9
hereof may be limited under federal securities law or to the extent the
enforceability of this Agreement may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the rights of creditors
generally).
(c) You will not offer to sell Interests to, solicit offers to buy
Interests from, or transmit Subscription Agreements to, any person on behalf of
MD that you have reasonable grounds to believe (based on information obtained
from such person or otherwise known to you) does not meet the age, net worth,
annual income or other standards applicable to that person as set forth in the
Subscription Agreement.
(d) You will deliver a copy of the Prospectus, containing such legends
as directed by MD, to each subscriber to whom you sell the Interests at or
before the completion of any sale of Interests to such subscriber (which sale
shall be deemed, for the purposes of this Agreement to occur on the date on
which that subscriber delivers subscription funds to the escrow agent), or
earlier if required by the blue sky or securities laws of any state. You have
not and will not give any information or make any representation in connection
with the offer or sale of Interests other than as contained in the Prospectus,
and will not publish, circulate or otherwise distribute without MD's approval
any solicitation material other than the Prospectus and other sales material
("Sales Literature") provided to you by MD specifically for distribution to
subscribers with the Prospectus. Any such Sales Literature, if distributed, must
have been preceded or must be accompanied by the Prospectus. You agree not to
discuss any specific oil and gas prospect or to refer to any such oil and gas
prospect in any analysis or report on the Interests prepared by you or on your
behalf.
(e) You will make offers to sell Interests to, sell to or solicit
offers to subscribe for Interests from persons in only those states or other
jurisdictions where MD represents to you in writing that such Interests may be
offered and sold and you agree to make reasonable efforts to comply with all
applicable laws, rules and regulations of those states and jurisdictions in
which you offer or sell Interests.
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(f) You are and on the last Closing Date will be (i) a securities
broker-dealer registered with the Securities and Exchange Commission and any
jurisdiction where broker-dealer registration is required in order to offer and
sell the Interests and (ii) a member in good standing of the National
Association of Securities Dealers, Inc. ("NASD").
(g) You agree to make reasonable efforts to sell Interests or cause
them to be sold by the Soliciting Dealers in a manner consistent with all the
rules of the NASD applicable in connection with the offering of Interests
including, without limitation, the following provisions of Article III to the
Rules of Fair Practice:
2730. SECURITIES TAKEN IN TRADE
(a) A member engaged in a fixed price offering, who purchases
or arranges the purchase of securities taken in trade, shall purchase
the securities at a fair market price at the time of purchase or shall
act as agent in the sale of such securities and charge a normal
commission therefor.
(b) When used in this section--
(1) the term "taken in trade" means the purchase by a member
as principal, or as agent for the account of another, of a security
from a customer pursuant to an agreement or understanding that the
customer purchase securities from the member which are part of a fixed
price offering.
(2) the term "fair market price" means a price not higher than
the price at which the securities would be purchased from the customer
or from a similarly situated customer in the ordinary course of
business by a dealer in such securities in transactions of similar size
and having similar characteristics but not involving a security taken
in trade.
(3) the term "normal commission" means an amount of commission
which the member would normally charge to that customer or a similarly
situated customer in the ordinary course of business in transactions of
similar size and having similar characteristics but not involving a
security taken in trade.
(c) For purposes of this Section a member shall be
(1) deemed, with respect to securities other than common
stocks, to have taken such securities in trade at a fair market price
when the price paid is not higher than the highest independent bid for
the securities at the time of purchase, if such bid quotations for the
securities are readily available.
(2) presumed, with respect to common stocks, to have taken
such common stocks in trade at a fair market price when the price paid
is not hi(,her than the highest independent bid for the securities at
the time of purchase, if such bid quotations for the securities are
readily available.
(3) presumed to have taken a security in trade at a price
higher than a fair market price when the price paid is higher than the
lowest independent offer for the securities at the time of purchase, if
such offer quotations for the securities are readily available.
(d) A member, in connection with every transaction subject to
this Section, shall with respect to
(1) common stocks, which are traded on a national securities
exchange or for which quotations are entered in an automated quotation
system, obtain the necessary bid and offer quotations from the national
securities exchange or from the automated quotation system; and
(2) other securities and common stocks not included in
subparagraph (1) of this subsection (d) obtain directly or with the
assistance of an independent agent bid and offer quotations from two or
more independent dealers relating to the securities to be taken in
trade or, if such quotations are not readily available,
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exercise its best efforts to obtain such quotations with respect to
securities having similar characteristics and of similar quality as
those to be taken in trade.
(e) A member who purchases a security taken in trade shall
keep or cause to be kept adequate records to demonstrate compliance
with this Section and shall preserve the records for at least 24 months
after the transaction. If an independent agent is used for the purpose
of obtaining quotations, the member must request the agent to identify
the dealers from whom the quotations were obtained and the time and
date they were obtained or request the agent to keep and maintain for
at least 24 months a record containing such information.
2740. SELLING CONCESSIONS
In connection with the sale of securities which are part of a
fixed price offering:
(a) A member may not grant or receive selling concessions,
discounts, or other allowances except as consideration for services
rendered in distribution and may not grant such concessions, discounts
or other allowances to anyone other than a broker or dealer actually
engaged in the investment banking or securities business; provided,
however, that nothing in this Section shall prevent any member from (1)
selling any such securities to any person, or account managed by any
person, to whom it has provided or will provide bona fide research, if
the stated public offering price for such securities is paid by the
purchaser; or (2) selling any such securities owned by him to any
person at any net price which may be fixed by him unless prevented
therefrom by agreement.
(b) The term "bona fide research," when used in this Section,
means advice, rendered either directly or through publications or
writings, as to the value of securities, the advisability of investing
in, purchasing, or selling securities, and the availability of
securities or purchasers or sellers of securities, or analyses and
reports concerning issuers, industries, securities, economic factors
and trends, portfolio strategy, and performance of accounts; provided,
however, that investment management or investment discretionary
services are not bona fide research.
(c) A member who grants a selling concession, discount or
other allowance to another person shall obtain a written agreement from
that person that he will comply with the provisions of this Section,
and a member who grants such selling concession, discount or other
allowance to a nonmember broker or dealer in a foreign country shall
also obtain from such broker or dealer a written agreement to comply,
as though such broker or dealer were a member, with the provisions of
Section 8 and 36 of this Article and to comply with Section 25 of this
Article as that Section applies to a nonmember broker/dealer in a
foreign country.
(d) A member who receives an order from any person designating
another broker or dealer to receive credit for the sale shall, within
30 days after the end of each calendar quarter, file reports with the
Association containing the following information with respect to each
fixed price offering which terminated during that calendar quarter: the
name of the person making the designation; the identity of the brokers
or dealers designated; the identity and amount of securities for which
each broker or dealer was designated; the date of the commencement and
termination of the offering and such other information as the
Association shall deem pertinent.
(e) A member who is designated by its customer for the sale of
securities shall keep, and maintain for a period of 24 months, records
in such form and manner to show the following information: name of
customer making the designation; the identity and amount of securities
for which the member was designated; the identity of the manager or
managers of the offering, if any; the date of the commencement of the
offering and such other information as the Association shall deem
pertinent.
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2420. DEALING WITH NON-MEMBERS
(a) No member shall deal with any non-member broker or dealer
except at the same prices, for the same commissions or fees, and on the
same terms and conditions as are by such member accorded to the general
public.
(b) Without limiting the generality of the foregoing, no
member shall:
(1) in any transaction with any non-member broker or
dealer, allow or grant to such non-member broker or dealer any
selling concession, discount or other allowance allowed by
such member to a member of a registered securities association
and not allowed to a member of the general public;
(2) join with any non-member broker or dealer in any
syndicate or group contemplating the distribution to the
public of any issue of securities or any part thereof, or
(3) sell any security to or buy any security from any
non-member broker or dealer except at the same price at which
at the time of such transaction such member would buy or sell
such security, as the case may be, from or to a person who is
a member of the general public not engaged in the investment
banking or securities business.
(c) Transaction with foreign non-members. The provisions of
paragraphs (a) and (b) of this rule shall not apply to any non-member
broker or dealer in a foreign country who is not eligible for
membership in a registered securities association, but in any
transaction with any such foreign non-member broker or dealer, where a
selling concession, discount, or other allowance is allowed, a member
shall as a condition of such transaction secure from such foreign
broker or dealer an agreement that, in making any sales to purchasers
within the United States of securities acquired as a result of such
transactions, he will conform to the provisions of paragraphs (a) and
(b) of this rule to the same extent as though he were a member of the
Corporation.
(d) "Non-member broker or dealer". For the purpose of this
rule, the term "non-member broker or dealer" shall include any broker
or dealer who makes use of the mails or of any means or instrumentality
of interstate commerce to effect any transaction in, or to induce the
purchase or sale of, any security, otherwise than on a national
securities exchange, who is not a member of any securities association,
registered with the Commission pursuant to Section 15A of the Act,
except a broker or dealer who deals exclusively in commercial paper,
bankers' acceptances or commercial bills.
(e) Nothing in this rule shall be so construed or applied as
to prevent any member of the Corporation from granting to any other
member of any registered securities association any dealer's discount,
allowance, commission, or special terms.
2810. DIRECT PARTICIPATION PROGRAMS, (B) REQUIREMENTS (2) SUITABILITY
(B) In recommending to a participant the purchase, sale or exchange of an
interest in a direct participation program, a member or person associated with a
member shall:
(i) have reasonable grounds to believe, on the basis
of information obtained from the participant concerning his
investment objectives, other investments, financial situation
and needs, and any other information known by the member or
associated person, that:
a. the participant 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 where they are a significant aspect of the
program:
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b. the participant has a fair market net
worth sufficient to sustain the risks inherent in the
program, including loss of investment and lack of
liquidity; and
c. the program is otherwise suitable for the
participant; and
(ii) maintain in the files of the member documents
disclosing the basis upon which the determination of
suitability was reached as to each participant.
(c) Notwithstanding the provisions of subsections (a) and (b)
hereof, no member shall execute any transaction in a direct
participation program in a discretionary account without prior written
approval of the transaction by the customer.
2750. TRANSACTIONS WITH RELATED PERSONS
(a) Except as otherwise provided in Subsection (d) of this
Section, no member engaged in a fixed price offering of securities
shall sell the securities to, or place the securities with, any person
or account which is a related person of the member unless such related
person is itself subject to this Section or is a non-member foreign
broker or dealer who has entered into the agreements required by
Subsection 24(c) of this Article.
(b) For purposes of this Section 36, a "related person" of a
member includes any person or account which directly or indirectly
owns, is owned by or is under common ownership with the member.
(c) A person owns another person or account for purposes of
this Section if the person directly or indirectly:
(1) has the right to participate to the extent of
more than 25 percent in the profits of the other person; or
(2) owns beneficially more than 25 percent of the
outstanding voting securities of the person.
(d) The prohibition contained in Subsection (a) does not apply
to the sale of securities to, or the placement of securities in, a
trading or investment account of a member or a related person of a
member after termination of the fixed price offering if the member or
the related person of the member has made a bona fide public offering
of the securities. A member or a related person of a member is presumed
not to have made a bona fide public offering for the purpose of this
subsection if the securities being offered immediately trade in the
secondary market at a price or prices which are at or above the public
offering price.
(h) You shall immediately forward all Subscription Agreements received
by you, together with all checks received in payment of the purchase price for
Interests, in accordance with Section 4(b).
(i) If you have reviewed representative oil and gas properties which
have been designated by or held the inventory of MD or its affiliates, you will
not discuss any of such oil and gas properties in connection with the sale of
Interests or otherwise indicate any facts about such properties except those, if
any, discussed in the Prospectus.
(j) You will comply with the duties imposed by Rules 15c2-4 and 15c2-8
as promulgated by the Securities and Exchange Commission pursuant to Section 15
of the Securities Exchange Act of 1934, as amended. You will cause the
Soliciting Dealers to transmit for prompt deposit all subscriptions checks,
before noon of the next business day after their receipt by a Soliciting Dealer,
in the designated Partnership escrow account. In the event you receive a check
which is not payable to the escrow agent, you shall promptly return such check
directly to the subscriber not later than the end of the next business day
following its receipt.
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(k) Prior to recommending an investment in or offering or selling the
Interest to a prospective purchaser you shall have completely read the
Prospectus and related materials and have reasonable grounds to conclude that:
(1) the prospective purchaser is or will be in a financial position to realize
the benefits described in the Prospectus of an investment in the Interests; (2)
the prospective purchaser has met the suitability requirements described in the
Prospectus and has a fair market net worth sufficient to sustain the risks
inherent in an investment in the Interests specifically, including, the loss of
the entire investment and lack of liquidity; and (3) the investment is otherwise
suitable for the prospective investor.
(l) You will maintain in your files for a period of six (6) years from
the close of the last Offering Period documents which disclose the basis upon
which you determined that the prospective investor satisfied the suitability
requirements and was otherwise suitable.
(m) Notwithstanding the provisions of subsection (k) hereof, you will
not execute any transaction with respect to Interests in a Partnership on behalf
of a discretionary account without prior approval of the transactions by the
customer.
(n) In the event that you have been notified by MD that the Prospectus
is materially deficient, you will suspend and cause the Soliciting Dealers to
suspend sales until such time as the Prospectus is appropriately amended or
supplemented. You will deliver the amended Prospectus or any supplements thereto
to all prospective purchasers and to purchasers who acquired Interests prior to
the date you suspended sales.
(o) Pursuant to this Agreement, you will:
(i) not permit any Soliciting Dealer to offer for sale or sell
any of the Interests in any state where the Interests have not been
registered;
(ii) use your best efforts to insure that the Soliciting
Dealers conduct the Offering pursuant to the Securities Act of 1933, as
amended, state securities laws, the terms of this Agreement, and in
conformity with the provisions of the Prospectus;
(iii) not have any direct interest in a Partnership. In no
event shall the Dealer Manager be considered or become a partner in a
Partnership, and the Dealer Manager shall have no voice or right to be
involved in the management of the affairs of any of the Partnerships;
and
(iv) promptly pay the Soliciting Dealers the negotiated sales
commissions and due diligence fees as provided in the Soliciting Dealer
Agreement executed with the respective Soliciting Dealers.
(p) You have conducted your own independent due diligence inquiry and
have concluded that all material facts are adequately and accurately disclosed
and, prior to executing a purchase order in the Interests, will inform the
prospective purchaser, or cause him to be informed by a Soliciting Dealer, of
all pertinent facts relating to the liquidity of the Interests during the life
of a Partnership.
(q) Each Soliciting Dealer shall be required to execute a Soliciting
Dealer Agreement in the form attached hereto as Annex "A" and made a part
hereof.
(r) You representations, warranties and covenants as contained in this
Section 3 will continue in effect throughout the last Offering Period.
Section 4. Subscriptions and Closing.
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(a) You acknowledge and agree that MD has reserved the right to reject
or reduce any subscription and that subscriptions for Interests will be accepted
by MD only from investors who in the judgment of MD meet the appropriate
suitability standards set forth in the Prospectus and the Subscription
Agreement.
(b) All Subscription Agreements and all checks received in payment of
the purchase price for Interests shall be subject to, and MD and you hereby
agree that you each shall act in accordance with, the following provisions:
(i) You shall cause all Subscription Agreements and checks, by
noon of the business day following the receipt thereof, to be delivered
to NationsBank, Texas, N.A., Tyler, Texas or other escrow agent
designated by MD (the "Escrow Agent"). All checks will be deposited in
a separate escrow account with the Escrow Agent, to be held therein in
accordance with the terms of the Escrow Agreement between MD and the
Escrow Agent and to be released only in accordance with the Escrow
Agreement; and
(ii) MD shall, by noon of the second business day following
its receipt of a copy of the Subscription Agreement, advise you and the
applicable Soliciting Dealer by telegram, telecopy or other similar
means of telecommunications or by telephone (confirmed in writing), if
MD initially accepts or rejects the subscription evidenced by that
Subscription Agreement because that subscriber is considered not
suitable for Interests, and if that subscription has been rejected by
MD, MD shall, promptly after advising you and the applicable Soliciting
Dealer of that rejection, direct the Escrow Agent to return to the
Soliciting Dealer and the subscriber's check, and you shall cause the
Soliciting Dealer to return the originally executed Subscription
Agreement and that check to the subscriber.
(c) MD will notify you and each Soliciting Dealer of the closing of the
offering of Interests in a Partnership and the date as of which a Partnership is
to be funded with subscription proceeds held under the Escrow Agreement. A
closing (a "Closing") will be scheduled to be held at the offices of MD, 3901 S.
Broadway, Tyler, Texas 75701, as soon as practicable after the date on which you
shall have been notified of the closing of the offering of Interests in a
Partnership, or on such date and at such place as MD may determine (a "Closing
Date").
(d) The right of a Partnership to use funds deposited in the
Partnership account for purposes other than the payment of commissions and fees
shall be subject to the accuracy of and the compliance by MD with its
representations, warranties and covenants set forth herein, to its performance
of its obligations hereunder and to the satisfaction at the Closing with respect
to that Partnership of each of the following further conditions:
(i) You shall have received a copy of the opinion of Vinson &
Elkins L.L.P., counsel to MD and the Partnership, as to certain federal
income tax matters discussed under "Tax Aspects" in the Prospectus,
which opinion shall be reasonably satisfactory to you and your counsel
as of that Closing Date.
(ii) You shall have received a blue sky memorandum prepared by
Vinson & Elkins L.L.P. with respect to the Partnership, to the effect
that the Interests have been duly registered or qualified for sale
under the securities or blue sky laws of the states in which, in
accordance with such memorandum, offers and sales of the Interests may
be made to investors (being those states with respect to which you and
other Soliciting Dealers requested that MD use its reasonable efforts
to register or qualify the Interests for offering and sale under the
securities or blue sky laws of such states pursuant to Section 5(e)
hereof).
(iii) All proceedings and documents in connection with the
transactions contemplated by the Prospectus and this Agreement shall be
reasonably satisfactory in form and substance to you and your counsel,
and MD and the Partnership shall use their reasonable efforts to ensure
that you and your counsel shall have received such other documents in
connection with such transactions as you or they may reasonably
request.
(iv) You and your counsel shall have received a letter or
letters from Vinson & Elkins L.L.P. in form and scope reasonably
satisfactory to you and your counsel as to the due organization of the
Partnership under the law of Delaware, the due admission of the Limited
Partners or General Partners to the Partnership,
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the due organization of MD under Delaware law, the qualification of the
Partnership and MD to conduct business in Texas as a foreign limited
partnership and corporation, respectively, the due execution of this
Agreement by the Partnership and MD and the due execution of the
Agreement of Partnership of the Partnership by MD.
Section 5. Covenants of MD. MD covenants with you, in its individual
capacity and in its capacity as Managing Partner, that:
(a) MD will deliver to you, at MD's sole expense, such copies of the
Prospectus and related Subscription Agreements and Sales Literature as you may
reasonably request.
(b) If any event that occurs before the last Closing Date and that
relates to or affects the business or condition (financial or other) of MD or a
Partnership makes it necessary to amend or supplement the Prospectus or the
Registration Statement in order that the Prospectus or the Registration
Statement will not contain an untrue statement of a material fact or omit to
state a material fact necessary in order to make the statements therein not
misleading in light of the circumstances existing at the time it is delivered to
a subscriber, MD will (i) notify you of the occurrence of such event, (ii)
prepare, file, transmit and use its reasonable efforts to cause to become
effective (to the extent appropriate) any such required amendments or
supplements to the Prospectus or the Registration Statement, (iii) advise you,
promptly after MD receives notice thereof, of the time when any post-effective
amendment to the Registration Statement has become effective or of the time when
any amendment or supplement to the Prospectus has been filed and (iv) promptly
prepare and furnish to you a reasonable number of copies of the amendments of,
or supplements to, the Prospectus or the Registration Statement.
(c) MD will notify you immediately and confirm the notice in writing of
the issuance by the Commission or by any state securities administrator of any
stop order suspending the effectiveness of any registration or qualification of
the Interests for sale or enjoining the sale of the interests or of the
initiation of any proceedings for that purpose. MD will make every reasonable
effort to prevent the issuance of any such stop order and, if any such stop
order shall at any time be issued, to obtain the lifting thereof at the earliest
possible moment.
(d) As soon as practicable after the receipt of any Subscription
Agreements, MD will approve or reject such subscriptions and notify you of the
same.
(e) In addition to those jurisdictions in which the Blue Sky Memorandum
indicates that you may offer (or solicit offers) for Interests, MD will use its
reasonable efforts to register or qualify the Interests for offering and sale
under the securities or blue sky laws of such additional jurisdictions as you
may request, will furnish all such information and documents as may be
reasonably necessary for such purpose and will notify you in writing as to the
effective date of such registrations or qualifications as soon as practicable
after the receipt or confirmation thereof, provided that you shall have
specified and made such request in writing to MD with respect to each additional
jurisdiction in which you intend to offer any of the Interests for sale, or
solicit any offers to subscribe for or buy any of the Interests, or otherwise
negotiate with any person in respect of any of the Interests, and MD shall have
no duty, responsibility, liability or obligation to you under this subsection
(e) or any other provision hereof with respect to any other jurisdiction. MD
will undertake to file all reports required to be filed subsequent to completion
of the offering of the Interests and otherwise to continue to comply with the
securities or blue sky laws of each such jurisdiction.
Section 6. Payment of Expenses and Fees.
(a) Except as specifically provided elsewhere in this Agreement, you,
the Soliciting Dealers and MD and the Partnerships will pay their own expenses
incident to the transactions contemplated by this Agreement, including fees of
their counsel.
(b) Prior to the time that $1,000,000 or more of subscription funds for
a Partnership are received and accepted, MD may, but is not obligated to,
advance to you from MD's own funds the sales commissions and due diligence
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fees which would otherwise be payable in connection with subscription funds
received and accepted prior to such time; provided that such advance may only be
paid with respect to subscriptions that have been accepted by MD. In the event
that either (1) subscription funds of $1,000,000 or more are not received by the
termination of the Offering Period with respect to Interests in a Partnership or
(ii) MD otherwise elects not to close the offering of the Interests in a
Partnership, you will promptly upon notice transmit to MD funds in the amount of
the sales commissions and due diligence fees advanced to you and which have not
been reallowed to a Soliciting Dealer.
(c) Upon the receipt and acceptance of $1,000,000 in subscriptions for
a Partnership, MD may, but is not obligated to, advance to you from MD's own
funds sales commissions and due diligence fees relating to subscriptions
solicited by you; provided that such advance may only be paid with respect to
subscriptions that have been accepted by MD and for which the subscription funds
have cleared at the office of the Escrow Agent.
(d) In the event that MD makes an advance of sales commissions and due
diligence fees pursuant to Section 6(b) or (c) above, you hereby agree that (i)
prior to the related Closing, MD retains the right in its sole discretion to
refund to any subscriber solicited by you the full amount of the subscription
funds transmitted by that subscriber and (ii) in the event that MD refunds
subscription funds to a subscriber solicited by you, you will promptly upon
receipt of notice of that refund transmit to MD funds in the amount of the sales
commissions and due diligence fees advanced to you with respect to your
acceptance of an order for Interests from such subscriber and which have not
been reallowed to a Soliciting Dealer.
(e) If the Closing for the sale of Interests in a Partnership occurs,
as compensation for your services under this Agreement, MD shall pay you from
its own funds: (i) a cash sales commission based on eight percent (8%) of the
sales price of Interests, which you shall reallow to the Soliciting Dealers for
the Interests sold by them, and (ii) you may also be reimbursed up to one-half
percent (1/2%) of the sales price of Interests sold by you for actual expenses
incurred in affirmatively discharging your due diligence responsibilities
pursuant to Rule 2810 of the NASD Conduct Rules and its subsections, less any
sales concessions and due diligence fees advanced to you prior to that Closing
under Section 6(b) or (c) above, except that neither you nor any Soliciting
Dealer will receive any such sales commissions or due diligence fees for
Interests sold to (i) officers, directors or employees of MD or affiliates
thereof, (ii) affiliates of the Managing Partner or (iii) if you so elect by
notifying MD in writing, any of your officers, directors, employees or
registered representatives. No sales commissions or due diligence fees will be
paid on subscriptions refunded for any reason to subscribers prior to that
Closing.
Section 7. Conditions to Obligations of Soliciting Dealer. Your
obligations under this Agreement with respect to a particular Partnership are
subject to the following:
(a) the accuracy of and compliance with the representations and
warranties of MD made in Section 2 hereof and the performance by MD,
individually and in its capacity as Managing Partner, of all material
obligations under this Agreement; and
(b) the absence, on the Closing Date for the sale of Interests in that
Partnership, of any stop order issued under the Act suspending the use of the
Prospectus or the sale of the Interests or of the initiation or the threatened
initiation of any proceedings therefor.
If any of the conditions specified in this Section 7 shall not have
been fulfilled, or cannot be fulfilled on or prior to the Closing Date with
respect to such Partnership, this Agreement with respect to that Partnership and
all of your obligations relating thereto, other than those contained in Section
9 hereof, may be terminated by you by notifying MD of such termination in
writing or by telegram at or prior to that Closing, and any such termination
shall be without liability of any party to any other party except as otherwise
provided in Section 9 hereof.
Section 8. Conditions to Obligations of MD. The obligations of MD under
this Agreement with respect to a particular Partnership are subject to the
following:
<PAGE> 13
Mewbourne Energy 99-00 Drilling Programs
Dealer Manager Agreement
, 1999
Page 13
(a) the accuracy of and compliance with your representations and
warranties made in Section 3 hereof and the performance by you of all material
obligations under this Agreement;
(b) the absence, on Closing Date for the sale of Interests in that
Partnership, of any stop order issued under the Act suspending the use of the
Prospectus or the sale of the Interests or of the initiation or the threatened
initiation of any proceedings therefor; and
(c) if the Partnership elects in its discretion to offer rescission to
any subscriber because (i) any of the conditions described in this Agreement
shall not have been fulfilled or (ii) other circumstances arise subsequent to
the date hereof that in the judgment of MD require that such an offer be made,
in either case because of any action or inaction taken or failed to be taken by
you in connection with your offering or sale of the Interests, you agree to
return any sales commissions and due diligence fees earned by you and not
reallowed to a Soliciting Dealer with respect to any purchaser who in fact
rescinds in response to such offer, promptly upon written notice of that
rescission from the Partnership.
If any of the conditions specified in this Section 8 shall not have
been fulfilled, or cannot be fulfilled on or prior to a Closing Date with
respect to such Partnership, this Agreement with respect to that Partnership and
all obligations of the Partnership and MD relating thereto, other than those
contained in Section 9 hereof, may be terminated by MD by notifying you of that
termination in writing or by telegram at or prior to that Closing and any such
termination shall be without liability of any party to any other party except as
otherwise provided in Section 9 hereof.
Section 9. Indemnification.
(a) MD will indemnity and hold you harmless against any losses, claims,
damages or liabilities, joint or several, to which you may become subject, under
the Act or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon (i) any untrue
statement of any material fact contained in the Registration Statement, the
Prospectus or any Sales Literature or any omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
in light of the circumstances under which they were made not misleading (other
than any untrue statement or omission made in reliance upon and in conformity
with information furnished to MD or a Partnership by or on behalf of you, your
officers, directors or controlling persons or at your or their request
specifically for use in the preparation of the Registration Statement, the
Prospectus or any Sales Literature or any amendment thereof or supplement
thereto); provided that the foregoing indemnity is subject to the condition
that, insofar as it relates to any untrue statement or omission made in the
Prospectus but eliminated or remedied in an amendment thereof or supplement
thereto available to you prior to delivery of written confirmation of sale, such
indemnity shall not inure to the benefit of any person from whom the person
asserting any such loss, claim, damage or liability purchased the Interests that
are the subject thereof (or to the benefit of any person who controls any such
person), if a copy of the amendment or supplement to the Prospectus was not sent
or given to that person with or prior to the written confirmation of the sale of
those Interests to that person or (ii) a breach by MD or a Partnership of any of
its respective representations, warranties, agreements or covenants contained in
this Agreement; and MD will reimburse you for all legal or other expenses
(including reasonable expenses of internal and outside counsel) reasonably
incurred by you in connection with defending any such action or claim. The
agreement of indemnity in this Section 9(a) and in Section 9(b) below shall be
in addition to any liability that MD or a Partnership may otherwise have and
shall extend upon the same terms and conditions to each person, if any, who
controls you and shall apply whether or not any negligent act or omission by you
is alleged or proven; provided, however, that neither MD nor a Partnership shall
be responsible under this Agreement for any losses, damages or liabilities to
the extent they are found in a final judgment of a court of competent
jurisdiction to have resulted solely from your gross negligence or willful
misconduct in performing services hereunder.
(b) A Partnership shall indemnify you for any losses, claims, damages
or liabilities relating to the partnership and to which you may become subject
due to an alleged violation of federal or state securities laws and which arise
out of or are based upon the items set forth in Sections 9(a)(i) and (ii) above
(and are subject to the same conditions and limitations set forth in 9(a)(i) and
(ii) above) if (i) there has been a successful adjudication on the merits of
each
<PAGE> 14
Mewbourne Energy 99-00 Drilling Programs
Dealer Manager Agreement
, 1999
Page 14
count involving alleged securities laws violations as to you, (ii) such claims
have been dismissed with prejudice on the merits by a court of competent
jurisdiction as to you or (iii) a court of competent jurisdiction approves a
settlement of the claims against you. In connection with any claim for
indemnification for federal or state securities law violations under this
Section 9(b), you shall place before such court the positions of the Securities
and Exchange Commission, the Securities Commission of the State of Texas and any
other applicable regulatory authority with respect to such indemnification for
securities law violations.
(c) You agree to indemnity and hold harmless MD and the Partnerships
against any losses, claims, damages or liabilities, joint or several, to which
any of them may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon (i) any untrue statement of a material fact made by you
with respect to your offering of the Interests, (ii) any untrue statement of a
material fact contained in the Registration Statement, the Prospectus or any
Sales Literature or any omission to state therein a material fact required to be
stated therein or necessary to make the statements therein in light of the
circumstances under which they were made not misleading, but only to the extent
that such untrue statement or omission was made in reliance upon and in
conformity with information furnished to MD or a Partnership by or on behalf of
you, your officers, directors or controlling persons or at your or their request
for use in the preparation of the Registration Statement, the Prospectus or any
Sales Literature or an amendment thereof or supplement thereto or (iii) a breach
by you of any of your representations, warranties, covenants or agreements
contained in this Agreement; and you will reimburse MD and the Partnerships for
any legal or other expenses reasonably incurred by any of them in connection
with investigating or defending any such action or claim. The agreement of
indemnity contained in this subsection (c) shall be in addition to any liability
which you may otherwise have and shall extend, upon the same terms and
conditions, to each partner of a Partnership and to each officer, director and
other person, if any, who controls MD.
(d) Within seven days after receipt by an indemnified party under
subsection (a), (b) or (c) above of notice of the commencement of any action,
that indemnified party shall, if a claim in respect thereof is to be made
against the indemnifying party under that subsection, notify the indemnifying
party in writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party otherwise than under that subsection. In case any such
action shall be brought against any indemnified party, and the indemnified party
shall notify the indemnifying party of the commencement thereof, the
indemnifying party shall be entitled to participate in, and to the extent that
it shall wish, jointly with any other indemnifying party similarly notified, to
assume the defense thereof with counsel reasonably satisfactory to such
indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof and retention
of such counsel, the indemnifying party shall not be liable to such indemnified
party under such part for any legal or other expense subsequently incurred by
such indemnified party in connection with the defense thereof other than
reasonable costs of investigation unless (i) the employment by the indemnified
party of separate counsel shall have been authorized in writing in advance by an
indemnifying party in connection with the defense of such action, (ii) the
indemnifying parties shall not have employed counsel to have charge of the
defense of such action, (iii) such indemnified party shall have reasonably
concluded that there may be one or more defenses available to it which are
different from or additional to those available to one or more of the
indemnifying parties, or (iv) such indemnified party shall have concluded that
there is any material conflict of interest such that representation of the
indemnifying party and the indemnified party would not be in the best interests
of the indemnified party. Notwithstanding anything to the contrary in this
Section 9, the indemnifying party shall not be liable for any settlement of a
claim or action without its written consent.
(e) To provide for just and equitable contribution in any action in
which a claim for indemnification is made pursuant to this Section 9, but when
it is judicially determined (by the entry of a final judgment or decree by a
court of competent jurisdiction and the expiration of time to appeal or the
denial of the last appeal) that indemnification may not be enforced in that case
notwithstanding that this Section 9 provides for indemnification in that case,
all the parties hereto shall contribute to the aggregate losses, claims, damages
or liabilities to which they may be subject (after contribution from others) in
such proportion so that you are responsible for the portion represented by the
percentage that the sales commissions and due diligence fees received by you
bears to the gross proceeds of the offering of the Interests, and so that the
related Partnership (to the extent permitted by subsection (b) of this Section
9) and MD are responsible for the remaining portion; provided, however, that no
person found guilty (by the entry of a final judgment
<PAGE> 15
Mewbourne Energy 99-00 Drilling Programs
Dealer Manager Agreement
, 1999
Page 15
or decree by a court of competent jurisdiction) of a fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who is not similarly found guilty of
such fraudulent representation. This subsection (e) shall not be operative as to
you to the extent that a Partnership or MD or any person who controls a
Partnership or MD within the meaning of the Act is entitled to receive or has
received indemnification under this Section 9.
Section 10. Representations, Warranties and Agreements to Survive
Delivery. All representations, warranties and agreements contained in this
Agreement or contained in certificates delivered pursuant to this Agreement will
remain operative and in full force and effect, regardless of any investigation
made by or on behalf of you or MD, and will survive the Closing.
Section 11. Notices. All communications hereunder shall be in writing
and, if sent to you, will be mailed, delivered or telegraphed and confirmed to
you at the address set forth on the signature page hereof, or if sent to
Managing Dealer, MD or a Partnership will be mailed, delivered or telegraphed
and confirmed to you, MD or the Partnership at:
Mewbourne Development Corporation
3901 S. Broadway
Tyler, Texas 75701
Attention: Michael F. Shepard
with a copy to:
Vinson & Elkins L.L.P.
3700 Trammell Crow Center
2001 Ross Avenue
Dallas, Texas 75201
Attention: A. Winston Oxley
Section 12. Parties. This Agreement will inure to the benefit of and be
binding upon you, MD, the Partnerships and your and their respective successors,
heirs and representatives. This Agreement and its conditions and provisions are
intended to be and are for the sole and exclusive benefit of the parties to it
and their respective successors, heirs and representatives and not for the
benefit of any other person, firm or corporation unless otherwise expressly
stated.
Section 13. Governing Law. This Agreement shall be governed by and
construed under the laws of the State of Texas.
Section 14. Modifications. No provision of this Agreement may be
changed or terminated except by a writing signed by the party or parties to be
charged therewith.
Section 15. Waiver. Any party to this Agreement may waive compliance by
any other party with any of the terms, provisions and conditions set forth in
this Agreement; provided, however, that any such waiver must be in a writing
specifically setting forth the provisions of this Agreement waived thereby.
Section 16. Entire Agreement. This Agreement contains the entire
agreement among the parties to it and is intended to supersede any and all prior
agreements among those parties relating to the same subject matter.
Section 17. Invalidity. In the event any provision of this Agreement
shall be held to be invalid in any circumstance, that invalidity shall not
affect any other provision of this Agreement.
Section 18. Counterparts. This Agreement may be executed simultaneously
in several counterparts, each of which will be deemed an original, but all of
which together will constitute one and the same instrument.
Section 19. Assignment. No party may assign its rights or obligations
under this Agreement without the prior written consent of each other party
hereto, except that MD may assign its rights and obligations under this
Agreement in connection with a merger, consolidation, reorganization or other
similar transaction.
<PAGE> 16
Mewbourne Energy 99-00 Drilling Programs
Dealer Manager Agreement
, 1999
Page 16
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to us a counterpart hereof, whereupon this
instrument, along with all counterparts, will become a binding agreement, among
you, MD and the Partnerships, all in accordance with its terms.
Sincerely,
MEWBOURNE DEVELOPMENT CORPORATION
By:
-----------------------------------------
Its:
-----------------------------------------
MEWBOURNE ENERGY PARTNERS 99-A, L.P.
By: Mewbourne Development Corporation
Managing General Partner
By:
-----------------------------------
Its:
-----------------------------------
MEWBOURNE ENERGY PARTNERS 00-A, L.P.
By: Mewbourne Development Corporation
Managing General Partner
By:
-----------------------------------
Its:
-----------------------------------
MEWBOURNE SECURITIES, INC.
By:
-----------------------------------------
Its:
-----------------------------------------
<PAGE> 1
EXHIBIT 3.1
CERTIFICATE OF LIMITED PARTNERSHIP
OF
MEWBOURNE ENERGY PARTNERS 99-A, L.P.
This Certificate of Limited Partnership of MEWBOURNE ENERGY PARTNERS
99-A, L.P. (the "Partnership") is being executed and filed by the undersigned
general partner to form a limited partnership under the Delaware Revised
Uniform Limited Partnership Act.
ARTICLE ONE
The name of the limited partnership formed hereby is MEWBOURNE ENERGY
PARTNERS 99-A, L.P.
ARTICLE TWO
The address of the registered office of the Partnership in the State
of Delaware is Corporation Trust Center, 1209 Orange Street, Wilmington, County
of New Castle, Delaware.
ARTICLE THREE
The name and address of the registered agent of the Partnership in the
State of Delaware is The Corporation Trust Company, Corporation Trust Center,
1209 Orange Street, Wilmington, County of New Castle, Delaware.
ARTICLE FOUR
The name and business address of the general partner of the
Partnership is:
Name Business Address
---- ----------------
Mewbourne Development Corporation 3901 S. Broadway
Tyler, Texas 75701
IN WITNESS WHEREOF, the undersigned has executed this Certificate of
Limited Partnership by and through a duly authorized officer thereof on this
1st day of April, 1999.
MEWBOURNE DEVELOPMENT
CORPORATION, Managing Partner
By: /s/ J. Roe Buckley
-------------------------------------
J. Roe Buckley
Treasurer
<PAGE> 1
EXHIBIT 3.2
FORM OF
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF LIMITED PARTNERSHIP
OF
MEWBOURNE ENERGY PARTNERS 99-A, L.P.
The undersigned managing partner of Mewbourne Energy Partners 99-A,
L.P., a limited partnership organized under the Delaware Revised Uniform
Limited Partnership Act (the "Partnership"), does hereby certify the following
amendment to the Certificate of Limited Partnership of the Partnership as on
file with the Secretary of State of Delaware, as follows:
Article Four is amended to add those persons set forth in
Exhibit "A" hereto as general partners of the Partnership. The address
of each general partner added hereby is as set forth in Exhibit "A"
hereto.
IN WITNESS WHEREOF, this Certificate of Amendment has been duly
executed by the undersigned managing partner as of the day of , 200 .
MEWBOURNE DEVELOPMENT CORPORATION
By:
--------------------------------------
Its:
-------------------------------------
<PAGE> 1
EXHIBIT 4.4
===============================================================================
M
D
C
MEWBOURNE ENERGY PARTNERS
-A, L.P.
A DELAWARE LIMITED PARTNERSHIP
CERTIFICATE NUMBER NUMBER OF LIMITED PARTNER INTERESTS
T H I S C E R T I F I E S T H A T
IS A LIMITED PARTNER OF MEWBOURNE ENERGY PARTNERS -A , L.P., A DELAWARE
LIMITED PARTNERSHIP (THE "PARTNERSHIP"), OWNING THE NUMBER OF LIMITED PARTNER
INTERESTS IN THE PARTNERSHIP ABOVE SPECIFIED, EACH LIMITED PARTNER INTEREST
HAVING AN INITIAL PURCHASE PRICE FROM THE PARTNERSHIP OF ONE THOUSAND DOLLARS
($1,000.00). EACH LIMITED PARTNER INTEREST IS SUBJECT TO ALL OF THE TERMS AND
CONDITIONS OF THE AGREEMENT OF PARTNERSHIP OF THE PARTNERSHIP AND ENTITLED TO
ALL THE RIGHTS AND PRIVILEGES STATED THEREIN. THIS CERTIFICATE IS INTENDED
SOLELY TO PROVIDE IN CONCISE FORM CERTAIN INFORMATION ABOUT THE OWNERSHIP OF
LIMITED PARTNER INTERESTS IN THE PARTNERSHIP. ALL RIGHTS, OBLIGATIONS AND OTHER
ATTRIBUTES (INCLUDING THOSE RELATING TO ASSIGNMENT AND TRANSFER) PERTAINING TO
THE LIMITED PARTNER INTERESTS DESCRIBED IN THIS CERTIFICATE ARE SET FORTH IN
AND GOVERNED BY THE AGREEMENT OF PARTNERSHIP OF THE PARTNERSHIP, TO WHICH
REFERENCE MUST BE MADE FOR DESCRIPTION OF SUCH RIGHTS, OBLIGATIONS AND OTHER
ATTRIBUTES. THIS CERTIFICATE IS NOT VALID UNLESS EXECUTED BY AN AUTHORIZED
OFFICER OF THE MANAGING PARTNER OF THE PARTNERSHIP.
MEWBOURNE ENERGY PARTNERS, -A, L.P.
BY: MEWBOURNE DEVELOPMENT CORPORATION,
MANAGING PARTNER
DATED: BY:
-------------------------------------------
J. ROE BUCKLEY, TREASURER
================================================================================
<PAGE> 2
This Certificate and the Agreement of Partnership of the Partnership
are your evidence of ownership of Limited Partner Interests, and both should be
retained. This Certificate should be submitted to the Partnership in the event
of any proposed change in ownership of your Limited Partner Interests.
For transfer purposes, please return this Certificate to Mewbourne
Development Corporation, Investor Services Department, 3901 S. Broadway, Tyler,
Texas 75701, (903) 561-2900.
For Value received, the undersigned hereby sells, assigns and transfers
_________________ of the Limited Partner Interests represented by this
Certificate unto:
----------------------------------------------------
(Print Name of Transferee)
----------------------------------------------------
(Street Address of Transferee)
----------------------------------------------------
(City) (State) (Zip)
and does hereby irrevocably constitute and appoint the Managing Partner
attorney to transfer the said Limited Partner Interests on the books of the
Partnership with full power of substitution.
Subject to the terms of Section 8.1 of the Agreement of Partnership of the
Partnership, the undersigned consents/does not consent to the above-named
transferee's becoming a substituted Limited Partner in the Partnership.
Date:
------------------------
- --------------------------------------------------------------------------------
(Signature* of Limited Partner Interest Holder or Authorized Representative)
- --------------------------------------------------------------------------------
(Signature* of Joint Limited Partner Interest Holder)
- --------------------------------------------------------------------------------
(Printed Name of Limited Partner Interest Holder)
- --------------------------------------------------------------------------------
(Printed Name of Joint Limited Partner Interest Holder)
Signed in presence of:
----------------------------------------------------------
(Witness)
*NOTE: Please sign your name exactly as it is shown on the Certificate. When
Limited Partner Interests are held by joint tenants, both should sign. When
signing as attorney, executor, administrator, trustee, or guardian, please give
full title as such. If a corporation, please sign in full corporate name by an
authorized corporate officer, and indicate corporate office held by person
signing. If a partnership, please sign in partnership name by authorized
person.
<PAGE> 1
================================================================================
EXHIBIT 4.5
[MDC LOGO]
MEWBOURNE ENERGY PARTNERS
-A, L.P.
A DELAWARE LIMITED PARTNERSHIP
CERTIFICATE NUMBER NUMBER OF GENERAL PARTNER INTERESTS
THIS CERTIFIES THAT
IS A GENERAL PARTNER OF MEWBOURNE ENERGY PARTNERS -A , L.P., A DELAWARE
LIMITED PARTNERSHIP (THE "PARTNERSHIP"), OWNING THE NUMBER OF GENERAL
PARTNER INTERESTS IN THE PARTNERSHIP ABOVE SPECIFIED, EACH GENERAL
PARTNER INTEREST HAVING AN INITIAL PURCHASE PRICE FROM THE PARTNERSHIP
OF ONE THOUSAND DOLLARS ($1,000.00). EACH GENERAL PARTNER INTEREST IS
SUBJECT TO ALL OF THE TERMS AND CONDITIONS OF THE AGREEMENT OF
PARTNERSHIP OF THE PARTNERSHIP AND ENTITLED TO ALL THE RIGHTS AND
PRIVILEGES STATED THEREIN. THIS CERTIFICATE IS INTENDED SOLELY TO
PROVIDE IN CONCISE FORM CERTAIN INFORMATION ABOUT THE OWNERSHIP OF
GENERAL PARTNER INTERESTS IN THE PARTNERSHIP. ALL RIGHTS, OBLIGATIONS
AND OTHER ATTRIBUTES (INCLUDING THOSE RELATING TO ASSIGNMENT AND
TRANSFER) PERTAINING TO THE GENERAL PARTNER INTERESTS DESCRIBED IN THIS
CERTIFICATE ARE SET FORTH IN AND GOVERNED BY THE AGREEMENT OF
PARTNERSHIP OF THE PARTNERSHIP, TO WHICH REFERENCE MUST BE MADE FOR
DESCRIPTION OF SUCH RIGHTS, OBLIGATIONS AND OTHER ATTRIBUTES. THIS
CERTIFICATE IS NOT VALID UNLESS EXECUTED BY AN AUTHORIZED OFFICER OF
THE MANAGING PARTNER OF THE PARTNERSHIP.
MEWBOURNE ENERGY PARTNERS, -A, L.P.
BY: MEWBOURNE DEVELOPMENT CORPORATION,
MANAGING PARTNER
DATED: BY:
------------- ------------------------------------
J. ROE BUCKLEY, TREASURER
================================================================================
<PAGE> 2
This Certificate and the Agreement of Partnership of the Partnership
are your evidence of ownership of General Partner Interests, and both should be
retained. This Certificate should be submitted to the Partnership in the event
of any proposed change in ownership of your General Partner Interests.
For transfer purposes, please return this Certificate to Mewbourne
Development Corporation, Investor Services Department, 3901 S. Broadway, Tyler,
Texas 75701, (903) 561-2900.
For Value received, the undersigned hereby sells, assigns and transfers
_________________ of the General Partner Interests represented by this
Certificate unto:
------------------------------------------------------
(Print Name of Transferee)
------------------------------------------------------
(Street Address of Transferee)
------------------------------------------------------
(City) (State) (Zip)
and does hereby irrevocably constitute and appoint the Managing Partner attorney
to transfer the said General Partner Interests on the books of the Partnership
with full power of substitution.
Subject to the terms of Section 8.1 of the Agreement of Partnership of the
Partnership, the undersigned consents/does not consent to the above-named
transferee's becoming a substituted General Partner in the Partnership.
Date:
-------------------------------
------------------------------------------------------------------------------
(Signature* of General Partner Interest Holder or Authorized Representative)
------------------------------------------------------------------------------
(Signature* of Joint General Partner Interest Holder)
------------------------------------------------------------------------------
(Printed Name of General Partner Interest Holder)
------------------------------------------------------------------------------
(Printed Name of Joint General Partner Interest Holder)
Signed in presence of:
---------------------------------------------------------
(Witness)
*NOTE: Please sign your name exactly as it is shown on the Certificate. When
General Partner Interests are held by joint tenants, both should sign. When
signing as attorney, executor, administrator, trustee, or guardian, please give
full title as such. If a corporation, please sign in full corporate name by an
authorized corporate officer, and indicate corporate office held by person
signing. If a partnership, please sign in partnership name by authorized person.
<PAGE> 1
EXHIBIT 10.2
ESCROW AGREEMENT
This Escrow Agreement (herein so called), dated , 1999, made by and
between Mewbourne Development Corporation, a Delaware corporation ("MD"), and
Bank of America of Texas, N.A. ("Escrow Agent");
WHEREAS, MD will serve as the Managing Partner of Mewbourne Energy
Partners 99-A L.P. and Mewbourne Energy Partners 00-A, L.P (the "Partnerships")
in which general and limited partnership interests (collectively, the
"Interests") are to be offered and sold in an offering pursuant to the
Securities Act of 1933 as amended;
WHEREAS, the Partnerships will participate with MD and Mewbourne Oil
Company ("MOC"), in a program for the purpose of developing oil and gas
prospects through drilling and producing oil and gas thereon (the "Programs");
WHEREAS, the Form S-1 Registration Statement (the "Statement") dated ,
1999 relating to the interests to be sold provides that subscription proceeds
for such Interests ("Subscription Proceeds") from investors who are initially
approved by MD will be deposited in an escrow account with Escrow Agent and may
not be contributed to the capital of a Partnership unless at the end of the
subscription period for the Partnership aggregate Subscription Proceeds of over
$1,000,000 have been received and accepted for such Partnership and certain
other conditions have been met;
WHEREAS, the Statement relating to the Interests to be sold provides
that investors desiring to purchase Interests in a Partnership shall provide MD
with certain information concerning their suitability for investment in a
Partnership by completing the Subscription Agreement (the "Subscription
Agreement"); and
WHEREAS, MD desires that Escrow Agent provide procedures for the
deposit and safekeeping of the Subscription Proceeds and delivery of the
Subscription Agreement to MD subject to the terms of this Escrow Agreement;
NOW, THEREFORE, in consideration of the mutual promises herein set
forth, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties thereto covenant and
agree as follows:
1. Escrow Period. The term of this Escrow Agreement shall begin on the
effective date of the Statement and shall terminate in accordance with Section
7 below.
2. Escrow Account and Deposit of Escrow Funds. For the Partnerships,
Escrow Agent shall open a special trust account (the "Account") at Bank of
America of Texas, N.A. for and in the name of Bank of America of Texas, N.A. as
Escrow Agent under this Escrow Agreement. Following receipt by Escrow Agent of
the Subscription Agreement and Subscription Proceeds for the purchase of
Interests in a Partnership, the Subscription Agreement shall be promptly
delivered to MD and the instruments representing the Subscription Proceeds
shall be deposited and maintained by Escrow Agent in accordance with the terms
of this Escrow Agreement. The Subscription Proceeds so deposited, together with
any and all interest earned thereon, are referred to as the "Escrow Funds."
3. Duties of Escrow Agent. The Escrow Agent shall have the following
general duties (a) to promptly deliver the Subscription Agreement to MD; (b) to
deposit and safely maintain the
<PAGE> 2
Escrow Funds in the Account, guarding at all times against the commingling
thereof with any funds of MD or its affiliates during the term of this Escrow
Agreement; (c) at the direction of MD, to invest the Escrow Funds in
investments that are permissible under rule 15c2-4 promulgated by the
Securities and Exchange Commission under the Securities Exchange Act of 1934,
as amended, including, without limitation (if permissible), time deposits,
short-term bank certificates of deposit, short-term governmental obligations
and bank money market accounts to be held by Escrow Agent; (d) to prepare and
maintain true and complete records with respect to the Escrow Funds, including
the name of each subscriber and the portion of the Escrow Funds from time to
time attributable to him; and (e) to disburse the Escrow Funds in accordance
with the terms of this Escrow Agreement.
4. Payment of Escrow Funds. The Escrow Funds, or portions thereof,
shall be paid out by Escrow Agent in accordance with written instructions from
MD as follows: (a) to each subscriber, if any, whose subscription has been
rejected by MD within five business days after the clearance of those Escrow
Funds, that portion of the Escrow Funds attributable to that subscriber as
shown on Escrow Agent's records, including any interest earned thereon; (b) to
each subscriber, if any, whose Subscription Proceeds have not been contributed
to a Partnership prior to the termination of the offering period for Interests
in the Partnership, and any subscriber who may be rejected as an Investor
Partner subsequent to the period described in Subsection (a) of this Section 4,
that portion of the Escrow Funds attributable to the rejected subscriber as
shown on Escrow Agent's records together with any interest attributable thereto
(as calculated by MD); (c) to each subscriber, if any, whose subscription has
been reduced, that portion of the Escrow Funds equal to the amount of such
reduction attributable thereto as shown on Escrow Agent's records; (d) to MD
for distribution to each subscriber within 60 days of closing of a Partnership,
that portion of accrued and unpaid interest on the Escrow Funds relating to
that Partnership, which Escrow Funds were deposited no fewer than five business
days prior to the termination of the offering of Interests in that Partnership,
attributable to that subscriber as shown on Escrow Agent's records; and (e) to
an account for a Partnership all remaining Escrow Funds attributable to that
Partnership. Notwithstanding the foregoing, no portion of the Escrow Funds may
be paid to a Partnership unless the Escrow Agent shall have the excess of
$1,000,000 in Escrow Funds with respect to the Partnership and MD informs the
Escrow Agent in writing that aggregate Subscription Proceeds for Interests in
such Partnership of $1,000,000 or more have been received and cleared from
subscribers that MD initially approves as suitable to be Investor Partners (as
set forth in the Statement) in the Partnership. Notwithstanding the provisions
of this Section 4, or any other provision of this Escrow Agreement, after the
Escrow Agent shall have in excess of $1,000,000 in Escrow Funds with respect to
a Partnership and MD informs the Escrow Agent in writing that aggregate
Subscription Proceeds for Interests in that Partnership of $1,000,000 or more
have been received and cleared by Escrow Agent, upon the written request of MD,
Escrow Agent shall disburse all or any portion of the Escrow Funds to an
account established by MD for the Partnership.
Notwithstanding anything contained herein to the contrary, it is
expressly contemplated by MD and the Escrow Agent that MD shall be solely
responsible for all computations and disbursements of interest and the
preparation and mailing of all forms with respect thereto, including without
limitation Form 1099 as is contemplated in Subsections (b), (c), and (d) of
this Section 4. The Escrow Agent shall deliver to MD from time to time such
records and information which are available to Escrow Agent and are necessary
to make the computations of interest contemplated herein.
2
<PAGE> 3
5. Expenses and Compensation. All expenses incurred by Escrow Agent in
connection with this Escrow Agreement and the compensation of Escrow Agent set
forth in Exhibit 1 hereto shall be charged to MD and MD agrees to pay promptly
all such expenses and compensation following receipt of an invoice therefor.
6. Escrow Agent. MD and Escrow Agent agree that the following
provisions shall control with respect to the rights, duties, liabilities,
privileges and immunities of Escrow Agent: (a) Escrow Agent is not a party to,
and is not bound by, any agreement or other document out of which this Escrow
Agreement may rise; (b) Escrow Agent is not responsible or liable in any manner
whatsoever for the sufficiency, correctness, genuineness, or validity of the
subject matter of this Escrow Agreement; (c) Escrow Agent shall be protected in
acting upon any written notice, request, waiver, consent, certificate, receipt,
authorization, agreement, power of attorney, or other instrument that Escrow
Agent in good faith believes to be genuine and what it purports to be.
As between MD and the Escrow Agent, MD agrees to indemnify the Escrow
Agent and its officers, directors, employees, agents and attorneys
(collectively, the "Indemnified Parties") against and hold the Indemnified
Parties harmless from any and all losses, costs, damages, expenses, claims, and
attorney's fees suffered or incurred by the Indemnified Parties as a result of,
in connection with or arising from or out of the acts of omissions of any
Indemnified Party in performance of or pursuant to this Escrow Agreement,
except such acts or omissions as may result from such Indemnified Party's
willful misconduct or gross negligence.
All protections and indemnitees benefitting the Escrow Agent (and any
other Indemnified Party) are cumulative of any other rights it (or they) may
have by law or otherwise, and shall survive the termination of the Escrow
Agreement or the resignation or removal of the Escrow Agent.
7. Termination. This Escrow Agreement shall terminate upon the first
to occur of any one of the following: December 31, 1998; (a) the full
disbursement of the Escrow Funds with respect to the final Partnership; (b) the
written agreement of termination by MD and Escrow Agent; or (c) the
dissolution, insolvency, or involuntary bankruptcy of MD or an affiliate
thereof.
8. Miscellaneous.
(a) All notices, demands, requests, and other communications
required or permitted hereunder shall be in writing and shall be deemed to be
delivered when actually received at the address of the addressee set forth
below its name on the signature page of this Escrow Agreement. The rights and
obligations under this Escrow Agreement may not be assigned or delegated by any
party hereto without the prior written consent of the other party hereto. This
Escrow Agreement constitutes the entire agreement and supersedes all other
prior agreements and understandings, whether oral or written, between the
parties hereto with respect to the subject matter hereof;
(b) The Escrow Agent may consult with and rely on the advice
of counsel satisfactory to it at any time in respect to any question relating
to its duties and responsibilities hereunder or otherwise in connection
herewith, and shall not be liable for any action taken suffered, or omitted by
the Escrow Agent in good faith upon the advice of such counsel, and shall be
fully protected in doing so, and shall be fully compensated for all costs and
expenses in doing so. The Escrow Agent may act through its officers, employees,
agents and attorneys;
3
<PAGE> 4
(c) Any check included in the Escrow Funds shall be collected
by the Escrow Agent and the proceeds held as part of the Escrow Funds. No
monies shall be disbursed by the Escrow Agent until it has collected funds. The
Escrow Agent may pay out monies held in escrow by its check. The Escrow Agent
shall not be obligated to take any legal action to enforce payment of any item
deposited with it in escrow;
(d) The Escrow Agent shall not be liable for any action that
it may do or refrain from doing in connection herewith, except on account of
its own gross negligence or willful misconduct;
(e) The Escrow Agent's only duty, liability and
responsibility shall be to deliver the Subscription Agreements to MD and to
hold the property as herein directed and to pay and deliver the same to such
persons and under such conditions as are herein set forth;
(f) Should any controversy arise between any party with
respect to this agreement, the Escrow Agreement shall have the right to
institute a bill of interpleader in any court of competent jurisdiction to
determine the rights of the parties. Should a bill of interpleader be
instituted, or should the Escrow Agent become involved in litigation in any
manner whatsoever on account of this Agreement or the escrow deposit made
hereunder, the obligor, its successors and assigns shall pay the Escrow Agent
reasonable attorneys' fees incurred by the Escrow Agent and shall indemnify and
save the Escrow Agent harmless from any other disbursements, expenses, losses,
costs and damages in connection with and resulting from such litigation, except
such amounts as shall have been caused by the Escrow Agent's gross negligence
or willful misconduct;
(g) The Escrow Agent shall be obligated to perform only such
duties as are expressly set forth herein, and no implied covenants or
obligations shall be inferred from this Agreement;
(h) The Escrow Agent, or any successor to it hereafter
appointed, may at any time resign by giving prior written notice in writing to
the other parties hereto and shall be discharged from its duties hereunder upon
the appointment of a successor Escrow Agent as hereinafter provided. In the
event of any such resignation, a successor Escrow Agent shall be appointed by
the written consent of the parties hereto. In the event that the parties hereto
fail to appoint a successor Escrow Agent within 30 days of the Escrow Agent's
resignation, the Escrow Agent shall have the right to petition a court of
competent jurisdiction to appoint a successor Escrow Agent. Any successor
Escrow Agent shall deliver to the parties hereto a written instrument accepting
the appointment hereunder, and thereupon it shall succeed to all the rights and
duties of the Escrow Agent hereunder and shall be entitled to receive all of
the Escrow Funds then held by the predecessor Escrow Agent hereunder;
(i) THIS ESCROW AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, EXCEPT THAT THE PORTIONS OF
THE TEXAS TRUST CODE, SECTION 111.001, ET SEQ. OF THE PROPERTY CODE, V.A.T.S.
CONCERNING FIDUCIARY DUTIES AND LIABILITIES OF TRUSTEES SHALL NOT APPLY TO THIS
AGREEMENT. THE PARTIES EXPRESSLY WAIVE SUCH DUTIES AND LIABILITIES, IT BEING
THEIR INTENT TO CREATE SOLELY AN AGENCY RELATIONSHIP AND HOLD ESCROW AGENT
LIABLE ONLY IN THE EVENT OF ITS GROSS NEGLIGENCE OR WILLFUL MISCONDUCT IN ORDER
TO OBTAIN THE
4
<PAGE> 5
LOWER FEE SCHEDULE RATES AS SPECIFICALLY NEGOTIATED WITH ESCROW AGENT. ANY
LITIGATION CONCERNING THE SUBJECT MATTER OF THIS AGREEMENT SHALL BE EXCLUSIVELY
PROSECUTED IN THE COURTS OF DALLAS COUNTY, TEXAS, AND ALL PARTIES CONSENT TO
THE EXCLUSIVE JURISDICTION AND VENUE OF THOSE COURTS.
IN WITNESS WHEREOF, the undersigned parties have caused this Escrow
Agreement to be signed and attested to by its duly authorized officers, all as
of the date first written above.
ESCROW AGENT:
BANK OF AMERICA OF TEXAS, N.A.
By:
--------------------------------------
Address: Attn: Bank of America Trust
3301 Golden Road
Tyler, Texas 75701
Fax No.: (903) 510-5045
MEWBOURNE DEVELOPMENT CORPORATION
By
--------------------------------------
Address: 3901 South Broadway
Tyler, Texas 75701
Fax No.: (903) 561-1870
5
<PAGE> 1
EXHIBIT 10.3
A.A.P.L. FORM 610 - 1989
MODEL FORM OPERATING AGREEMENT
OPERATING AGREEMENT
DATED
_____________, 19____,
OPERATOR
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CONTRACT AREA See Attached Exhibit "A"
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- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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COUNTY OR PARISH OF , STATE OF
--------------------------- -----------------------
COPYRIGHT 1989 ALL RIGHT RESERVED
AMERICAN ASSOCIATION OF PETROLEUM
LANDMEN, 4100 FOSSIL CREEK BLVD. FORT
WORTH, TEXAS. 76137. APPROVED FORM.
A.A.P.L NO. 610 - 1989
<PAGE> 2
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Article Title Page
<S> <S> <C>
I. DEFINITIONS..............................................................................................1
II. EXHIBITS.................................................................................................3
III. INTERESTS OF PARTIES.....................................................................................3
A. OIL AND GAS INTERESTS...........................................................................3
B. INTERESTS AND PARTIES IN COSTS AND PRODUCTION...................................................3
C. SUBSEQUENTLY CREATED INTERESTS..................................................................4
IV. TITLES...................................................................................................5
A. TITLE EXAMINATION...............................................................................5
B. LOSS OR FAILURE OF TITLE........................................................................5
1. deleted................................................................................5
2. deleted................................................................................5
3. Other Losses...........................................................................5
4. deleted................................................................................6
V. OPERATOR.................................................................................................6
A. DESIGNATION AND RESPONSIBILITIES OF OPERATOR....................................................6
B. RESIGNATION OR REMOVAL OF OPERATOR AND SELECTION OF SUCCESSOR...................................6
1. Resignation or Removal of Operator.....................................................6
2. Selection of Successor Operator........................................................7
3. Effect of Bankruptcy...................................................................7
C. EMPLOYEES AND CONTRACTORS.......................................................................7
D. RIGHTS AND DUTIES OF OPERATOR...................................................................7
1. Competitive Rates and Use of Affiliates................................................7
2. Discharge of Joint Account Obligations.................................................7
3. Protection from Liens..................................................................8
4. Custody of Funds.......................................................................8
5. Access to Contract Area and Records....................................................8
6. Filing and Furnishing Governmental Reports.............................................8
7. Drilling and Testing Operations........................................................8
8. Cost Estimates.........................................................................9
9. Insurance..............................................................................9
VI. DRILLING AND DEVELOPMENT.................................................................................9
A. DELETED.........................................................................................9
B. SUBSEQUENT OPERATIONS...........................................................................9
1. Proposed Operations....................................................................9
2. Operations by Less Than All Parties...................................................10
3. Stand-By Costs........................................................................13
4. Deepening.............................................................................14
5. Sidetracking..........................................................................15
6. Order of Preference of Operations.....................................................15
7. Conformity to Spacing Pattern.........................................................15
8. Paying Wells..........................................................................15
C. COMPLETION OF WELLS; REWORKING AND PLUGGING BACK...............................................16
1. Completion............................................................................16
2. Rework, Recomplete or Plug Back.......................................................16
</TABLE>
(i)
<PAGE> 3
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
<TABLE>
<S> <S> <C>
D. OTHER OPERATIONS...............................................................................17
E. ABANDONMENT OF WELLS...........................................................................17
1. Abandonment of Dry Holes..............................................................17
2. Abandonment of Wells That Have Produced...............................................17
3. Abandonment of Non-Consent Operations.................................................18
F. TERMINATION OF OPERATIONS......................................................................19
G. TAKING PRODUCTION IN KIND......................................................................19
Option No. 1: Gas Balancing Agreement Attached.............................................19
Option No. 2: No Gas Balancing Agreement...................................................20
VII. EXPENDITURES AND LIABILITY OF PARTIES...................................................................21
A. LIABILITY OF PARTIES...........................................................................21
B. LIENS AND SECURITY INTERESTS...................................................................21
C. ADVANCES.......................................................................................23
D. DEFAULTS AND REMEDIES..........................................................................23
1. Suspension of Rights..................................................................23
2. Suit for Damages......................................................................24
3. Deemed Non-Consent....................................................................24
4. Advance Payment.......................................................................24
5. Costs and Attorneys' Fees.............................................................24
E. RENTALS, SHUT-IN WELL PAYMENTS AND MINIMUM ROYALTIES...........................................25
F. TAXES..........................................................................................25
VIII. ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST........................................................26
A. SURRENDER OF LEASES............................................................................26
B. RENEWAL OR EXTENSION OF LEASES.................................................................26
C. ACREAGE OR CASH CONTRIBUTIONS..................................................................27
D. ASSIGNMENT; MAINTENANCE OF UNIFORM INTEREST....................................................28
E. WAIVER OF RIGHTS TO PARTITION..................................................................28
F. PREFERENTIAL RIGHT TO PURCHASE.................................................................28
IX. INTERNAL REVENUE CODE ELECTION..........................................................................29
X. CLAIMS AND LAWSUITS.....................................................................................29
XI. FORCE MAJEURE...........................................................................................29
XII. NOTICES.................................................................................................30
XIII. TERM OF AGREEMENT.......................................................................................30
XIV. COMPLIANCE WITH LAWS AND REGULATIONS....................................................................31
A. LAWS, REGULATIONS AND ORDERS...................................................................31
B. GOVERNING LAW..................................................................................31
C. REGULATORY AGENCIES............................................................................31
XV. MISCELLANEOUS...........................................................................................32
A. EXECUTION......................................................................................32
B. SUCCESSORS AND ASSIGNS.........................................................................32
C. COUNTERPARTS...................................................................................32
D. SEVERABILITY...................................................................................33
XVI. OTHER PROVISIONS........................................................................................33
</TABLE>
(ii)
<PAGE> 4
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
OPERATING AGREEMENT
THIS AGREEMENT, entered into by and between__________________________,
hereinafter designated and referred to as "Operator," and the signatory party
or parties other than Operator, sometimes hereinafter referred to individually
as "Non-Operator", and collectively as "Non-Operators."
WITNESSETH:
WHEREAS, the parties to this agreement are owners of Oil and Gas
Leases and/or Oil and Gas Interests in the land identified in Exhibit "A", and
the parties hereto have reached an agreement to explore and develop these
Leases and/or Oil and Gas Interests for the production of Oil and Gas to the
extent and as hereinafter provided,
NOW, THEREFORE, it is agreed as follows:
ARTICLE I.
DEFINITIONS
As used in this agreement, the following words and terms shall have
the meanings here ascribed to them:
A. The term "AFE" shall mean an Authority for Expenditure prepared by
a party to this agreement for the purpose of estimating the costs to be
incurred in conducting an operation hereunder.
B. The term "Completion" or "Complete" shall mean a single operation
intended to complete a well as a producer of Oil and Gas in one or more Zones,
including, but not limited to, the setting of production casing, perforating,
well stimulation and production testing conducted in such operation.
C. The term "Contract Area" shall means all of the lands, Oil and Gas
Leases and/or Oil and Gas Interests intended to be developed and operated for
Oil and Gas purposes under this agreement. Such lands, Oil and Gas Leases and
Oil and Gas Interests are described in Exhibit "A".
D. The term "Deepen" shall mean a single operation whereby a well is
drilled to an objective Zone below the deepest Zone in which the well was
previously drilled, or below the Deepest Zone proposed in the associated AFE,
whichever is the lesser.
E. The terms "Drilling Party" and "Consenting Party" shall mean a
party who agrees to join in and pay its share of the cost of any operation
conducted under the provisions of this agreement.
F. The term "Drilling Unit" shall mean the area fixed for the drilling
of one well by order or rule of any state or federal body having authority. If
a Drilling Unit is not fixed by any such rule or order, a Drilling Unit shall
be the drilling unit as established by the pattern of drilling in the Contract
Area unless fixed by express agreement of the Drilling Parties.
G. The term "Drillsite" shall mean the Oil and Gas Lease or Oil and
Gas Interest on which a proposed well is to be located.
H. The term "Initial Well" shall mean the well required to be drilled
by the parties hereto as provided in Article VI.A.
<PAGE> 5
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
I. The term "Non-Consent Well" shall mean a well in which less than
all parties have conducted an operation as provided in Article VI.B.2.
J. The terms "Non-Drilling Party" and "Non-Consenting Party" shall
mean a party who elects not to participate in a proposed operation.
K. The term "Oil and Gas" shall mean oil, gas, casinghead gas, gas
condensate, and/or all other liquid or gaseous hydrocarbons and other
marketable substances produced therewith, unless an intent to limit the
inclusiveness of this term is specifically stated.
L. The term "Oil and Gas Interests" or "Interests" shall mean unleased
fee and mineral interests in Oil and Gas in tracts of land lying within the
Contract Area which are owned by parties to this agreement.
M. The terms "Oil and Gas Lease," "Lease" and "Leasehold" shall mean
the oil and gas leases or interests therein covering tracts of land lying
within the Contract Area which are owned by the parties to this agreement.
N. The term "Plug Back" shall mean a single operation whereby a deeper
Zone is abandoned in order to attempt a Completion in a shallower Zone.
O. The term "Recompletion" or "Recomplete" shall mean an operation
whereby a Completion in one Zone is abandoned in order to attempt a Completion
in a different Zone within the existing wellbore.
P. The term "Rework" shall mean an operation conducted in the wellbore
of a well after it is Completed to secure, restore, or improve production in a
Zone which is currently open to production in the wellbore. Such operations
include, but are not limited to, well stimulation operations but exclude any
routine repair or maintenance work or drilling, Sidetracking, Deepening,
Completing, Recompleting, or Plugging Back of a well.
Q. The term "Sidetrack" shall mean the directional control and
intentional deviation of a well from vertical so as to change the bottom hole
location unless done to straighten the hole or to drill around junk in the hole
to overcome other mechanical difficulties.
R. The term "Zone" shall mean a stratum of earth containing or thought
to contain a common accumulation of Oil and Gas separately producible from any
other common accumulation of Oil and Gas.
Unless the context otherwise clearly indicates, words used in the
singular include the plural, the word "person" includes natural and artificial
persons, the plural includes the singular, and any gender includes the
masculine, feminine, and neuter.
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<PAGE> 6
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
ARTICLE II.
EXHIBITS
The following exhibits, as indicated below and attached hereto, are
incorporated in and made a part hereof:
X A. Exhibit "A" shall include the following information:
- -----
(1) Description of lands subject to this agreement,
(2) Restrictions, if any, as to depths, formations, or
substances,
(3) Parties to agreement with addresses and telephone numbers
for notice purposes,
(4) Percentages or fractional interests of parties to this
agreement.
X B. Exhibit "B," Form of Lease.
- -----
X C. Exhibit "C," Accounting Procedure.
- -----
X D. Exhibit "D," Insurance.
- -----
X E. Exhibit "E," Gas Balancing Agreement.
- -----
F. Exhibit "F," Non-Discrimination and Certification of
Non-Segregated Facilities.
G. Exhibit "G," Tax Partnership.
H. Other:
-------------------------------------------------------
If any provision of any exhibit, except Exhibits "E," "F" and "G," is
inconsistent with any provision contained in the body of this agreement, the
provisions in the body of this agreement shall prevail.
ARTICLE III.
INTERESTS OF PARTIES
A. OIL AND GAS INTERESTS:
If any party owns an Oil and Gas Interest in the Contract Area, that
Interest shall be treated for all purposes of this agreement and during the
term hereof as if it were covered by the form of Oil and Gas Lease attached
hereto as Exhibit "B," and the owner thereof shall be deemed to own both
royalty interest in such lease and the interest of the lessee thereunder.
B. INTERESTS AND PARTIES IN COSTS AND PRODUCTION:
Unless changed by other provisions, all costs and liabilities incurred
in operations under this agreement shall be borne and paid, and all equipment
and materials acquired in operations on the Contract Area shall be
-3-
<PAGE> 7
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
owned, by the parties as their interests are set forth in Exhibit "A." In the
same manner, the parties shall also own all production of Oil and Gas from the
Contract Area subject, however, to the payment of royalties and other burdens
on production as described hereafter.
Regardless of which party has contributed any Oil and Gas Lease or Oil
and Gas Interest on which royalty or other burdens may be payable and except as
otherwise expressly provided in this agreement, each party shall pay or
deliver, or cause to be paid or delivered, all burdens on its share of the
production from the Contract Area up to, but not in excess of, the amount of
such burdens and shall indemnify, defend and hold the other parties free from
any liability therefor. Except as otherwise expressly provided in this
agreement, if any party has contributed hereto any Lease or Interest which is
burdened with any royalty, overriding royalty, production payment or other
burden on production in excess of the amounts stipulated above, such party so
burdened shall assume and alone bear all such excess obligations and shall
indemnify, defend and hold the other parties hereto harmless from any and all
claims attributable to such excess burden. However, so long as the Drilling
Unit for the productive Zone(s) is identical with the Contract Area, each party
shall pay or deliver, or cause to be paid or delivered, all burdens on
production from the Contract Area due under the terms of the Oil and Gas
Lease(s) which such party has contributed to this agreement, and shall
indemnify, defend and hold the other parties free from any liability therefor.
No party shall ever be responsible, on a price basis higher than the
price received by such party, to any other party's lessor or royalty owner, and
if such other party's lessor or royalty owner should demand and receive
settlement on a higher price basis, the party contributing the affected Lease
shall bear the additional royalty burden attributable to such higher price.
Nothing contained in this Article III.B. shall be deemed an assignment
or cross-assignment of interests covered hereby, and in the event two or more
parties contribute to this agreement jointly owned Leases, the parties'
undivided interests in said Leaseholds shall be deemed separate leasehold
interests for the purposes of this agreement.
C. SUBSEQUENTLY CREATED INTERESTS:
If any party has contributed hereto a Lease or Interest that is
burdened with an assignment of production given as security for the payment of
money, or if, after the date of this agreement, any party creates an overriding
royalty, production payment, net profits interest, assignment of production or
other burden payable out of production attributable to its working interest
hereunder, such burden shall be deemed a "Subsequently Created Interest."
Further, if any party has contributed hereto a Lease or Interest burdened with
an overriding royalty, production payment, net profits interest, or other
burden payable out of production created prior to the date of this agreement,
and such burden is not shown on Exhibit "A," such burden also shall be deemed a
Subsequently Created Interest to the extent such burden causes the burdens on
such party's Lease or Interest to exceed the amount stipulated in Article
III.B. above.
The party whose interest is burdened with the Subsequently Created
Interest (the "Burdened Party") shall assume and alone bear, pay and discharge
the Subsequently Created Interest and shall indemnify, defend and hold harmless
the other parties from and against any liability therefor. Further, if the
Burdened Party fails to pay, when due, its share of expenses chargeable
hereunder, all provisions of Article VII.B. shall be enforceable against the
Subsequently Created Interest in the same manner as they are enforceable
against the working interest of the Burdened Party. If the Burdened Party is
required under this agreement to assign or relinquish to any other party, or
parties, all or a portion of its working interest and/or the production
attributable thereto, said other party, or parties, shall receive said
assignment and/or production free and clear
-4-
<PAGE> 8
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
of said Subsequently Created Interest, and the Burdened Party shall indemnify,
defend and hold harmless said other party, or parties, from any and all claims
and demands for payment asserted by owners of the Subsequently Created
Interest.
ARTICLE IV.
TITLES
A. TITLE EXAMINATION:
Title examination shall be made on the Drillsite of any proposed well
prior to commencement of drilling operations and, if a majority in interest of
the Drilling Parties so request or Operator so elects, title examination shall
be made on the entire Drilling Unit, or maximum anticipated Drilling Unit, of
the well. The opinion will include the ownership of the working interest,
minerals, royalty, overriding royalty and production payments under the
applicable Leases. Each party contributing Leases and/or Oil and Gas Interests
to be included in the Drillsite or Drilling Unit, if appropriate, shall furnish
to Operator all abstracts (including federal lease status reports), title
opinions, title papers and curative material in its possession free of charge.
All such information not in the possession of or made available to Operator by
the parties, but necessary for the examination of the title, shall be obtained
by Operator. Operator shall cause title to be examined by attorneys on its
staff or by outside attorneys. Copies of all title opinions shall be furnished
to each Drilling Party. Costs incurred by Operator in procuring abstracts, fees
paid outside attorneys for title examination (including preliminary,
supplemental, shut-in royalty opinions and division order title opinions) and
other direct charges as provided in Exhibit "C" shall be borne by the Drilling
Parties in the proportion that the interest of each Drilling Party bears to the
total interest of all Drilling Parties as such interests appear in Exhibit "A."
Each party shall be responsible for securing curative matter and
pooling amendments or agreements required in connection with Leases or Oil and
Gas Interests contributed by such party. Operator shall be responsible for the
preparation and recording of pooling designations or declarations and
communication agreements as well as the conduct of hearings before governmental
agencies for the securing of spacing or pooling orders or any other orders
necessary or appropriate to the conduct of operations hereunder. This shall not
prevent any party from appearing on its own behalf at such hearings. Costs
incurred by Operator, including fees paid to outside attorneys, which are
associated with hearings before governmental agencies, and which costs are
necessary and proper for the activities contemplated under this agreement,
shall be direct charges to the joint account and shall not be covered by the
administrative overhead charges in Exhibit "C."
No well shall be drilled on the Contract Area until after (1) the
title to the Drillsite or Drilling Unit, if appropriate, has been examined as
above provided, and (2) the title has been approved by the examining attorney
or title has been accepted by Operator.
B. LOSS OR FAILURE OF TITLE:
1. deleted
2. deleted
3. Other Losses: All losses of Leases or Interests committed to this
agreement, shall be joint losses and shall be borne by all parties in
proportion to their interests shown on Exhibit "A." This shall include but not
be limited to the loss of any Lease or Interest through failure to develop or
because express or implied
-5-
<PAGE> 9
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
covenants have not been performed (other than performance which requires only
the payment of money), and the loss of any Lease by expiration at the end of
its primary term if it is not renewed or extended. There shall be no
readjustment of interests in the remaining portion of the Contract Area on
account of any joint loss.
4. deleted
ARTICLE V.
OPERATOR
A. DESIGNATION AND RESPONSIBILITIES OF OPERATOR:
__________________________________________ shall be the Operator of
the Contract Area, and shall conduct and direct and have full control of all
operations on the Contract Area as permitted and required by, and within the
limits of this agreement. In its performance of services hereunder for the
Non-Operators, Operator shall be an independent contractor not subject to the
control or direction of the Non-Operators except as to the type of operation to
be undertaken in accordance with the election procedures contained in this
agreement. Operator shall not be deemed, or hold itself out as, the agent of
the Non-Operators with authority to bind them to any obligation or liability
assumed or incurred by Operator as to any third party. Operator shall conduct
its activities under this agreement as a reasonable prudent operator, in a good
and workmanlike manner, with due diligence and dispatch, in accordance with
good oilfield practice, and in compliance with applicable law and regulation,
but in no event shall it have any liability as Operator to the other parties
for losses sustained or liabilities incurred except such as may result from
gross negligence or willful misconduct.
B. RESIGNATION OR REMOVAL OF OPERATOR AND SELECTION OF SUCCESSOR:
1. Resignation or Removal of Operator: Operator may resign at any time
by giving written notice thereof to Non-Operators. If Operator terminates its
legal existence, or is no longer capable of serving as Operator, Operator shall
be deemed to have resigned without any action by Non-Operators, except the
selection of a successor. Operator may be removed only for good cause by the
affirmative vote of Non-Operators owning a majority interest based on ownership
as shown on Exhibit "A" remaining after excluding the voting interest of
Operator; such vote shall not be deemed effective until a written notice has
been delivered to the Operator by a Non-Operator detailing the alleged default
and Operator has failed to cure the default within thirty (30) days from its
receipt of the notice or, if the default concerns an operation then being
conducted, within forty-eight (48) hours of its receipt of the notice. For
purposes hereof, "good cause" shall mean not only gross negligence or willful
misconduct but also the material breach of or inability to meet the standards
of operation contained in Article V.A. or material failure or inability to
perform its obligations under this agreement.
Subject to Article VII.D.1., such resignation or removal shall not
become effective until 7:00 o'clock A.M. on the first day of the calendar month
following the expiration of ninety (90) days after the giving of notice of
resignation by Operator or action by the Non-Operators to remove Operator,
unless a successor Operator has been selected and assumes the duties of
Operator at an earlier date. Operator, after effective date of resignation or
removal, shall be bound by the terms hereof as a Non-Operator. A change of a
corporate name or structure of Operator or transfer of Operator's interest to
any single subsidiary, parent or successor corporation or other affiliated
entity shall not be the basis for removal of Operator.
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
2. Selection of Successor Operator: Upon the resignation or removal of
Operator under any provision of this agreement, a successor Operator shall be
selected by the parties. The successor Operator shall be selected from the
parties owning an interest in the Contract Area at the time such successor
Operator is selected. The successor Operator shall be selected by the
affirmative vote of two (2) or more parties owning a majority interest based on
ownership as shown on Exhibit "A;" provided, however, if an Operator which has
been removed or is deemed to have resigned fails to vote or votes only to
succeed itself, the successor Operator shall be selected by the affirmative
vote of the party or parties owning a majority interest based on ownership as
shown on Exhibit "A" remaining after excluding the voting interest of the
Operator that was removed or resigned. The former Operator shall promptly
deliver to the successor Operator all records and data relating to the
operations conducted by the former Operator to the extent such records and data
are not already in the possession of the successor operator. Any cost of
obtaining or copying the former Operator's records and data shall be charged to
the joint account.
3. Effect of Bankruptcy: If Operator becomes insolvent, bankrupt or is
placed in receivership, it shall be deemed to have resigned without any action
by Non-Operators, except the selection of a successor. If a petition for relief
under the federal bankruptcy laws is filed by or against Operator, and the
removal of Operator is prevented by the federal bankruptcy court, all
Non-Operators and Operator shall comprise an interim operating committee to
serve until Operator has elected to reject or assume this agreement pursuant to
the Bankruptcy Code, and an election to reject this agreement by Operator as
debtor in possession, or by a trustee in bankruptcy, shall be deemed a
resignation as Operator without any action by Non-Operators, except the
selection of a successor. During the period of time the operating committee
controls operations, all actions shall require the approval of two (2) or more
parties owning a majority interest based on ownership as shown on Exhibit "A."
In the event there are only two (2) parties to this agreement, during the
period of time the operating committee controls operations, a third party
acceptable to Operator, Non-Operator and the federal bankruptcy court shall be
selected as a member of the operating committee, and all actions shall require
the approval of two (2) members of the operating committee without regard for
their interest in the Contract Area based on Exhibit "A."
C. EMPLOYEES AND CONTRACTORS:
The number of employees or contracts used by Operator in conducting
operations hereunder, their selection, and the hours of labor and the
compensation for services performed shall be determined by Operator, and all
such employees or contractors shall be the employees or contractors of
Operator.
D. RIGHTS AND DUTIES OF OPERATOR:
1. Competitive Rates and Use of Affiliates: All wells drilled on the
Contract Area shall be drilled on a competitive contract basis at the usual
rates prevailing in the area. If it so desires, Operator may employ its own
tools and equipment in the drilling of wells, but its charges therefor shall
not exceed the prevailing rates in the area and the rate of such charges shall
be agreed upon by the parties in writing before drilling operating are
commenced, and such work shall be performed by Operator under the same terms
and conditions as are customary and usual in the area in contracts of
independent contractors who are doing work of a similar nature. All work
performed or materials supplied by affiliates or related parties of Operator
shall be performed or supplied at competitive rates, pursuant to written
agreement, and in accordance with customs and standards prevailing in the
industry.
2. Discharge of Joint Account Obligations: Except as herein otherwise
specifically provided, Operator shall promptly pay and discharge expenses
incurred in the development and operation of the Contract
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
Area pursuant to this agreement and shall charge each of the parties hereto
with their respective proportionate shares upon the expense basis provided in
Exhibit "C." Operator shall keep an accurate record of the joint account
hereunder, showing expenses incurred and charges and credits made and received.
3. Protection from Liens: Operator shall pay, or cause to be paid, as
and when they become due and payable all accounts of contractors and suppliers
and wages and salaries for services rendered or performed, and for materials
supplied on, to or in respect of the Contract Area or any operations for the
joint account thereof, and shall keep the Contract Area free from liens and
encumbrances resulting therefrom except for those resulting from a bona fide
dispute as to services rendered or materials supplied.
4. Custody of Funds: Operator shall hold for the account of the
Non-Operators any funds of the Non-Operators advanced or paid to the Operator,
either for the conduct of operations hereunder or as a result of the sale of
production from the Contract Area, and such funds shall remain the funds of the
Non-Operators on whose account they are advanced or paid until used for their
intended purpose or otherwise delivered to the Non-Operators or applied toward
the payment of debts as provided in Article VII.B. Nothing in this paragraph
shall be construed to establish a fiduciary relationship between Operator and
Non-Operators for any purpose other than to account for Non-Operator funds as
herein specifically provided. Nothing in this paragraph shall require the
maintenance by Operator of separate accounts for the funds of Non-Operators
unless the parties otherwise specifically agree.
5. Access to Contract Area and Records: Operator shall, except as
otherwise provided herein, permit each Non-Operator or its duly authorized
representative, at the Non-Operator's sole risk and cost, full and free access
at all reasonable times to all operations of every kind and character being
conducted for the joint account on the Contract Area and to the records of
operations conducted thereon or production therefrom, including Operator's
books and records relating thereto. Such access rights shall not be exercised
in a manner interfering with Operator's conduct of an operation hereunder and
shall not obligate Operator to furnish any geologic or geophysical data of an
interpretive nature unless the cost of preparation of such interpretive data
was charged to the joint account. Operator will furnish to each Non-Operator
upon request copies of any and all reports and information obtained by Operator
in connection with production and related items, including, without limitation,
meter and chart reports, production purchaser statements, run tickets and
monthly gauge reports, but excluding purchase contracts and pricing information
to the extent not applicable to the production of the Non-Operator seeking the
information. Any audit of Operator's records relating to amounts expended and
the appropriateness of such expenditures shall be conducted in accordance with
the audit protocol specified in Exhibit "C."
6. Filing and Furnishing Governmental Reports: Operator will file, and
upon written request promptly furnish copies to each requesting Non-Operator
not in default of its payment obligations, all operational notices, reports or
applications required to be filed by local, State, Federal or Indian agencies
or authorities having jurisdiction over operations hereunder. Each Non-Operator
shall provide to Operator on a timely basis all information necessary to
Operator to make such filings.
7. Drilling and Testing Operations: The following provisions shall
apply to each well drilled hereunder, including but not limited to the Initial
Well:
(a) Operator will promptly advise Non-Operators of the date
on which the well is spudded, or the date on which drilling operations are
commenced.
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
(b) Operator will send to Non-Operators such reports, test
results and notices regarding the progress of operations on the well as the
Non-Operators shall reasonably request, including, but not limited to, daily
drilling reports, completion reports, and well logs.
(c) Operator shall adequately test all Zones encountered
which may reasonably be expected to be capable of producing Oil and Gas in
paying quantities as a result of examination of the electric log or any other
logs or cores or tests conducted hereunder.
8. Cost Estimates: Upon request of any Consenting Party, Operator
shall furnish estimates of current and cumulative costs incurred for the joint
account at reasonable intervals during the conduct of any operation pursuant to
this agreement. Operator shall not be held liable for errors in such estimates
so long as the estimates are made in good faith.
9. Insurance: At all times while operations are conducted hereunder,
Operator shall comply with the workers compensation law of the state where the
operations are being conducted; provided, however, that Operator may be a
self-insurer for liability under said compensation laws in which event the only
charge that shall be made to the joint account shall be as provided in Exhibit
"C." Operator shall also carry or provide insurance for the benefit of the
joint account of the parties as outlined in Exhibit "D" attached hereto and
made a part hereof. Operator shall require all contractors engaged in work on
or for the Contract Area to comply with the workers compensation law of the
state where the operations are being conducted and to maintain such other
insurance as Operator may require.
In the event automobile liability insurance is specified in said
Exhibit "D," or subsequently receives the approval of the parties, not direct
charge shall be made by Operator for premiums paid for such insurance for
Operators's automotive equipment.
ARTICLE VI.
DRILLING AND DEVELOPMENT
A. DELETED
B. SUBSEQUENT OPERATIONS:
1. Proposed Operations: If any party hereto should desire to drill any
well on the Contract Area other than the Initial Well, or if any party should
desire to Rework, Sidetrack, Deepen, Recomplete or Plug Back a dry hole or a
well no longer capable of producing in paying quantities in which such party
has not otherwise relinquished its interest in the proposed objective Zone
under this agreement, the party desiring to drill, Rework, Sidetrack, Deepen,
Recomplete or Plug Back such a well shall give written notice of the proposed
operation to the parties who have not otherwise relinquished their interest in
such objective Zone under this agreement and to all other parties in the case
of a proposal for Sidetracking or Deepening, specifying the work to be
performed, the location, proposed depth, objective Zone and the estimated cost
of the operation. The parties to whom such a notice is delivered shall have
thirty (30) days after receipt of the notice within which to notify the party
proposing to do the work whether they elect to participate in the cost of the
proposed operation. If a drilling rig is on location, notice of a proposal to
Rework, Sidetrack, Recomplete, Plug Back or Deepen may be given by telephone
and the response period shall be limited to forty-eight (48) hours, exclusive
of Saturday, Sunday and legal holidays. Failure of a party to whom such notice
is delivered to reply within the period above fixed shall constitute an
election by that party not to participate in the cost of the
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
proposed operation. Any proposal by a party to conduct an operation conflicting
with the operation initially proposed shall be delivered to all parties within
the time and in the manner provided in Article VI.B.6.
If all parties to whom such notice is delivered elect to participate
in such a proposed operation, the parties shall be contractually committed to
participate therein provided such operations are commenced with the time period
hereafter set forth, and Operator shall, no later than ninety (90) days after
expiration of the notice period of thirty (30) days (or as promptly as
practicable after the expiration of the forty-eight (48) hour period when a
drilling rig is on location, as the case may be), actually commence the
proposed operation and thereafter complete it with due diligence at the risk
and expense of the parties participating therein; provided, however, said
commencement date may be extended upon written notice of same by Operator to
the other parties, for a period of up to thirty (30) additional days if, in the
sole opinion of Operator, such additional time is reasonably necessary to
obtain permits from governmental authorities, surface rights (including
rights-of-way) or appropriate drilling equipment, or to complete title
examination or curative matter required for title approval or acceptance. If
the actual operation has not been commenced within the time provided (including
any extension thereof as specifically permitted herein or in the force majeure
provisions of Article XI) and if any party hereto still desires to conduct said
operation, written notice proposing same must be resubmitted to the other
parties in accordance herewith as if no prior proposal had been made. Those
parties that did not participate in the drilling of a well for which a proposal
to Deepen or Sidetrack is made hereunder shall, if such parties desire to
participate in the proposed Deepening or Sidetracking operation, reimburse the
Drilling Parties in accordance with article VI.B.4. in the event of a Deepening
operation and in accordance with Article VI.B.5.
in the event of a Sidetracking operation.
2. Operations by Less Than All Parties:
(a) Determination of Participation. If any party to whom such
notice is delivered as provided in Article VI.B.1. or VI.C.1. (Option No. 2)
elects not to participate in the proposed operation, then, in order to be
entitled to the benefits of this Article, the party or parties giving the
notice and such other parties as shall elect to participate in the operation
shall, no later than ninety (90) days after the expiration of the notice period
of thirty (30) days (or as promptly as practicable after the expiration of the
forty-eight (48) hour period when a drilling rig is on location, as the case
may be) actually commence the proposed operation and complete it with due
diligence. Operator shall perform all work for the account of the Consenting
Parties; provided, however, if no drilling rig or other equipment is on
location, and if Operator is a Non-Consenting Party, the Consenting Parties
shall either: (i) request Operator to perform the work required by such
proposed operation for the account of the Consenting Parties, or (ii)
designated one of the Consenting Parties as Operator to perform such work. The
rights and duties granted to and imposed upon the Operator under this agreement
are granted to and imposed upon the party designated as Operator for an
operation in which the original Operator is a Non-Consenting Party. Consenting
Parties, when conducting operations on the Contract Area pursuant to this
Article VI.B.2., shall comply with all terms and conditions of this agreement.
If less than all parties approve any proposed operation, the proposing
party, immediately after the expiration of the applicable notice period, shall
advise all Parties of the total interest of the parties approving such
operation and its recommendation as to whether the Consenting Parties should
proceed with the operation as proposed. Each Consenting Party, within
forty-eight (48) hours (exclusive of Saturday, Sunday and legal holidays) after
delivery of such notice, shall advise the proposing party of its desire to (i)
limit participation to such party's interest as shown on Exhibit "A" or (ii)
carry only its proportionate part (determined by dividing such party's interest
in the Contract Area by the interests of all Consenting Parties in the Contract
Area) of Non-Consenting Parties' interests, or (iii) carry its proportionate
part (determined as provided in(ii)) of Non-Consenting Parties' interest
together with all or a portion of its proportionate part of any Non-
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
Consenting Parties' interests that any Consenting Party did not elect to take.
Any interest of Non-Consenting Parties that is not carried by a Consenting
Party shall be deemed to be carried by the party proposing the operation if
such party does not withdraw its proposal. Failure to advise the proposing
party within the time required shall be deemed an election under (i). In the
event a drilling rig is on location, notice may be given by telephone, and the
time permitted for such a response shall not exceed a total of forty-eight (48)
hours (exclusive of Saturday, Sunday and legal holidays). The proposing party,
at its election, may withdraw such proposal if there if less than 100%
participation and shall notify all parties of such decision within ten(10)
days, or within twenty-four (24) hours if a drilling rig is on location,
following expiration of the applicable response period. If 100% subscription to
the proposed operation is obtained, the proposing party shall promptly notify
the Consenting Parties of their proportionate interests in the operation and
the party serving as Operator shall commence such operation within the period
provided in Article VI.B.1., subject to the same extension right as provided
therein.
(b) Relinquishment of Interest for Non-Participation. The
entire cost and risk of conducting such operations shall be borne by the
Consenting Parties in the proportions they have elected to bear same under the
terms of the preceding paragraph. Consenting Parties shall keep the leasehold
estates involved in such operations free and clear of all liens and
encumbrances of every kind created by or arising from the operations of the
Consenting Parties. If such an operation results in a dry hole, then subject to
Articles VI.B.6. and VI.E.3, the Consenting Parties shall plug and abandon the
well and restore the surface location at their sole cost, risk and expense;
provided, however, that those Non-Consenting Parties that participated in the
drilling, Deepening or Sidetracking of the well shall remain liable for, and
shall pay, their proportionate shares of the cost of plugging and abandoning
the well and restoring the surface location insofar only as those costs were
not increased by the subsequent operations of the Consenting Parties. If any
well drilled, Reworked, Sidetracked, Deepened, Recompleted or Plugged Back
under the provisions of this Article results in a well capable of producing Oil
and/or Gas in paying quantities, the Consenting Parties shall Complete and
equip the well to produce at their sole cost and risk, and the well shall then
be turned over to Operator (if the Operator did not conduct the operation) and
shall be operated by it at the expense and for the account of the Consenting
Parties. Upon commencement of operations for the drilling, Reworking,
Sidetracking, Recompleting, Deepening or Plugging Back of any such well by
Consenting Parties in accordance with the provisions of this Article, each
Non-Consenting Party shall be deemed to have relinquished to Consenting
Parties, and the Consenting Parties shall own and be entitled to receive, in
proportion to their respective interests, all of such Non-Consenting Party's
interest in the well and share of production therefrom or, the case of a
Reworking, Sidetracking, Deepening, Recompleting or Plugging Back, or a
Completion pursuant to a Article VI.C.1. Option No. 2, all of such
Non-Consenting Party's interest in the production obtained from the operation
in which the Non-Consenting Party did not elect to participate. Such
relinquishment shall be effective until the proceeds of the sale of such share,
calculated at the well, or market value thereof if such share is not sold
(after deducting applicable ad valorem, production, severance, and excise
taxes, royalty, overriding royalty and other interests not excepted by Article
III.C. payable out of or measured by the production from such well accruing
with respect to such interest until it reverts), shall equal the total of the
following:
(i) 400% of each such Non-Consenting Party's share
of the cost of any newly acquired surface equipment beyond the wellhead
connections (including but not limited to stock tanks, separators, treaters,
pumping equipment and piping), plus 100% of each such Non-Consenting Party's
share of the cost of operation of the well commencing with first production and
continuing until each such NonConsenting Party's relinquished interest shall
revert to it under other provisions of this Article, it being agreed that each
Non-Consenting Party's share of such costs and equipment will be that interest
which would have
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
been chargeable to such Non-Consenting Party had it participated in the well
from the beginning of the operations; and
(ii) 400% of (a) that portion of the costs and
expenses of drilling, Reworking, Sidetracking, Deepening, Plugging Back,
testing, Completing and Recompleting, after deducting any cash contributions
received under Article VIII.C., and of (b) that portion of the cost of newly
acquired equipment in the well (to and including the wellhead connections),
which would have been chargeable to such NonConsenting Party if it had
participated therein.
Notwithstanding anything to contrary in this Article VI.B., if the
well does not reach the deepest objective Zone described in the notice
proposing the well for reasons other than the encountering of granite or
practically impenetrable substance or other condition in the hole rendering
further operations impracticable, Operator shall give notice thereof to each
Non-Consenting Party who submitted or voted for an alternative proposal under
Article VI.B.6. to drill the well to a shallower Zone than the deepest
objective Zone proposed in the notice under which the well was drilled, and
each such Non-Consenting Party shall have the option to participate in the
initial proposed Completion of the well by paying its share of the cost of
drilling the well to its actual depth, calculated in the manner provided in
Article VI.B.4.(a). If any such Non-Consenting Party does not elect to
participate in the first Completion proposed for such well, the relinquishment
provisions of this Article VI.B.2. (b) shall apply to such party's interest.
(c) Reworking, Recompleting or Plugging Back. An election not
to participate in the drilling, Sidetracking or Deepening of a well shall be
deemed an election not to participate in any Reworking or Plugging Back
operation proposed in such a well, or portion thereof, to which the initial
non-consent election applied that is conducted at any time prior to full
recovery by the Consenting Parties of the NonConsenting Party's recoupment
amount. Similarly, an election not to participate in the Completing or
Recompleting of a well shall be deemed an election not to participate in any
Reworking operation proposed in such a well, or portion thereof, to which the
initial non-consent election applied that is conducted at any time prior to
full recovery by the Consenting Parties of the Non-Consenting Party's
recoupment amount. Any such Reworking, Recompleting or Plugging Back operation
conducted during the recoupment period shall be deemed part of the cost of
operation of said well and there shall be added to the sums to be recouped by
the Consenting Parties 400% of that portion of the costs of operation of said
well and there shall be added to the sums to be recouped by the Consenting
Parties 400% of that portion of the costs of the Reworking, Recompleting or
Plugging Back operation which would have been chargeable to such Non-Consenting
Party had it participated therein. If such a Reworking, Recompleting or
Plugging Back operation is proposed during such recoupment period, the
provisions of this Article VI.B. shall be applicable as between said Consenting
Parties in said well.
(d) Recoupment Matters. During the period of time Consenting
Parties are entitled to receive Non-Consenting Party's share of production, or
the proceeds therefrom, Consenting Parties shall be responsible for the payment
of all ad valorem, production, severance, excise, gathering and other taxes,
and all royalty, overriding royalty and other burdens applicable to
Non-Consenting Party's share of production not excepted by Article III.C.
In the case of any Reworking, Sidetracking, Plugging Back,
Recompleting or Deepening operation, the Consenting Parties shall be permitted
to use, free of cost, all casing, tubing and other equipment in the well, but
the ownership of all such equipment shall remain unchanged; and upon
abandonment of a well after such Reworking, Sidetracking, Plugging Back,
Recompleting or Deepening, the Consenting Parties shall account
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
for all such equipment to the owners thereof, with each party receiving its
proportionate part in kind or in value, less cost of salvage.
Within ninety (90) days after the completion of any operations under
this Article, the party conducting the operations for the Consenting Parties
shall furnish each Non-Consenting Party with an inventory of the equipment in
and connected to the well, and an itemized statement of the cost of drilling,
Sidetracking, Deepening, Plugging Back, testing, Completing, Recompleting, and
equipping the well for production; or, at its option, the operating party, in
lieu of an itemized statement of such costs of operation, may submit a detailed
statement of monthly billings. Each month thereafter, during the time the
Consenting Parties are being reimbursed as provided above, the party conducting
in the operations for the Consenting Parties shall furnish the Non-Consenting
Parties with an itemized statement of all costs and liabilities incurred in the
operation of the well, together with a statement of the quantity of Oil and Gas
produced from it and the amount of proceeds realized from the sale of the
well's working interest production during the preceding month. In determining
the quantity of Oil and Gas produced during any month, Consenting Parties shall
use industry accepted methods such as but not limited to metering or periodic
well tests. Any amount realized from the sale or other disposition of equipment
newly acquired in connection with any such operation which would have been
owned by a Non-Consenting Party had it participated therein shall be credited
against the total unreturned costs of the work done and of the equipment
purchased in determining when the interest of such Non-Consenting Party shall
revert to it as above provided; and if there is a credit balance, it shall be
paid to such Non-Consenting Party.
If and when the Consenting Parties recover from a Non-Consenting
Party's relinquished interest the amounts provided for above, the relinquished
interests of such Non-Consenting Party shall automatically revert to it as of
7:00 a.m. on the day following the day on which such recoupment occurs, and,
from and after such reversion, such Non-Consenting Party shall own the same
interest in such well, the material and equipment in or pertaining thereto, and
the production therefrom as such Non-consenting Party would have been entitled
to had it participated in the drilling, Sidetracking, Reworking, Deepening,
Recompleting or Plugging Back of said well. Thereafter, such Non-Consenting
Party shall be charged with and shall pay its proportionate part of the further
costs of the operation of said well in accordance with the terms of this
agreement and Exhibit "C" attached hereto.
3. Stand-By Costs: When a well has been drilled or Deepened has
reached its authorized depth and all tests have been completed and the results
thereof furnished to the parties, or when operations on the well have been
otherwise terminated pursuant to Article VI.F., stand-by costs incurred pending
response to a party's notice proposing a Reworking, Sidetracking, Deepening,
Plugging Back or Completing operation in such a well (including the period
required under Article VI.B.6 to resolve competing proposals) shall be charged
and borne as part of the drilling or Deepening operation just completed.
Stand-by costs subsequent to all parties responding, or expiration of the
response time permitted, whichever first occurs, and prior to agreements as to
the participating interest of all Consenting Parties pursuant to the terms of
the second grammatical paragraph of Article VI.B.2.(a), shall be charged to and
borne as part of the proposed operation, but if the proposal is subsequently
withdrawn because of insufficient participation, such stand-by costs shall be
allocated between the Consenting Parties in the proportion each Consenting
Party's interest as shown on Exhibit "A" bears to the total interest as shown
on Exhibit "A" of all Consenting Parties.
In the event that notice for a Sidetracking operation is given while
the drilling rig to be utilized is on location, any party may request and
receive up to five (5) additional days after expiration of the forty-eight hour
response period specified in Article VI.B.1. within which to respond by paying
for all stand-by costs and other costs incurred during such extended response
period; Operator may require such party to pay the estimated
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
stand-by time in advance as a condition to extending the response period. If
more than one party elects to take such additional time to respond to the
notice, standby costs shall be allocated between the parties taking additional
time to respond on a day-to-day basis in the proportion each electing party's
interest as shown on Exhibit "A" bears to the total interest as shown on
Exhibit "A" of all the electing parties.
4. Deepening. If less than all the parties elect to participate in a
drilling, Sidetracking, or Deepening operation proposed pursuant to Article
VI.B.1, the interest relinquished by the Non-Consenting Parties to the
Consenting Parties under Article VI.B.2. shall relate only and be limited to
the lesser of (i) the total depth actually drilled or (ii) the objective depth
or Zone of which the parties were given notice under Article VI.B.1. plus any
deeper zone as may be encountered in drilling to such additional depth as is
drilled to enable completion in the objective depth or zone ("Initial
Objective"). Such well shall not be Deepened beyond the Initial Objective
without first complying with this Article to afford the Non-Consenting Parties
the opportunity to participate in the Deepening operation.
In the event any Consenting Party desires to drill or Deepen a
Non-Consent Well to a depth below the Initial Objective, such party shall give
notice thereof, complying with the requirements of Article VI.B.1, to all
parties (including Non-Consenting Parties). Thereupon, Articles VI.B.1. and 2.
shall apply and all parties receiving such notice shall have the right to
participate or not participate in the Deepening of such well pursuant to said
Articles VI.B.1 and 2. If a Deepening operation is approved pursuant to such
provisions, and if any Non-Consenting Party elects to participate in the
Deepening operation, such Non-Consenting party shall pay or make reimbursement
(as the case may be) of the following costs and expenses:
(a) If the proposal to Deepen is made prior to the Completion
of such well as a well capable of producing in paying quantities, such
Non-Consenting Party shall pay (or reimburse Consenting Parties for, as the
case may be) that share of costs and expenses incurred in connection with the
drilling of said well from the surface to the Initial Objective which
Non-Consenting Party would have paid had such NonConsenting Party agreed to
participate therein, plus the Non-Consenting Party's share of the cost of
Deepening and of participating in any further operations on the well in
accordance with the other provisions of this Agreement; provided, however, all
costs for testing and Completion or attempted Completion of the well incurred
by Consenting Parties prior to the point of actual operations to Deepen beyond
the Initial Objective shall be for the sole account of Consenting Parties.
(b) If the proposal is made for a Non-Consent Well that has
been previously Completed as a well capable of producing in paying quantities,
but is no longer capable of producing in paying quantities, such Non-Consenting
Party shall pay (or reimburse Consenting Parties for, as the case may be) its
proportionate share of all costs of drilling, Completing, and equipping said
well from the surface to the Initial Objective, calculated in the manner
provided in paragraph (a) above. The Non-Consenting Party shall also pay its
proportionate share of all costs of re-entering said well. The Non-Consenting
Parties' proportionate part (based on the percentage of such well
Non-Consenting Party would have owned had it previously participated in such
Non-Consent Well) of the costs of salvable materials and equipment remaining in
the hole and salvable surface equipment used in connection with such well shall
be determined in accordance with Exhibit "C".
The foregoing shall not imply a right of any Consenting Party to
propose any Deepening for a Non- Consent Well prior to the drilling of such
well to its Initial Objective without the consent of the other Consenting
Parties as provided in Article VI.F.
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
5. Sidetracking: Any party having the right to participate in a
proposed Sidetracking operation that does not own an interest in the affected
wellbore at the time of the notice shall, upon electing to participate, tender
to the wellbore owners its proportionate share (equal to its interest in the
Sidetracking operation) of the value of that portion of the existing wellbore
to be utilized as follows:
(a) If the proposal is for Sidetracking an existing dry hole,
reimbursement shall be on the basis of the actual costs incurred in the initial
drilling of the well down to the depth at which the Sidetracking operation is
initiated.
(b) If the proposal is for Sidetracking a well which has
previously produced, reimbursement shall be on the basis of such party's
proportionate share of drilling and equipping costs incurred in the initial
drilling of the well down to the depth at which the Sidetracking operation is
conducted, calculated in the manner described in Article VI.B.4(b) above. Such
party's proportionate share of the cost of the well's salvable materials and
equipment down to the depth at which the Sidetracking operation is initiated
shall be determined in accordance with the provisions of Exhibit "C."
6. Order of Preference of Operations. Except as otherwise specially
provided in this agreement, if any party desires to propose the conduct of an
operation that conflicts with a proposal that has been made by a party under
this Article VI, such party shall have fifteen (15) days from delivery of the
initial proposal, in the case of a proposal to drill a well or to perform an
operation on a well where no drilling rig is on location, or twenty-four (24)
hours, exclusive of Saturday, Sunday, and legal holidays, from delivery of the
initial proposal, if a drilling rig is on location for the well on which such
operation is to be conducted, to deliver to all parties entitled to participate
in the proposed operation such party's alternative proposal, such alternate
proposal to contain the same information required to be included in the initial
proposal. Each party receiving such proposals shall elect by delivery of notice
to Operator within five (5) days after expiration of the proposal period or
within twenty-four (24) hours (exclusive of Saturday, Sunday and legal
holidays) if a drilling rig is on location for the well that is the subject of
the proposals, to participate in one of the competing proposals. Any party not
electing within the time required shall be deemed not to have voted. The
proposal receiving the vote of parties owning the largest aggregate percentage
interest of the parties voting shall have priority over all other competing
proposals; in the case of a tie vote, the initial proposal shall prevail.
Operator shall deliver notice of such results to all parties entitled to
participate in the operation within five (5) days after expiration of the
election period (or within twenty-four (24) hours, exclusive of Saturday,
Sunday and legal holidays, if a drilling rig is on location). Each party shall
then have two (2) days (or twenty-four (24) hours if a rig is on location) from
receipt of such notice to elect by delivery of notice to Operator to
participate in such operation or to relinquish interest in the affected well
pursuant to the provisions of Article VI.B.2.; failure by a party to deliver
notice within such period shall be deemed an election not to participate in the
prevailing proposal.
7. Conformity to Spacing Pattern: Notwithstanding the provisions of
this Article VI.B.2., it is agreed that no wells shall be proposed to be
drilled to or Completed in or produced from a Zone from which a well located
elsewhere on the Contract Area is producing, unless such well conforms to the
then-existing well spacing pattern for such Zone.
8. Paying Wells: No party shall conduct any Reworking, Deepening,
Plugging Back, Completion, Recompletion, or Sidetracking operation under this
agreement with respect to any well then capable of producing in paying
quantities except with the consent of all parties that have not relinquished
interests in the well at the time of such operation.
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
C. COMPLETION OF WELLS; REWORKING AND PLUGGING BACK:
1. Completion: Without the consent of all parties, no well shall be
drilled, Deepened or Sidetracked, except any well drilled, Deepened or
Sidetracked pursuant to the provisions of Article VI.B.2. of this agreement.
Consent to the drilling, Deepening or Sidetracking shall include:
[X] Option No. 1: All necessary expenditures for the drilling,
Deepening or Sidetracking, testing, Completing and equipping of the well,
including necessary tankage and/or surface facilities.
[ ] Option No. 2: All necessary expenditures for the drilling,
Deepening or Sidetracking and testing of the well. When such well has reached
its authorized depth, and all logs, cores and other tests have been completed,
and the results thereof furnished to the parties, Operator shall give immediate
notice to the Non-Operators having the right to participate in a Completion
attempt whether or not Operator recommends attempting to Complete the well,
together with Operator's AFE for Completion costs if not previously provided.
The parties receiving such notice shall have forty-eight (48) hours (exclusive
of Saturday, Sunday and legal holidays) in which to elect by delivery of notice
to Operator to participate in a recommended Completion attempt or to make a
Completion proposal with an accompanying AFE. Operator shall deliver any such
Completion proposal, or any Completion proposal conflicting with Operator's
proposal, to the other parties entitled to participate in such Completion in
accordance with the procedures specified in Article VI.B.6. Election to
participate in a Completion attempt shall include consent to all necessary
expenditures for the Completing and equipping of such well, including necessary
tankage and/or surface facilities but excluding any stimulation operation not
contained on the Completion AFE. Failure of any party receiving such notice to
reply within the period above fixed shall constitute an election by that party
not to participate in the cost of the Completion attempt; provided, that
Article VI.B.6. shall control in the case of conflicting Completion proposals.
If one or more, but less than all of the parties, elect to attempt a
Completion, the provisions of Article VI.B.2. hereof (the phrase "Reworking,
Sidetracking, Deepening, Recompleting or Plugging Back" as contained in Article
VI.B.2. shall be deemed to include "Completing") shall apply to the operations
thereafter conducted by less than all parties; provided, however, that Article
VI.B.2. shall apply separately to each separate Completion or Recompletion
attempt undertaken hereunder, and an election to become a NonConsenting Party
as to one Completion or Recompletion attempt shall not prevent a party from
becoming a Consenting Party in subsequent Completion or Recompletion attempts
regardless whether the Consenting Parties as to earlier Completions or
Recompletions have recouped their costs pursuant to Article VI.B.2.; provided
further, that any recoupment of costs by a Consenting Party shall be made
solely from the production attributable to the Zone in which the Completion
attempt is made. Election by a previous Non-Consenting Party to participate in
a subsequent Completion or Recompletion attempt shall require such party to pay
its proportionate share of the cost of salvable materials and equipment
installed in the well pursuant to the previous Completion or Recompletion
attempt, insofar and only insofar as such materials and equipment benefit the
Zone in which such party participates in a Completion attempt.
2. Rework, Recomplete or Plug Back: No well shall be Reworked,
Recompleted or Plugged Back except a well Reworked, Recompleted, or Plugged
Back pursuant to the provisions of Article VI.B.2. of this agreement. Consent
to the Reworking, Recompleting or Plugging Back of a well shall include all
necessary expenditures in conducting such operations and Completing and
equipping of said well, including necessary tankage and/or surface facilities.
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
D. OTHER OPERATIONS:
Operator shall not undertake any single project reasonably estimated
to require an expenditure in excess of Seventy-Five Thousand Dollars
($75,000.00) except in connection with the drilling, Sidetracking, Reworking,
Deepening, Completing, Recompleting or Plugging Back of a well that has been
previously authorized by or pursuant to this agreement; provided, however,
that, in case of explosion, fire, flood or other sudden emergency, whether of
the same or different nature, Operator may take such steps and incur such
expenses as in its opinion are required to deal with the emergency to safeguard
life and property but Operator, as promptly as possible, shall report the
emergency to the other parties. If Operator prepares an AFE for its own use,
Operator shall furnish any Non-Operator so requesting an information copy
thereof for any single project in excess of Fifty Thousand Dollars
($50,000.00). Any party who has not relinquished its interest in a well share
have the right to propose that Operator perform repair work or undertake the
installation of artificial lift equipment or ancillary production facilities
such as salt water disposal wells or to conduct additional work with respect to
a well drilled hereunder or other similar project (but not including the
installation of gathering lines or other transportation or marketing
facilities, the installation of which shall be governed by separate agreement
between the parties) reasonably estimated to require an expenditure in excess
of the amount first set forth above in this Article VI.D. (except in connection
with an operation required to be proposed under Articles VI.B.1. or VI.C.1.
Option No. 2, which shall be governed exclusively by those Articles). Operator
shall deliver such proposal to all parties entitled to participate therein. If
within thirty (30) days thereof Operator secures the written consent of any
party or parties owning at least 50% of the interests of the parties entitled
to participate in such operation, each party having the right to participate in
such project shall be bound by the terms of such proposal and shall be
obligated to pay its proportionate share of the costs of the proposed project
as if it had consented to such project pursuant to the terms of the proposal.
E. ABANDONMENT OF WELLS:
1. Abandonment of Dry Holes: Except for any well drilled or Deepened
pursuant to Article VI.B.2., any well which has been drilled or Deepened under
the terms of this agreement and is proposed to be completed as a dry hole shall
not be plugged and abandoned without the consent of all parties. Should
Operator, after diligent effort, be unable to contact any party, or should any
party fail to reply within forty-eight (48) hours (exclusive of Saturday,
Sunday and legal holidays) after delivery of notice of the proposal to plug and
abandon such well, such party shall be deemed to have consented to the proposed
abandonment. All such wells shall be plugged and abandoned in accordance with
applicable regulations and at the cost, risk and expense of the parties who
participated in the cost of drilling or Deepening such well. Any party who
objects to plugging and abandoning such well by notice delivered to Operator
within forty-eight (48) hours (exclusive of Saturday, Sunday and legal
holidays) after delivery of notice of the proposed plugging shall take over the
well as of the end of such forty-eight (48) hour notice period and conduct
further operations in search of Oil and/or Gas subject to the provisions of
Article VI.B.; failure of such party to provide proof reasonably satisfactory
to Operator of its financial capability to conduct such operations or take over
the well within such period or thereafter to conduct operations on such well or
plug and abandon such well shall entitle Operator to retain or take possession
of the well and plug and abandon the well. The party taking over the well shall
indemnify Operator (if Operator is an abandoning party) and the other
abandoning parties against liability for any further operations conducted on
such well except for the costs of plugging and abandoning the well and
restoring the surface, for which the abandoning parties shall remain
proportionately liable.
2. Abandonment of Wells That Have Produced: Except for any well in
which a Non-Consent operation has been conducted hereunder for which the
Consenting Parties have not been fully reimbursed as herein provided, any well
which has been completed as a producer shall not be plugged and abandoned
without
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
the consent of all parties. If all parties consent to such abandonment, the
well shall be plugged and abandoned in accordance with applicable regulations
and at the cost, risk and expense of all the parties hereto. Failure of a party
to reply within sixty (60) days of delivery of notice of proposed abandonment
shall be deemed an election to consent to the proposal. If, within sixty (60)
days after delivery of notice of the proposed abandonment of any well, all
parties do not agree to the abandonment of such well, those wishing to continue
its operation from the Zone then open to production shall be obligated to take
over the well as of the expiration of the applicable notice period and shall
indemnify Operator (if Operator is an abandoning party) and the other
abandoning parties against liability for any further operations on the well
conducted by such parties. Failure of such party or parties to provide proof
reasonably satisfactory to Operator of their financial capability to conduct
such operations or to take over the well within the required period or
thereafter to conduct operations on such well shall entitle Operator to retain
or take possession of such well and plug and abandon the well.
Parties taking over a well as provided herein shall tender to each of
the other parties its proportionate share of the value of the well's salvable
material and equipment, determined in accordance with the provisions of Exhibit
"C," less the estimated cost of salvaging and the estimated cost of plugging
and abandoning and restoring the surface; provided, however, that in the event
the estimated plugging and abandoning and surface restoration costs and the
estimated cost of salvaging are higher than the value of the well's salvable
material and equipment, each of the abandoning parties shall tender to the
parties continuing operations their proportionate shares of the estimated
excess cost. Each abandoning party shall assign to the non-abandoning parties,
without warranty, express or implied, as to title or as to quantity, or fitness
for use of the equipment and material, all of its interest in the wellbore of
the well and related equipment, together with its interest in the Leasehold
insofar and only insofar as such Leasehold covers the right to obtain
production from that wellbore in the Zone then open to production. If the
interest of the abandoning party is or includes an Oil and Gas Interest, such
party shall execute and deliver to the non-abandoning party or parties an oil
and gas lease, limited to the wellbore and the Zone then open to production,
for a term of one (1) year and so long thereafter as Oil and/or Gas is produced
from the Zone covered thereby, such lease to be on the form attached as Exhibit
"B." The assignments or leases so limited shall encompass the Drilling Unit
upon which the well is located. The payments by, and the assignments or leases
to, the assignees shall be in a ratio based upon the relationship of their
respective percentage of participation in the Contract Area to the aggregate of
the percentages of participation in the Contract Area of all assignees. There
shall be no readjustment of interests in the remaining portions of the Contract
Area.
Thereafter, abandoning parties shall have no further responsibility,
liability, or interest in the operation of or production from the well in the
Zone then open other than the royalties retained in any lease made under the
terms of this Article. Upon request, Operator shall continue to operate the
assigned well for the account of the non-abandoning parties at the rates and
charges contemplated by this agreement, plus any additional cost and charges
which may arise as the result of the separate ownership of the assigned well.
Upon proposed abandonment of the producing Zone assigned or leased, the
assignor or lessor shall then have the option to repurchase its prior interest
in the well (using the same valuation formula) and participate in further
operations therein subject to the provisions hereof.
3. Abandonment of Non-Consent Operations: The provisions of Article
VI.E.1. or VI.E.2. above shall be applicable as between Consenting Parties in
the event of the proposed abandonment of any well excepted from said Articles;
provided, however, no well shall be permanently plugged and abandoned unless
and until all parties having the right to conduct further operations therein
have been notified of the proposed abandonment and afforded the opportunity to
elect to take over the well in accordance with the provisions of this Article
VI.E.; and provided further, that Non-Consenting Parties who own an interest in
a portion of the
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
well shall pay their proportionate shares of abandonment and surface
restoration costs for such well as provided in Article VI.B.2(b).
F. TERMINATION OF OPERATIONS:
Upon the commencement of an operation for the drilling, Reworking,
Sidetracking, Plugging Back, Deepening, testing, Completion or plugging of a
well, including but not limited to the Initial Well, such operation shall not
be terminated without consent of parties bearing 75% of the costs of such
operation; provided, however, that in the event granite or other practically
impenetrable substance or condition in the hole is encountered which renders
further operations impractical, Operator may discontinue operations and give
notice of such condition in the manner provided in Article VI.B.1 and the
provisions of Article VI.B. or VI.E. shall thereafter apply to such operation,
as appropriate.
G. TAKING PRODUCTION IN KIND:
[X] Option No. 1: GAS BALANCING AGREEMENT ATTACHED
Each party shall take in kind or separately dispose
of its proportionate share of all Oil and Gas produced from
the Contract Area, exclusive of production which may be used
in development and producing operations and in preparing and
treating Oil and Gas for marketing purposes and production
unavoidably lost. Any extra expenditure incurred in the
taking in kind or separate disposition by any party of its
proportionate share of the production shall be borne by such
party. Any party taking its share of production in kind shall
be required to pay for only its proportionate share of such
part of Operator's surface facilities which it uses.
Each party shall execute such division orders and
contracts as may be necessary for the sale of its interest in
production from the Contract Area, and except as provided in
Article VII.B., shall be entitled to receive payment directly
from the purchaser thereof for its share of all production.
If any party fails to make the arrangements
necessary to take in kind or separately dispose of its
proportionate share of the Oil produced from the Contract
Area, Operator shall have the right, subject to the
revocation at will by the party owning it, but not the
obligation to purchase such Oil or sell it to others at any
time and from time to time, for the account of the non-taking
party. Any such purchase or sale by Operator may be
terminated by Operator upon at least ten (10) days written
notice to the owner of said production and shall be subject
always to the right of the owner of the production upon at
least ten (10) days written notice to Operator to exercise at
any time its right to take in kind, or separately dispose of,
its share of all Oil not previously delivered to a purchaser.
Any purchase or sale by Operator of any other party's share
of Oil shall be only for such reasonable periods of time as
are consistent with the minimum needs of the industry under
the particular circumstances, but in no event for a period in
excess of one (1) year.
Any such sale by Operator shall be in a manner
commercially reasonable under the circumstances but Operator
shall have no duty to share any existing market or to obtain
a price equal to that received under any existing market. The
sale or delivery by Operator of a non-taking party's share of
Oil under the terms of any existing contract of Operator
shall
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
not give the non-taking party any interest in or make the
non-taking party a party to said contract. No purchase shall
be made by Operator without first giving the non-taking party
at least ten (10) days written notice of such intended
purchase and the price to be paid or the pricing basis to be
used.
All parties shall give timely written notice to
Operator of their Gas marketing arrangements for the
following month, excluding price, and shall notify Operator
immediately in the event of a change in such arrangements.
Operator shall maintain records of all marketing
arrangements, and of volumes actually sold or transported,
which records shall be made available to Non-Operators upon
reasonable request.
In the event one or more parties' separate
disposition of its share of the Gas causes split-stream
deliveries to separate pipelines and/or deliveries which on a
day-to-day basis for any reason are not exactly equal to a
party's respective proportionate share of total Gas sales to
be allocated to it, the balancing or accounting between the
parties shall be in accordance with any Gas balancing
agreement between the parties hereto, whether such an
agreement is attached as Exhibit "E" or is a separate
agreement. Operator shall give notice to all parties of the
first sales of Gas from any well under this agreement.
[ ] Option No. 2: NO GAS BALANCING AGREEMENT:
Each party shall take in kind or separately dispose
of its proportionate share of all Oil and Gas produced from
the Contract Area, exclusive of production which may be used
in development and producing operations and in preparing and
treating Oil and Gas for marketing purposes and production
unavoidably lost. Any extra expenditure incurred in the
taking in kind or separate disposition by any party of its
proportionate share of the production shall be borne by such
party. Any party taking its share of production in kind shall
be required to pay for only its proportionate share of such
part of Operator's surface facilities which it uses.
Each party shall execute such division orders and
contracts as may be necessary for the sale of its interest in
production from the Contract Area, and, except as provided in
Article VII.B., shall be entitled to receive payment directly
from the purchaser thereof for its share of all production.
If any party fails to make the arrangements
necessary to take in kind or separately dispose of its
proportionate share of the Oil and/or Gas produced from the
Contract Area, Operator shall have the right, subject to the
revocation at will by the party owning it, but not the
obligation, to purchase such Oil and/or Gas or sell it to
others at any time and from time to time, for the account of
the non-taking party. Any such purchase or sale by Operator
may be terminated by Operator upon at least ten (10) days
written notice to the owner of said production and shall be
subject always to the right of the owner of the production
upon at least ten (10) days written notice to Operator to
exercise its right to take in kind, or separately dispose of,
its share of all Oil and/or Gas not previously delivered to a
purchaser; provided, however, that the effective date of any
such revocation may be deferred at Operator's election for a
period not to exceed ninety (90) days if Operator has
committed such production to a purchase contract having a
term extending beyond such ten (10) day period. Any purchase
or sale by Operator of any other party's share of Oil and/or
Gas shall be only for such
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
reasonable periods of time as are consistent with the minimum
needs of the industry under the particular circumstances, but
in no event for a period in excess of one (1) year.
Any such sale by Operator shall be in a manner
commercially reasonable under the circumstances, but Operator
shall have no duty to share any existing market or
transportation arrangement or to obtain a price or
transportation fee equal to that received under any existing
market or transportation arrangement. The sale or delivery by
Operator of a non-taking party's share of production under
the terms of any existing contract of Operator shall not give
the non-taking party any interest in or make the non-taking
party a party to said contract. No purchase of Oil and Gas
and no sale of Gas shall be made by Operator without first
giving the non-taking party ten days written notice of such
intended purchase or sale and the price to be paid or the
pricing basis to be used. Operator shall give notice to all
parties of the first sale of Gas from any well under this
Agreement.
All parties shall give timely written notice to
Operator of their Gas marketing arrangements for the
following month, excluding price, and shall notify to
Operator immediately in the event of a change in such
arrangements. Operator shall maintain records of all
marketing arrangements, and of volumes actually sold or
transported, which records shall be made available to
Non-Operators upon reasonable request.
ARTICLE VII.
EXPENDITURES AND LIABILITY OF PARTIES
A. LIABILITY OF PARTIES:
The liability of the parties shall be several, not joint or
collective. Each party shall be responsible only for its obligations, and shall
be liable only for its proportionate share of the costs of developing and
operating the Contract Area. Accordingly, the liens granted among the parties
in Article VII.B. are given to secure only the debts of each severally, and no
party shall have any liability to third parties hereunder to satisfy the
default of any other party in the payment of any expense or obligation
hereunder. It is not the intention of the parties to create, nor shall this
agreement be construed as creating, a mining or other partnership, joint
venture, agency relationship or association, or to render the parties liable as
partners, co-venturers, or principals. In their relations with each other under
this agreement, the parties shall not be considered fiduciaries or to have
established a confidential relationship but rather shall be free to act on an
arm's-length basis in accordance with their own respective self-interest,
subject, however, to the obligation of the parties to act in good faith in
their dealings with each other with respect to activities hereunder.
B. LIENS AND SECURITY INTERESTS:
Each party grants to the other parties hereto a lien upon any interest
it now owns or hereafter acquires in Oil and Gas Leases and Oil and Gas
Interests in the Contract Area, and a security interest and/or purchase money
security interest in any interest it now owns or hereafter acquires in the
personal property and fixtures on or used or obtained for use in connection
therewith, to secure performance of all of its obligations under this agreement
including but not limited to payment of expense, interest and fees, the proper
disbursement of all monies paid hereunder, the assignment or relinquishment of
interest in Oil and Gas Leases as required hereunder, and the proper
performance of operations hereunder. Such lien and security interest granted by
each party hereto shall include such party's leasehold interests, working
interests, operating rights, and royalty
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
and overriding royalty interests in the Contract Area now owned or hereafter
acquired and in lands pooled or unitized therewith or otherwise becoming
subject to this agreement, the Oil and Gas when extracted therefrom and
equipment situated thereon or used or obtained for use in connection therewith
(including, without limitation, all wells, tools, and tubular goods), and
accounts (including, without limitation, accounts arising from gas imbalances
or from the sale of Oil and/or Gas at the wellhead), contract rights, inventory
and general intangibles relating thereto or arising therefrom, and all proceeds
and products of the foregoing.
To perfect the lien and security agreement provided herein, each party
hereto shall execute and acknowledge the recording supplement and/or any
financing statement prepared and submitted by any party hereto in conjunction
herewith or at any time following execution hereof, and Operator is authorized
to file this agreement or the recording supplement executed herewith as a lien
or mortgage in the applicable real estate records and as a financing statement
with the proper officer under the Uniform Commercial Code in the state in which
the Contract Area is situated and such other states as Operator shall deem
appropriate to perfect the security interest granted hereunder. Any party may
file this agreement, the recording supplement executed herewith, or such other
documents as it deems necessary as a lien or mortgage in the applicable real
estate records and/or a financing statement with the proper officer under the
Uniform Commercial Code.
Each party represents and warrants to the other parties hereto that
the lien and security interest granted by such party to the other parties shall
be a first and prior lien, and each party hereby agrees to maintain the
priority of said lien and security interest against all persons acquiring an
interest in Oil and Gas Leases and Interests covered by this agreement by,
through or under such party. All parties acquiring an interest in Oil and Gas
Leases and Oil and Gas Interests covered by this agreement, whether by
assignment, merger, mortgage, operation of law, or otherwise, shall be deemed
to have taken subject to the lien and security interest granted by this Article
VII.B. as to all obligations attributable to such interest hereunder whether or
not such obligations arise before or after such interest is acquired.
To the extent that parties have a security interest under the Uniform
Commercial Code of the state in which the Contract Area is situated, they shall
be entitled to exercise the rights and remedies of a secured party under the
Code. The bringing of a suit and the obtaining of judgment by a party for the
secured indebtedness shall not be deemed an election of remedies or otherwise
affect the lien rights or security interest as security for the payment
thereof. In addition, upon default by any party in the payment of its share of
expenses, interests or fees, or upon the improper use of funds by the Operator,
the other parties shall have the right, without prejudice to other rights or
remedies, to collect from the purchaser the proceeds from the sale of such
defaulting party's share of Oil and Gas until the amount owed by such party,
plus interest as provided in "Exhibit C," has been received, and shall have the
right to offset the amount owed against the proceeds from the sale of such
defaulting party's share of Oil and Gas. All purchasers of production may rely
on a notification of default from the non-defaulting party or parties stating
the amount due as a result of the default, and all parties waive any recourse
available against purchasers for releasing production proceeds as provided in
this paragraph.
If any party fails to pay its share of cost within sixty (60) days
after rendition of a statement therefor by Operator, the non-defaulting
parties, including Operator, shall, upon request by Operator, pay the unpaid
amount in the proportion that the interest of each such party bears to the
interest of all such parties. The amount paid by each party so paying its share
of the unpaid amount shall be secured by the liens and security rights
described in Article VII.B., and each paying party may independently pursue any
remedy available hereunder or otherwise.
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
If any party does not perform all of its obligations hereunder, and
the failure to perform subjects such party to foreclosure or execution
proceedings pursuant to the provisions of this agreement, to the extent allowed
by governing law, the defaulting party waives any available right of redemption
from and after the date of judgment, any required valuation or appraisement of
the mortgaged or secured property prior to sale, any available right to stay
execution or to require a marshaling of assets and any required bond in the
event a receiver is appointed. In addition, to the extent permitted by
applicable law, each party hereby grants to the other parties a power of sale
as to any property that is subject to the lien and security rights granted
hereunder, such power to be exercised in the manner provided by applicable law
or otherwise in a commercially reasonable manner and upon reasonable notice.
Each party agrees that the other parties shall be entitled to utilize
the provisions of Oil and Gas lien law or other lien law of any state in which
the Contract Area is situated to enforce the obligations of each party
hereunder. Without limiting the generality of the foregoing, to the extent
permitted by applicable law, Non- Operators agree that Operator may invoke or
utilize the mechanics' or materialmen's lien law of the state in which the
Contract Area is situated in order to secure the payment to Operator of any sum
due hereunder for services performed or materials supplied by Operator.
C. ADVANCES:
Operator, at its election, shall have the right from time to time to
demand and receive from one or more of the other parties payment in advance of
their respective shares of the estimated amount of the expense to be incurred
in operations hereunder during the next succeeding month, which right may be
exercised only by submission to each such party of an itemized statement of
such estimated expense, together with an invoice for its share thereof. Each
such statement and invoice for the payment in advance of estimated expense
shall be submitted on or before the 20th day of the next preceding month. Each
party shall pay to Operator its proportionate share of such estimate within
fifteen (15) days after such estimate and invoice is received. If any party
fails to pay its share of said estimate within said time, the amount due shall
bear interest as provided in Exhibit "C" until paid. Proper adjustment shall be
made monthly between advances and actual expense to the end that each party
shall bear and pay its proportionate share of actual expenses incurred, and no
more.
D. DEFAULTS AND REMEDIES
If any party fails to discharge any financial obligation under this
agreement, including without limitation the failure to make any advance under
the preceding Article VII.C. or any other provision of this agreement, within
the period required for such payment hereunder, then in addition to the
remedies provided in Article VII.B. or elsewhere in this agreement, the
remedies specified below shall be applicable. For purposes of this Article
VII.D., all notices and elections shall be delivered only by Operator, except
that Operator shall deliver any such notice and election requested by a
non-defaulting Non-Operator, and when Operator is the party in default, the
applicable notices and elections can be delivered by any Non-Operator. Election
of any one or more of the following remedies shall not preclude the subsequent
use of any other remedy specified below or otherwise available to a
no-defaulting party.
1. Suspension of Rights: Any party may deliver to the party in default
a Notice of Default, which shall specify the default, specify the action to be
taken to cure the default, and specify that failure to take such action will
result in the exercise of one or more of the remedies provided in this Article.
If the default is not cured within thirty (30) days of the delivery of such
Notice of Default, all of the rights of the defaulting party granted by this
agreement may upon notice be suspended until the default is cured, without
prejudice to the right of the non-defaulting party or parties to continue to
enforce the obligations of the defaulting party
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
previously accrued or thereafter accruing under this agreement. If Operator is
the party in default, the Non- Operators shall have in addition the right, by
vote of Non-Operators owning a majority in interest in the Contract Area after
excluding the voting interest of Operator, to appoint a new Operator effective
immediately. The rights of a defaulting party that may be suspended hereunder
at the election of the non-defaulting parties shall include, without
limitation, the right to receive information as to any operation conducted
hereunder during the period of such default, the right to elect to participate
in an operation proposed under Article VI.B. of this agreement, the right to
participate in an operation being conducted under this agreement even if the
party has previously elected to participate in such operation, and the right to
receive proceeds of production from any well subject to this agreement.
2. Suit for Damages: Non-defaulting parties or Operator for the
benefit of non-defaulting parties may sue (at joint account expense) to collect
the amounts in default, plus interest accruing on the amounts recovered from
the date of default until the date of collection at the rate specified in
Exhibit "C" attached hereto. Nothing herein shall prevent any party from suing
any defaulting party to collect consequential damages accruing to such party as
a result of the default.
3. Deemed Non-Consent: The non-defaulting party may deliver a written
Notice of Non-Consent Election to the defaulting party at any time after the
expiration of the thirty-day cure period following delivery of the Notice of
Default, in which event if the billing is for the drilling of a new well or the
Plugging Back, Sidetracking, Reworking or Deepening of a well which is to be or
has been plugged as a dry hole, or for the Completion or Recompletion of any
well, the defaulting party will be conclusively deemed to have elected not to
participate in the operation and to be a Non-Consenting Party with respect
thereto under Article VI.B. or VI.C., as the case may be, to the extent of the
costs unpaid by such party, notwithstanding any election to participate
theretofore made. If election is made to proceed under this provision, then the
non-defaulting parties may not elect to sue for the unpaid amount pursuant to
Article VII.D.2.
Until the delivery of such Notice of Non-Consent Election to the
defaulting party, such party shall have the right to cure its default by paying
its unpaid share of costs plus interest at the rate set forth in Exhibit "C,"
provided, however, such payment shall not prejudice the rights of the
non-defaulting parties to pursue remedies for damages incurred by the
non-defaulting parties as a result of the default. Any interest relinquished
pursuant to this Article VII.D.3. shall be offered to the non-defaulting
parties in proportion to their interests, and the non-defaulting parties
electing to participate in the ownership of such interest shall be required to
contribute their shares of the defaulted amount upon their election to
participate therein.
4. Advance Payment: If a default is not cured within thirty (30) days
of the delivery of a Notice of Default, Operator, or Non-Operators if Operator
is the defaulting party, may thereafter require advance payment from the
defaulting party of such defaulting party's anticipated share of any item of
expense for which Operator, or Non-Operators, as the case may be, would be
entitled to reimbursement under any provision of this agreement, whether or not
such expense was the subject of the previous default. Such right includes, but
is not limited to, the right to require advance payment for the estimated costs
of drilling a well or Completion of a well as to which an election to
participate in drilling or Completion has been made. If the defaulting party
fails to pay the required advance payment, the non-defaulting parties may
pursue any of the remedies provided in this Article VII.D. or any other default
remedy provided elsewhere in this agreement. Any excess of funds advanced
remaining when the operation is completed and all costs have been paid shall be
promptly returned to the advancing party.
5. Costs and Attorneys' Fees: In the event any party is required to
bring legal proceedings to enforce any financial obligation of a party
hereunder, the prevailing party in such action shall be entitled to
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
recover all court costs, costs of collection, and a reasonable attorney's fee,
which the lien provided for herein shall also secure.
E. RENTALS, SHUT-IN WELL PAYMENTS AND MINIMUM ROYALTIES:
Rentals, shut-in well payments and minimum royalties which may be
required under them terms of any lease shall be paid by the party or parties
who subjected such lease to this agreement at its or their expense. In the
event two or more parties own and have contributed interests in the same lease
to this agreement, such parties may designate one of such parties to make said
payments for and on behalf of all such parties. Any party may request, and
shall be entitled to receive, proper evidence of all such payments. In the
event of failure to make proper payment of any rental, shut-in well payment or
minimum royalty through mistake or oversight where such payment is required to
continue the lease in force, any loss which results from such non-payment shall
be borne in accordance with the provisions of Article IV.B.3.
Operator shall notify Non-Operators of the anticipated completion of a
shut-in well, or the shutting in or return to production of a producing well,
at least five (5) days (excluding Saturday, Sunday and legal holidays) prior to
taking such action, or at the earliest opportunity permitted by circumstances,
but assumes no liability for failure to do so. In the event of failure by
Operator to so notify Non-Operators, the loss of any lease contributed hereto
by Non-Operators for failure to make timely payments of any shut-in well
payment shall be borne jointly by the parties hereto under the provisions of
Article IV.B.3.
F. TAXES:
Beginning with the first calendar year after the effective date
hereof, Operator shall render for ad valorem taxation all property subject to
this agreement which by law should be rendered for such taxes, and it shall pay
all such taxes assessed thereon before they become delinquent. Prior to the
rendition date, each Non-Operator shall furnish Operator information as to
burdens (to include, but not be limited to, royalties, overriding royalties and
production payments) on Leases and Oil and Gas Interests contributed by such
Non- Operator. If the assessed valuation of any Lease is reduced by reason of
its being subject to outstanding excess royalties, overriding royalties or
production payments, the reduction in ad valorem taxes resulting therefrom
shall inure to the benefit of the owner or owners of such Lease, and Operator
shall adjust the charge to such owner or owners so as to reflect the benefit of
such reduction. If the ad valorem taxes are based in whole or in part upon
separate valuations of each party's working interest, then notwithstanding
anything to the contrary herein, charges to the joint account shall be made and
paid by the parties hereto in accordance with the tax value generated by each
party's working interest. Operator shall bill the other parties for their
proportionate shares of all tax payments in the manner provided in Exhibit "C."
If Operator considers any tax assessment improper, Operator may, at
its discretion, protest within the time and manner prescribed by law, and
prosecute the protest to a final determination, unless all parties agree to
abandon the protest prior to final determination. During the pendency of
administrative or judicial proceedings, Operator may elect to pay, under
protest, all such taxes and any interest and penalty. When any such protested
assessment shall have been finally determined, Operator shall pay the tax for
the joint account, together with any interest and penalty accrued, and the
total cost shall then be assessed against the parties, and be paid by them, as
provided in Exhibit "C."
Each party shall pay or cause to be paid all production, severance,
excise, gathering and other taxes imposed upon or with respect to the
production or handling of such party's share of Oil and Gas produced under the
terms of this agreement.
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
ARTICLE VIII.
ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST
A. SURRENDER OF LEASES:
The Leases covered by this agreement, insofar as they embrace acreage
in the Contract Area, shall not be surrendered in whole or in part unless all
parties consent thereto.
However, should any party desire to surrender its interest in any
Lease or in any portion thereof, such party shall give written notice of the
proposed surrender to all parties, and the parties to whom such notice is
delivered shall have thirty (30) days after delivery of the notice within which
to notify the party proposing the surrender whether they elect to consent
thereto. Failure of a party to whom such notice is delivered to reply within
said 30-day period shall constitute a consent to the surrender of the Leases
described in the notice. If all parties do not agree or consent thereto, the
party desiring to surrender shall assign, without express or implied warranty
of title, all of its interest in such Lease, or portion thereof, and any well,
material and equipment which may be located thereon and any rights in
production thereafter secured, to the parties not consenting to such surrender.
If the interest of the assigning party is or includes an Oil and Gas Interest,
the assigning party shall execute and deliver to the party or parties not
consenting to such surrender an oil and gas lease covering such Oil and Gas
Interest for a term of one (1) year and so long thereafter as Oil and/or Gas is
produced from the land covered thereby, such lease to be on the form attached
hereto as Exhibit "B." Upon such assignment or lease, the assigning party shall
be relieved from all obligations thereafter accruing, but not theretofore
accrued, with respect to the interest assigned or leased and the operation of
any well attributable thereto, and the assigning party shall have no further
interest in the assigned or leased premises and its equipment and production
other than the royalties retained in any lease made under the terms of this
Article. The party assignee or lessee shall pay to the party assignor or lessor
the reasonable salvage value of the latter's interest in any well's salvable
materials and equipment attributable to the assigned or leased acreage. The
value of all salvable materials and equipment shall be determined in accordance
with the provisions of Exhibit "C," less the estimated cost of salvaging and
the estimated cost of plugging and abandoning and restoring the surface. If
such value is less than such costs, then the party assignor or lessor shall pay
to the party assignee or lessee the amount of such deficit. If the assignment
or lease is in favor of more than one party, the interest shall be shared by
such parties in the proportions that the interest of each bears to the total
interest of all such parties. If the interest of the parties to whom the
assignment is to be made varies according to depth, then the interest assigned
shall similarly reflect such variances.
Any assignment, lease or surrender made under this provision shall not
reduce or change the assignor's, lessor's or surrendering party's interest as
it was immediately before the assignment, lease or surrender in the balance of
the Contract Area; and the acreage assigned, leased or surrendered, and
subsequent operations thereon, shall not thereafter be subject to the terms and
provisions of this agreement but shall be deemed subject to an Operating
Agreement in the form of this agreement.
B. RENEWAL OR EXTENSION OF LEASES:
If any party secures a renewal or replacement of an Oil and Gas Lease
or Interest subject to this agreement, then all other parties shall be notified
promptly upon such acquisition or, in the case of a replacement Lease taken
before expiration of an existing Lease, promptly upon expiration of the
existing Lease. The parties notified shall have the right for a period of
thirty (30) days following delivery of such notice in which to elect to
participate in the ownership of the renewal or replacement Lease, insofar as
such Lease
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
affects lands within the Contract Area, by paying to the party who acquired it
their proportionate shares of the acquisition cost allocated to that part of
such Lease within the Contract Area, which shall be in proportion to the
interests held at the time by the parties in the Contract Area. Each party who
participates in the purchase of a renewal or replacement Lease shall be given
an assignment of its proportionate interest therein by the acquiring party.
If some, but less than all, of the parties elect to participate in the
purchase of a renewal or replacement Lease, it shall be owned by the parties
who elect to participate therein, in a ratio based upon the relationship of
their respective percentage of participation in the Contract Area to the
aggregate of the percentages of participation in the Contract Area of all
parties participating in the purchase of such renewal or replacement Lease. The
acquisition of a renewal or replacement Lease by any or all of the parties
hereto shall not cause a readjustment of the interests of the parties stated in
Exhibit "A," but any renewal or replacement Lease in which less than all
parties elect to participate shall not be subject to this agreement but shall
be deemed subject to a separate Operating Agreement in the form of this
agreement.
If the interests of the parties in the Contract Area vary according to
depth, then their right to participate proportionately in renewal or
replacement Leases and their right to receive an assignment of interest shall
also reflect such depth variances.
The provisions of this Article shall apply to renewal or replacement
Leases whether they are for the entire interest covered by the expiring Lease
or cover only a portion of its area or an interest therein. Any renewal or
replacement Lease taken before the expiration of its predecessor Lease, or
taken or contracted for or becoming effective within six (6) months after the
expiration of the existing Lease, shall be subject to this provision so long as
this agreement is in effect at the time of such acquisition or at the time the
renewal or replacement Lease becomes effective; but any Lease taken or
contracted for more than six (6) months after the expiration of an existing
Lease shall not be deemed a renewal or replacement Lease and shall not be
subject to the provisions of this agreement.
The provisions in this Article shall also be applicable to extensions
of Oil and Gas Leases.
C. ACREAGE OR CASH CONTRIBUTIONS:
While this agreement is in force, if any party contracts for a
contribution of cash towards the drilling of a well or any other operation on
the Contract Area, such contribution shall be paid to the party who conducted
the drilling or other operation and shall be applied by it against the cost of
such drilling or other operation. If the contribution be in the form of
acreage, the party to whom the contribution is made shall promptly tender an
assignment of the acreage, without warranty of title, to the Drilling Parties
in the proportions said Drilling Parties shared the cost of drilling the well.
Such acreage shall become a separate Contract Area and, to the extent possible,
be governed by provisions identical to this agreement. Each party shall
promptly notify all other parties of any acreage or cash contributions it may
obtain in support of any well or any other operation on the Contract Area. The
above provisions shall also be applicable to optional rights to earn acreage
outside the Contract Area which are in support of well drilled inside the
Contract Area.
If any party contracts for any consideration relating to disposition
of such party's share of substances produced hereunder, such consideration
shall not be deemed a contribution as contemplated in this Article VIII.C.
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
D. ASSIGNMENT; MAINTENANCE OF UNIFORM INTEREST:
For the purpose of maintaining uniformity of ownership in the Contract
Area in the Oil and Gas Leases, Oil and Gas Interests, wells, equipment and
production covered by this agreement no party shall sell, encumber, transfer or
make other disposition of its interest in the Oil and Gas Leases and Oil and
Gas Interests embraced within the Contract Area or in wells, equipment and
production unless such disposition covers either:
1. the entire interest of the party in all Oil and Gas Leases, Oil and
Gas Interests, wells, equipment and production; or
2. an equal undivided percent of the party's present interest in all
Oil and Gas Leases, Oil and Gas Interests, wells, equipment and production in
the Contract Area.
Every sale, encumbrance, transfer or other disposition made by any
party shall be made expressly subject to this agreement and shall be made
without prejudice to the right of the other parties, and any transferee of an
ownership interest in any Oil and Gas Lease or Interest shall be deemed a party
to this agreement as to the interest conveyed from and after the effective date
of the transfer of ownership; provided, however, that the other parties shall
not be required to recognize any such sale, encumbrance, transfer or other
disposition for any purpose hereunder until thirty (30) days after they have
received a copy of the instrument of transfer or other satisfactory evidence
thereof in writing from the transferor or transferee. No assignment or other
disposition of interest by a party shall relieve such party of obligations
previously incurred by such party hereunder with respect to the interest
transferred, including without limitation the obligation of a party to pay all
costs attributable to an operation conducted hereunder in which such party has
agreed to participate prior to making such assignment, and the lien and
security interest granted by Article VII.B. shall continue to burden the
interest transferred to secure payment of any such obligations.
If, at any time the interest of any party is divided among and owned
by four or more co-owners, Operator, at its discretion, may require such
co-owners to appoint a single trustee or agent with full authority to receive
notices, approve expenditures, receive billings for and approve and pay such
party's share of the joint expenses, and to deal generally with, and with power
to bind, the co-owners of such party's interest within the scope of the
operations embraced in this agreement; however, all such co-owners shall have
the right to enter into and execute all contracts or agreements for the
disposition of their respective shares of the Oil and Gas produced from the
Contract Area and they shall have the right to receive, separately, payment of
the sale proceeds thereof.
E. WAIVER OF RIGHTS TO PARTITION:
If permitted by the laws of the state or states in which the property
covered hereby is located, each party hereto owning an undivided interest in
the Contract Area waives any and all rights it may have to partition and have
set aside to it in severaly its undivided interest therein.
F. PREFERENTIAL RIGHT TO PURCHASE:
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
ARTICLE IX.
INTERNAL REVENUE CODE ELECTION
If, for federal income tax purposes, this agreement and the operations
hereunder are regarded as a partnership, and if the parties have not otherwise
agreed to form a tax partnership pursuant to Exhibit "G" or other agreement
between them, each party thereby affected elects to be excluded from the
application of all of the provisions of Subchapter "K," Chapter 1, Subtitle
"A," of the Internal Revenue Code of 1986, as amended ("Code"), as permitted
and authorized by Section 761 of the Code and the regulations promulgated
thereunder. Operator is authorized and directed to execute on behalf of each
party hereby affected such evidence of this election as may be required by the
Secretary of the Treasury of the United States or the Federal Internal Revenue
Service, including specifically, but not by way of limitation, all of the
returns, statements, and the data required by Treasury Regulations ss.1.761.
Should there be any requirement that each party hereby affected give further
evidence of this election, each such party shall execute such documents and
furnish such other evidence as may be required by the Federal Internal Revenue
Service or as may be necessary to evidence this election. No such party shall
give any notices or take any other action inconsistent with the election made
hereby. If any present or future income tax laws of the state or states in
which the Contract Area is located or any future income tax laws of the United
States contain provisions similar to those in Subchapter "K," Chapter I,
Subtitle "A," of the Code, under which an election similar to that provided by
Section 761 of the Code is permitted, each party hereby affected shall make
such election as may be permitted or required by such laws. In making the
foregoing election, each such party states that the income derived by such
party from operations hereunder can be adequately determined without the
computation of partnership taxable income.
ARTICLE X.
CLAIMS AND LAWSUITS
Operator may settle any single uninsured third party damage claim or
suit arising from operations hereunder if the expenditure does not exceed
Seventy-Five Thousand Dollars ($75,000.00) and if the payment is in complete
settlement of such claim or suit. If the amount required for settlement exceeds
the above amount, the parties hereto shall assume and take over the further
handling of the claim or suit, unless such authority is delegated to Operator.
All costs and expenses of handling, settling, or otherwise discharging such
claim or suit shall be at the joint expense of the parties participating in the
operation from which the claim or suit arises. If a claim is made against any
party or if any party is sued on account of any matter arising from operations
hereunder over which such individual has no control because of the rights given
Operator by this agreement, such party shall immediately notify all other
parties, and the claim or suite shall be treated as any other claim or suit
involving operations hereunder.
ARTICLE XI.
FORCE MAJEURE
If any party is rendered unable, wholly or in part, by force majeure
to carry out its obligations under this agreement, other than the obligation to
indemnify or make money payments or furnish security, that party shall give to
all other parties prompt written notice of the force majeure with reasonably
full particulars concerning it; thereupon, the obligations of the party giving
the notice, so far as they are affected by the force majeure, shall be
suspended during, but no longer than, the continuance of the force majeure. The
term "force majeure," as here employed, shall mean an act of God, strike,
lockout, or other industrial disturbance, act of
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
the public enemy, war, blockade, public riot, lightning, fire, storm, flood or
other act of nature, explosion, governmental action, governmental delay,
restraint or inaction, unavailability of equipment, and any other cause,
whether of the kind specifically enumerated above or otherwise, which is not
reasonably within the control of the party claiming suspension.
The affected party shall use all reasonable diligence to remove the
force majeure situation as quickly as practicable. The requirement that any
force majeure shall be remedied with all reasonable dispatch shall not require
the settlement of strikes, lockouts, or other labor difficulty by the party
involved, contrary to its wishes; however all such difficulties shall be
handled shall be entirely within the discretion of the party concerned.
ARTICLE XII.
NOTICES
All notices authorized or required between the parties by any of the
provisions of this agreement, unless otherwise specifically provided, shall be
in writing and delivered in person or by United States mail, courier service,
telegram, telex, telecopier or any other form of facsimile, postage or charges
prepaid, and addressed to such parties at the addresses listed on Exhibit "A."
All telephone or oral notices permitted by this agreement shall be confirmed
immediately thereafter by written notice. The originating notice given under
any provision hereof shall be deemed delivered only when received by the party
to whom such notice is directed, and the time for such party to deliver any
notice in response thereto shall run from the date the originating notice is
received. "Receipt" for purposes of this agreement with respect to written
notice delivered hereunder shall be actual delivery of the notice to the
address of the party to be notified specified in accordance with this
agreement, or to the telecopy, facsimile or telex machine of such party. The
second or any responsive notice shall be deemed delivered when deposited in the
United States mail or at the office of the courier or telegraph service, or
upon transmittal by telex, telecopy or facsimile, or when personally delivered
to the party to be notified, provided, that when response is required within 24
or 48 hours, such response shall be given orally or by telephone, telex,
telecopy or other facsimile within such period. Each party shall have the right
to change its address at any time, and from time to time, by giving written
notice thereof to all other parties. If a party is not available to receive
notice orally or by telephone when a party attempts to deliver a notice
required to be delivered within 24 or 48 hours, the notice may be delivered in
writing by any other method specified herein and shall be deemed delivered in
the same manner provided above for any responsive notice.
ARTICLE XIII.
TERM OF AGREEMENT
This agreement shall remain in full force and effect as to the Oil and
Gas Leases and/or Oil and Gas Interests subject hereto for the period of time
selected below; provided, however, no party hereto shall ever be construed as
having any right, title or interest in or to any Lease or Oil and Gas Interest
contributed by any other party beyond the term of this agreement.
[X] Option No. 1: So long as any of the Oil and Gas Leases
subject to this agreement remain or are continued in force
as to any part of the Contract Area, whether by production,
extension, renewal or otherwise.
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
[ ] Option No. 2: In the event the well described in Article
VI.A., or any subsequent well drilled under any provision of
this agreement, results in the Completion of a well as a well
capable of production of Oil and/or Gas in paying quantities,
this agreement shall continue in force so long as any such
well is capable of production, and for an additional period
of _____________ days thereafter; provided, however, if,
prior to the expiration of such additional period, one or
more of the parties hereto are engaged in drilling,
Reworking, Deepening, Sidetracking, Plugging Back, testing or
attempting to Complete or Re-complete a well or wells
hereunder, this agreement shall continue in force until such
operations have been completed and if production results
therefrom, this agreement shall continue in force as provided
herein. In the event the well descried in Article VI.A., or
any subsequent well drilled hereunder, results in a dry hole,
and no other well is capable of producing Oil and/or Gas from
the Contract Area, this agreement shall terminate unless
drilling, Deepening, Sidetracking, Completing, Recompleting,
Plugging Back or Reworking operations are commenced within
_____________days from the date of abandonment of said well.
"Abandonment" for such purposes shall mean either (i) a
decision by all parties not to conduct any further operations
on the well or (ii) the elapse of 180 days from the conduct
of any operations on the well, whichever first occurs.
The termination of this agreement shall not relieve any party hereto
from any expense, liability or other obligation or any remedy therefor which
has accrued or attached prior to the date of such termination.
Upon termination of this agreement and the satisfaction of all
obligations hereunder, in the event a memorandum of this Operating Agreement
has been filed of record, Operator is authorized to file of record in all
necessary recording offices a notice of termination, and each party hereto
agrees to execute such a notice of termination as to Operator's interest, upon
request of Operator, if Operator has satisfied all its financial obligations.
ARTICLE XIV.
COMPLIANCE WITH LAWS AND REGULATIONS
A. LAWS, REGULATIONS AND ORDERS:
This agreement shall be subject to the applicable laws of the state in
which the Contract Area is located, to the valid rules, regulations, and orders
of any duly constituted regulatory body of said state; and to all other
applicable federal, state, and local laws, ordinances, rules, regulations and
orders.
B. GOVERNING LAW:
This agreement and all matters pertaining hereto, including but not
limited to matters of performance, non-performance, breach, remedies,
procedures, rights, duties, and interpretation or construction, shall be
governed and determined by the law of the state in which the Contract Area is
located. If the Contract Area is in two or more states, the law of the state of
Texas shall govern.
C. REGULATORY AGENCIES:
Nothing herein contained shall grant, or be construed to grant,
Operator the right or authority to waive or release any rights, privileges, or
obligations which Non-Operators may have under federal or state laws or
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<PAGE> 35
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
under rules, regulations or orders promulgated under such laws in reference to
oil, gas and mineral operations, including the location, operation, or
production of wells, on tracts offsetting or adjacent to the Contract Area.
With respect to the operations hereunder, Non-Operators agree to
release Operator from any and all losses, damages, injuries, claims and causes
of action arising out of, incident to or resulting directly or indirectly from
Operator's interpretation or application of rules, rulings, regulations or
orders of the Department of Energy or Federal Energy Regulatory Commission or
predecessor or successor agencies to the extent such interpretation or
application was made in good faith and does not constitute gross negligence.
Each Non-Operator further agrees to reimburse Operator for such Non-Operator's
share of production or any refund, fine, levy or other governmental sanction
that Operator may be required to pay as a result of such an incorrect
interpretation or application, together with interest and penalties thereon
owing by Operator as a result of such incorrect interpretation or application.
ARTICLE XV.
MISCELLANEOUS
A. EXECUTION:
This agreement shall be binding upon each Non-Operator when this
agreement or a counterpart thereof has been executed by such Non-Operator and
Operator notwithstanding that this agreement is not then or thereafter executed
by all of the parties to which it is tendered or which are listed on Exhibit
"A" as owning an interest in the Contract Area or which own, in fact, an
interest n the Contract Area. Operator may, however, by written notice to all
Non-Operators who have become bound by this agreement as aforesaid, given at
any time prior to the actual spud date of the Initial Well bu in no event later
than five days prior to the date specified in Article VI.A. for commencement of
the Initial Well, terminate this agreement if Operator in its sole discretion
determines that there is insufficient participation to justify commencement of
drilling operations. In the event of such a termination by Operator, all
further obligations of the parties hereunder shall cease as of such
termination. In the event any Non-Operator has advanced or prepaid any share of
drilling or other costs hereunder, all sums so advanced shall be returned to
such Non-Operator without interest. In the event Operator proceeds with
drilling operations for the Initial Well without the execution hereof by all
persons listed on Exhibit "A" as having a current working interest in such
well, Operators shall indemnify Non- Operators with respect to all costs
incurred for the Initial Well which would have been charged to such person
under this agreement if such person had executed the same and Operator shall
receive all revenues which would have been received by such person under this
agreement if such person had executed the same.
B. SUCCESSORS AND ASSIGNS:
This agreement shall be binding upon and shall inure to the benefit of
the parties hereto and their respective heirs, devisees, legal representatives,
successors and assigns, and the terms hereof shall be deemed to run with the
Leases or Interests included within the Contract Area.
C. COUNTERPARTS:
This instrument may be executed in any number of counterparts, each of
which shall be considered an original for all purposes.
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<PAGE> 36
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
D. SEVERABILITY:
For the purposes of assuming or rejecting this agreement as an
executory contract pursuant to federal bankruptcy laws, this agreement shall
not be severable, but rather must be assumed or rejected in its entirety, and
the failure of any party to this agreement to comply with all of its financial
obligations provided herein shall be a material default.
ARTICLE XVI.
OTHER PROVISIONS
Notwithstanding anything contained herein to the contrary:
A. Should it be necessary to conduct hearings before governmental agencies
for the securing of spacing or pooling orders, or for certifying new gas, the
costs attributable to such hearings as well as fees paid attorneys and
witnesses, shall be borne by the Drilling Parties in the proportion that the
interest of each Drilling Party bears to the total interest of all Drilling
Parties as such interests appear in Exhibit "A".
B. In addition to Article VII.C. and D., Operator shall have the right,
at its discretion, to require prepayment of all costs, including dry hole costs
completion costs, recompletion costs or costs associated with remedial work,
based on an Authority for Expenditure for any well drilled on the Contract
Area. Failure by any party to remit its proportionate part of the above
referenced prepayment to Operator in the manner within the time period
requested shall be deemed an election by such party not to participate in the
cost of the proposed operation thereafter, the proposed operation shall be
conducted under Article VI.B.2. of this Agreement.
C. The proceeds from the sale of all hydrocarbons produced, saved and
sold shall be paid to Operator by all purchasing companies purchasing such
hydrocarbons and by the execution of this Agreement, the Non- Operators
covenant and agree to save all purchasing companies harmless from any and all
liability by reason of paying any such proceeds to Operator. Further,
Non-Operators authorize and direct Operator to deduct from their proportionate
share of such sales all Lease Operating Expenses and other expenses owed to
Operator provided for under the terms of this Agreement and remit the balance
from such sale to Non-Operators.
D. This Agreement shall be construed in accordance with and governed by
the laws of the State of Texas, and all sums payable hereunder to Operator
shall be paid at P.O. Box 7698, Tyler, Texas 75711.
E. In the event that any party shall subsequently create against its
interests any additional royalty, overriding royalty, production payment, or
other burden or charge, the party which subsequently creates any such
additional burden or charge shall hold the other parties to this Agreement
harmless from such additional burdens or charges, and shall satisfy and
discharge such burdens and charges out of its own funds. As security
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<PAGE> 37
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
for the performance of the obligations created by this paragraph, the parties
entitled to be held harmless shall have a lien to secure the performance of the
obligations created by this paragraph. Such lien shall exist upon the interest
to be owned by the party charged with performing such obligation.
F. No party shall exercise any right of partition of the Contract Area or
sale thereof in lieu of partition during the term of this Agreement.
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<PAGE> 38
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
IN WITNESSES WHEREOF, this agreement shall be effective as of the
______ day of _____________, 19___.
ATTEST OR WITNESS: OPERATOR
-------------------------------------
By
- -------------------------------- -------------------------------------
- -------------------------------- -------------------------------------
Type or print name
Title
--------------------------------
Date
---------------------------------
Tax ID or S.S. No.
-------------------
NON-OPERATORS
-------------------------------------
By
- -------------------------------- -------------------------------------
- -------------------------------- -------------------------------------
Type or print name
Title
--------------------------------
Date
---------------------------------
Tax ID or S.S. No.
-------------------
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<PAGE> 39
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
-------------------------------------
By
- -------------------------------- -------------------------------------
- -------------------------------- -------------------------------------
Type or print name
Title
--------------------------------
Date
---------------------------------
Tax ID or S.S. No.
-------------------
-------------------------------------
By
- -------------------------------- -------------------------------------
- -------------------------------- -------------------------------------
Type or print name
Title
--------------------------------
Date
---------------------------------
Tax ID or S.S. No.
-------------------
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<PAGE> 40
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
ACKNOWLEDGMENTS
Note: The following forms of acknowledgment are the short forms
approved by the Uniform Law on Notarial Acts. The validity and effect of these
forms in any state will depend upon the statutes of that state.
Individual acknowledgment:
State of ___________________)
) ss.
County of___________________)
This instrument was acknowledged before me on
by
- ----------------------------------- ------------------------------------------
(Seal, if any)
--------------------------------------------
Title (and Rank)
----------------------------
My commission expires:
----------------------
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<PAGE> 41
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
Acknowledgment in representative capacity:
State of___________________________)
) ss.
County of__________________________)
This instrument was acknowledged before me on
by as
- ----------------------------------- ----------------------------------------
of .
- ------------------------ ----------------------------------------------------
(Seal, if any)
--------------------------------------------
Title (and Rank)
----------------------------
My commission expires:
----------------------
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<PAGE> 42
EXHIBIT "A"
Attached to and made a part of that certain Operating Agreement dated ________,
between ____________, as Operator, and ________________, as Non-Operator.
(TO BE COMPLETED AT A LATER DATE)
END OF EXHIBIT "A"
A-1
<PAGE> 43
EXHIBIT "B"
Producer's 88 - (Producer's Revised 1972) Printed and for sale by Hall-
(New Mexico) Form 342P Peerbough Prom, Roswell, N.M.
OIL & GAS LEASE
THIS AGREEMENT made this__________day of___________, 19____, between
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
of
- ------------------------------------------------ -----------------------------
(Post Office Address)
herein called lessor (whether one or more) and ____________________, lessee:
1. Lessor, in consideration of TEN AND OTHER DOLLARS in hand paid,
receipt of which is here acknowledged, and of the royalties herein provided and
of the agreements of the lessor herein contained, hereby grants, leases and
lets exclusively unto lessee for the purpose of investigating, exploring,
properties, drilling, and operating for and producing oil and gas, injecting
gas, waters, other fluids, and air into subsurface strata, laying pipe lines,
storing oil, building banks, roadways, telephone lines, and other structures
and things thereon to produce, save, take care of, treat, process, store and
transport said minerals ,the following described land in ____________________
County, New Mexico, to-wit:
For the purposes of calculating the rental payments herein provided
for, said land is estimated to comprise _____________ acres, whether it
actually comprises more or less.
2. Subject to the other provisions herein contained, this lease shall
remain in force for a term of ______ years from this date (called "primary
term"), and as long thereafter as oil, gas or other mineral is produced from
said land or land with which said land is pooled.
3. The royalties to be paid by lessee are: (a) on oil, and on other
liquid hydrocarbons saved at the well, of that produced and saved from said
land, same to be delivered at the wells or to the credit of lessor in the pipe
line to which the wells may be connected; (b) on gas, including casinghead gas
or other gaseous substance produced from said land used off the premises or
used in the manufacture or gasoline or other products, the market value at the
well of _____________ of the gas used, provided that on gas sold on or off the
premises the royalty shall be _____________ of the amount realize from such
sale; (c) and at any time when this lease is not validated by other provision
thereof and there is a gas and/or condensate well on said land, or land pooled
therewith, but gas and/or condensate is not being so sold or used and such well
is shut in, either before or after production therefrom, then on or before 90
days after said well is shut in, and thereafter at annual intervals, lessee may
pay or tender an advance annual shut-in royalty equal to the amount of delay
B-1
<PAGE> 44
rentals provided for in this lease for the acreage then held under this lease
by the party making such payment or tender, and so long as said shut-in royalty
is paid or tendered this lease shall not terminate and it will be considered
under all clauses hereof that gas is being produced from the leased premises in
paying quantities. Each such payment shall be paid or tendered to the party or
parties who at the time of such payment would be entitled to receive the
royalties which would be paid under this lease if the well were in fact
producing, or be paid or tendered to the credit of such party or parties in the
depository bank and in the manner hereinafter provided for the payment of
rentals. The amount realized from the sale of gas on or off the premises shall
be the price established by the gas sales contract entered into in good faith
by Lessee and gas purchaser for such term and under such conditions as are
customary in the industry. "Price" shall mean the net amount received by Lessee
after giving effect to applicable regulatory orders and after application of
any applicable price adjustments specified in such contract or regulation
orders. In the event Lessee compresses, treats, purifies, or dehydrates such
gas (whether on or off the leased premises) or transports gas off the leased
premises, Lessee in computing royalty hereunder may deduct from such price a
reasonable charge for each of such functions performed.
4. If operations for drilling are not commenced on said land or on
land pooled therewith on or before one (1) year from this date, this lease
shall terminate as to both parties, unless on or before one (1) year from this
date lessee shall pay or tender to the lessor a rental of $____________________
which shall cover the privilege of deferring commencement of such operations
for a period of twelve (12) months. In like manner and upon like payments or
tenders, annually, the commencement of said operations may be further deferred
for successive periods of twelve (12) months each during the primary term.
Payment or tender may be made to the lessor or to the credit of the lessor in
the ____________________ Bank at ____________________, which bank, or any
successor thereof, shall continue to be the agent for the lessor and lessor's
heirs and assigns. If such bank (or any successor bank) shall fail, liquidate,
or be succeeded by another bank, or for any reason shall fail or refuse to
accept rental, lessee shall not be held in default until thirty (30) days after
lessor shall deliver to lessee a recordable instrument making provision for
another acceptable method of payment or tender, and any depository charge is a
liability of the lessor. The payment or tender of rental may be made by check
or draft of lessee, mailed or delivered to said bank or lessor, or any lessor
if more than one, on or before the rental paying date. Any timely payment or
tender of rental or shut-in royalty which is made in a bona fide attempt to
make proper payment, but which is erroneous in whole or in part as to parties,
amounts, or depositories shall nevertheless be sufficient to prevent
termination of this lease in the same manner as though a proper payment had
been made; provided, however, lessee shall correct such error within thirty
(30) days after lessee has received written notice thereof by certified mail
from lessor together with such instruments as are necessary to enable lessee to
make proper payment.
5. Lessee is hereby granted the right and power, from time to time, to
pool or combine, this lease, the land covered by it or any part or horizon
thereof with any other land, lease, leases, mineral estates or parts thereof
for the production of oil or gas. Units pooled hereunder shall not exceed the
standard proration unit fixed by law or by the New Mexico Oil Conservation
Commission or by other lawful authority for the pool or area in which said land
is situated, plus a tolerance of 10%. Lessee shall file written unit
designations in the county in which the premises are located and such units may
be designated from time to time and either before or after the completion of
wells. Drilling operations on or production from any part of any such unit
shall be considered for all purposes, except the payment of royalty, as
operations conducted upon or production from the land described in this lease.
There shall be allocated to the land covered by this lease included in any such
unit that portion of the total production of pooled minerals from wells in the
unit, after deducting any used in lease or unit operations, which the number of
surface acres in the land covered by this lease included in the unit bears to
the total number of surface acres in the unit. The production so allocated
shall be considered for all purposes, including the payment or delivery of
royalty, to be the entire production of pooled minerals from the portion of
said land covered hereby and included in said unit in the same manner as though
produced from
B-2
<PAGE> 45
said land under the terms of this lease. Any pooled unit designated by lessee,
as provided herein, may be dissolved by lessee by recording an appropriate
instrument in the County where the land is situated at any time after the
completion of a dry hole or the cessation of production on said unit.
6. If prior to the discovery of oil or gas hereunder, lessee should
drill and abandon a dry hole or holes hereunder, or if after discovery of oil
or gas the production thereof should cease for any cause, this lease shall not
terminate if lessee commences working or additional drilling operations within
60 days thereafter and diligently prosecutes the same, or (if it be within the
primary term) commences or resumes the payment or tender of rentals or
commences operations for drilling or reworking on or before the rental paying
date next ensuing after the expiration of three months from date of abandonment
of said dry hole or holes or the cessation of production. If at the expiration
of the primary term oil or gas is not being lessee is then engaged in
operations for drilling or reworking of any well, this lease shall remain in
force so long as such operations are diligently prosecuted with no Cessation of
more than 60 consecutive days. If during the drilling or reworking of any well
under this paragraph, lessee loses or junks the hole or well and after diligent
efforts in good faith is unable to complete said operations then within 30 days
after the abandonment of said operations lessee may commence another well and
drill the same with due diligence. If any drilling, additional drilling, or
reworking operations hereunder result in production, then this lease shall
remain in full force so long thereafter as oil or gas is produced hereunder.
7. Lessee shall have free use of oil, gas and water from said land,
except water from lessor's wells and tanks, for all operations hereunder, and
the royalty shall be computed after deducting any so used. Lessee shall have
the right at any time during or after the expiration of this lease to remove
all property and fixtures placed by lessee on said land, including the right to
draw and remove all casing. When required by lessor, lessee will bury all pipe
lines on cultivated lands below ordinary plow depth, and no well shall be
drilled within two hundred feet (200 ft.) of any residence or bam now on said
land without lessor's consent. Lessor shall have the privilege, at his risk and
expense, of using gas from any gas well on said land for stoves and inside
lights in the principal dwelling thereon, out of any surplus gas not needed for
operations hereunder.
8. The rights of either party hereunder may be assigned in whole or in
part and the provisions hereof shall extend to the heirs, executors,
administrators, successors and assigns; but no change or division in the
ownership of the land, or in the ownership of or right to receive rentals,
royalties or payments, however accomplished shall operate to enlarge the
obligations or diminish the rights of lessee; and no such change or division
shall be binding upon lessee for any purpose until 30 days after lessee has
been furnished by certified mail at lessee's principal place of business with
acceptable instruments or certified copies thereof constituting the chain of
title from the original lessor. If any such change in ownership occurs through
the death of the owner, lessee may pay or tender any rentals, royalties or
payments to the credit of the deceased or his estate in the depository bank
until such time as lessee has been furnished with evidence satisfactory to
lessee as to the persons entitled to such sums. In the event of an assignment
of this lease as to a segregated portion of said land, the rentals payable
hereunder shall be apportioned as between the several leasehold owners ratably
according to the surface area of each, and default in rental payment by one
shall not affect the rights of other leasehold owners hereunder. An assignment
of this lease, in whole or in part, shall, to the extent of such assignment,
relieve and discharge lessee of any obligations hereunder, and, if lessee or
assignee of part or parts hereof shall fail to make default in the payment of
the proportionate part of the rentals due from such lessee or assignee or fail
to comply with any other provision of such lease, such default shall not affect
this lease in so far as it covers a part of said lands upon which lessee or any
assignee thereof shall so comply or make such payments. Rentals as used in this
paragraph shall also include shut-in royalty.
9. Should lessee be prevented from complying with any express or
implied covenant of this lease, or from conducting drilling or reworking
operations hereunder, or from producing oil or gas hereunder by
B-3
<PAGE> 46
reason of scarcity or inability to obtain or use equipment or material, or by
operation of force majeure, or by any Federal or state law or any order, rule
or regulation of governmental authority, then while so prevented, lessee's duty
shall be suspended, and lessee shall not be liable for failure to comply
therewith; and this lease shall be extended while and so long as lessee is
prevented by any such cause from conducting drilling or reworking operations on
or from producing oil or gas hereunder; and the time while lessee is so
prevented shall not be counted against lessee, anything in this lease to the
contrary notwithstanding.
10. Lessor hereby warrants and agrees to defend the title to said
land, and agrees that lessee, at its option, may discharge any tax, mortgage,
or other lien upon said land, and in the event lessee does so, it shall be
subrogated to such lien with the right to enforce same and apply rentals and
royalties accruing hereunder toward satisfying same. Without impairment of
lessee's rights under the warranty, if this lease covers a less interest in the
oil or gas in all or any part of said land than the entire and undivided fee
simple estate (whether lessor's interest is herein specified or not) then the
royalties, shut-in royalty, rental, and other payments, if any, securing from
any part as to which this lease covers less than such full interest, shall be
paid only in the proportion which the interest therein, if any, covered by this
lease, bears to the whole and undivided fee simple estate therein. Should any
one or more of the parties named above as lessors fail to execute this lease,
it shall nevertheless be binding upon the party or parties executing the same.
11. Lessee, its/his successors, heirs and assigns, shall have the
right at any time to surrender this lease, in whole or in part, to lessor or
his heirs, successors, and assigns by delivering or mailing a release thereof
to the lessor, or by placing a release thereof of record in the county in which
said land is situated; thereupon lessee shall be relieved from all obligations,
expressed or implied, of this agreement as to acreage so surrendered, and
thereafter the rentals and shut-in royalty payable hereunder shall be reduced
in the proportion that the acreage covered hereby is reduced by said release or
releases.
Executed the day and year first above written.
B-4
<PAGE> 47
EXHIBIT "C"
Attached to and made a part of that certain Operating Agreement dated ________,
______, between _____________, as Operator and ______________, as Non-Operators.
ACCOUNTING PROCEDURE
I. GENERAL PROVISIONS
1. DEFINITIONS
"Property" shall mean the real and personal property subject to the
Agreement to which this Accounting Procedure is attached.
"Operations" shall mean any and all operations and activities
necessary or proper for the acquisition, development, operation,
protection and maintenance of the Property and the Affiliated Program.
"Joint Account" shall mean the account showing the charges and credits
accruing because of the Operations and which are to be shared by the
Parties according to their pro rata interests.
"Operator" shall mean the Party designated to conduct the Operations.
"Non-Operators" shall mean the Parties other than the Operator.
"Parties" shall mean Operator and Non-Operators.
C-1
<PAGE> 48
"First-level supervisors" shall mean those employees whose primary
function in Operations is the direct supervision of other employees,
service companies, drilling rigs, contract labor, and other personnel
directly employed on the Property in a field operating capacity.
"Technical Employees" shall mean those employees having special
drilling, engineering, geological, production or other professional
skills, and whose primary function in Operations is the handling of
specific operating conditions and problems for the benefit of the
Property.
"Personal Expenses" shall mean travel, meals, lodging, and other
reasonable reimbursable expenses of Operator's employees.
"Material" shall mean personal property, equipment or supplies
acquired or held for use on the Property.
"Controllable Material" shall be defined as Material which is
ordinarily so classified and controlled by Operator in the conduct of
its Operations.
2. STATEMENT AND BILLINGS
Operator shall bill Non-Operators on or before the last day of each
month for their proportionate share of costs and expenses for the
preceding month. Such bills will be accompanied by statements of all
charges and credits to the Joint Account, summarized by appropriate
classifications indicative of the nature thereof.
3. ADVANCES AND PAYMENTS BY ADMINISTRATORS
A. Unless otherwise provided for in the Agreement, the Operator
may require the Non-Operators to advance their share of
estimated cash outlay for the succeeding month's operation
within fifteen (15) days after receipt of the billing or by
the first day of the month for which the advance is required,
whichever is later. Operator shall adjust each monthly
billing to reflect advances received from the Non-Operators.
C-2
<PAGE> 49
B. Each Non-Operator shall pay to Operator in Smith County,
Texas its proportion of all bills within fifteen (15) days
after receipt. If payment is not made within such time, the
unpaid balance shall bear interest monthly at a rate of one
and one-half percent (1 1/2%) per month or the maximum
contract rate permitted by the applicable usury laws in the
state in which the Property is located, whichever is the
lesser, plus attorney's fees, court costs, and other costs in
connection with the collection of unpaid amounts.
4. ADJUSTMENTS
Payment of any such bills shall not prejudice the right of any
Non-Operator to protest or question the correctness thereof; provided
however, all bills and statements rendered to Non-Operators by
Operator during any calendar year shall conclusively be presumed to be
true and correct after twenty-four (24) months following the end of
any such calendar year, unless within the said twenty-four (24) month
period a Non-Operator takes written exception thereto and makes claim
on Operator for adjustment. No adjustment favorable to Operator shall
be made unless it is made within the same prescribed period. The
provisions of this paragraph shall not prevent adjustments resulting
from a physical inventory of Controllable Material as provided for in
Section V.
5. AUDITS
A. A Non-Operator, upon notice in writing to Operator and all
other Non-Operators, shall have the right to audit Operator's
accounts and records relating to the Joint Account for any
calendar year within the twenty-four (24) month period
following the end of such calendar year; provided, however,
the making of an audit shall not extend the time for the
taking of written exception to and the adjustment of accounts
as provided for in Paragraph 4 of this Section I. Where there
are two or more Non-Operators, the Non-Operators shall make
every reasonable effort to conduct a joint audit in a manner
which will result in a minimum of inconvenience to the
Operator. Operator shall bear no portion of the
Non-Operator's audit cost incurred under this paragraph. The
audits shall not be conducted more than once each year
without prior approval of Operator, except upon the
resignation or removal of the Operator, and shall be made at
the expense of those Non-Operators approving such audit.
B. The Operator shall reply in writing to an audit report within
180 days after receipt of such report.
C-3
<PAGE> 50
6. APPROVAL BY NON-OPERATORS
Where an approval or other agreement of Non-Operators is expressly
required under other sections of this Accounting Procedure and if the
agreement to which this Accounting Procedure is attached contains no
contrary provisions in regard thereto, Operator shall notify all
Non-Operators of the Operator's proposal and the agreement or approval
of a majority in interest of the Non-Operators shall be controlling on
all Non-Operators.
II. DIRECT CHARGES
Operator shall charge the Joint Account with the following items:
1. ECOLOGICAL AND ENVIRONMENTAL
Costs incurred for the benefit of the Property as a result of
governmental or regulatory requirements to satisfy environmental
considerations applicable to the Operations. Such costs may include
surveys of an ecological or archaeological nature and pollution
control procedures as required by applicable laws and regulations.
2. RENTALS AND ROYALTIES
Lease rentals and royalties paid by Operator for the Operations.
3. LABOR
Salaries, wages, benefits and related expenses shall be charged an a
day-rate basis (recomputed within a reasonable periodic time period)
for:
C-4
<PAGE> 51
A. (1) Operator's employees directly employed on the
Property in the conduct of Operations.
(2) First-level supervisors in the field.
(3) Technical employees directly employed on the
Property.
(4) Technical employees either temporarily or
permanently assigned to and directly employed in the
Operations of the Property.
B. Operator's cost of holiday, vacation, sickness and disability
benefits and other customary allowances paid to the employees
whose salaries and wages are chargeable to the Joint Account
under Paragraph 3A of this Section II. Cost under this
Paragraph 3B may be charged on a "when and as paid basis" or
by "percentage assessment" on the amount of salaries and
wages chargeable to the Joint Account under Paragraph 3A of
this Section II. If percentage assessment is used, the rate
shall be based on the Operator's cost experience.
C. Expenditures or contributions made pursuant to assessments
imposed by governmental authority which are applicable to
Operator's labor cost of salaries and wages chargeable to the
Joint Account under Paragraphs 3A of this Section II.
D. Personal expenses of those employees whose salaries and wages
are chargeable to the Joint Account under Paragraph 3A of
this Section II.
E. Operator's current costs of established plans for employees'
group life insurance, hospitalization, pension, retirement,
stock purchase, thrift, bonus, and other benefit plans of a
like nature, applicable to Operator's labor cost chargeable
to the Joint Account under Paragraphs 3A of this Section II
shall be Operator's actual cost not to exceed the percent
most recently recommended by the Council of Petroleum
Accountants Societies.
C-5
<PAGE> 52
4. MATERIAL
Material purchased or furnished by Operator for use on the Property as
provided under Section IV. Only such Material shall be purchased for
or transferred to the Property as may be required for immediate use
and is reasonably practical and consistent with efficient and
economical operations.
The accumulation of surplus stocks shall be avoided.
5. TRANSPORTATION
Transportation of employees and Material necessary for the Operations,
not previously charged as a part of day-rate basis.
6. SERVICES
The cost of contract services and utilities procured from outside
sources including without limitation auditing and taxation services,
engineering consultant services including engineers, geologists and
landmen, and services in connection with matters before or involving
government agencies or regulatory bodies.
7. EQUIPMENT AND FACILITIES FURNISHED BY OPERATOR
A. Operator shall charge the Joint Account for use of Operator
owned equipment and facilities at rates commensurate with
costs of ownership and operation. Such rates shall include
costs of maintenance, repairs, other operating expense,
insurance, taxes, depreciation, and interest on gross
investment less accumulated depreciation not to exceed twelve
percent (12%) per annum. Such rates shall not exceed average
commercial rates currently prevailing in the immediate area
of the Property.
B. In lieu of charges in Paragraph 7A above, Operator may elect
to use average commercial rates prevailing in the immediate
area of the Property. For automotive equipment, Operator may
elect to use rates published by the Petroleum Motor Transport
Association.
C-6
<PAGE> 53
8. DAMAGES AND LOSSES TO PROPERTY
All costs or expenses necessary for the repair or replacement of
Property made necessary because of damages or losses incurred by fire,
flood, storm, theft, accident, or other cause, except those resulting
from Operator's gross negligence or willful misconduct. Operator shall
furnish Non-Operators written notice of damages or losses incurred as
soon as practicable after a report thereof has been received by
Operator.
9. LEGAL EXPENSE
All costs and expenses of handling, investigating, and settling
litigation or claims arising by reason of the Operations or necessary
to protect or recover the Property, including, but not limited to,
attorney's fees, court costs, cost of investigation or procuring
evidence and amounts paid in settlement or satisfaction of any such
litigation or claims. All costs and expenses necessary for title work,
division order title opinions, transfer orders, deeds, assignments and
conveyances which affect title to the oil and gas estate. All costs
and expenses related to curative matters and representation before
regulatory or governmental agencies.
10. TAXES
All taxes of every kind and nature assessed or levied upon or in
connection with the Property, the operation thereof, or the production
therefrom, and which taxes have been paid by the Operator for the
benefit of the Parties. If the ad valorem taxes are based in whole or
in part upon separate valuations of each party's working interest,
then notwithstanding anything to the contrary herein, charges to the
Joint Account shall be made and paid by the Parties hereto in
accordance with the tax value generated by each party's working
interest.
11. INSURANCE
Net premiums paid for insurance provided for the Operations for the
projection of the Parties. In the event Operations are conducted in a
state in which Operator may act as self-insurer for Worker's
Compensation and/or Employer's Liability under the respective state's
laws, Operator may, at its election, include the risk under its
self-insurance program and in that event, Operator shall include a
charge at Operator's cost not to exceed manual rates.
C-7
<PAGE> 54
12. ABANDONMENT AND RECLAMATION
Costs incurred for abandonment of the Property, including costs
required by governmental or other regulatory authority.
13. COMMUNICATIONS
Cost of acquiring, leasing, installing, operating, repairing and
maintaining communication systems, including radio and microwave
facilities directly serving the Property. In the event communication
facilities/systems serving the Property are Operator owned, charges to
the Joint Account shall be made as provided in Paragraph 7 of this
Section II.
14. ADDITIONAL SERVICES
The cost of all additional services provided by the Operator or by
third parties relating to the Operations, whether direct or indirect,
including without limitation accounting, engineering, land and
administrative services. Such charges to the Joint Account will
include without limitation salaries and benefits of Operator's
personnel; automotive and travel; office rental; utilities; the cost
of furnishing, maintaining, operating or otherwise securing the use of
office equipment, furniture, machines, computers, and other physical
equipment and facilities; Amounts paid to outside parties for
additional services; an allocable part of General and Administrative
Expenses and other indirect cost and all other cost and expense
related to the performance of these additional services.
15. OTHER EXPENDITURES
Any other expenditure not covered or dealt with in the foregoing
provisions of this Section II or in Section III, and which is incurred
by the Operator for the necessary and proper conduct of the
Operations.
C-8
<PAGE> 55
III. INDIRECT CHARGES
1. OVERHEAD - DRILLING AND PRODUCING OPERATIONS
Overhead - Fixed Rate Basis
(1) Operator shall charge the Joint Account at the following rates
per well per month:
Drilling Well Rate: $7,420.00
Producing Well Rate: $ 780.00
(2) Application of Overhead - Fixed Rate Basis shall be as
follows:
(a) Drilling Well Rate
1) Charges for onshore drilling wells shall
begin on the date well is spudded and
terminate on the date of completion or
abandonment.
2) Charges for wells undergoing any type of
workover or recompletion for a period of
five (5) consecutive workdays or more shall
be made at the drilling well rate. Such
charges shall be applied for the period
from date workover operations, with rig,
commence through date of rig release,
except that no charge shall be made during
suspension of operations for fifteen (15)
or more consecutive days.
(b) Producing Well Rates
C-9
<PAGE> 56
1) An active well either produced or injected
into for any portion of the month shall be
considered as a one-well charge for the
entire month.
2) Each active completion in a multi-completed
well in which production is not commingled
down hole shall be considered as a one-well
charge providing each completion is
considered a separate well by the governing
regulatory authority.
3) An inactive gas well shut in because of
overproduction or failure of purchaser to
take the production shall be considered as
a one-well charge providing the gas well is
directly connected to a permanent sales
outlet.
4) A one-well charge may be made for the month
in which plugging and abandonment
operations are completed on any well.
5) Each facility serving the Operations other
than a well shall count as a well for this
purpose, such as compressor or dehydration
facilities, or other facilities for
producing (including secondary recovery)
operations or for treating, handling or
marketing production.
6) All other inactive wells (including but not
limited to inactive wells covered by unit
allowable, ____________________ lease
allowable, transferred allowable, etc.)
shall not qualify for an overhead charge.
(3) The well rates shall be adjusted as of the first day of
April, 1999, and each year on the first day of April
thereafter. The adjustment shall be computed by multiplying
the rate currently in use by the percentage increase or
decrease in the average weekly earnings of Crude Petroleum
and Gas Production Workers for the last calendar year
compared to the calendar year preceding as show by the index
of average weekly earnings of Crude Petroleum and Gas Fields
Production Workers as published by the United States
Department of Labor, Bureau of Labor Statistics, or the
equivalent Canadian index as published by Statistics Canada,
as applicable. The adjusted rates shall be the rates
currently in use, plus or minus the computed adjustment.
C-10
<PAGE> 57
2. OVERHEAD - MAJOR CONSTRUCTION
To compensate Operator for overhead costs incurred in the construction
and installation of fixed assets, the expansion of fixed assets, and
any other project clearly discernible as a fixed asset required for
the development and operation of the Property, Operator shall either
negotiate a rate prior to the beginning of construction, or shall
charge the Joint Account for overhead based on the following rates for
any Major Construction project in excess of $25,000.
A. Five percent (5%) of first $100,000 or total cost if less;
plus
B. Three percent (3%) of costs in excess of $100,000 but less
than $1,000,000; plus
C. Two percent (2%) of costs in excess of $1,000,000.
Total cost shall mean the gross cost of any one project. For the
purpose of this paragraph, the component parts of a single project
shall not be treated separately and the cost of drilling and workover
wells and artificial lift equipment shall be excluded.
3. CATASTROPHE OVERHEAD
To compensate Operator for overhead costs incurred in the event of
expenditures resulting from a single occurrence due to oil spill,
blowout, explosion, fire, storm, hurricane, or other catastrophes as
agreed to by the Parties, which are necessary to restore the Property
to the equivalent condition that existed prior to the event causing
the expenditures, Operator shall either negotiate a rate prior to
charging the Joint Account or shall charge the Joint Account for
overhead based on the following rates:
A. Five percent (5%) of total costs through $100,000; plus
B. Three percent (3%) of costs in excess of $100,000 but less
than $1,000,000; plus
C-11
<PAGE> 58
C. Two percent (2%) of costs in excess of $1,000,000.
Expenditures subject to the overheads above will not be reduced by
insurance recoveries, and no other overhead provisions of this Section
III shall apply.
4. PROSPECT SCREENING AND EVALUATION
The General and Administrative Expenses incurred by the Operator in
the screening, evaluation and acquisition of Prospects. Such charge
shall be based on an allocation system which is in accordance with
generally accepted accounting principles.
5. GENERAL AND ADMINISTRATIVE EXPENSE
Operator shall charge the Non-Operators for General and Administrative
Expenses allocated to the Program or Partnership in accordance with
generally accepted accounting principles.
6. AMENDMENT OF RATES
The Overhead rates provided for in this Section III may be amended
from time to time only by mutual agreement between the Parties hereto
if, in practice, the rates are found to be insufficient or excessive.
IV. PRICING OF JOINT ACCOUNT MATERIAL -
PURCHASES, TRANSFERS AND DISPOSITIONS
Operator is responsible for Joint Account Material and shall make proper and
timely charges and credits for all Material movements affecting the Property.
Operator shall provide all Material for use on the Property; however, at
Operator's option, such Material may be supplied by the Non-Operator. Operator
shall make timely disposition of idle and/or surplus Material, such disposal
being made either through sale to Operator or Non-Operator, division in kind,
or sale to outsiders. Operator may purchase, but shall be under no
C-12
<PAGE> 59
obligation to purchase, the interest of Non-Operators in surplus Material. The
disposal of surplus Controllable Material not purchased by the Operator shall
be for the highest price offered and where possible Operator shall obtain bids
from two or more parties.
1. PURCHASES
Material purchased shall be charged at the price paid by Operator
after _____________ deduction of all discounts received. In case of
Material found to be defective or returned to vendor for any other
reasons, credit shall be passed to the Joint Account when adjustment
has been received by the Operator.
2. TRANSFERS AND DISPOSITIONS
Material furnished to the Property and Material transferred from the
Property or disposed of by the Operator, unless otherwise agreed to by
the Parties, shall be priced on the following basis exclusive of cash
discounts:
A. New Material (Condition "A")
Material shall be priced at the current replacement cost of
the same kind of Material, effective at date of movement.
B. Good Used Material (Condition "B")
Material in sound and serviceable condition and suitable for
reuse without reconditioning:
(1) Material moved to the Property
At seventy-five percent (75%) of current new price,
as determined by Paragraph A.
C-13
<PAGE> 60
(2) Material used on and moved from the Property
(a) At seventy-five percent (75%) of current
new price, as determined by Paragraph A, if
Material was originally charged to the
Joint Account as new Material or
(b) At sixty-five percent (65%) of current now
price, as determined by Paragraph A, if
Material was originally charged to the
Joint Account as used Material.
(3) Material not used on and moved from the Property
At seventy-five percent (75%) of current now price
as determined by Paragraph A.
The cost of reconditioning, if any, shall be
absorbed by the transferring property.
C. Other Used Material
(1) Condition "C"
Material which is not in sound and serviceable
condition and not suitable for its original function
until after reconditioning shall be priced at fifty
percent (50%) of current new price as determined by
Paragraph A. The cost of reconditioning shall be
charged to the receiving property, provided
Condition "C" value plus cost of reconditioning does
not exceed Condition "B" value.
C-14
<PAGE> 61
(2) Condition "D"
Material, excluding junk, no longer suitable for its
original purpose, but usable for some other purpose
shall be priced on a basis commensurate with its
use. Operator may dispose of Condition "D" Material
under procedures normally used by Operator without
prior approval of Non-Operators.
(3) Condition "E"
Junk shall be priced at prevailing prices. Operator
may dispose of Condition "E" Material under
procedures normally utilized by operator without
prior approval of Non-Operators.
D. Obsolete Material
Material is serviceable and usable for its original function
but condition and/or value of such Material is not equivalent
to that which would justify a price provided above may be
specifically priced as agreed to by the Parties. Such price
should result in the Joint Account being charged with the
value of the service rendered by such Material.
3. WARRANTY OF MATERIAL FURNISHED BY OPERATOR
Operator does not warrant the Material furnished. In case of defective
Material, credit shall not be passed to the Joint Account until
adjustment has been received by Operator from the manufacturers or
their agents.
V. INVENTORIES
The Operator shall maintain detailed records of Controllable Material. At
reasonable intervals, inventories shall be taken by the Operator. Adjustments
resulting from the reconciliation of a physical inventory shall be made within
six months following the taking of the inventory. Special inventories may be
taken by the Non- Operators at their expense in accordance with Paragraph 5 of
Section I.
C-15
<PAGE> 62
EXHIBIT "D"
Attached to and made a part of that certain Operating Agreement dated ________,
between _______________, as Operator, and _________________, et al, as
Non-Operator.
INSURANCE
At all times during the conduct of operations hereunder, Operator shall
maintain in force the following insurance, at the expense of and for the
benefit of the joint account:
1. Workmen's Compensation Insurance
A. Statutory Workmen's Compensation coverage to include all
areas involved in operations covered under this contract.
B. Employers liability with a limit of $500,000 each accident.
2. Comprehensive General Liability Insurance (CGL)
A. Standard Comprehensive General, conditions including coverage
for products/completed operations.
B. Contractual Liability insuring contracts between Mewbourne
Oil Company and their contractors; covering assumed tort
liability.
D-1
<PAGE> 63
C. Limits of Liability:
General Aggregate Limit $2,000,000
Products and Completed Operations Aggregate Limit $1,000,000
Personal and Advertising Injury Limit $1,000,000
Each Occurrence Limit $1,000,000
3. Aircraft and Automobile Liability Insurance
A. Standard Comprehensive form including all owned, non-owned
and hired automobile equipment.
B. Limits of Liability: $1,000,000
Combined Single Limit
C. If the Operator will use Owned, Hired or Non-owned Aircraft:
Aircraft Public Liability Insurance $25,000,000
Combined Single Limit
D-2
<PAGE> 64
4. Contractors and Subcontractors
Operator agrees to use its best efforts to assure that its contractors
and subcontractors also comply with the insurance requirements listed
in paragraphs 1-3 above and that certain contractors and
subcontractors engaged in higher risk activities carry appropriate
insurance coverage.
5. Umbrella Policy
In addition to paragraphs 1-3 above, Operator also carries $50,000,000
in Excess Umbrella Liability policies.
6. Operator's Extra Expense Insurance
Operator will carry Operator's Extra Expense Insurance covering costs
of well control, clean up, and redrilling, with a limit per occurrence
of $3,000,000 for well depths of 1-10,000' and $10,000,000 for well
depths over 10,000'.
7. Additional Insurance
In addition to the above referenced types of insurance coverage,
Operator may, but is not required to, carry additional types of
insurance coverage including, but not limited to, various types of
additional excess umbrella liability, public property damage, oil
lease property, pollution or contamination, or similar coverage. The
actual premiums paid for all insurance shall be charged on a pro-rata
basis to the Joint account of the parties hereto.
8. Other Provisions
Any liability, loss, damage claim or expense resulting from accidents
or occurrences not covered by insurance of the character referred to
above or in excess of the insurance actually carried under the
D-3
<PAGE> 65
above provisions, shall be borne by the parties hereto in the
proportions in which they own in the unit area. In the event Operator
is unable to procure and maintain any of the insurance enumerated
above, Operator shall promptly give written notice thereof to the
other parties and in such event, resulting loss, damage, claim and
expense shall be borne by the parties hereto proportion to their
respective interests in the unit area. Such notice shall also
constitute a waiver of the requirement that Operator procure and
maintain the insurance which is the subject of notice.
D-4
<PAGE> 66
EXHIBIT "E"
ATTACHED to that certain Operating Agreement dated _________________, between
________________ as Operator, and ____________________, as Non-Operator.
GAS BALANCING AGREEMENT
FOR GAS WELL PRODUCTION
DURING the period or periods when any party hereto has no market for,
or its purchaser is unable to take or if any party fails to take its share of
gas, the other parties shall be entitled to produce each month one hundred
percent of the allowable gas production assigned to the Unit Area by the
appropriate governmental entity having jurisdiction, and each of such parties
shall have the right to take all or any part of its prorata share. All parties
hereto shall share in and own the condensate recovered at the surface in
accordance with their respective interest, but each party taking such gas shall
own all of the gas delivered to its purchaser. Each party unable to market its
share of the gas produced shall be credited with gas in storage equal to its
share of the gas produced, less its share of gas used in lease operations,
vented or lost. Operator shall maintain a current account of the gas balance
between the parties and shall furnish all parties hereto monthly statements
showing the total quantity of gas produced, used in lease operations, vented or
lost, and the total quantity of condensate recovered.
AFTER notice to Operator, any party may begin taking or delivering its
share of the gas produced. In addition to its share, each party, until it has
recovered its gas in storage and balanced its gas account, shall be entitled to
take or deliver a volume of gas equal to fifty (50%) percent of each
overproduced party's share of gas produced. If more than one party is entitled
to the additional gas produced, they shall divide such additional gas in
accordance with Unit participation.
IN, the event production of gas permanently ceases prior to the time
that the accounts of the parties have been balanced, a complete balancing shall
be accomplished by a money settlement. Such settlement shall be based on the
price or prices received by each over-produced party, less taxes, for its share
of the overproduced gas, without interest.
E-1
<PAGE> 67
AT all times while gas is produced from the Unit Area, each party
shall make appropriate settlement of all royalties, overriding royalty
interest, and other payments out of or in lieu of production for which it is
responsible, as if each party were taking or delivering to a purchaser its
share, and its share only, of such gas production. Each party hereto agrees to
hold each other party harmless from any and all claims for royalty payments
asserted by royalty owners to whom each party is accountable.
THE provisions of this agreement shall be separately applicable to
each reservoir to the end that production from one reservoir in a gas well may
not be utilized for the purpose of balancing underproduction from other
reservoirs.
END EXHIBIT "E"
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 of our
report dated September 3, 1998, on our audit of the balance sheet of Mewbourne
Development Corporation, and our report dated April 12, 1999, on our audit of
the balance sheet of Mewbourne Energy Partners 99-A, L.P. We also consent to
the reference to our firm under the caption "Experts."
/s/ PRICEWATERHOUSECOOPERS L.L.P.
Dallas, Texas
April 21, 1999
<PAGE> 1
EXHIBIT 23.3
[FORREST A. GARB & ASSOCIATES, INC.]
CONSENT OF INDEPENDENT ENGINEERS
We consent to the inclusion in this registration statement on Form S-1
for the Mewbourne Energy 99-00 Drilling Programs of the summary of the Reserve
Report as of January 1, 1999, for 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
94 Private L.P., Mewbourne Energy Partners 95-A, L.P., Mewbourne Energy
Partners 95-B, L.P., Mewbourne Energy Partners 96-A, L.P. and Mewbourne Energy
Partners 97-A, L.P. as audited by us. We also consent to the reference therein
to our firm as an "Independent Expert."
/s/ FORREST A. GARB & ASSOCIATES, INC.
FORREST A. GARB & ASSOCIATES, INC.
Dallas, Texas
April 21, 1999
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<NAME> MEWBOURNE ENERGY PARTNERS 99-A, LP
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-09-1999
<PERIOD-END> APR-09-1999
<CASH> 100
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 100
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 100
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 100
<TOTAL-LIABILITY-AND-EQUITY> 100
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
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<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
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