<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 22, 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
--------------------------
REEF MILLENNIUM ENERGY FUND
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
NEVADA 1381 TO BE APPLIED
FOR
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) Number)
</TABLE>
1901 N. CENTRAL EXPRESSWAY, SUITE 300
RICHARDSON, TEXAS 75080
(972)437-6792
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
MICHAEL J. MAUCELI
MANAGER
REEF PARTNERS LLC
1901 N. CENTRAL EXPRESSWAY, SUITE 300
RICHARDSON, TEXAS 75080
(972)437-6792
(Name and address, including zip code, of agent for service)
COPY TO:
LAWRENCE B. MANDALA, ESQ.
JOEL HELD, ESQ.
ARTER & HADDEN LLP
1717 MAIN STREET, SUITE 4100
DALLAS, TEXAS 75201
(214) 761-2100
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/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective Registration Statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT OFFERING PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
Preformation Limited Partner and
Additional General Partner Interests..... 5,000 Units $20,000 $100,000,000 $26,400
</TABLE>
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 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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- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED , 2000.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
PROSPECTUS
REEF MILLENNIUM ENERGY FUND
[LOGO]
5,000 UNITS OF PREFORMATION LIMITED PARTNER
AND ADDITIONAL GENERAL PARTNER INTERESTS IN
A SERIES OF UP TO 10 LIMITED PARTNERSHIPS
<TABLE>
<S> <C>
MINIMUM OF 50 UNITS PER PARTNERSHIP ($1,000,000) PRICE: $20,000 PER UNIT
MINIMUM PURCHASE: $5,000 ( 1/4
MAXIMUM OF 500 UNITS PER PARTNERSHIP ($10,000,000) UNIT)
</TABLE>
Reef Millennium Energy Fund is a series of up to ten limited partnerships to
be formed to drill and own operating and non-operating interests in oil and
natural gas wells around the world, with major or large independent oil and gas
companies as co-owners. The primary purposes of each partnership will be to
generate revenue from the discovery of oil and gas, distribute cash to the
partners, and provide tax benefits. Reef Partners LLC will be the managing
general partner of each partnership.
A minimum of 50 units ($1,000,000) and a maximum of 500 units ($10,000,000)
will be sold in each partnership. We will buy at least 5% of the units in each
partnership that is formed. A partnership will not be formed unless at least 50
units have been subscribed for, including units we buy. Investors may elect to
purchase units as limited partners or as additional general partners.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK. BEFORE
BUYING UNITS, YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON
PAGE 9 IN THIS PROSPECTUS, INCLUDING:
OIL AND GAS OPERATIONS ARE HIGHLY SPECULATIVE - WE WILL MANAGE AND CONTROL EACH
PARTNERSHIP - YOU WILL BE UNABLE TO EVALUATE DRILLING OR INVESTMENT PROSPECTS
- THIRD PARTIES MAY CONTROL DRILLING, COMPLETION AND PRODUCTION OPERATIONS
- - PERSONAL LIABILITY OF ADDITIONAL GENERAL PARTNERS - LIMITED TRANSFERABILITY OF
PARTNERSHIP INTERESTS- CASH DISTRIBUTIONS ARE NOT GUARANTEED - CONFLICTS OF
INTEREST - TAX RISKS.
We are offering units in up to three partnerships in 2000, up to three
partnerships in 2001 and up to four partnerships in 2002. The offering period
for the first partnership, Millennium Energy Fund A, L.P., began on the date of
this prospectus. The offering period for the other nine partnerships will follow
sequentially. We may terminate the offering period for a partnership at any time
after the minimum number of units (50) has been subscribed for in the
partnership, including units we buy. If we do not terminate a partnership's
offering period before the maximum number of units (500) in the partnership has
been subscribed for, the offering periods for each partnership will terminate on
or before December 31st of the year in which the partnership's offering period
begins.
Western American Securities Corporation is the Dealer Manager for this
offering. It is offering the units on a "best efforts minimum/maximum" basis.
The Dealer Manager must sell the minimum number of units in a partnership
(50) in order for the partnership to be formed. The Dealer Manager is required
to use only its best efforts to sell the units offered in each partnership.
Subscription proceeds of each partnership will be held in a separate
interest-bearing escrow account until the minimum number of units in the
partnership have been subscribed for, including units we buy, and may be
released before the end of the partnership's offering period. If the minimum
number of units in a partnership are not subscribed for prior to the termination
of a partnership's offering period, that partnership will not be formed, and the
escrow agent will promptly return all subscription proceeds from your investment
in such partnership to you, with interest.
<TABLE>
<CAPTION>
PROCEEDS, BEFORE
PRICE TO SELLING COMMISSIONS EXPENSES, TO THE
PUBLIC AND MANAGEMENT FEE PARTNERSHIPS
<S> <C> <C> <C>
Per Unit (minimum purchase: 1/4 Unit)........... $20,000 $3,000 $17,000
Total Minimum................................... $1,000,000 $142,500(1) $850,000
Total Maximum................................... $100,000,000 $14,250,000(1) $85,000,000
</TABLE>
(1) The managing general partner will buy at least 5% of the Units. No selling
commissions or management fee will be paid on those Units.
WESTERN AMERICAN SECURITIES CORPORATION, DEALER MANAGER
1901 N. CENTRAL EXPRESSWAY--SUITE 400
RICHARDSON, TEXAS 75080
(800) 422-1606
A MEMBER OF THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.
AND SECURITIES INVESTOR PROTECTION CORPORATION
THE DATE OF THIS PROSPECTUS IS , 2000.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
PROSPECTUS SUMMARY......................................................................................... 1
Terms of the Offering.................................................................................... 1
Risk Factors............................................................................................. 3
Compensation of the Managing General Partner............................................................. 5
Participation in Costs and Revenues...................................................................... 6
Use of Proceeds.......................................................................................... 7
Tax Considerations; Opinion of Counsel................................................................... 7
Rights of the Investor Partners.......................................................................... 8
RISK FACTORS............................................................................................... 9
Special Risks of the Partnerships........................................................................ 9
Risks of Oil and Natural Gas Investments................................................................. 13
Tax Risks................................................................................................ 14
FORWARD-LOOKING STATEMENTS................................................................................. 16
TERMS OF THE OFFERING...................................................................................... 16
General.................................................................................................. 16
Offering Periods......................................................................................... 16
Election to Purchase as Limited Partner or Additional General Partner.................................... 17
Subscriptions for Units; Escrow Account.................................................................. 17
Formation of the Partnerships............................................................................ 18
Types of Units........................................................................................... 18
Investor Suitability..................................................................................... 20
ASSESSMENTS AND FINANCING.................................................................................. 21
SOURCE OF FUNDS AND USE OF PROCEEDS........................................................................ 22
Source of Funds.......................................................................................... 22
Use of Proceeds.......................................................................................... 22
Subsequent Source of Funds............................................................................... 23
PARTICIPATION IN COSTS AND REVENUES........................................................................ 23
Cash Distributions....................................................................................... 23
Profits and Losses....................................................................................... 24
Revenues................................................................................................. 24
Costs.................................................................................................... 24
Deficit Capital Account Balances......................................................................... 28
Cash Distribution Policy................................................................................. 28
Termination.............................................................................................. 29
Amendment of Partnership Allocation Provisions........................................................... 29
COMPENSATION TO THE MANAGING GENERAL PARTNER AND AFFILIATES................................................ 29
PROPOSED ACTIVITIES........................................................................................ 30
Introduction............................................................................................. 30
Acquisition and Drilling of Undeveloped Prospects........................................................ 31
Title to Properties...................................................................................... 32
Drilling and Completion Phase............................................................................ 33
Drilling and Operating Agreement......................................................................... 33
Production Phase of Operations........................................................................... 34
Insurance................................................................................................ 35
COMPETITION, MARKETS AND REGULATION........................................................................ 36
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
Competition.............................................................................................. 36
Markets.................................................................................................. 36
Regulation............................................................................................... 37
MANAGEMENT................................................................................................. 37
General.................................................................................................. 37
Experience and Capabilities as Operator.................................................................. 38
Reef Partners LLC........................................................................................ 38
Ownership of Reef Partners LLC........................................................................... 39
Compensation............................................................................................. 39
Legal Proceedings........................................................................................ 40
CONFLICTS OF INTEREST...................................................................................... 40
FIDUCIARY RESPONSIBILITY OF THE MANAGING GENERAL PARTNER................................................... 44
PRIOR ACTIVITIES........................................................................................... 45
TAX CONSIDERATIONS......................................................................................... 50
Summary of Conclusions................................................................................... 51
General Tax Effects of Partnership Structure............................................................. 54
Intangible Drilling and Development Costs Deductions..................................................... 54
Depletion Deductions..................................................................................... 55
Depreciation Deductions.................................................................................. 56
Interest Deductions...................................................................................... 56
Transaction Fees......................................................................................... 56
Basis and at Risk Limitations............................................................................ 57
Passive Loss Limitations................................................................................. 57
Conversion of Interests.................................................................................. 58
Alternative Minimum Tax.................................................................................. 59
Gain or Loss on Sale of Property or Units................................................................ 59
Partnership Distributions................................................................................ 59
Partnership Allocations.................................................................................. 60
Profit Motive............................................................................................ 60
Administrative Matters................................................................................... 60
Accounting Methods and Periods........................................................................... 62
Social Security Benefits; Self-Employment Tax............................................................ 62
Taxation of Foreign Operations........................................................................... 62
State and Local Taxes.................................................................................... 62
Individual Tax Advice Should be Sought................................................................... 62
SUMMARY OF PARTNERSHIP AGREEMENT........................................................................... 62
Responsibility of Managing General Partner............................................................... 63
Liability of General Partners, Including Additional General Partners..................................... 63
Liability of Limited Partners............................................................................ 63
Allocations and Distributions............................................................................ 63
Voting Rights............................................................................................ 64
Retirement and Removal of the Managing General Partner................................................... 64
Term and Dissolution..................................................................................... 65
Indemnification.......................................................................................... 65
Reports to Partners...................................................................................... 66
Power of Attorney........................................................................................ 66
Other Provisions......................................................................................... 66
TRANSFERABILITY OF UNITS................................................................................... 67
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
PLAN OF DISTRIBUTION....................................................................................... 67
LEGAL OPINIONS............................................................................................. 69
EXPERTS.................................................................................................... 69
ADDITIONAL INFORMATION..................................................................................... 69
GLOSSARY OF TERMS.......................................................................................... 69
</TABLE>
iii
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS SOME INFORMATION FROM THIS PROSPECTUS. IT IS NOT
COMPLETE AND MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU.
YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE RISK FACTORS AND
THE FINANCIAL STATEMENTS AND THE NOTES TO THOSE STATEMENTS. YOU WILL FIND
DEFINITIONS OF TERMS RELATING TO THE OIL AND GAS BUSINESS IN THE "GLOSSARY OF
TERMS" beginning on page 69.
TERMS OF THE OFFERING (SEE PAGE 16)
<TABLE>
<CAPTION>
<S> <C>
The Program....................... Reef Millennium Energy Fund is a series of up to ten
Nevada limited partnerships to be formed to drill and
own operating and non-operating interests in oil and
natural gas wells around the world. We intend to acquire
interests in oil and natural gas properties in which
major or large independent oil and gas companies also
have interests. We believe that these acquisitions from
major or large independent oil and gas companies may
permit the partnerships to obtain the benefit of
seismic, geological and geophysical exploration and
initial drilling efforts conducted by such companies.
The primary purposes of each partnership will be to
generate revenue from partnership operations, distribute
cash to the partners, and provide tax benefits.
Managing General Partner.......... Reef Partners LLC
Securities Offered................ A minimum of 50 units and a maximum of 500 units of
limited partnership interest and additional general
partnership interest in each of 10 limited partnerships.
Investors may elect to purchase units as limited
partners or as additional general partners.
Offering Price.................... $20,000 per unit
Minimum Investment................ $5,000 ( 1/4 unit)
Assessments....................... You are not required to make any capital contributions
to a partnership other than payment of the offering
price for your units. We may, however, call for
additional assessments on the partners of up to $20,000
per unit for the purpose of conducting subsequent
operations:
- on prospects the partnership began to evaluate during
the partnership's initial operations; or
- on leases related to such prospects that we deem
merit additional operations to fully develop the
prospects.
Although you are not required to pay any assessments,
your percentage interest in the partnership will be
reduced if other partners pay an assessment and you do
not.
</TABLE>
1
<PAGE>
<TABLE>
<S> <C>
Offering Period................... We are offering units in up to three partnerships in
2000, up to three partnerships in 2001 and up to four
partnerships in 2002. The offering period for the first
partnership, Millennium Energy Fund A, L.P., began on
the date of this prospectus. The offering period for the
other nine partnerships will follow sequentially. We may
terminate the offering period for a partnership at any
time after the minimum number of units (50) has been
subscribed for in the partnership, including units we
buy. If we do not terminate a partnership's offering
period before the maximum number of units (500) in the
partnership has been subscribed for, the offering
periods for each partnership will terminate as follows:
</TABLE>
<TABLE>
<CAPTION>
THE OFFERING PERIOD
WILL
TERMINATE ON OR
FOR PARTNERSHIPS OFFERED IN: BEFORE:
- ----------------------------- ----------------------
<S> <C>
2000....... December 31, 2000
2001....... December 31, 2001
2002....... December 31, 2002
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
Suitability Standards..................... Investment in the units is suitable for you only if you do not need
liquidity in this investment and can afford to lose all or
substantially all of your investment. Your subscription for units
will be accepted only if you represent that you meet the suitability
standards described below under "`TERMS OF THE OFFERING--Investor
Suitability."
Plan of Distribution...................... Western American Securities Corporation is the Dealer Manager for
this offering. The Dealer Manager must sell the minimum number of
units in a partnership (50) in order for the partnership to be
formed. The Dealer Manager is required to use only its best efforts
to sell the units offered in each partnership. Subscription proceeds
of each partnership will be held in a separate interest-bearing
escrow account until the minimum number of units in the partnership
have been subscribed for, including units we buy, and may be released
before the end of the partnership's offering period. If the minimum
number of units in a partnership are not subscribed for prior to the
termination of a partnership's offering period, that partnership will
not be formed, and the escrow agent will promptly return all
subscription proceeds from your investment in such partnership to
you, with interest.
Conversion of Units....................... Additional general partners in a partnership may convert their
general partnership interests into limited partnership interests at
any time after the first anniversary of the partnership's formation.
All additional general partnership interests in a partnership will be
converted into limited partnership interests as soon as practicable
after the end of the year in which drilling by the partnership has
been completed.
Reports to Investors...................... Each of the partnerships intends to furnish to investors annual
reports containing audited financial statements and the related
report by its independent certified public accountants, and a
semiannual report containing unaudited financial information for the
first six months of each year.
Principal Office.......................... The principal office of the partnerships and Reef Partners LLC is
located at 1901 N. Central Expressway, Suite 300, Richardson, Texas
75080, and their telephone number is (972) 437-6792.
</TABLE>
2
<PAGE>
RISK FACTORS (SEE PAGE 9)
The units are a speculative investment and involve a high degree of risk.
You should consider the following risk factors together with the other
information in this prospectus in evaluating an investment in the units.
SPECIAL RISKS OF THE PARTNERSHIPS (SEE PAGE 9)
- We will have exclusive management and control of all aspects of the
business of each partnership. You will not be permitted to take part in
the management or in the decision-making of any partnership in which you
invest.
- We have not yet selected any prospects for oil and natural gas drilling or
investment by the any of the partnerships. Therefore, you will not have an
opportunity to evaluate any of the prospects before investing in the
partnership.
- A partnership may own less than 50% of the working interest or a
non-operating interest in an oil or natural gas property. In these
circumstances, the partnership will be dependent on third parties who will
control the drilling, completion and production operations on the
property.
- The partnerships are likely to acquire interests in oil and natural gas
prospects located outside the United States. An investment in the units
therefore will be subject to risks generally associated with conducting
business in foreign countries, including foreign laws and regulations that
may be materially different from those of the United States and the risks
of political unrest, currency fluctuation, and changes in foreign economic
or political conditions.
- If you purchase general partnership interests, you will have unlimited
liability for partnership obligations arising while you are an additional
general partner in one of the partnerships, unless the partnership's
assets and insurance, together with our assets and insurance (since we
agree in the partnership agreement to indemnify the additional general
partners), are sufficient to satisfy the partnership's obligations.
- Cash distributions are not guaranteed and will depend on each
partnership's future operating performance.
- An investment in the partnerships is illiquid. You may not be able to sell
your partnership interests. No public market for the units exists or is
likely to exist.
- Potential conflicts of interest could arise between us and our affiliates,
on the one hand, and the partnerships and investors, on the other hand.
For example:
- we and our affiliates currently manage oil and gas drilling programs
similar to the partnerships;
- we decide which prospects each partnership will acquire;
- one of our affiliates may act as operator and may furnish drilling and
completion services to the partnerships; and
- we and our affiliates are general partners of other partnerships and
owe duties of good-faith and fair dealing to these other partnerships.
There can be no assurance that any transaction between us and our
affiliates will be on terms as favorable as could have been negotiated
with unaffiliated third parties.
3
<PAGE>
- Compensation and fees are payable by each partnership to us and our
affiliates upon formation and throughout the life of the partnership.
- Your subscription for units is irrevocable.
- It is possible that some or all of the insurance coverage that a
partnership has available may become unavailable or too expensive. If this
should occur, you could be subject to greater risk of loss of your
investment because less insurance would be available to protect against
casualty losses.
- To the extent that less subscription proceeds are raised, a partnership
will be able to drill fewer wells or own interests in fewer properties.
This would result in less ability of the partnership to spread the risk of
loss of your investment among several wells or properties.
- We will purchase at least 5% of the units in each of the partnerships. We
and our affiliates may, but are not obligated to, purchase a greater
percentage of the units in a partnership. Purchases of units by us and our
affiliates could assure that the $1.0 million minimum aggregate
subscription amount for a partnership is reached.
- Information concerning the prior drilling experience of previous
partnerships sponsored by us and our affiliates is not indicative of
results to be expected by these partnerships.
- We are not liable to you or a partnership for an action we take on behalf
of the partnership if:
- we determine in good faith that our action was in the best interest of
the partnership; and
- our action did not constitute negligence or misconduct.
RISKS OF OIL AND NATURAL GAS INVESTMENTS (SEE PAGE 13)
- The drilling, ownership and operation of oil and natural gas wells, and
the ownership of non-operating interests in oil and natural gas
properties, are highly speculative activities. There is a possibility that
wells drilled may not produce oil or natural gas. Even wells that are
productive may not produce sufficient quantities of oil or natural gas to
return all or a significant portion of your investment to you.
- A partnership may be required to pay delay rentals in order to keep a
lease in effect on a property prior to drilling. Oil and gas leases
usually require such payments to be made within a year if no drilling has
commenced on a property. The amount of these delay rentals can under
certain circumstances exceed the property's cost and might seriously
deplete the partnership's capital.
- Revenues of each partnership will be directly related to future oil and
natural gas prices that we cannot predict.
- Access to markets for oil or natural gas may be restricted as a result of
many factors, including distances to existing pipelines, an oversupply of
crude oil and natural gas, changing demand from weather conditions, and
regulations of federal and state governmental authorities. These factors
could impede or delay revenues to the partnerships.
- Oil and natural gas operations are subject to extensive government
regulation. Changes in or future environmental laws or other governmental
regulation could increase a partnership's expenses, decrease its revenues,
or otherwise adversely effect a partnership.
- Each partnership will be subject to environmental hazards associated with
oil and natural gas drilling and production, including the risks of
unexpected or unusual formations, pressures, blowouts, fires, and
accidental leakage of hazardous materials.
- A partnership's producing oil and natural gas wells, if any, may be
shut-in for extended periods, or have their production reduced or sold on
less favorable terms, due to lack of market demand.
4
<PAGE>
- Production from a partnership's oil and natural gas wells, if any, will
decline over time, and does not indicate any consistent level of future
production. This production decline may be rapid and irregular when
compared to a well's initial production.
TAX RISKS (SEE PAGE 14)
- The federal income tax benefits of an investment in the partnerships
depend on provisions of tax laws and regulations that are subject to
change, and on the classification of the partnerships as partnerships for
federal income tax purposes. Although we have obtained an opinion from our
counsel regarding certain tax matters, we are not requesting a ruling from
the Internal Revenue Service on any tax matters.
- You may recognize taxable income from an investment in a partnership that
would require you to pay federal income tax in an amount greater than the
amount of cash distributions to you from the partnership.
- Investment as an additional general partner may not be advisable for you
unless your taxable income from all sources is recurring or subject to
high marginal federal income tax rates.
- Investment as a limited partner may be less advisable for you unless you
have substantial current taxable income from passive trade or business
activities.
- The fact that the partnerships will not register with the IRS as "tax
shelters" does not diminish the possibility of an audit of the
partnerships' returns by the IRS.
COMPENSATION OF THE MANAGING GENERAL PARTNER (SEE PAGE 29)
The following table summarizes the compensation to be received by us and our
affiliates from each of the partnerships:
<TABLE>
<CAPTION>
RECIPIENT FORM OF COMPENSATION AMOUNT
- ------------------------------ ------------------------------ ------------------------------
<S> <C> <C>
Managing General Partner Partnership interest(1) 10% interest before
partnership payout; 25%
interest after partnership
payout(2)
Managing General Partner Management Fee 15% of subscriptions, less
organization and offering
costs to be paid by us
(non-recurring fee)
Affiliate of the Managing Operator's Per-Well Charges $600 per well per month(3)
General Partner
Managing General Partner Direct Costs Reimbursement at cost(4)
Managing General Partner and Payment for equipment, Competitive prices(4)
its Affiliates supplies, marketing and other
services
</TABLE>
- ------------------------
(1) Excluding any partnership interest we may have as a result of our purchase
of units. We will buy at least 5% of the units issued by each partnership at
the offering price of $20,000 per unit, net of commissions and the
management fee.
(2) "Payout" of a partnership occurs when the partners other than us receive
cash distributions from the partnership equal to their capital contribution
to the partnership. There is no assurance that a partnership will achieve
payout.
5
<PAGE>
(3) Payable only when an affiliate of the managing general partner is designated
as operator on a property.
(4) Cannot be quantified until the partnership is conducting business.
PARTICIPATION IN COSTS AND REVENUES (SEE PAGE 23)
Cash distributions from a partnership will first be distributed 90% to the
holders of units and 10% to us until the holders of units have received cash
distributions equal to their cash capital contributions (i.e. "payout"). After
payout, cash distributions will be distributed 75% to unit holders and 25% to
us. Partnership profits will be generally allocated 75% to the holders of units
and 25% to us. We will buy at least 5% of the units issued by each partnership
at the offering price of $20,000 per unit, net of commissions and the management
fee. Therefore, we will have an interest in 30% of partnership profits and
persons other than us will have the remaining 70% interest.
Partnership losses and deductions for intangible drilling costs,
organization and offering expenses, management fees, costs of leases and
tangible equipment and drilling and completions costs will generally be
allocated 100% to the holders of units. Deductions for partnership operating and
administrative expenses will generally be allocated in the same ratio as
partnership profits.
The following table summarizes the participation in the costs and revenues
of each partnership by us and by the holders of units issued by the partnership:
<TABLE>
<CAPTION>
BEFORE AFTER
PARTNERSHIP PAYOUT PARTNERSHIP PAYOUT
---------------------------- ----------------------------
UNITS ISSUED MANAGING UNITS ISSUED MANAGING
BY THE GENERAL BY THE GENERAL
PARTNERSHIP(1) PARTNER(2) PARTNERSHIP(1) PARTNER(2)
--------------- ----------- --------------- -----------
<S> <C> <C> <C> <C>
PARTNERSHIP COSTS
Broker-dealer commissions(3)............................... 100% 0% -- --
Management fee(3).......................................... 100% 0% -- --
Lease costs................................................ 100% 0% 100% 0%
Intangible drilling and development costs.................. 100% 0% 100% 0%
Drilling and completion costs.............................. 100% 0% 100% 0%
Operating costs............................................ 75% 25% 75% 25%
Direct costs............................................... 75% 25% 75% 25%
Administrative costs....................................... 75% 25% 75% 25%
</TABLE>
<TABLE>
<CAPTION>
BEFORE AFTER
PARTNERSHIP PAYOUT PARTNERSHIP PAYOUT
---------------------------- ----------------------------
UNITS ISSUED MANAGING UNITS ISSUED MANAGING
BY THE GENERAL BY THE GENERAL
PARTNERSHIP(1) PARTNER(2) PARTNERSHIP(1) PARTNER(2)
--------------- ----------- --------------- -----------
<S> <C> <C> <C> <C>
PARTNERSHIP REVENUES
Partnership cash distributions............................. 90% 10% 75% 25%
Partnership taxable income from operations(4).............. 75% 25% 75% 25%
Partnership losses from operations(4)...................... 75% 25% 75% 25%
Gain or loss from the sale of Partnership properties or
equipment(4)............................................. 75% 25% 75% 25%
</TABLE>
- ------------------------
(1) Includes units purchased by us. We will buy at least 5% of the units issued
by each partnership at the offering price of $20,000 per unit, net of
commissions and the management fee.
(2) Does not include any allocation to us due to our ownership of partnership
units.
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(3) An amount equal to 15% of the subscriptions to each partnership will be paid
to us. If organization and offering costs are less than 15% of aggregate
subscriptions to the partnership, we will keep the difference as a one-time
management fee. If organization and offering costs exceed 15% of aggregate
subscriptions to the partnership, we will pay all such costs.
(4) Under certain circumstances, allocations other than in the 75/25 ratio
described above will be made to "re-adjust" partners' capital accounts
because of previously allocated losses, deductions or profits. See a
detailed description of "PARTICIPATION IN COSTS AND REVENUES" at page 23.
USE OF PROCEEDS (SEE PAGE 22)
We estimate that the proceeds from the aggregate contributions to the
capital of a partnership will be applied as follows, assuming the minimum and
maximum number of units is sold:
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL
CAPITAL CONTRIBUTIONS
------------------------------------
ACTIVITY MINIMUM OFFERING MAXIMUM OFFERING
- ---------------------------------------------------------- ----------------- -----------------
<S> <C> <C>
Drilling and Completion Costs............................. 85.00% 85.00%
Organization and Offering Costs(1)(2)..................... 15.00% 10.25%
Management Fee............................................ 0.00% 4.75%
----------- -----------
Total................................................... 100.00% 100.00%
=========== ===========
</TABLE>
- ------------------------
(1) An amount equal to 15% of the subscriptions to each partnership will be paid
to us. If organization and offering costs are less than 15% of aggregate
subscriptions to the partnership, we will keep the difference as a one-time
management fee. If organization and offering costs exceed 15% of aggregate
subscriptions to the partnership, we will pay all such costs.
(2) Assumes all organization and offering costs are allocated to a single
partnership. If all ten partnerships are formed, we intend to allocate
organization and offering costs among the partnerships in proportion to the
capital contributions to each partnership.
TAX CONSIDERATIONS; OPINION OF COUNSEL (SEE PAGE 50)
We have received an opinion from our counsel, Arter & Hadden LLP, concerning
certain federal income tax considerations applicable to an investment in the
partnerships. The full text of the opinion is attached as Appendix D to this
prospectus. We encourage you to read the opinion in its entirety and to read the
discussion of "TAX CONSIDERATIONS" in this prospectus, which begins on page 50,
for a full understanding of the opinion, including the assumptions made and
matters considered by Arter & Hadden LLP in providing its opinion.
Based upon current laws, regulations, interpretations, and court decisions,
Arter & Hadden LLP has rendered its opinion that:
- the material federal income tax benefits in the aggregate from an
investment in the Partnerships will be realized;
- the partnerships will be treated as partnerships for federal income tax
purposes and not as corporations and not as associations taxable as
corporations or as publicly traded partnerships;
- to the extent a partnership's wells are timely drilled and amounts are
timely paid, its partners will be entitled to their pro rata share of the
partnership's intangible drilling costs paid in the first calendar year of
a partnership's operations;
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- the deductibility of losses generated from a partnership will not be
limited by the at risk rules or its limitations related to an Investor's
adjusted basis in his partnership interest to the extent the cash
contributed to a partnership by the Investor constitutes "personal funds"
as defined in Treasury Regulation Section 1.465-9(f).
- the interests of persons who purchase units of general partnership
interest will not be considered a passive activity within the meaning of
Internal Revenue Code section 469 and losses generated while such general
partnership interests are held will not be limited by the passive activity
provisions;
- limited partners' interests (other than those held by investors in general
partnership interests who convert their interests into limited partners'
interests) will be considered a passive activity within the meaning of
Internal Revenue Code Section 469 and losses generated therefrom will be
limited by the passive activity provisions;
- a partnership will not be terminated solely as the result of the
conversion of partnership interests from general partner interests to
limited partner interests;
- the partners' distributive shares of partnership tax items will be
determined and allocated substantially in accordance with the terms of the
partnership agreement; and
- the partnerships will not be required to register with the IRS as tax
shelters.
An opinion of counsel merely represents counsel's best legal judgment under
existing statutes, judicial decisions, and administrative regulations and
interpretations. There can be no assurance that some of the deductions claimed
by a partnership will not be challenged successfully by the IRS.
Due to the lack of authority or the essentially factual nature of the
question, counsel expressed no opinion on the following:
- the impact of an investment in a partnership on an investor's individual
tax situation or alternative minimum tax;
- whether, under Internal Revenue Code Section 183, the losses of the
partnerships will be treated as derived from "activities not engaged in
for profit," and therefore nondeductible from other gross income;
- whether any of the partners will be eligible for percentage depletion
deductions;
- whether any interest incurred by a partner with respect to any borrowings
will be deductible or subject to limitations on deductibility; and
- whether the fees to be paid to the managing general partner and to third
parties will be deductible.
RIGHTS OF THE INVESTOR PARTNERS (SEE PAGE 62)
Your rights as a partner of one of the partnerships will be governed by the
partnership agreement of the partnership, the form of which is attached to this
prospectus as Appendix A. These rights include the following:
- We will have the exclusive right to manage and control all aspects of the
business of the partnership. No investor will have any voice in the
day-to-day business operations of the partnership.
- Profits and losses are to be allocated and cash is to be distributed in
the manner discussed in the section of this prospectus entitled
"PARTICIPATION IN COSTS AND REVENUES."
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- Investors owning 10% or more of the then outstanding units have the right
to ask us to call a meeting of the investor partners. A vote of a majority
of the then outstanding units is required to approve:
- any sale of all or substantially all of the partnership's assets;
- our removal as managing general partner and the election of a new
managing general partner;
- the dissolution of the partnership;
- any non-ministerial amendment to the partnership agreement; and
- the cancellation of contracts for services with us.
- We have agreed to indemnify each investor who owns units of general
partnership interest for obligations, losses, or judgments of the
partnership or the managing general partner that exceed the amount of
applicable insurance coverage and amounts that would become available from
the sale of all partnership assets.
- We are obligated to furnish you semi-annual and annual reports. These
reports will contain financial statements (audited in the annual reports),
information regarding transactions between us and the partnership, reserve
information prepared by an independent petroleum engineer, and information
regarding the partnership's activities.
- You may sell, transfer, or assign your units only if we consent and the
transferee satisfies all applicable suitability requirements for the
ownership of your units.
- You have the right to inspect the partnership's books and records at any
reasonable time at our offices.
RISK FACTORS
Investment in the partnerships involves a high degree of risk and is
suitable only for investors of substantial financial means who have no need of
liquidity in their investments. You should consider carefully the following
factors, in addition to the other information in this prospectus, prior to
making your investment decision.
SPECIAL RISKS OF THE PARTNERSHIPS
WE WILL MANAGE AND CONTROL THE PARTNERSHIPS' BUSINESS. THIRD PARTIES MAY
MANAGE AND CONTROL PROSPECTS. We will exclusively manage and control all aspects
of the business of each partnership and will make all decisions concerning the
business of each partnership. Additionally, the partnerships might acquire a
non-operating interest or a less than 50% working interest in various oil and
natural gas properties. In this event, we may not be able to manage and control
the drilling, completion and production operations on the properties. Instead,
parties other than us may control and manage such properties. You will not be
permitted to take part in the management or in the decision making of any
partnership.
BECAUSE WE HAVE NOT IDENTIFIED OR SELECTED ANY PROSPECTS, YOU WILL NOT BE
ABLE TO EVALUATE A PARTNERSHIP'S PROSPECTS BEFORE MAKING YOUR INVESTMENT
DECISION. We have not selected any prospect for acquisition by any partnership
and will not select prospects for a particular partnership until after the
activation of that partnership. You will not have an opportunity before
purchasing units to evaluate the relevant geophysical, geological, economic or
other information regarding the prospects to be selected. Because all
subscriptions are irrevocable, because the offering period for a particular
partnership can extend over a number of months, and because no prospect will be
acquired until after activation of that partnership, delays are likely in the
investment of proceeds from your subscription.
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IF A PARTNERSHIP ACQUIRES PROSPECTS OUTSIDE THE UNITED STATES, IT WILL BE
SUBJECT TO CERTAIN RISKS OF INTERNATIONAL OPERATIONS. The partnerships are
likely to acquire interests in oil and natural gas prospects located outside the
United States. An investment in the units therefore will be subject to risks
generally associated with conducting business in foreign countries, such as:
- foreign laws and regulations that may be materially different from those
of the United States;
- changes in applicable laws and regulations;
- labor and political unrest;
- foreign currency fluctuation;
- changes in foreign economic and political conditions;
- export and import restrictions;
- tariffs, customs, duties and other trade barriers;
- difficulties in staffing and managing foreign operations;
- longer payment cycles;
- difficulties in collecting accounts receivable and enforcing agreements;
- nationalization or expropriation; and
- repatriation of income or capital.
In addition, in the event of a dispute, a partnership may be subject to the
exclusive jurisdiction of foreign courts and agencies, or may not be successful
in obtaining jurisdiction over foreign persons in state or federal courts in the
United States. A partnership also may be hindered or prevented from enforcing
its rights against foreign governments and their instrumentalities because of
the doctrine of sovereign immunity.
ADDITIONAL GENERAL PARTNERS HAVE UNLIMITED LIABILITY FOR PARTNERSHIP
OBLIGATIONS. Under Nevada law, the state in which each partnership will be
formed, general partners of a partnership have unlimited liability for
obligations and liabilities of that partnership. If you purchase units as an
additional general partner you will be liable for all obligations and
liabilities arising from partnership operations if these liabilities exceed the
assets and insurance of the partnership, and our assets and insurance (since we
have agreed to indemnify the additional general partners). This liability may
exceed the amount of your subscription.
CASH DISTRIBUTIONS ARE NOT GUARANTEED. Although we intend to distribute
substantially all of a partnership's available cash flow to its partners
monthly, cash distributions are not guaranteed and will depend on each
partnership's future operating performance. See "PARTICIPATION IN COSTS AND
REVENUES--Cash Distribution Policy." We will review the accounts of each
partnership at least quarterly to determine the cash available for distribution.
Distributions will depend primarily on a partnership's cash flow from
operations, which will be affected, among other things, by the price of oil and
natural gas and the level of production of a partnership's prospects. See
"--Risks of Oil and Natural Gas Investments."
YOUR ABILITY TO RESELL YOUR UNITS IS LIMITED DUE TO THE LACK OF A PUBLIC
MARKET AND RESTRICTIONS CONTAINED IN THE PARTNERSHIP AGREEMENT. You may not be
able to sell your partnership interests. No public market for the units exists
or is likely to develop. Your ability to resell your units also is restricted by
the partnership agreement. See "TRANSFERABILITY OF UNITS."
WE AND OUR AFFILIATES MAY HAVE CONFLICTS OF INTEREST WITH YOU AND THE
PARTNERSHIPS. The continued active participation by us and our affiliates in
oil and gas activities individually, and on behalf of other partnerships
organized or to be organized by us, and the manner in which partnership revenues
are
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allocated, create conflicts of interest with the partnerships. We and our
affiliates have interests that inherently conflict with those of the
unaffiliated partners, including the following:
- We and our affiliates manage other oil and natural gas drilling programs.
We will owe a duty of good faith to each of the partnerships that we
manage. Actions taken with regard to other partnerships may not be
advantageous to a particular partnership.
- We decide which prospects each partnership will acquire. We could benefit,
as a result of cost savings or reduction of risk, for instance, by
assigning or not assigning and by retaining particular prospects to a
partnership.
- One of our affiliates may act as operator and provide drilling and
completion services to the partnerships, for which we will be compensated
(at rates competitive with the rates charged by unaffiliated persons for
similar services). We could have an incentive to continue to operate wells
that were no longer economic to the partnership, in order to continue to
receive operating fees.
There can be no assurance that any transaction between us and our affiliates
will be on terms as favorable as could have been negotiated with unaffiliated
third parties.
COMPENSATION PAYABLE TO US AND OUR AFFILIATES WILL EFFECT DISTRIBUTIONS. We
will receive, and our affiliates may receive, compensation from each partnership
throughout the life of the partnership. We and our affiliates may enter into
transactions with the partnerships for services, supplies, and equipment and
will be entitled to compensation at competitive prices and terms as determined
by reference to charges of unaffiliated companies providing similar services,
supplies, and equipment. Compensation payments to us and our affiliates will be
due regardless of a partnership's profitability and will reduce the amount of
cash available to a partnership for distribution to its partners.
YOUR SUBSCRIPTION FOR UNITS IS IRREVOCABLE. Your execution of the
subscription agreement is a binding offer to buy units in a partnership. Once
you subscribe for units, you will not be able to revoke your subscription.
A PARTNERSHIP'S INSURANCE COVERAGE COULD BE REDUCED OR BECOME
UNAVAILABLE. It is possible that some or all of the insurance coverage that a
partnership has available may become unavailable or too expensive. In this
situation, we may elect to change the partnership's insurance coverage. Upon
such change, additional general partners could become limited partners.
Additional general partners who elected to remain additional general partners
could be exposed to additional financial risk due to the reduced insurance
coverage. Additional general partners would continue to be individually liable
for all obligations and liabilities of the partnership. On the other hand,
additional general partners who elect to become limited partners could become
subject to passive activity treatment for partnership deductions and thereby
lose or suffer a deferral of the benefits of some or all of such deductions. All
investor partners could be subject to greater risk of loss of their investment
since less insurance would be available to protect from casualty losses.
A PARTNERSHIP'S ABILITY TO DIVERSIFY RISKS DEPENDS UPON THE NUMBER OF UNITS
ISSUED AND THE AVAILABILITY OF SUITABLE PROSPECTS. We intend to spread the risk
of oil and natural gas drilling and ownership of interests in oil and natural
gas properties by participating in the drilling of wells on or owning interests
in a number of different prospects with major and large independent oil and gas
companies. A partnership subscribed at the minimum level would be able to
participate in fewer prospects, thereby increasing the risk to the partners. As
the partnership size increases, the diversification of the partnership will
increase because the partnership can drill or obtain interests in multiple
prospects. However, if we are unable to secure sufficient attractive prospects
for a larger partnership, it is possible that the average quality of the
partnership prospects could decline. In addition, greater demands will be placed
on our management capabilities in larger partnerships.
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<PAGE>
A PARTNERSHIP MAY BECOME LIABLE FOR JOINT ACTIVITIES OF OTHER WORKING
INTEREST OWNERS. The partnerships will usually acquire less than the full
working interest in prospects and, as a result, will engage in joint activities
with other working interest owners. Additionally, it is expected that the
partnership will purchase less than a 50% working interest in most prospects,
with the result that someone other than us or the partnership may control,
operate, and manage such prospects. A partnership could be held liable for the
joint activity obligations of the other working interest owners, such as
nonpayment of costs and liabilities arising from the actions of the working
interest owners. Full development of the prospects may be jeopardized in the
event other working interest owners cannot pay their shares of drilling and
completion costs.
THE PARTNERSHIPS HAVE LIMITED EXTERNAL SOURCES OF FUNDS, WHICH COULD RESULT
IN A SHORTAGE OF WORKING CAPITAL. Each of the partnerships intends to utilize
substantially all available capital from this offering for the drilling and
completion of wells, and acquisition of non-operating interests in oil and
natural gas properties. Each partnership will have only nominal funds available
for partnership purposes until there are revenues from partnership operations.
The partnership agreement permits the partnership to borrow money only after
drilling has been completed and all additional general partnership interests
have been converted into limited partnership interests. Any future requirement
for additional funding will have to come, if at all, from the partnership's
revenues, from assessments against the partners, or from borrowings. We cannot
assure that partnership operations will be sufficient to provide the partnership
with necessary additional funding, and no partner is required to pay any
assessments. We are prohibited under the partnership agreement from loaning
money to the partnerships, and we cannot assure that a partnership will be able
to borrow funds from third parties on commercially reasonable terms or at all.
OTHER PARTNERSHIPS SPONSORED BY US WILL COMPETE WITH THESE PARTNERSHIPS FOR
PROSPECTS, EQUIPMENT, CONTRACTORS, AND PERSONNEL. We plan to offer interests in
other partnerships to be formed for substantially the same purposes as those of
the partnerships. Therefore, a number of partnerships with unexpended capital
funds, including those partnerships to be formed before and after the
partnerships, may exist at the same time. Due to competition among partnerships
for suitable prospects and availability of equipment, contractors, and our
personnel, the fact that partnerships previously organized by us and our
affiliates may still be purchasing prospects (when the partnership is attempting
to purchase prospects) may make more difficult the completion of prospect
acquisition activities by a partnership.
PURCHASE OF UNITS BY US OR OUR AFFILIATES MAY ASSURE THE MINIMUM AGGREGATE
SUBSCRIPTION IN A PARTNERSHIP IS OBTAINED. We will purchase 5% of the total
units issued by each of the partnerships at the offering price of $20,000 per
unit, net of commissions and the management fee. We and our affiliates also may,
but are not required to, purchase additional units, the effect of which may be
to assure that the minimum aggregate subscription amount is obtained for any
partnership.
OUR PAST EXPERIENCE IS NOT INDICATIVE OF THE RESULTS OF THESE
PARTNERSHIPS. Information concerning the prior drilling experience of previous
partnerships sponsored by us and our affiliates, presented under the caption
"PRIOR ACTIVITIES," does not indicate the results to be expected by these
partnerships.
BECAUSE INVESTORS BEAR THE PARTNERSHIPS' ACQUISITION, DRILLING AND
DEVELOPMENT COSTS, THEY BEAR MOST OF THE RISK OF NON-PRODUCTIVE
OPERATIONS. Under the cost and revenue sharing provisions of the partnership
agreement, we will share costs with you differently than the way we will share
revenues with you. Because the partners other than us will bear a substantial
amount of the costs of acquiring, drilling and developing a partnership's
prospects, the partners other than us will bear a substantial amount of the
costs and risks of drilling dry holes and marginally productive wells.
THE PARTNERSHIP AGREEMENT PROHIBITS YOUR PARTICIPATION IN A PARTNERSHIP'S
BUSINESS. You may not participate in the management of the partnership
business. The partnership agreement forbids you from acting in a manner harmful
to the business of the partnership. If you violate the terms of the partnership
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agreement, you may have to pay the partnership or other partners for all damages
resulting from your breach of the partnership agreement.
THE PARTNERSHIP AGREEMENT LIMITS OUR LIABILITY TO YOU AND THE PARTNERSHIP
AND REQUIRES THE PARTNERSHIP TO INDEMNIFY US AGAINST CERTAIN LOSSES. We will
have no liability to the partnership or to any partner for any loss suffered by
the partnership, and will be indemnified by the partnership against loss
sustained by us in connection with the partnership if:
- we determine in good faith that our action was in the best interest of the
partnership;
- we were acting on behalf of or performing services for the partnership;
and
- our action did not constitute negligence or misconduct by us.
BECAUSE WE WILL ACT AS GENERAL PARTNER OF SEVERAL PARTNERSHIPS, OTHER
COMMITMENTS MAY ADVERSELY EFFECT OUR FINANCIAL CONDITION. As a result of our
commitments as general partner of several partnerships and because of the
unlimited liability of a general partner to third parties, our net worth is at
risk of reduction. Because we are primarily responsible for the conduct of the
partnership's affairs, a significant adverse financial reversal for us could
have an adverse effect on a partnership and the value of its units.
RISKS OF OIL AND NATURAL GAS INVESTMENTS
OIL AND NATURAL GAS INVESTMENTS ARE HIGHLY RISKY. The selection of
prospects for oil and natural gas drilling, the drilling, ownership and
operation of oil and natural gas wells, and the ownership of non-operating
interests in oil and natural gas properties, are highly speculative. There is a
possibility you will lose all or substantially all of your investment in a
partnership. We cannot predict whether any prospect will produce oil or natural
gas or commercial quantities of oil or natural gas. Drilling activities may be
unprofitable, not only from non-productive wells, but from wells that do not
produce oil or natural gas in sufficient quantities or quality to return a
profit. Delays and added expenses may also be caused by poor weather conditions
affecting, among other things, the ability to lay pipelines. In addition, ground
water, various clays, lack of porosity, and permeability may hinder, restrict or
even make production impractical or impossible. Each partnership may drill one
or more exploratory wells. Drilling exploratory wells involves greater risks of
dry holes and loss of the partners' investment than the drilling of
developmental wells. Drilling developmental wells generally involves less risk
of dry holes but developmental acreage is more expensive and subject to greater
royalties and other burdens on production. This investment is suitable for you
only if you are financially able to withstand a loss of all or substantially all
of your investment.
A PARTNERSHIP MAY BE REQUIRED TO PAY DELAY RENTALS TO HOLD PROPERTIES AND
THESE PAYMENTS MAY DEPLETE PARTNERSHIP CAPITAL. Oil and gas leases generally
require that the property must be drilled upon by a certain date or additional
funds known as delay rentals must be paid to keep the lease in effect. Delay
rentals must typically be paid within a year of the entry into the lease, if no
production or drilling activity has commenced. If delay rentals become due on
any property a partnership acquires, the partnership will have to pay its share
of such delay rentals or lose its lease on the property. These delay rentals
could equal or exceed the cost of the property. Further, payment of these delay
rentals could seriously deplete a partnership's capital available to fund
drilling activities when they do commence.
PRICES OF OIL AND NATURAL GAS ARE UNSTABLE. Global economic conditions,
political conditions, and energy conservation have created unstable prices for
oil and natural gas. Oil and natural gas prices may fluctuate significantly in
response to minor changes in supply, demand, market uncertainty, political
conditions in oil-producing countries, activities of oil-producing countries to
limit production, global economic conditions, weather conditions and other
factors that are beyond our control. The prices for domestic oil and natural gas
production have varied substantially over time and may in the future decline,
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which would adversely affect the partnerships and the investor partners. Prices
for oil and natural gas have been and are likely to remain extremely unstable.
COMPETITION, MARKET CONDITIONS AND GOVERNMENT REGULATION MAY ADVERSELY
EFFECT THE PARTNERSHIPS. A large number of companies and individuals engage in
drilling for oil and natural gas. As a result, there is intense competition for
the most desirable prospects. The sale of any oil or natural gas found and
produced by the partnerships will be affected by fluctuating market conditions
and regulations, including environmental standards, set by state and federal
agencies. From time-to-time, a surplus of oil and natural gas occurs in areas of
the United States. The effect of a surplus may be to reduce the price the
partnerships may receive for their oil or gas production, or to reduce the
amount of oil or natural gas that the partnerships may produce and sell.
ENVIRONMENTAL HAZARDS AND LIABILITIES MAY ADVERSELY EFFECT THE PARTNERSHIPS
AND RESULT IN LIABILITY FOR THE ADDITIONAL GENERAL PARTNERS. There are numerous
natural hazards involved in the drilling of oil and natural gas wells, including
unexpected or unusual formations, pressures, blowouts involving possible damages
to property and third parties, surface damages, bodily injuries, damage to and
loss of equipment, reservoir damage and loss of reserves. Uninsured liabilities
would reduce the funds available to a partnership, may result in the loss of
partnership properties and may create liability for you if you are an additional
general partner. Although the partnerships will maintain insurance coverage in
amounts we deem appropriate, it is possible that insurance coverage may be
insufficient. In that event, partnership assets would be utilized to pay
personal injury and property damage claims and the costs of controlling blowouts
or replacing destroyed equipment rather than for additional drilling activities.
A PARTNERSHIP MAY INCUR LIABILITY FOR LIENS AGAINST ITS
SUBCONTRACTORS. Although we will endeavor to ascertain the financial condition
of nonaffiliated subcontractors, if subcontractors fail to timely pay for
materials and services, the properties of the partnerships could be subject to
materialmen's and workmen's liens. In that event, the partnerships could incur
excess costs in discharging such liens.
SHUT-IN WELLS AND DELAYS IN PRODUCTION MAY ADVERSELY EFFECT PARTNERSHIP
OPERATIONS. Production from wells drilled in areas remote from marketing
facilities may be delayed until sufficient reserves are established to justify
construction of necessary pipelines and production facilities. In addition,
production from wells may be reduced or delayed due to marketing demands that
tend to be seasonal. Wells drilled for the partnerships may have access to only
one potential market. Local conditions, including closing businesses,
conservation, shifting population, pipeline maximum operating pressure
constraints, and development of local oversupply or deliverability problems
could halt sales from partnership wells.
THE PRODUCTION AND PRODUCING LIFE OF PARTNERSHIP WELLS IS UNCERTAIN.
PRODUCTION WILL DECLINE. We cannot predict the life and production of any well.
The actual lives could differ from those anticipated. Sufficient oil or natural
gas may not be produced for you to receive a profit or even to recover your
initial investment. Moreover, production from a partnership's oil and natural
gas wells, if any, will decline over time, and does not indicate any consistent
level of future production. This production decline may be rapid and irregular
when compared to a well's initial production.
TAX RISKS
TAX TREATMENT MAY CHANGE. The tax treatment currently available with
respect to oil and natural gas exploration and production may be modified or
eliminated on a retroactive or prospective basis by additional legislative,
judicial, or administrative actions.
TAX TREATMENT DEPENDS UPON PARTNERSHIP CLASSIFICATION. Tax counsel has
rendered its opinion to us that each partnership will be classified for federal
income tax purposes as a partnership and not as an association taxable as a
corporation or as a "publicly traded partnership." This opinion is not binding
on the IRS or the courts. The IRS could assert that a partnership should be
classified as a "publicly traded
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partnership." This would mean that any income, gain, loss, deduction, or credit
of the partnership would remain at the entity level, and not flow through to the
partners, and the income of the partnership would be subject to corporate tax
rates at the entity level and that distributions to the investor partners might
be considered dividend distributions subject to federal income tax at the
partners' level.
TAX LIABILITIES MAY EXCEED CASH DISTRIBUTIONS. You may be required to pay
federal income tax by reason of your distributive share of partnership taxable
income for any year in an amount exceeding the cash distributed to you by the
partnership. You must include in your own return for a taxable year your share
of the items of the partnership's income, gain, profit, loss, and deductions for
the year, whether or not cash proceeds are actually distributed to you.
TAX TREATMENT WILL DIFFER FOR ADDITIONAL GENERAL PARTNERS AND LIMITED
PARTNERS. An investment as an additional general partner in a partnership may
not be advisable for you if your taxable income from all sources is not
recurring or is not normally subject to the higher marginal federal income tax
rates. An investment as a limited partner may not be advisable for you if you do
not anticipate having substantial current taxable income from passive trade or
business activities. You would not be able to utilize any passive losses
generated by the partnerships unless you received passive income.
If you invest as an additional general partner, you will have the right to
convert your general partnership interests into limited partnership interests,
subject to certain limitations. All units of general partnership interest held
by investors will be converted into units of limited partnership interest as
soon as practicable after the end of the year in which drilling by the
partnership has been completed. After the conversion, gain will be recognized to
the extent that any liabilities of which an additional general partner is
considered relieved due to the conversion exceed his adjusted basis in his
partnership interest.
Partnership income, losses, gains, and deductions allocable to any limited
partners will be subject to the passive activity rules and those allocable to an
additional general partner will generally not be subject to the passive activity
rules. Upon conversion of an additional general partner's interest to that of a
limited partner, subsequently allocable income and gains will be treated as
nonpassive while losses and deductions will be limited under the passive loss
rules.
AUDITS OF A PARTNERSHIP'S TAX RETURNS COULD RESULT IN INCREASED TAXES DUE BY
THE PARTNERS OR AUDITS OF PARTNERS' INDIVIDUAL TAX RETURNS. The fact that the
partnerships will not be registered with the IRS as "tax shelters" does not
reduce the possibility that the IRS will audit each partnership's returns. If an
audit occurs, tax adjustments might be made that would increase the amount of
taxes due or increase the risk of audit of partners' individual tax returns.
Costs and expenses may be incurred by a partnership in contesting any audit
adjustments. The cost of responding to audits of partners' tax returns will be
borne solely by the partners whose returns are audited.
A MATERIAL PORTION OF YOUR SUBSCRIPTION PROCEEDS ARE NOT CURRENTLY
DEDUCTIBLE. A material portion of the subscription proceeds of a partnership
will be expended for cost and expense items that will not be currently
deductible for income tax purposes.
THE IRS COULD CHALLENGE A PARTNERSHIP'S DEDUCTIONS FOR PREPAYMENT OF
DRILLING COSTS. Some drilling cost expenditures may be made as prepayments
during a year for drilling and completion operations that in large part may be
performed during the following year. All or a portion of these prepayments may
be currently deductible by a partnership if the well to which the prepayment
relates is spudded within 90 days after the end of the year the prepayment is
made; the payment is not a mere deposit; and the payment serves a business
purpose or otherwise satisfies the clear reflection of income rule. A
partnership could fail to satisfy the requirements for deduction of prepaid
intangible drilling and development costs. The IRS may challenge the
deductibility of such prepayments. If a challenge were successful, the
challenged prepaid expenses would be deductible in the tax year in which the
services under the drilling contracts are actually performed, rather than the
tax year in which the payment was made.
15
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. You can identify these statements by the use of forward-looking
words such as "may," "will," "expect," "anticipate," "estimate," "continue," or
other similar words. You should read statements that contain these words
carefully because they discuss our future expectations, contain projections of
our future results of operations or financial condition or state other
"forward-looking" information. We believe that it is important to communicate
our future expectations to our investors. However, there may be events in the
future that we are not able to accurately predict or control. The factors listed
above in the section captioned "Risk Factors," as well as any cautionary
language in this prospectus, provide examples of risks, uncertainties and events
that may cause our actual results to differ materially from the expectations we
describe in our forward-looking statements. Before you invest in our units, you
should be aware that the occurrence of the events described in these risk
factors and elsewhere in this prospectus could have a material adverse effect on
our business, operating results and financial condition.
TERMS OF THE OFFERING
GENERAL
Reef Partners LLC, a Nevada limited liability company ("Reef Partners"), is
offering the Reef Millennium Energy Fund (the "Program"). The Program consists
of an offering of an aggregate of 5,000 units of preformation additional general
partner and limited partner interests (the "Units") in a series of up to ten
Nevada limited partnerships (each a "Partnership" and collectively, the
"Partnerships"). Units are being offered at an offering price of $20,000 per
Unit to prospective investors who meet the suitability standards described
below. See "--Investor Suitability." The minimum required subscription per
investor is one-quarter Unit ($5,000). If an investor purchases Units on more
than one occasion during the offering period of a Partnership, the minimum
required subscription on each occasion is one-quarter Unit ($5,000).
Each of the Partnerships will be formed by Reef Partners as managing general
partner (the "Managing General Partner"), promptly after subscriptions to such
Partnership have been received for at least 50 Units ($1,000,000). The Managing
General Partner will subscribe for at least five percent of the Units of each
Partnership that is formed (the "Managing General Partner's Minimum
Subscription"). The Managing General Partner and its Affiliates may in their
sole and absolute discretion, but are not required to, subscribe for Units in
excess of the Managing General Partner's Minimum Subscription. A Partnership
will not be formed until subscriptions have been received for at least 50 Units,
including Units subscribed for by the Managing General Partner and its
Affiliates. No more than 500 Units ($10,000,000) will be subscribed for in any
of the Partnerships.
The price to be paid by the Managing General Partner for the Managing
General Partner's Minimum Subscription, and the price to be paid by the Managing
General Partner and its affiliates for additional Units that any of them may
subscribe for, if any, is the same price per Unit to be paid by Investors, net,
however, of commissions and the management fee. The Managing General Partner
and/or its Affiliates will be entitled to the same ratable interest per Unit
they purchase in the Partnership as other Unit Holders. The purchase of Units by
the Managing General Partner and/or its Affiliates may permit a particular
Partnership to satisfy its requirements to sell the minimum number of Units in
order to close the offering of Units of the Partnership. Any Units purchased by
the Managing General Partner and/or its Affiliates will be made for investment
purposes only and not with a view toward redistribution or resale of the Units.
OFFERING PERIODS
Reef Partners is offering Units in up to three Partnerships in 2000, up to
three Partnerships in 2001 and up to four Partnerships in 2002. The offering
period for the first Partnership, Millennium Energy Fund A, L.P., began on the
date of this prospectus. The offering period for the other nine Partnerships
will follow sequentially.
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<PAGE>
The offering period for a Partnership may be terminated at any time after
the minimum number of Units (50) has been subscribed for in the Partnership,
including Units subscribed for by the Managing General Partner and its
Affiliates. Unless Reef Partners elects to terminate a Partnership's offering
period before the maximum number of units (500) in the Partnership has been
subscribed for, the offering periods for each Partnership will terminate as
follows:
<TABLE>
<CAPTION>
THE OFFERING PERIOD
WILL
TERMINATE ON OR
FOR PARTNERSHIPS OFFERED IN: BEFORE:
- ----------------------------- ----------------------
<S> <C>
2000............... December 31, 2000
2001 December 31, 2001
2002 December 31, 2002
</TABLE>
Reef Partners anticipates that this Prospectus will be supplemented or
amended when the offering period has terminated for a particular Partnership in
order to reflect the results of the offering of such Partnership.
ELECTION TO PURCHASE AS LIMITED PARTNER OR ADDITIONAL GENERAL PARTNER
A subscriber may elect to purchase Units as a Limited Partner or as an
Additional General Partner, and may purchase Units of limited partnership
interest and Units of general partnership interest. There is no restriction on
the number of limited partnership interests or general partnership interests
that may be issued by any of the Partnerships.
SUBSCRIPTIONS FOR UNITS; ESCROW ACCOUNT
Subscriptions for Units are payable in cash upon subscription. Checks for
Units should be made payable to "Bank One, Escrow Agent for Millennium Energy
Fund [A, B, C, D, E, F, G, H, I or J, as applicable], L.P." and should be given
to the subscriber's broker for submission to the Dealer Manager and Escrow
Agent.
The execution of the Subscription Agreement by a subscriber, or by his
authorized representative in the case of fiduciary accounts, constitutes a
binding offer to buy Unit(s) in a Partnership and an agreement to hold the offer
open until the Subscription is accepted or rejected by the Managing General
Partner. Once an investor subscribes for Units, he or she will not have any
revocation rights, unless otherwise provided by state law. The Managing General
Partner may not complete a sale of Units to any investor until at least five
business days after the date the investor has received a final prospectus. In
addition, the Managing General Partner will send to each investor a confirmation
of his purchase.
The Managing General Partner may refuse to accept any Subscription without
liability to the subscriber. The Managing General Partner may reject a
Subscription if, for example, the prospective investor does not satisfy the
suitability standards described below or if the Subscription is received after
the offering period has terminated. The execution of the Subscription Agreement
and its acceptance by the Managing General Partner also constitute the execution
of the Partnership Agreement and an agreement to be bound by the terms thereof
as a Partner, including the granting of a special power of attorney to the
Managing General Partner appointing it as the Partner's lawful representative to
make, execute, sign, swear to, and file a Certificate of Limited Partnership and
any amendment thereof, governmental reports, certifications, contracts, and
other matters.
Subscription proceeds of each Partnership will be held in a separate
interest-bearing escrow account with Bank One Texas, N.A. as escrow agent (the
"Escrow Agent") until at least 50 Units in the Partnership have been subscribed
for, including Units subscribed for by the Managing General Partner and its
Affiliates. If the minimum number of Units in a Partnership are not subscribed
for prior to the termination of a Partnership's offering period, that
Partnership will not be formed, and the Escrow Agent will promptly
17
<PAGE>
return all subscription proceeds with respect to that Partnership to its
subscribers in full, with any interest earned on the subscriptions. If at least
50 Units have been subscribed for during a Partnership's offering period,
including Units subscribed for by the Managing General Partner and its
Affiliates, then the Managing General Partner may direct the Escrow Agent to
disburse the funds in the escrow account, in whole or in part, at any time
during the remainder of the Partnership's offering period, and to pay to the
Managing General Partner all funds in the escrow account upon termination of the
Partnership's offering period.
Subscriptions will not be commingled with the funds of the Managing General
Partner or its Affiliates, nor will Subscriptions be subject to the claims of
their creditors. Subscription proceeds will be invested during the offering
period only in short-term institutional investments comprised of or secured by
securities of the U.S. government. Interest accrued on Subscription funds prior
to closing of the offering and funding of a Partnership will be allocated pro
rata to the respective Subscriber.
FORMATION OF THE PARTNERSHIPS
Each Partnership will be formed pursuant to the Nevada Uniform Limited
Partnership Act (the "Act") and funded promptly following the termination of its
offering period. However, a Partnership will not be funded with less than
minimum aggregate Subscriptions of $1,000,000. A Partnership will not have any
substantial assets or liabilities and will not commence any drilling operations
until after its funding.
Each Partnership is and will be a separate and distinct business and
economic entity from each other Partnership. Thus, the Investor Partners in one
Partnership will be Partners only of that Partnership in which they specifically
subscribe and will not have any interest in any of the other Partnerships.
Therefore, they should consider and rely solely upon the operations and success
(or lack thereof) of their own Partnership in assessing the quality of their
investment. The performance of one Partnership will not be attributable to the
performance of other Partnerships. Investor Partners will not have any interest
in the Managing General Partner or any of its Affiliates (other than the
Partnership in which they specifically subscribe).
Upon funding of a Partnership, the Managing General Partner will deposit the
Subscription funds in interest-bearing accounts or invest such funds in
short-term highly-liquid securities where there is appropriate safety of
principal, in that Partnership's name until the funds are required for
Partnership purposes. Interest earned on amounts so deposited or invested will
be credited to the accounts of the respective Partnership whose funds earned the
interest.
The Managing General Partner anticipates that within 12 months following the
formation of a Partnership all Subscriptions will have been expended or
committed for Partnership operations. Unless the Managing General Partner shall
determine that it is prudent for the Partnership to set aside funds for working
capital, contingencies, or any other matter, any unexpended and/or uncommitted
Subscriptions at the end of such 12-month period will be returned pro rata to
the Investor Partners and the Managing General Partner will reimburse such
Partners for Organization and Offering Costs and the Management Fee allocable to
the return of capital.
The Managing General Partner will file a Certificate of Limited Partnership
and any other documents required to form each Partnership with the State of
Nevada. The Managing General Partner also will take all other actions necessary
to qualify each Partnership to do business as a limited partnership or cause the
limited partnership status of the Partnership to be recognized in any other
jurisdiction where such Partnership conducts business.
TYPES OF UNITS
INVESTOR MAY CHOOSE TO BE LIMITED PARTNER AND/OR ADDITIONAL GENERAL
PARTNER. An Investor Partner may purchase Units in a Partnership as a Limited
Partner and/or as an Additional General Partner. Although income, gains, losses,
deductions, and cash distributions allocable to the Investor Partners are
generally shared pro rata based upon the amount of their Subscriptions, there
are material differences in the federal income tax effects and the liability
associated with these different types of Units. Any income, gain, loss, or
deduction attributable to Partnership activities will generally be allocable to
the Partners who bear the economic risk of loss with respect to such activities.
Additional General Partners generally will be permitted to offset Partnership
losses and deductions against income from any source. Limited Partners generally
will be allowed to offset Partnership losses and deductions only against passive
income.
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<PAGE>
An investor must indicate on the Investor Signature Page the number of
limited partnership Units or general partnership Units subscribed to and fill in
the appropriate line on the Subscription Agreement. If a subscriber fails to
indicate on the Subscription Agreement a choice between investing as a Limited
Partner or as an Additional General Partner, the Managing General Partner will
not accept the Subscription but will promptly return the Subscription Agreement
and the tendered subscription funds to the purported Subscriber.
LIMITED PARTNERS. The liability of a Limited Partner of the Partnership for
the Partnership's debts and obligations will be limited to that Partner's
Capital Contributions, his share of Partnership assets, and the return of any
part of his Capital Contribution (a) for a period of one year thereafter for the
amount of his returned contribution (if the Limited Partner received the return
of any part of his contribution without violation of the Partnership Agreement
or the Act), but only to the extent necessary to discharge the Limited Partner's
liabilities to creditors who extended credit to the Partnership during the
period the contribution was held by the Partnership and (b) for a period of six
years thereafter for the amount of the contribution wrongfully returned (if the
Limited Partner has received the return of any part of his contribution in
violation of the Partnership Agreement or the Act).
GENERAL PARTNERS. The General Partners will consist of the Managing General
Partner and each investor purchasing Units of general partnership interest
(referred to herein as "Additional General Partners"). As a general partner of a
Partnership, each Additional General Partner will be fully liable for the debts,
obligations and liabilities of the Partnership individually and as a group with
all other general partners as provided by the Act to the extent liabilities are
not satisfied from the proceeds of insurance, from the indemnification by the
Managing General Partner, or from the sale of Partnership assets. See "RISK
FACTORS." While the activities of the Partnerships are covered by substantial
insurance policies and indemnification by the Managing General Partner (see
"PROPOSED ACTIVITIES--Insurance" and "SUMMARY OF PARTNERSHIP
AGREEMENT--Indemnification"), the Additional General Partners may incur personal
liability (not covered by insurance, Partnership assets, or indemnification) as
a result of the activities of a Partnership.
CONVERSION OF UNITS BY THE MANAGING GENERAL PARTNER AND BY ADDITIONAL
GENERAL PARTNERS. The Managing General Partner will convert all Units of
general partnership interest of a particular Partnership into Units of limited
partnership interest as soon as practicable after the end of the year in which
drilling by that Partnership has been completed. In addition, upon written
notice to the Managing General Partner, and except as provided below and in the
Partnership Agreement, Additional General Partners of a Partnership have the
right to convert their interests into limited partnership interests of that
Partnership:
- at any time after one year following the closing of the offering of that
Partnership and the disbursement to that Partnership of the proceeds of
the offering; and
- at any time within the 30 day period prior to any material change in the
amount of the Partnership's insurance coverage.
Upon conversion, an Additional General Partner of a Partnership will become
a Limited Partner of that Partnership. Conversion will not be permitted if it
will cause a termination of the Partnership for federal income tax purposes.
Conversion of an Additional General Partner to a Limited Partner in a
particular Partnership will not be effective until the Managing General
Partner's filing of an amendment to the Partnership's Certificate of Limited
Partnership. The Managing General Partner is obligated to file an amendment to
its Certificate at any time during the full calendar month after receipt by the
Managing General Partner of the required notice of the Additional General
Partner, provided that the conversion will not constitute a termination of the
Partnership for tax purposes. A conversion made in response to a material change
in a Partnership's insurance coverage will be made effective prior to the
effective date of the change in insurance coverage. After the conversion of his
general partnership interest to that of a Limited Partner, each converting
19
<PAGE>
Additional General Partner will continue to have unlimited liability for
Partnership liabilities arising prior to the effective date of such conversion,
but will have limited liability to the same extent as Limited Partners after
conversion to Limited Partner status is effected.
Except with respect to Units it buys in a Partnership for cash, the Managing
General Partner is not entitled to convert its interests into limited
partnership interests. Limited Partners do not have any right to convert their
Units into Units of general partnership interest.
INVESTOR SUITABILITY
It is the obligation of persons selling Units to make every reasonable
effort to assure that the Units are suitable for investors, based on the
investor's investment objectives and financial situation, regardless of the
investor's income or net worth.
GENERAL SUITABILITY REQUIREMENT. Units, including fractional Units, will be
sold only to an investor who has (i) a minimum net worth of $225,000 or (ii) a
minimum net worth of $60,000 and had during the last tax year or estimates that
he will have during the current tax year taxable income of at least $60,000
without regard to an investment in Units. Net worth shall be determined
exclusive of home, home furnishings and automobiles. In addition, Units will be
sold only to an investor who makes a written representation that he is the sole
and true party in interest and that he is not purchasing for the benefit of any
other person (or that he is purchasing for another person who meets all of the
conditions set forth above).
ADDITIONAL REQUIREMENTS FOR INVESTORS IN CERTAIN STATES. Additional
suitability requirements are applicable to residents of certain states where the
offer and sale of Units are being made as set forth below.
California residents generally may not transfer Units without the consent of
the California Commissioner of Corporations.
Michigan, Ohio and Pennsylvania investors are not permitted to invest in the
Units if the dollar amount of the investment is equal to or more than 10% of
their net worth.
PURCHASERS OF LIMITED PARTNERSHIP INTEREST. A resident of California who
subscribes for Units of limited partnership interest must (i) have net worth of
not less than $250,000 (exclusive of home, furnishings, and automobiles) and
expect to have gross income in the year of his investment of $65,000 or more;
(ii) have net worth of not less than $500,000 (exclusive of home, furnishings,
and automobiles); (iii) have net worth of not less than $1,000,000; or
(iv) expect to have gross income in the year of his investment of not less than
$200,000.
A Michigan or North Carolina resident must have: (a) a net worth of not less
than $225,000 (exclusive of home, furnishings, and automobiles), or (b) a net
worth of not less than $60,000 (exclusive of home, furnishings, and automobiles)
and estimated taxable income of $60,000 or more in the year of his investment
without regard to an investment in a Partnership.
A Pennsylvania resident must: (i) have a net worth of at least $225,000
(exclusive of home, furnishings, and automobiles); (ii) have a net worth of at
least $60,000 (exclusive of home, furnishings, and automobiles) and estimated
taxable income of $60,000 or more in the year prior to the year of his
investment, without regard to the investment in the Program, or estimate that
his taxable income will be $60,000 or more in the year of his investment,
without regard to the investment in the Program; or (iii) purchase in a
fiduciary capacity for a person or entity having such net worth or such taxable
income.
PURCHASERS OF GENERAL PARTNERSHIP INTEREST. Except as otherwise provided
below, a resident of Arizona, Michigan, Mississippi, Missouri, New Mexico, North
Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Tennessee or Texas who
subscribes for Units of general partnership interest must represent that he
(i) has an individual or joint minimum net worth (exclusive of home, home
furnishings and automobiles) with his
20
<PAGE>
or her spouse of $225,000 without regard to the investment in the Program and a
combined minimum gross income of $100,000 ($120,000 for Arizona residents) or
more for the current year and for the two previous years; an investor in
Arizona, Michigan, Missouri, Ohio, Oklahoma and Oregon must represent that he
has an individual or joint minimum net worth (exclusive of home, home
furnishings, and automobiles) with his spouse of $225,000, without regard to an
investment in the Program, and an individual or combined taxable income of
$60,000 or more for the previous year and an expectation of an individual or
combined taxable income of $60,000 or more for each of the current year and the
succeeding year; (ii) has an individual or joint minimum net worth with his or
her spouse in excess of $1,000,000, inclusive of home, home furnishings and
automobiles; (iii) has an individual or joint minimum net worth with his or her
spouse in excess of $500,000, exclusive of home, home furnishings and
automobiles; or (iv) has a combined minimum gross income in excess of $200,000
in the current year and the two previous years.
A resident of California who subscribes for Units of general partnership
interest must (i) have net worth of not less than $250,000 (exclusive of home,
furnishings, and automobiles) and expect to have gross income in the year of his
investment of $120,000 or more; (ii) have net worth of not less than $500,000
(exclusive of home, furnishings, and automobiles); (iii) have net worth of not
less than $1,000,000; or (iv) expect to have gross income in the year of his
investment of not less than $200,000.
MISCELLANEOUS. Transferees of Units seeking to become substituted Partners
must also meet the suitability requirements discussed above, as well as the
requirements for transfer of Units and admission as a substituted Partner
imposed by the Partnership Agreement. These requirements apply to all transfers
of Units, including transfers of Units by a 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.
Where any Units are purchased by an investor in a fiduciary capacity for any
other person (or for an entity in which such investor is deemed to be a
"purchaser" of the subject Units) all of the suitability standards set forth
above will be applicable to such other person.
Investors are required to execute their own subscription agreements. The
Managing General Partner will not accept any subscription agreement that has
been executed by someone other than the investor (or, in the case of fiduciary
accounts, someone who does not have the legal power of attorney to sign on the
investor's behalf).
For details regarding how to subscribe, see "INSTRUCTIONS TO SUBSCRIBERS"
attached hereto as Appendix C.
ASSESSMENTS AND FINANCING
Partners are not required to make any capital contributions to a Partnership
other than payment of the offering price for their units. The Managing General
Partner may, however, call for additional assessments on the Partners of up to
$20,000 per Unit for the purpose of conducting subsequent operations:
- on Prospects the Partnership began to evaluate during the Partnership's
initial operations; or
- on Leases related to such Prospects that the Managing General Partner
deems merit additional operations to fully develop the Prospects.
Although Partners are not required to pay any assessments, their percentage
interest in the Partnership will be reduced if other Partners pay an assessment
and they do not. If a Partner fails to pay an assessment of up to $5,000 per
Unit (an "Initial Assessment"), then such Partner's percentage interest in the
revenues of the Partnership will be reduced proportionately based upon the ratio
of its unpaid Initial Assessments to all capital contributions. If a Partner
fails to pay an assessment between $5,000 and $20,000 (a "Secondary Assessment")
then such Partner's percentage interest in the revenues derived from the well
drilled and/or completed with the proceeds of the Secondary Assessment shall be
reduced based on the
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<PAGE>
ratio of the Partner's unpaid Secondary Assessment to all capital contributions
used for such drilling and/ or completion. If an assessment is made for a
purpose other than drilling a well, regardless of whether it was an Initial or a
Secondary Assessment, then a Partner electing not to pay will have its
percentage interest in the revenues of the Partnership proportionately reduced
based on the ratio of his unpaid non-drilling assessments to all capital
contributions and assessments.
The Partnership is not permitted to borrow funds on behalf of the
Partnership or for Partnership activities prior to completion of drilling and
the conversion of the Additional General Partners' interests into Limited
Partners Interests.
The Managing General Partner intends to develop particular Partnership
interests in its Prospects only with the proceeds of Subscriptions and its
Capital Contributions. However, such funds may not be sufficient to fund all
such costs and it may be necessary for a Partnership to retain Partnership
revenues for the payment of such costs, or for the Managing General Partner to
advance the necessary funds to a Partnership. Additional development refers to
work necessary or desirable to enhance production from existing wells. Payment
for such development work will be retained from Partnership proceeds in one of
two methods:
(a) An AFE ("authority for expenditures") estimate will be prepared by the
Managing General Partner for the Partnership. The development work will
be completed by the Operator at which time the Partnership will be billed
for the work performed; or
(b) An AFE estimate will be prepared by the Managing General Partner for the
Partnership. The Partnership will retain revenues from operations until
sufficient funds have been accumulated to pay for the development work,
at which time the work will be commenced by the Operator, and the
Operator will be paid as the work is performed.
The choice of which option to use will be at the discretion of the Managing
General Partner, based on the amount of the anticipated expenditure and the
urgency of the necessary work. Generally, the Managing General Partner will
elect option (a) for emergency and expenditures of less than $10,000 and option
(b) for expenditures of $10,000 and greater.
SOURCE OF FUNDS AND USE OF PROCEEDS
SOURCE OF FUNDS
Upon completion of the offering of Units in a Partnership, (and prior to
such time as borrowing shall become permissible) the sole funds available to
such Partnership will be the capital contributions of the Partners, which will
range from a minimum of $1,000,000 if the minimum subscription of 50 Units is
sold to a maximum of $10,000,000 if the maximum subscription of 500 Units is
sold. Such aggregate capital contributions includes the purchase of Units by the
Managing General Partner and its Affiliates. The Managing General Partner will
purchase at least 5% of the Units in each Partnership at the offering price of
$20,000 per Unit (net of commissions and the management fee).
USE OF PROCEEDS
A total of 5,000 Units is being offered to fund up to ten Partnerships over
a three-year period. In order to fund any particular Partnership, a minimum of
50 Units ($1,000,000) must be sold with respect to that Partnership. The
following table presents information respecting the financing of a Partnership
based upon the sale of 50 Units ($1,000,000) and the sale of 500 Units
($10,000,000), the minimum and maximum number of Units, respectively, that can
be sold for any Partnership.
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It is anticipated that substantially all of the funds available to a
Partnership will be disbursed for the following purposes and in the following
manner:
<TABLE>
<CAPTION>
MINIMUM MAXIMUM
SUBSCRIPTION SUBSCRIPTION
(50 UNITS) PERCENT (500 UNITS) PERCENT
------------ ---------- ------------- ----------
<S> <C> <C> <C> <C>
Total Partnership Capital.................................. $ 1,000,000 100.00% $ 10,000,000 100.00%
Less: Organization and offering costs(1)(2)................ 150,000 15.00% 1,025,000 10.25%
Less: Management fee to Managing General Partner(1)(2)..... -- 0.00% 475,000 4.75%
------------ ---------- ------------- ----------
Amount available for investment............................ $ 850,000 85.00% $ 8,500,000 85.00%
============ ========== ============= ==========
</TABLE>
- ------------------------
(1) An amount equal to 15% of the subscriptions to each partnership will be paid
to the Managing General Partner. If organization and offering costs are less
than 15% of aggregate subscriptions to the partnership, the Managing General
Partner will keep the difference as a one-time management fee. If
organization and offering costs exceed 15% of aggregate subscriptions to the
partnership, the Managing General Partner will pay all such costs.
(2) Assumes all organization and offering costs are allocated to a single
partnership. If all ten partnerships are formed, the Managing General
Partner intends to allocate organization and offering costs among the
partnerships in proportion to the capital contributions to each partnership.
SUBSEQUENT SOURCE OF FUNDS
As indicated above, it is anticipated that substantially all of a
Partnership's initial capital will be committed or expended following the
offering of Units in such Partnership. The Partnership Agreement does not permit
the Partnership to borrow any funds for its activities until drilling has been
completed and all additional general partnership interests have been converted
into limited partnership interests. Consequently, any future requirements for
additional capital may have to be satisfied from Partnership production or from
assessments voluntarily contributed by the Partners to fund Subsequent
Operations. See "ASSESSMENTS AND FINANCING" and "RISK FACTORS--Special Risks of
the Partnerships--The partnerships have limited external sources of funds, which
could result in a shortage of working capital." Alternatively, a Partnership
could farm-out or sell Partnership properties.
PARTICIPATION IN COSTS AND REVENUES
CASH DISTRIBUTIONS
Distributions of cash from a particular Partnership will be distributed
between the Managing General Partner and Investor Partners as follows:
<TABLE>
<CAPTION>
UNITS ISSUED MANAGING
BY THE PARTNERSHIP(1) GENERAL PARTNER(2)
----------------------- -------------------
<S> <C> <C>
Until Investor Partners Receive Partnership Cash Distributions Equal to
their Capital Contributions (Before "Payout")(3)....................... 90% 10%
After Investor Partners Receive Partnership Cash Distributions Equal to
their Capital Contributions (After "Payout")(3)........................ 75% 25%
</TABLE>
- ------------------------
(1) Includes Units purchased by the Managing General Partner. The Managing
General Partner will purchase at least 5% of the Units issued by each
Partnership, for cash, at the same price per Unit paid by Investor Partners,
net of commissions and the management fee.
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<PAGE>
(2) Excludes any Partnership interest of the Managing General Partner as a
result of its purchase of Units.
(3) There is no assurance that a Partnership will achieve Payout or that cash
distributions will occur. See "--Cash Distribution Policy" and "RISK
FACTORS."
PROFITS AND LOSSES
Profits and losses from Partnership operations and gains and losses from the
sale of Partnership property interests or equipment will be generally allocated
75% to the holders of Partnership Units and 25% to the Managing General Partner.
However, tax deductions with respect to certain Partnership expenses as
described below will be generally allocated 100% to the holders of Partnership
Units. Notwithstanding the foregoing, certain tax allocations may be made in a
different ratio than as described above to prevent the creation or increase in
Capital Account deficits for Investor Partners or to re-adjust Partner Capital
Accounts as the result of previously allocated profits, losses or deductions, or
to otherwise comply with applicable Treasury Regulations.
Specifically, Partnership profits shall be allocated (i) to Unit holders to
the extent of cumulative losses or deductions previously allocated to such Unit
holders; (ii) then to the Managing General Partner to the extent of cumulative
losses, if any, previously allocated to such Managing General Partner; and
(iii) then 75% to the Unit holders and 25% to the Managing General Partner.
Partnership losses shall be allocated (a) first, 75% to Unit holders and 25% to
the Managing General Partner to the extent of cumulative profits, if any,
previously allocated to the Partners in the 75/25 ratio; (b) then to the
Managing General Partner to the extent of losses, if any, previously allocated
to the Managing General Partner to avoid Investor Partner Capital Account
deficits; and (c) then 100% to the Unit holders. Following is a description of
the types of Partnership costs and revenues subject to these allocation and
distribution provisions.
REVENUES
OIL AND NATURAL GAS REVENUES; SALES PROCEEDS. Partnership cash from oil and
natural gas production and gain or loss from the sale or other disposition of
productive wells and Leases will be allocated 90% to the Units issued by the
Partnership and 10% to the Carried Interest of the Managing General Partner
until Investor Partners receive cash distributions from the Partnership equal to
their Capital Contribution (before "Payout"). After the Investor Partners
receive cash distributions from the Partnership equal to their Capital
Contribution (after "Payout"), Partnership cash from oil and natural gas
production will be allocated 75% to the Units issued by the Partnership and 25%
to the Carried Interest of the Managing General Partner.
INTEREST INCOME. Any interest earned on the deposit of Subscription funds
prior to the closing of the offering and funding of a Partnership will be
credited 100% to the Investor Partners. Interest earned on the deposit of
operating revenues and revenues from any other sources shall be allocated and
credited in the same percentages that oil and gas revenues are then being
allocated to the Investor Partners and the Managing General Partner.
SALE OF EQUIPMENT. All Partnership cash from sales of equipment will be
allocated (i) 90% to the Units issued by the Partnership and 10% to the Carried
Interest of the Managing General Partner before Payout and (ii) 75% to the Units
and 25% to the Carried Interest of the Managing General Partner after Payout.
COSTS
ORGANIZATION AND OFFERING COSTS. The Partnership will pay to the Managing
General Partner 15% of all Subscriptions received by the Partnership. Out of
this 15% of Subscriptions, the Managing General
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<PAGE>
Partner will pay all Organization and Offering Costs, including all legal,
accounting, printing, and filing fees associated with the organization of the
Partnerships and the offerings of Units, and all Dealer Manager commissions. The
Units issued by the Partnership will be allocated 100% of the tax deduction
attributable to these costs. All such costs (and related deductions) in excess
of 15% of Subscriptions will be allocated and charged 100% to the Managing
General Partner.
MANAGEMENT FEE. The nonrecurring Management Fee is the excess, if any, of
the 15% of Subscriptions over the costs described in the preceding paragraph.
The tax deduction attributable to the Management Fee will be allocated 100% to
the Investor Partners.
LEASE COSTS, DRILLING AND COMPLETION COSTS, AND GATHERING LINE
COSTS. Deductions attributable to the Costs of Leases, tangible Drilling and
Completion Costs and gathering line Costs will be allocated 100% to the Units
issued by the Partnership.
INTANGIBLE DRILLING AND DEVELOPMENT COSTS. Intangible drilling and
development costs and recapture of intangible drilling and development costs and
associated deductions will be allocated 100% to the Units issued by the
Partnership.
OPERATING COSTS. Operating Costs of Partnership wells and associated
deductions will be allocated and charged 75% to the Units issued by the
Partnership and 25% to the Carried Interest of the Managing General Partner.
DIRECT COSTS. Direct Costs of the Partnerships and associated deductions
will be allocated and charged 75% to the Units issued by the Partnership and 25%
to the Carried Interest of the Managing General Partner.
ADMINISTRATIVE COSTS. Administrative Costs of the Partnerships and
associated deductions will be allocated and charged 75% to the Units issued by
the Partnership and 25% to the Carried Interest of the Managing General Partner.
25
<PAGE>
The following table summarizes the participation in the cash distributions
and the general allocations of income, gain, loss and deductions by the Managing
General Partner and by the holders of Units issued by the Partnerships. As
stated above, the allocations may differ from the ratios in the table under
certain circumstances:
<TABLE>
<CAPTION>
BEFORE AFTER
PARTNERSHIP PAYOUT PARTNERSHIP PAYOUT
------------------------------ ------------------------------
UNITS ISSUED MANAGING UNITS ISSUED MANAGING
BY THE GENERAL BY THE GENERAL
PARTNERSHIP(1) PARTNER(2) PARTNERSHIP(1) PARTNER(2)
--------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
PARTNERSHIP COSTS
Broker-dealer commissions(3)............................... 100% 0% -- --
Management fee(3).......................................... 100% 0% -- --
Lease costs................................................ 100% 0% 100% 0%
Intangible drilling and development costs.................. 100% 0% 100% 0%
Drilling and completion costs.............................. 100% 0% 100% 0%
Operating costs(4)......................................... 75% 25% 75% 25%
Direct costs(5)............................................ 75% 25% 75% 25%
Administrative costs....................................... 75% 25% 75% 25%
PARTNERSHIP REVENUES
Partnership cash distributions............................. 90% 10% 75% 25%
Partnership taxable income from operations(6).............. 75% 25% 75% 25%
Partnership losses from operations(6)...................... 75% 25% 75% 25%
Gain or loss from the sale of Partnership properties or
equipment(6)............................................. 75% 25% 75% 25%
</TABLE>
- ------------------------
(1) Includes Units purchased by the Managing General Partner. The Managing
General Partner will buy at least 5% of the Units issued by each Partnership
at the offering price of $20,000 per Unit, net of commissions and the
management fee.
(2) Does not include any allocation to the Managing General Partner due to its
ownership of Partnership Units.
(3) Organization and Offering Costs will be paid by the Managing General Partner
out of the 15% of Subscriptions paid to it by the Partnership. Organization
and Offering Costs, including commissions, in excess of 15% of
Subscriptions, if any, will be paid by the Managing General Partner, without
recourse to the Partnership.
(4) Represents Operating Costs incurred after the completion of productive
wells, including monthly per-well charges which may be paid to an Affiliate
of the Managing General Partner if such Affiliate is acting as the operator
of a Partnership property.
(5) The Managing General Partner will receive monthly reimbursement from the
Partnerships for their Direct Costs incurred by the Managing General Partner
on behalf of the Partnerships.
(6) Under certain circumstances, allocations other than in the 75/25 ratio
described above will be made to "re-adjust" partners' capital accounts
because of previously allocated losses, deductions or profits. See
"--Profits and Losses."
26
<PAGE>
The Managing General Partner estimates that Direct Costs and Administrative
Costs allocable to the Investor Partners for the initial 12 months of a
Partnership's operations will be approximately $47,000 if minimum Subscriptions
($1,000,000) are received (representing 4.70% of aggregate Partnership capital);
and approximately $113,000 if maximum Subscriptions ($10,000,000) are received
(representing 1.13% of aggregate Partnership capital). The following table sets
forth the components of these estimated charges to the Investor Partners during
the first year after a Partnership is formed, assuming the minimum and maximum
Subscriptions are obtained:
<TABLE>
<CAPTION>
MINIMUM MAXIMUM
SUBSCRIPTION SUBSCRIPTION
(50 UNITS) (500 UNITS)
------------ ------------
<S> <C> <C>
Administrative Costs
Legal........................................................... $ 1,000 $ 2,000
Accounting...................................................... 10,000 20,000
Geological...................................................... -- --
Secretarial..................................................... 2,000 4,000
Travel.......................................................... -- --
Office Rent..................................................... -- --
Telephone....................................................... 1,000 2,000
Other........................................................... 2,000 12,000
---------- ----------
Total Administrative Costs.................................. $ 16,000 $ 40,000
========== ==========
Direct Costs:
Audit and Tax Preparation....................................... $ 10,000 $ 20,000
Independent Engineering Reports................................. 20,000 50,000
Materials, Supplies and Other................................... 1,000 3,000
---------- ----------
Total Direct Costs.......................................... $ 31,000 $ 73,000
========== ==========
</TABLE>
27
<PAGE>
The following table presents, for each partnership formed by the Managing
General Partner and its Affiliates in the last three years, the dollar amount of
direct costs and administrative costs incurred by the particular partnership in
each year.
<TABLE>
<CAPTION>
DIRECT & ADMINISTRATIVE COSTS
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Bell City 3-D Joint Venture........................................ $ -- $ 47 $ 711
Savoie-Fontentot Joint Venture..................................... 603 3,145 --
Hardison Sadler Joint Venture...................................... -- 3,118 --
Holt #2-R Joint Venture............................................ 44 2,246 45
Valle Morado Joint Venture......................................... -- 27 --
Thunder Alley Joint Venture........................................ 18 15 854
West Bell City 3-D Joint Venture................................... -- 58 --
Bell City #1 Joint Venture......................................... -- 95 68
Northwest Bell City Joint Venture.................................. -- 234 6,119
Bell City #2 Joint Venture......................................... -- -- 163
Bell City #3 Joint Venture......................................... -- -- 240
Bell City #4 Joint Venture......................................... -- -- 143
Bell City #5 Joint Venture......................................... -- -- 66
Domino Joint Venture............................................... -- -- --
Bell City #6 Joint Venture......................................... -- -- --
RAM Joint Venture.................................................. -- -- --
--------- --------- ---------
$ 665 $ 8,985 $ 8,409
========= ========= =========
</TABLE>
DEFICIT CAPITAL ACCOUNT BALANCES
To avoid the requirement of restoring a deficit Capital Account balance, no
losses will be allocated to the Units owned by an Investor Partner to the extent
such allocation would create or increase a deficit in the Capital Account
(adjusted for certain liabilities, as provided in the Partnership Agreement).
CASH DISTRIBUTION POLICY
The Managing General Partner intends to distribute substantially all of the
Partnerships' available cash flow on a monthly basis; however, the Managing
General Partner will review the accounts of each Partnership at least quarterly
for the purpose of determining the Distributable Cash available for
distribution. The ability of the Partnerships to make or sustain cash
distributions will depend upon numerous factors. No assurance can be given that
any level of cash distributions to the Investor Partners will be attained, that
cash distributions will equal or approximate cash distributions made to
investors in prior drilling programs sponsored by the Managing General Partner
or its Affiliates, or that any level of cash distributions can be maintained.
See "RISK FACTORS" and "PRIOR ACTIVITIES."
In general, the volume of production from producing properties declines with
the passage of time. The cash flow generated by each Partnership's Prospects and
the amounts available for distribution to a Partnership's respective Partners
from such Prospects will, therefore, decline in the absence of significant
increases in the prices that the Partnerships receive for their respective oil
and gas production, or significant increases in the production of oil and gas
from Prospects resulting from the successful additional development of such
Prospects. See "RISK FACTORS--Risks of Oil and Natural Gas Investments."
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<PAGE>
TERMINATION
Upon termination and final liquidation of a Partnership, the assets of the
Partnership will be distributed to the Partners based upon their Capital Account
balances. If the Managing General Partner has a deficit in its Capital Account,
it will be required to restore such deficit; however, no Investor Partner will
be obligated to restore his deficit, if any.
AMENDMENT OF PARTNERSHIP ALLOCATION PROVISIONS
The Managing General Partner is authorized to amend the Partnership
Agreement if, in its sole discretion based on advice from its legal counsel or
accountants, an amendment to revise the cost and revenue allocations is required
for such allocations to be recognized for federal income tax purposes either
because of the promulgation of Treasury Regulations or other developments in the
tax law. Any new allocation provisions provided by an amendment are required to
be made in a manner that would result in the most favorable aggregate
consequences to the Investor Partners as nearly as possible consistent with the
original allocations described herein.
COMPENSATION TO THE MANAGING GENERAL PARTNER AND AFFILIATES
The following table summarizes the items of compensation to be received by
the Managing General Partner and its Affiliates from each of the Partnerships:
<TABLE>
<CAPTION>
RECIPIENT FORM OF COMPENSATION AMOUNT
- ------------------------------------ ------------------------------------ ------------------------------------
<S> <C> <C>
Managing General Partner Partnership interest(1) 10% interest before Payout;
25% interest after Payout(2)
Managing General Partner Management Fee 15% of Subscriptions, less
Organization and Offering Costs to
be paid by the Managing General
Partner (non-recurring)
Affiliate of the Managing Operator's Per-Well Charges $600 per well per month(3)
General Partner
Managing General Partner Direct Costs Reimbursement at Cost(4)
Managing General Partner and its Payment for equipment, supplies, Competitive prices(4)
Affiliates marketing, and other services
</TABLE>
- ------------------------
(1) Excluding any Partnership interest of the Managing General Partner as a
result of its purchase of Units. The Managing General Partner will buy at
least 5% of the Units issued by each Partnership at the offering price of
$20,000 per Unit.
(2) There is no assurance that a Partnership will achieve Payout or that cash
distributions will occur. See "PARTICIPATION IN COSTS AND REVENUES--Cash
Distribution Policy" and "RISK FACTORS."
(3) Payable to such Affiliate only when such Affiliate is designated as the
Operator on a property.
(4) Cannot be quantified until the Partnership is conducting business.
The Managing General Partner will receive a payment equal to 15% of such
Partnership's Subscriptions. From this payment, the Managing General Partner
will pay Organization and Offering Costs. If Organization and Offering Costs are
less than 15% of aggregate Subscriptions to the Partnership, the Managing
General Partner will keep the difference as a one-time management fee. If
Organization and Offering Costs exceed 15% of aggregate Subscriptions to the
Partnership, the Managing General Partner will pay all such costs. Since a
maximum of $10 million of Units can be sold in any individual Partnership,
29
<PAGE>
the maximum amount of a Partnership's capital contributions that will be
utilized for Organization and Offering Costs and payment of the Management Fee
with respect to any individual Partnership would be $1,500,000. The actual
amount of the Management Fee cannot be determined until Organization and
Offering Costs for an offering are determined.
On certain of the Prospects, a Partnership will enter into a drilling
contract with Reef Exploration, Inc., an Affiliate of the Managing General
Partner ("Reef Exploration"), to drill and complete Partnership wells. In the
majority of cases, however, a party other than Reef Exploration will be retained
to drill, complete, and operate wells on Prospects. The Managing General Partner
and its Affiliates may use certain of their own personnel and equipment during
the drilling and completion phase of operations. These services will be billed
at rates not to exceed those charged for similar services and equipment by other
non-affiliated operators in the Partnership area of operations.
In the event that Reef Exploration is retained as an Operator to drill and
complete wells on certain Prospects, the Partnership will pay Reef Exploration,
for each well completed and placed into production, a fee based upon the depth
of the well at its deepest penetration. During the production phase of
operations, if Reef Exploration is retained as Operator of partnership wells, it
will receive a monthly fee of $600 per well for operations and field
supervision, accounting, engineering, management, and general and administrative
expenses. Non-routine operations will be billed to the Partnership at their
Costs. See "PROPOSED ACTIVITIES--Drilling and Completion Phase" and "--Drilling
and Operating Agreement."
The Managing General Partner will be reimbursed for all documented
out-of-pocket expenses incurred on behalf of the Partnership, including
Administrative Costs. The Partnerships also will reimburse the Managing General
Partner for Direct Costs incurred by the Managing General Partner on behalf of
the Partnerships.
The Managing General Partner and its Affiliates may enter into other
transactions with the Partnerships for services, supplies and equipment, and
will be entitled to compensation at competitive prices and terms as determined
by reference to charges of unaffiliated companies providing similar services,
supplies and equipment. See "CONFLICTS OF INTEREST."
PROPOSED ACTIVITIES
INTRODUCTION
The Partnerships will be formed to drill, complete, own and operate oil and
natural gas wells. The Managing General Partner may conduct Partnership
operations thoughout the world, in such locations as it may deem advisable. The
Managing General Partner intends for the Partnerships to acquire interests in
oil and natural gas properties in which major or large independent oil and gas
companies also have interests. The Managing General Partner believes that these
acquisitions from major or large independent oil and gas companies may permit
the Partnerships to obtain the benefit of seismic, geological and geophysical
exploration and initial drilling efforts conducted by such major companies.
The Managing General Partner, for example, is presently the managing
venturer in the Reef Partners RAM Joint Venture, a Texas joint venture ("RAM
Joint Venture") formed to participate with Amoco Canada Petroleum Company, Ltd.
("Amoco"), Mobil Oil Canada ("Mobil") and others in the drilling of an oil and
gas well in Calgary, Alberta, Canada. RAM Joint Venture acquired a portion of
the interest of Reef Exploration, Inc., an affiliate of the Managing General
Partner ("Reef Exploration"), in a farmout agreement among Reef Exploration,
Amoco and Mobil. As a result of its acquisition of an interest in the farmout
agreement, RAM Joint Venture acquired the right to participate with Amoco and
Mobil in the drilling of a well in Canada, gaining the benefit of the seismic
information and other research data developed by Amoco and Mobil. It is not
contemplated that the Partnerships will have any interest in
30
<PAGE>
RAM Joint Venture or the referenced farmout agreement. The Managing General
Partner, however, does intend to seek out similar investment opportunities for
the Partnerships. See "PRIOR ACTIVITIES."
Risks will be spread to a limited extent by participating in drilling
operations on a number of different Prospects. Until the amount of funds to be
available for a Partnership's drilling activities is determined, the precise
number of Prospects cannot be determined and the drilling budget cannot be
formulated.
The Investor Partners should be aware that distributions will decrease over
time due to the declining rate of production from wells. Changes in oil and
natural gas prices will decrease or increase cash distributions. Distributions
will be partially sheltered by the percentage depletion allowance. See "RISK
FACTORS," "PRIOR ACTIVITIES," and "TAX CONSIDERATIONS--Summary of Conclusions,"
"--Intangible Drilling and Development Costs Deductions," "--Depletion
Deductions," "--Partnership Distributions," and "--Partnership Allocations."
The attainment of the Partnership's business objectives (generation of
revenue from Partnership operations, distribution of cash to the Partners and
provision of tax benefits) will depend upon many factors, including the ability
of the Managing General Partner to select productive Prospects, the drilling and
completion of wells in an economical manner, the successful management of such
Prospects, the level of oil and natural gas prices in the future, the degree of
governmental regulation over the production and sale of oil and natural gas, the
future economic conditions in the United States (and the world), and changes in
the Code. Accordingly, there can be no assurance that the Partnership will
achieve its business objectives. Moreover, because each Partnership will
constitute a separate and distinct business and economic entity from each other
Partnership, the degree to which the business objectives are achieved will vary
among the Partnerships.
Various of the activities and policies of the Partnership discussed
throughout this section and elsewhere in the prospectus are defined in and
governed by the Partnership Agreement (the amendment of which requires the
affirmative vote of a majority of the then outstanding Units), including the
requirements relating to the acquisition of Prospects and the payment of
royalties; the amount of the Managing General Partner's Capital Contribution to
the Partnership; the guidelines with respect to well pricing and the cost of
services furnished by the Managing General Partner and/or Affiliates; assessment
and borrowing policies; voting rights of Investor Partners; the term of the
Partnership; and compensation of the Managing General Partner. Other policies
and restrictions upon the activities of the Managing General Partner and the
Partnership are not set forth in the Partnership Agreement, but instead reflect
the current intention of the Managing General Partner and thus are subject to
change at its discretion. For these later activities, the Managing General
Partner, in making a change, will utilize its reasonable business judgment as
manager of the Partnership and will exercise its judgment consistent with its
obligations as a fiduciary to the Investor Partners.
ACQUISITION AND DRILLING OF UNDEVELOPED PROSPECTS
Each Partnership will invest in a number of Prospects, with major and large
independent oil and gas companies as co-owners. The Managing General Partner
will select interests in undeveloped Prospects sufficient to drill the
Partnerships' wells. No Prospects have been pre-selected by the Managing General
Partner. A Prospect may be generally defined as a contiguous oil and gas
leasehold estate, or lesser interest therein, upon which drilling operations may
be conducted.
Depending on its attributes, a Prospect may be characterized as an
"exploratory" or "development" site. Generally speaking, exploratory drilling
involves the conduct of drilling operations in search of a new and yet
undiscovered pool of oil and gas (or, alternatively, drilling within a
discovered pool with the hope of greatly extending the limits of such pool),
whereas development drilling involves drilling to a known producing formation in
a previously discovered field.
31
<PAGE>
It is anticipated that all prospects will be evaluated by Frank Lott, Reef
Exploration's geologist (see "MANAGEMENT"), utilizing data provided by Reef
Exploration's library of well logs, production records from Reef Exploration's
and others' wells, and such other information as may be available and useful. In
addition, Prospects will be evaluated by petroleum engineers, geophysicists, and
other technical consultants retained by Reef Exploration or the Managing General
Partner.
Prospects will be acquired pursuant to an arrangement whereby the
Partnership will acquire part of the Working Interest (which, for purposes of
this prospectus, includes any interest, however it is referred to, which is
subject to some portion of the costs of development, operation or maintenance),
subject to landowners' royalty interests and other royalty interests payable to
unaffiliated third parties in varying amounts. In its discretion the Managing
General Partner may acquire less than 100% of the Working Interest provided that
costs are reduced proportionately. The Partnership Agreement forbids the
Managing General Partner or any Affiliate from acquiring or retaining any
overriding royalty interest in the Partnership's interest in the Prospects. The
Partnerships will generally acquire less than 100% of the Working Interest in
each Prospect in which they participate. In order to comply with certain
conditions for the treatment of Additional General Partners' interests in the
Partnership as not passive activities (and thereby not subjecting the Additional
General Partners to limitation on the deduction of Partnership losses
attributable to such Additional General Partners to income from passive
activities), the Managing General Partner has represented that the Partnerships
will acquire and hold only operating mineral interests and that none of the
Partnership's revenues will be from non-working interests. The Managing General
Partner, for its sole benefit, may sell or otherwise dispose of Prospect
interests not acquired by the Partnerships or may retain a Working Interest in
such Prospects and participate in the drilling and development of the Prospect
on the same basis as the Partnerships.
In acquiring interests in Leases, the Partnerships may pay such
consideration and make such contractual commitments and agreements as the
Managing General Partner deems fair, reasonable and appropriate. For purposes of
this prospectus, the term "Lease" means any full or partial interest in:
(i) undeveloped oil and gas leases; (ii) oil and gas mineral rights;
(iii) licenses; (iv) concessions; (v) contracts; (vi) fee rights; or
(vii) other rights authorizing the owner thereof to drill for, reduce to
possession and produce oil and gas. While it is expected that a substantial
portion of the Leases and interest therein to be developed by the Partnerships
will be acquired by assignment from the Managing General Partner or its
Affiliates, the Partnerships also may purchase Leases directly from unaffiliated
persons. All Leases that are transferred to the Partnerships from the Managing
General Partner will be transferred at its Cost, unless the Managing General
Partner has reason to believe that Cost is materially more than the fair market
value of such property in which case the price will not exceed the fair market
value of such property. The Managing General Partner will obtain an appraisal
from a qualified independent expert with respect to sales of properties of the
Managing General Partner and its Affiliates to the Partnerships.
The actual number, identity and percentage of Working Interests or other
interests in Prospects to be acquired by the Partnerships will depend upon,
among other things, the total amount of Capital Contributions to a Partnership,
the latest geological and geophysical data, potential title or spacing problems,
availability and price of drilling services, tubular goods and services,
approvals by Federal and state departments or agencies, agreements with other
Working Interest owners in the Prospects, farm-ins, and continuing review of
other Prospects that may be available.
TITLE TO PROPERTIES
Prior to the drilling of any Partnership well, the Managing General Partner
will assign the Partnership interest in the Lease to the Partnership. Leases
acquired by each Partnership may initially and temporarily be held in the name
of the Managing General Partner, as nominee, to facilitate joint-owner
operations and the acquisition of properties. The existence of the unrecorded
assignments from the record owner will indicate that the Leases are being held
for the benefit of each particular Partnership and that the Leases
32
<PAGE>
are not subject to debts, obligations or liabilities of the record owner;
however, such unrecorded assignments may not fully protect the Partnerships from
the claims of creditors of the Managing General Partner.
Investor Partners must rely on the Managing General Partner to use its best
judgment to obtain appropriate title to Leases. Provisions of the Partnership
Agreement relieve the Managing General Partner from any mistakes of judgment
with respect to the waiver of title defects. The Managing General Partner will
take such steps as it deems necessary to assure that title to Leases is
acceptable for purposes of the Partnerships. The Managing General Partner is
free, however, to use its own judgment in waiving title requirements and will
not be liable for any failure of title to Leases transferred to the
Partnerships. Further, neither the Managing General Partner nor its Affiliates
will make any warranties as to the validity or merchantability of titles to any
Leases to be acquired by the Partnerships.
DRILLING AND COMPLETION PHASE
GENERAL. After drilling the Operator will complete each well deemed by the
Operator to be capable of production of oil or natural gas in commercial
quantities. No representations are given herein as to the depths and formations
to be encountered in each Partnership's wells. With respect to those Prospects
as to which the Partnership owns less than a 50% Working Interest, it is
probable that the majority owner of such Prospects will select the operator for
the wells drilled on such Prospects and that the operator will not be the
Managing General Partner. The Managing General Partner will monitor the
performance and activities of the Operator, participate as the Partnership's
representative in decision-making with regard to the joint venture activities,
and otherwise represent the Partnership with regard to the activities of the
joint venture. Where someone other than the Managing General Partner serves as
Operator, the cost of drilling to the Partnership will be the actual cost of
third-party drilling, plus the Managing General Partner's costs of supervision,
engineering, geology, accounting, and other services provided, as well as
monthly overhead specified in "COMPENSATION TO THE MANAGING GENERAL PARTNER AND
AFFILIATES," above.
The Managing General Partner will represent each Partnership in all
operations matters, including the drilling, testing, completion and equipping of
wells and the sale of each Partnership's oil and natural gas production from
wells of which it is the Operator.
SALE OF PRODUCTION. Each Partnership will attempt to sell the oil and
natural gas produced from its Prospects on a competitive basis at the best
available terms and prices. Domestic sales of oil will be at fair market prices.
Certain international sales however, may be at prices determined by foreign
governments or by entities controlled by foreign governments. The Managing
General Partner will not make any commitment of future production that does not
primarily benefit the Partnerships. Generally, purchase contracts for the sale
of oil are cancelable on 30 days' notice, whereas purchase contracts for the
sale of natural gas may have a term of a number of years and may require the
dedication of the gas from a well for the life of its reserves. Each Partnership
will sell natural gas discovered by it at negotiated prices domestically, based
upon a number of factors, such as the quality of the gas, well pressure,
estimated reserves, prevailing supply conditions and any applicable price
regulations promulgated by the Federal Energy Regulatory Commission.
International gas sales, like international oil sales, may be at prices
determined by foreign governments or entities controlled by foreign governments.
See "COMPETITION, MARKETS AND REGULATION."
DRILLING AND OPERATING AGREEMENT
In those cases in which Reef Exploration will serve as Operator for a
Prospect, the particular Partnership will enter into a Drilling and Operating
Agreement (herein, the "Agreement") with Reef Exploration as Operator. The
Agreement will be substantially similar to that filed as Exhibit 10.1 to the
Registration Statement and will provide that the Operator will conduct and
direct and have full control of all operations on the Partnership's Prospects.
The Operator will have no liability as operator to the
33
<PAGE>
Partnership for losses sustained or liabilities incurred, except as may result
from the Operator's negligence or misconduct. The Operator will be permitted to
subcontract certain of those responsibilities as Operator for Partnership wells;
provided, however, the operator will retain responsibility for work performed by
subcontractors. It is probable that Reef Exploration will not be selected as
Operator on those Prospects in which the Partnership owns less than a 50%
Working Interest. Under such circumstances, the Managing General Partner will
review the operating agreement to be entered into and attempt to negotiate
comparable terms.
Where the duties of operator are held by Reef Exploration and are
subcontracted to an independent third party, the cost of the wells to the
Partnership will be determined by the actual third party costs, plus Reef
Exploration's monthly fixed rate charges for supervision, engineering, geology,
accounting and other services for the area where the well is located.
The Partnership will pay a proportionate share of total lease, development,
and operating costs, and will be entitled to receive a proportionate share of
production subject only to royalties and overriding royalties. At the discretion
of the Managing General Partner, the Partnership may enter into joint ventures
that allow a functional allocation of tangible, intangible and lease costs,
where each joint venturer is responsible for its overhead costs, provided the
Partnership's interest in the revenues and income of such a joint venture is
proportional to its contribution to the total cost of such venture.
The Operator's duties include testing formations during drilling, and
completing the wells by installing such surface and well equipment, gathering
pipelines, heaters, separators, etc., as are necessary and normal in the area in
which the Prospect is located. The Managing General Partner will pay the
drilling and completion costs of the Operator as incurred, except that the
Managing General Partner is permitted to make advance payments to the Operator
where necessary to secure tax benefits of prepaid drilling costs and there is a
valid business reason. In order to comply with conditions to secure the tax
benefits of prepaid drilling costs, the Operator under the terms of the
Agreement will not refund any portion of amounts paid in the event actual costs
are less than amounts paid but will apply any such amounts solely for payment of
additional drilling services to the Partnership. If the Operator determines that
the well is not likely to produce oil and/or gas in commercial quantities, the
Operator will plug and abandon the well in accordance with applicable
regulations.
In the United States, the Partnership will have the right to take in kind
and dispose of its share of all oil and gas produced from its Prospects,
excluding its proportionate share of production required for lease operations
and production unavoidably lost. Initially a Partnership may designate the
Operator as its agent to market such production and authorize the Operator to
enter into and bind the Partnership in such agreements as it deems in the best
interest of the Partnership for the sale of such oil and/or natural gas.
PRODUCTION PHASE OF OPERATIONS
GENERAL. Once a Partnership's wells are "completed" (i.e., all surface
equipment necessary to control the flow of, or to shut down, a well has been
installed, including the gathering pipeline), production operations will
commence.
The Partnerships intend to sell oil and gas production from the
Partnerships' wells to refineries, foreign governmental agencies, entities
controlled by foreign governments, industrial users, gas brokers, interstate
pipelines or local utilities. Due to rapidly changing market conditions and
normal contracting procedures, final terms and contracts will not be completed
until after the wells have been drilled. As a result of effects of weather on
costs, a Partnership's results may be affected by seasonal factors. In addition,
both sales volumes and prices tend to be affected by demand factors with a
significant seasonal component.
EXPENDITURE OF PRODUCTION REVENUES. A Partnership's share of production
revenue from a given well will be burdened by and/or subject to royalties and
overriding royalties, monthly operating charges, and other operating costs.
These items of expenditure involve amounts payable solely out of, or expenses
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incurred solely by reason of, production operations. It will be the practice of
the Managing General Partner to deduct operating expenses from the production
revenue for the corresponding period.
INSURANCE
The Managing General Partner will carry blowout, pollution, public liability
and workmen's compensation insurance, but such insurance may not be sufficient
to cover all liabilities. Each Unit held by the Additional General Partners
represents an open-ended security for unforeseen events such as blowouts, lost
circulation, stuck drillpipe, etc. that may result in unanticipated additional
liability materially in excess of the per Unit Subscription amount.
The Managing General Partner has obtained various insurance policies, as
described below, and intends to maintain such policies subject to its analysis
of their premium costs, coverage and other factors. The Managing General Partner
may, in its sole discretion, increase or decrease the policy limits and types of
insurance from time to time as it deems appropriate under the circumstances,
which may vary materially. The following types and amounts of insurance have
been obtained and are expected to be maintained. The Managing General Partner is
the beneficiary under each policy and pays the premiums for each policy.
- Workmen's compensation insurance in full compliance with the laws of the
State of Texas; this insurance will be obtained for any other
jurisdictions where a Partnership conducts its business;
- Operator's bodily injury liability and property damage liability
insurance, each with a limit of $1,000,000;
- Employer's liability insurance with a limit of not less than $1,000,000;
- Automobile public liability insurance with a limit of not less than
$1,000,000 per occurrence, covering all automobile equipment; and
- Operator's liability insurance with limits of $10,000,000 each for
environmental, well control and general liability.
Reef Partners LLC, as Managing General Partner, in the exercise of its
fiduciary duty as Managing General Partner, will obtain insurance on behalf of
the Partnerships to provide each Partnership with such coverage as the Managing
General Partner believes is sufficient to protect the Investor Partners against
the foreseeable risks of drilling. The Managing General Partner will review the
Partnership insurance coverage prior to commencing drilling operations and
periodically evaluate the sufficiency of insurance. The Managing General Partner
will obtain and maintain such insurance coverage as it determines to be
commensurate with the level of risk involved.
The Managing General Partner will notify all Additional General Partners of
a Partnership at least 30 days prior to any material change in the amount of
such partnership's insurance coverage. Within this 30-day period and otherwise
after the expiration of one year following the closing of the offering with
respect to a particular Partnership, Additional General Partners have the right
to convert their Units into Units of limited partnership interest by giving
written notice to the Managing General Partner and will have limited liability
as a Limited Partner for any Partnership operations conducted after their
conversion date, effective upon the filing of an amendment to the Certificate of
Limited Partnership of a Partnership. At any time during this 30-day period,
upon receipt of the required written notice from the Additional General Partner
of his intent to convert, the Managing General Partner will amend the
Partnership Agreement and will file such amendment with the State of Nevada
prior to the effective date of the change in insurance coverage and thereby
effectuate the conversion of the interest of the former Additional General
Partner to that of a Limited Partner. Effecting conversion is subject to the
express requirement that the conversion will not cause a termination of the
Partnership for federal income tax purposes. However, even after an election of
conversion, an Additional General Partner will continue to have
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<PAGE>
unlimited liability regarding Partnership activities arising prior to the
effective date of such conversion. See "TERMS OF THE OFFERING."
COMPETITION, MARKETS AND REGULATION
COMPETITION
Competition is keen among persons and companies involved in the exploration
for and production of oil and gas. The Managing General Partner expects the
Partnerships to encounter strong competition at every phase of business. The
Partnerships will compete with entities having financial resources and staffs
substantially larger than those available to them. There are thousands of oil
and gas companies in the United States.
The national supply of natural gas is widely diversified, with no one entity
controlling over 5%. As a result of deregulation of the natural gas industry by
Congress and the Federal Energy Regulatory Commission ("FERC") natural gas
prices are generally determined by competitive forces. Prices of crude oil,
condensate and natural gas liquids are not currently regulated and are generally
determined by competitive forces.
There will be competition among operators for drilling equipment, goods, and
drilling crews. Such competition may affect the ability of each Partnership to
acquire Leases suitable for development by the Partnerships and to expeditiously
develop such Leases once they are acquired.
MARKETS
The marketing of any oil and gas produced by the Partnerships will be
affected by a number of factors that are beyond the Partnerships' control and
whose exact effect cannot be accurately predicted. These factors include the
amount of crude oil and natural gas imports, the availability and cost of
adequate pipeline and other transportation facilities, the success of efforts to
market competitive fuels (such as coal and nuclear energy), the laws of foreign
jurisdictions and the laws and regulations affecting foreign markets, and other
matters affecting the availability of a ready market, such as fluctuating supply
and demand.
The supply and demand balance of crude oil and natural gas in world markets
have caused significant variations in the prices of these products over recent
years. The North American Free Trade Agreement ("NAFTA") eliminated trade and
investment barriers in the United States, Canada, and Mexico, thereby increasing
foreign competition for domestic natural gas production. New pipeline projects
recently approved by, or presently pending before, the FERC as well as
nondiscriminatory access requirements could further substantially increase the
availability of gas imports to certain U.S. markets. Such imports could have an
adverse effect on both the price and volume of gas sales from Partnership wells.
Members of the Organization of Petroleum Exporting Countries establish
prices and production quotas for petroleum products from time to time with the
intent of reducing the current global oversupply and maintaining or increasing
certain price levels. The Managing General Partner is unable to predict what
effect, if any such actions will have on the amount of or the prices received
for oil produced and sold from the Partnerships' wells.
In several initiatives, FERC has required pipelines to develop electronic
communication and to provide standardized access via the internet to information
concerning capacity and prices on a nationwide basis, so as to create a national
market. Parallel developments toward an electronic marketplace for electric
power, mandated by the FERC, are serving to create multi-national markets for
energy product generally. These systems will allow rapid consummation of natural
gas transactions. Although this system may initially lower prices due to
increased competition, it is anticipated to expand natural gas markets and to
improve their reliability.
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Demand for natural gas by the electric power sector is expected to increase
modestly through the next decade. Increased competition in the electric
industry, coupled with the enforcement of stringent environmental regulations,
is expected to lead to an increased reliance on natural gas by the electric
industry.
REGULATION
The Partnerships' operations will be affected from time to time in varying
degrees by domestic and foreign political developments, federal and state laws
and regulations and the laws of other countries where some of the Prospects may
be located.
PRODUCTION. In most areas of operations within the United States the
production of oil and gas is regulated by state agencies which set allowable
rates of production and otherwise control the conduct of oil and gas operations.
Certain states control production through regulations establishing the spacing
of wells or limiting the number of days in a given month during which a well can
produce.
ENVIRONMENTAL. The Partnerships' drilling and production operations will
also be subject to environmental protection regulations established by federal,
state, and local agencies that in turn may necessitate significant capital
outlays that would materially affect the financial position and business
operations of the Partnerships. These regulations, enacted to protect against
waste, conserve natural resources and prevent pollution, could necessitate
spending funds on environmental protection measures, rather than on drilling
operations. If any penalties or prohibitions were imposed on a Partnership for
violating such regulations, that Partnership's operations could be adversely
affected.
NATURAL GAS TRANSPORTATION AND PRICING. FERC regulates the rates for
interstate transportation of natural gas as well as the terms for access to
natural gas pipeline capacity. Pursuant to the Wellhead Decontrol Act of 1989,
however, FERC may not regulate the price of gas. Such deregulated gas production
may be sold at market prices determined by supply, demand, Btu content,
pressure, location of wells, and other factors. The Managing General Partner
anticipates that all of the gas produced by Partnership wells will be considered
price decontrolled gas and that the Partnerships' gas will be sold at fair
market value.
PROPOSED REGULATION. Various legislative proposals are being considered in
Congress and in the legislatures of various states, which, if enacted, may
significantly and adversely affect the petroleum and natural gas industries.
Such proposals involve, among other things, the imposition of price controls on
all categories of natural gas production, the imposition of land use controls
(such as prohibiting drilling activities on certain federal and state lands in
roadless wilderness areas) and other measures. At the present time, it is
impossible to predict what proposals, if any, will actually be enacted by
Congress or the various state legislatures and what effect, if any, such
proposals will have on the Partnerships' operations.
FOREIGN REGULATION. The Managing General Partner expects to rely heavily on
local experts and personnel, including attorneys and accountants for advice and
assistance in complying with the laws and regulations of foreign jurisdictions
when Prospects are located in such jurisdictions.
MANAGEMENT
GENERAL
The Managing General Partner of the Partnerships is Reef Partners LLC, a
privately-owned Nevada limited liability company which was formed in
February 1999 by the holders of all of the outstanding common stock of Reef
Exploration. Reef Exploration was organized in 1987 for the principal purpose of
reviewing drilling prospects upon which partnerships and joint ventures formed
by Reef Exploration might engage in exploration, development and production
activities. Since 1987, Reef Exploration has been engaged continuously in the
business of exploring for, developing and producing oil and gas both within and
outside the continental United States, through partnerships and joint ventures
formed by it. Michael J.
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Mauceli, the Manager of the Managing General Partner, is the Chief Executive
Officer of Reef Exploration.
The Managing General Partner will actively manage and conduct the business
and oversee the day to day operations of the Partnerships. The Managing General
Partner will be responsible for maintaining Partnership bank accounts,
collecting Partnership revenues, making distributions to the Partners,
delivering reports to the Partners, and supervising the drilling, completion,
and operation of the Partnerships' oil and gas wells. Certain officers of the
Managing General Partner will be directors, officers and employees of Reef
Exploration. Subject to limitations set forth in the Partnership Agreement, such
individuals, the Managing General Partner and Reef Exploration itself intend to
continue to engage in the oil and gas business for their own account and for the
account of others. See "CONFLICTS OF INTEREST." The Managing General Partner and
such directors, officers and employees will devote such of their time and
talents to the management of the Partnerships as shall be necessary for the
proper conduct of the Partnerships' business.
EXPERIENCE AND CAPABILITIES AS OPERATOR
Reef Exploration may act as Operator for some of the Program wells and
provide drilling and completion services. Since 1987, Reef Exploration and/or
its Affiliates have drilled 98 wells in Argentina, Canada, Kansas, Louisiana,
Mississippi, Oklahoma and Texas. Reef Exploration and/or its Affiliates are
currently the Operators of 11 wells.
Reef Exploration employs a geologist who develops Prospects for drilling and
who helps oversee the drilling process. In addition, Reef Exploration retains a
petroleum engineering firm and a geophysical firm on a routine basis who are
responsible for well completions, pipelines, production operations, and
geophysical analysis and mapping of all prospects. Reef Exploration's geologist
and these firms will be retained by the Managing General Partner. The Managing
General Partner and Reef Exploration will retain drilling contractors,
completion subcontractors, and a variety of other subcontractors in the
performance of the work of drilling contract wells.
REEF PARTNERS LLC
The Manager, officers and key personnel of the Managing General Partner,
their ages, current positions with the Managing General Partner and/or Reef
Exploration, and certain additional information are set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITIONS AND OFFICES HELD
- ------------------------------------------- --------- -------------------------------------------
<S> <C> <C>
Michael J. Mauceli......................... 43 Manager of the Managing General Partner;
Chief Executive Officer and Director of
Reef Exploration
H. Walt Dunagin............................ 42 Land Manager of Reef Exploration
Frank Lott................................. 41 Exploration Manager of Reef Exploration
Daniel C. Sibley........................... 47 General Counsel and Chief Financial Officer
of the Managing General Partner and of Reef
Exploration
</TABLE>
MICHAEL J. MAUCELI is Manager and a member of the Managing General Partner,
and Chief Executive Officer and a Director of Reef Exploration. Mr. Mauceli has
held these positions with the Managing General Partner since its formation in
February 1999. He has served in these positions with Reef Exploration since
1987. Mr. Mauceli attended the University of Mississippi in Oxford, Mississippi,
majoring in business management and marketing. He also attended the University
of Houston where he
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received his Commercial Real Estate License. He entered the oil and gas business
in 1976 when he joined Tenneco Oil & Gas Company. In 1979, he moved to Dallas
where he was independently employed by several exploration and development firms
in planning exploration and marketing feasibility of privately sponsored
drilling programs.
H. WALT DUNAGIN is Land Manager of Reef Exploration. He has held this
position since 1990. He is a 1979 graduate of the University of Mississippi. He
began doing independent land work for Exxon Co. U.S.A. Since that time he has
performed land work in Mississippi, Louisiana, North Dakota, Montana, Oklahoma
and Texas. For six years prior to joining Reef Exploration, he was directly
involved in the sale of producing properties for Mobil, Texaco, Oryx Energy and
American Exploration Company. He became a Certified Professional Landman in
August 1986 and is a member of the American Association of Petroleum Landmen.
FRANK LOTT is Exploration Manager at Reef Exploration. He has held this
position since January 1999. He is a 1984 graduate of University of Texas at
Dallas, where he received his Bachelor's degree in Geology. He has approximately
15 years experience in geological and geophysical exploration, drilling,
completion and production.
DANIEL C. SIBLEY became General Counsel and Chief Financial Officer of the
Managing General Partner in December 1999. He has served in the same position
for Reef Exploration since 1998. From 1980 to 1998, Mr. Sibley was involved in
the private practice of law. He received a B.B.A. in accounting from the
University of North Texas in 1973, a law degree (J.D.) from the University of
Texas in 1977, and a Master of Laws--Taxation degree (L.L.M.) from Southern
Methodist University in 1984.
OWNERSHIP OF REEF PARTNERS LLC
The following table sets forth information with respect to the membership
interests of the Managing General Partner owned by each person who owns
beneficially 5% or more of the outstanding membership interests, by all managers
of the Managing General Partner individually, and by all managers and executive
officers of the Managing General Partner as a group.
<TABLE>
<CAPTION>
AMOUNT
BENEFICIALLY PERCENT
NAME AND ADDRESS OWNED OF CLASS
- ------------------------------------------------------------------------ ------------- ----------
<S> <C> <C>
Estate of Vearl Sneed................................................... N/A 50%
c/o Reef Partners LLC
1901 N. Central Expressway
Suite 300
Richardson, Texas 75080
Michael J. Mauceli...................................................... N/A 50%
c/o Reef Partners LLC
1901 N. Central Expressway
Suite 300
Richardson, Texas 75080
Managers and executive officers as a group (1 person)................... N/A 50%
</TABLE>
COMPENSATION
No officer, manager, director or employee of the Managing General Partner or
Reef Exploration will receive any direct remuneration or other compensation from
the Partnerships.
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LEGAL PROCEEDINGS
There are no legal proceedings pending against either the Managing General
Partner or Reef Exploration.
CONFLICTS OF INTEREST
The Managing General Partner and its Affiliates have interests that differ
in certain respects from those of the Partnerships and the Investor Partners.
Prospective Investor Partners should recognize that relationships and
transactions of the kinds described below involve inherent conflicts between the
interests of the Partnerships and those of the Managing General Partner or its
Affiliates, and that the risk exists that such conflicts will not always be
resolved in a manner which favors the Partnerships.
PRIOR AND FUTURE PROGRAMS BY MANAGING GENERAL PARTNER AND AFFILIATES. The
Managing General Partner expects to organize and manage oil and gas drilling
programs in the future which will have substantially the same investment
objectives as the Partnerships. Affiliates of the Managing General Partner
currently manage other drilling programs for private investors and operate oil
and gas properties for such investors in such other drilling programs. The
Managing General Partner will decide whether a Prospect will be retained or
acquired for the account of a Partnership or for other drilling programs that
the Managing General Partner or its Affiliates may presently manage or manage in
the future. The Partnerships will thus compete among themselves and with such
other programs for suitable Prospects, equipment, contractors and personnel.
To resolve conflicts, the Managing General Partner will initially examine
the funds available to the Partnerships and the time limitations on the
investment of such funds to determine whether a Partnership or another program
should acquire a potential Prospect. The Managing General Partner believes that
the possibility of conflicts of interest between the Partnerships and prior
programs is minimized by the fact that substantially all the funds available to
prior drilling programs in which the Managing General Partner or an Affiliate
serves as general partner have been committed to a specific drilling program.
In addition, the Managing General Partner will follow a policy of developing
next what it judges to be the best available Prospect. The Managing General
Partner anticipates that generally only one Partnership will be actively engaged
in drilling at any time. However, in the event more than one Partnership has
funds available for drilling, the Partnerships will alternate drilling of wells
based on the "best available Prospect" determination. The determination of the
"best available Prospect" is based on the Managing General Partner's assessment
of the economic potential of a Prospect and its suitability to a particular
Partnership, and considers various factors including estimated reserves on the
Prospect, the Prospect's contribution to geological or oil and natural gas
market diversification within a Partnership, the existence or lack of royalties
and overrides on the Prospect, estimated lease and well costs to develop the
Prospect, and limitations imposed by the prospectus and/or Partnership
Agreement.
FIDUCIARY RESPONSIBILITY OF THE MANAGING GENERAL PARTNER. The Managing
General Partner is a fiduciary and has a duty to exercise good faith and to deal
fairly with the Investor Partners in handling the affairs of the Partnerships.
The Managing General Partner will owe such a duty to other partnerships it may
manage in the future. Because the Managing General Partner must deal fairly with
the investors in all of its drilling programs, if conflicts between the interest
of a Partnership and such other drilling programs do arise, they may not in
every instance be resolved to the maximum advantage of the Partnership, and the
actions of the Managing General Partner could fall short of the full exercise of
its fiduciary duty to the Partnership. In the event the Managing General Partner
should breach its fiduciary duty, an Investor Partner would be entitled to an
accounting and to recover any economic losses caused by such breach, only after
either proving a breach in court or reaching a settlement with the Managing
General Partner.
PROPERTY TRANSACTIONS--ACQUISITIONS FROM MANAGING GENERAL PARTNER AND
AFFILIATES. The Partnership Agreement permits sales of Prospects to the
Partnerships by the Managing General Partner or its
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<PAGE>
Affiliates. In order to minimize conflicts of interest, however, the Partnership
Agreement places certain restrictions on the pricing and terms of these
transactions. The Managing General Partner's (or its Affiliates') Cost will be
the purchase price in any purchase of an interest in a Prospect (or of any other
property) from the Managing General Partner or its Affiliates. Further, if the
seller has reasonable grounds to believe that the fair market value of any
property is less than such seller's Cost, the sale must be made at a price not
in excess of fair market value.
The Managing General Partner or its Affiliates may not sell an interest in a
Prospect to a Partnership unless such Partnership acquires an equal
proportionate interest in all Leases comprising the Prospect owned by the
Managing General Partner or its Affiliates.
The Partnership Agreement prohibits the sale to a Partnership of less than
all of the Managing General Partner's or its Affiliates' interest in any
Prospect unless (i) the interest retained by the Managing General Partner or its
Affiliates is a proportionate Working Interest, (ii) the respective obligations
of the Partnership and the Managing General Partner or its Affiliates are
substantially the same immediately after the sale of the interest, and
(iii) the Managing General Partner's or its Affiliates' interest in revenues
does not exceed an amount proportionate to the retained Working Interest.
Neither the Managing General Partner nor its Affiliates is permitted to retain
any overriding royalty interests or other burdens on Lease interests conveyed to
the Partnerships.
If the Managing General Partner determines that less than all of its (or its
Affiliates') interest in a Prospect should be acquired by a Partnership, the
Managing General Partner or its Affiliate may either retain its proportionate
interest in the Prospect or transfer such interest to third parties. Since the
Partnership will not have expended any funds with respect to the interest sold
by the Managing General Partner or its Affiliate, any profit realized upon such
sales will be solely for the Managing General Partner's or such Affiliate's
account.
PROPERTY TRANSACTIONS--FARMOUTS. The Managing General Partner expects that
the Partnership will develop substantially all of its Leases and will farm out
few, if any. However, the decision to make Farmouts and the terms thereof
involve conflicts of interest. A Farmout may permit the Managing General Partner
to achieve cost savings and to reduce its risks. Further, in the event of a
Farmout to an Affiliate, the Managing General Partner or its Affiliates will
represent both related entities.
The Partnership Agreement limits Farmouts by providing that the Partnerships
will acquire only those Leases reasonably expected to meet the stated purposes
of the Partnerships. The Partnerships will not acquire any Lease for the purpose
of a subsequent sale or Farmout unless the acquisition is made after a well has
been drilled to a depth sufficient to indicate that such an acquisition would be
in the Partnerships' best interest. Further, the Partnerships may not farm out,
sell or otherwise dispose of Leases unless the Managing General Partner,
exercising the standard of a prudent operator, determines that: (a) a
Partnership lacks sufficient funds to drill on the Lease and cannot obtain
suitable financing; (b) downgrading subsequent to a Partnership's acquisition
has rendered drilling undesirable; (c) drilling would concentrate excessive
funds in one location creating undue risk to a Partnership; or (d) the best
interests of a Partnership, based on the standard of a prudent operator, would
be served by such disposition.
Any Farmout to an Affiliate must be on terms no less favorable to the
Partnership than those obtainable in the geographic area of operations. The
obligations, revenue sharing and compensation arrangements of the Managing
General Partner or its Affiliates must be substantially the same in each
participating partnership to the Farmout. Under no circumstances will the
Managing General Partner farm out a Lease for the primary purpose of avoiding
its costs relating to such Lease.
PROPERTY TRANSACTIONS--PROPERTIES WITHIN PROSPECT LIMITS. From time to
time, the Managing General Partner may cause Partnership Prospects to be
enlarged on the basis of geological data that defines the productive limits of
any pool discovered. If the Managing General Partner or an Affiliate owns a
separate property interest in the enlarged area and the activities of a
Partnership were material to establishing the
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<PAGE>
existence of undeveloped reserves on such property, the interest shall be sold
to such Partnership. The Partnerships are not required, however, to expend
additional funds for the acquisition of property unless such acquisition can be
made from Capital Contributions. In the event such property is not acquired by
the Partnership, the Partnership may lose a promising Prospect. Such Prospect
might be acquired by the Managing General Partner or an Affiliate thereof or
other drilling programs conducted by them.
In addition, the Managing General Partner's exercise of its discretion in
deciding which Prospects to transfer to the Partnerships could result in another
drilling program sponsored by the Managing General Partner acquiring property
adjacent to Partnership property. Such other program could gain an advantage
over a Partnership by reason of the knowledge gained through the Partnership's
prior experience in the area. Neither the Managing General Partner nor any
Affiliate will retain undeveloped acreage adjoining a Partnership Prospect in
order to use Partnership funds to "prove up" the acreage owned for its own
account.
If the Managing General Partner or an Affiliate (except another affiliated
limited partnership in which the interest of the Managing General Partner or its
Affiliates is identical or less than their interest in the Partnerships)
proposes to acquire an interest in a Prospect in which a Partnership already
owns an interest or in a Prospect abandoned by a Partnership within one year
preceding such proposed acquisition, the Managing General Partner or such
Affiliate will offer an equivalent interest therein to the Partnership. If cash
or financing is not available to such Partnership to enable it to consummate a
purchase of an equivalent interest in such property, neither the Managing
General Partner nor any of its Affiliates will acquire such interest or
property. The term "abandon" means the termination, either voluntarily or by
operation of the Lease or otherwise, of all of a Partnership's interest in a
Prospect. These limitations will not apply after the lapse of five years from
the date of formation of a Partnership.
TRANSACTIONS BETWEEN THE PARTNERSHIP AND OPERATOR. An Affiliate of the
Managing General Partner may act as an Operator on certain Prospects for certain
Partnerships. As a result, although the Managing General Partner believes the
terms of the Drilling and Operating Agreements entered into with such Affiliate
will be no less favorable to the Partnerships than those which could be obtained
with third parties dealing at arms-length, certain of these Agreements will not
be the product of arm's-length negotiation. Furthermore, the Managing General
Partner may be confronted with a continuing conflict of interest with respect to
the exercise and enforcement of the rights of the Partnerships under such
Agreements. The Managing General Partner believes the fees it or its Affiliates
will charge the Partnership for operator services will be competitive with those
charged by unaffiliated persons for such services.
EQUIPMENT, SUPPLIES AND OTHER SERVICES. The Managing General Partner or its
Affiliates may furnish drilling and completion services with respect to some or
all of the Partnership wells as well as equipment and supplies. The prices to be
charged a Partnership for such supplies and services will be competitive with
the prices of other unaffiliated persons in the same geographic area engaged in
similar businesses. The Partnership Agreement prohibits the use of turnkey
drilling contracts between the Partnership and the Managing General Partner or
its Affiliates.
The Partnership Agreement further limits the Managing General Partner and
its Affiliates in the compensation they may get from providing any oil field,
equipage or other services to the Partnerships or for selling or leasing any
equipment or related supplies to the Partnerships. Unless such person is
engaged, independently of the Partnerships and as an ordinary and ongoing
business, in the business of rendering such services or selling or leasing such
equipment and supplies to unaffiliated persons in the oil and gas industry, then
the compensation, price or rental will be the lesser of the cost of such
services, equipment or supplies to such person or the competitive rate that
could be obtained in the area. The Partnership Agreement further provides that
the Managing General Partner and its Affiliates may not profit under any
circumstances by drilling in contravention of their fiduciary obligations to the
Investor Partners. Any services not otherwise described in this Prospectus for
which the Managing General Partner or any of its
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<PAGE>
Affiliates are to be compensated will be embodied in a written contract that
precisely describes the services to be rendered and the compensation to be paid.
OTHER ARRANGEMENTS. The Partnership Agreement provides that
(i) Partnership funds will not be commingled with those of any other entity,
(ii) all benefits from marketing arrangements or other relationships affecting
the property of the Managing General Partner or its Affiliates and the
Partnerships will be fairly and equitably apportioned according to the
respective interests of each, and (iii) no loans may be made by the Partnerships
to the Managing General Partner or any Affiliate thereof nor by the Managing
General Partner or any Affiliate to the Partnerships.
MANAGING GENERAL PARTNER'S INTEREST. Although the Managing General Partner
believes that its interest in Partnership profits, losses, and cash
distributions is equitable (see "PARTICIPATION IN COSTS AND REVENUES"), such
interest was not determined by arm's-length negotiation.
ATTAINMENT OF PARTNERSHIP PAYOUT. The Managing General Partner will be
subject to a conflict of interest with respect to various decisions to the
extent that engaging in or refraining from certain Partnership activities may
affect the time at which Partnership Payout may occur. If Partnership Payout
occurs, an increase in the Managing General Partner's interest in a Partnership
will occur. See "PARTICIPATION IN COSTS AND REVENUES."
RECEIPT OF COMPENSATION REGARDLESS OF PROFITABILITY. The Managing General
Partner is entitled to receive the Management Fee, and reimbursement for certain
costs from the Partnerships, regardless of whether the Partnerships operate at a
profit or loss. See "COMPENSATION TO THE MANAGING GENERAL PARTNER AND
AFFILIATES." These fees and reimbursements will decrease the Unit Holders' share
of any cash flow generated by operations of the Partnerships or increase losses
if such operations should prove unprofitable.
TIME AND SERVICES OF COMMON MANAGEMENT. The Officers and Manager of the
Managing General Partner are also officers, directors or employees of its
Affiliates. As a result, they do not intend to devote their entire time to the
Partnerships. Management is required to devote to the business and affairs of
the Partnerships so much time as is, in their judgment, necessary to conduct
such business and affairs in the best interest of the Partnerships.
LEGAL REPRESENTATION. Counsel to the Partnerships and to the Managing
General Partner in connection with this offering are the same. Such dual
representation will continue in the future. However, in the event of an
indemnification proceeding between the Managing General Partner and a
Partnership, the Managing General Partner will cause the Partnership to retain
separate and independent counsel to represent its interest in such proceeding.
DUE DILIGENCE REVIEW. Western American Securities Corporation, the Dealer
Manager of the offering, has an ongoing relationship with the Managing General
Partner and its Affiliates, and its due diligence examination concerning this
offering cannot be considered to be independent. Michael J. Mauceli, a member
and the Manager of the Managing General Partner and a principal shareholder,
director and the Chief Executive Officer of Reef Exploration, is the brother of
Paul Mauceli, the sole shareholder and Chief Executive Officer of Western
American Securities Corporation.
OTHER RELATIONSHIPS. The Managing General Partners and its Affiliates will
have relationships on an ongoing basis with companies and other entities engaged
in the oil and gas industry, including operators, petroleum engineers,
consultants, financial institutions and others. Such relationships could
influence the Managing General Partner to take actions, or forbear from taking
actions, which it might not take or forbear from taking in the absence of these
relationships.
43
<PAGE>
CERTAIN TRANSACTIONS. Previous partnerships sponsored by the Managing
General Partner and its Affiliates have made payments to the Managing General
Partner or its Affiliates as follows:
<TABLE>
<CAPTION>
GENERAL AND
SALE OF LEASES; ADMINISTRATIVE
NON-RECURRING TURNKEY DRILLING AND OPERATOR'S EXPENSE
NAME OF PARTNERSHIP MANAGEMENT FEE COMPLETION CONTRACTS CHARGES REIMBURSEMENT(1)
- ------------------------------------------- --------------------- -------------------- ----------- ---------------------
<S> <C> <C> <C> <C>
Bell City 3-D Joint Venture................ -- $ 2,604,986 $ 1,145 --
Savoie-Fontentot Joint Venture............. -- 3,013,575 26,313 --
Hardison Sadler Joint Venture.............. -- 2,513,400 12,339 --
Holt #2-R Joint Venture.................... -- 796,950 2,310 --
Valle Morado Joint Venture................. -- 5,827,200 -- --
Thunder Alley Joint Venture................ -- 4,579,540 13,474 --
West Bell City 3-D Joint Venture........... -- 4,248,917 -- --
Bell City #1 Joint Venture................. -- 7,103,432 6,870 --
Northwest Bell City Joint Venture.......... -- 6,285,792 10,563 --
Bell City #2 Joint Venture................. -- 5,400,118 -- --
Bell City #3 Joint Venture................. -- 3,643,750 -- --
Bell City #4 Joint Venture................. -- 6,079,823 -- --
Bell City #5 Joint Venture................. -- 4,197,500 -- --
Domino Joint Venture....................... -- -- -- --
Bell City #6 Joint Venture................. -- -- -- --
RAM Joint Venture.......................... -- -- -- --
--------- -------------- --------- ---------
-- $ 56,294,983 $ 73,014 --
========= ============== ========= =========
</TABLE>
- ------------------------
(1) Such reimbursement is included in "Operator's Charges" above.
FIDUCIARY RESPONSIBILITY OF THE MANAGING GENERAL PARTNER
FIDUCIARY DUTY. The Managing General Partner is accountable to the
Partnerships as a fiduciary and consequently must exercise utmost good faith and
integrity in handling Partnership affairs. In this regard, the Managing General
Partner is required to supervise and direct the activities of the Partnerships
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 General Partner has a responsibility for
the safekeeping and use of all funds and assets of the Partnerships, whether or
not in its control, and it may not employ or permit another to employ such funds
or assets in any manner except for the exclusive benefit of the Partnerships.
Generally, courts have held that a limited partner may institute legal
action on behalf of himself and all other similarly situated limited partners (a
class action) to recover damages for a breach by a general partner of his
fiduciary duty, or on behalf of the partnership (a partnership derivative
action) to recover damages from third parties. In addition, limited partners may
have the right, subject to procedural and jurisdictional requirements, to bring
partnership class actions in federal courts to enforce their rights under the
federal securities laws. Further, limited partners who have suffered losses in
connection with the purchase or sale of their interests in a partnership may be
able to recover such losses from a general partner where the losses result from
a violation by the general partner of the antifraud provisions of the federal
securities laws. The burden of proving such a breach, and all or a portion of
the expense of such lawsuit, would have to be borne by the limited partner
bringing such action. In the event of a lawsuit for a breach of its fiduciary
duty to the Partnership and/or the Investor Partners, the Managing General
Partner, depending upon the particular circumstances involved, might be able to
raise various defenses to the lawsuit, including statute of limitations,
estoppel, laches, and doctrines such as the "unclean hands" doctrine.
44
<PAGE>
Investors who have questions concerning the responsibilities of the Managing
General Partner should consult their own counsel.
INDEMNIFICATION. The Partnership Agreement provides for indemnification of
the Managing General Partner against liability for losses arising from the
action or inaction of the Managing General Partner if: (a) the Managing General
Partner, in good faith, determined that such course of conduct was in the best
interests of the Partnership, (b) the Managing General Partner was acting on
behalf of or performing services for the Partnership, and (c) such course of
conduct did not constitute negligence or misconduct of the Managing General
Partner.
The Managing General Partner will not, however, be indemnified for
liabilities arising under federal and state securities laws unless (1) there has
been a successful adjudication on the merits of each count involving securities
law violations, (2) such claims have been dismissed with prejudice on the merits
by a court of competent jurisdiction, or (3) a court of competent jurisdiction
approves a settlement of such claims against a particular indemnitee and finds
that indemnification of the settlement and the related costs should be made, and
the court considering the request for indemnification has been advised of the
position of the Commission and of the position of any state securities
regulatory authority in which securities of the Partnership were offered or sold
as to indemnification for violations of securities laws.
A successful claim for indemnification would deplete Partnership assets by
the amount paid. As a result of such indemnification provisions, a purchaser of
Units may have a more limited right of legal action than he would have if such
provision were not included in the Partnership Agreement. To the extent that the
indemnification provisions purport to include indemnification for liabilities
arising under the Securities Act, in the opinion of the Commission, such
indemnification is against public policy as expressed in the Securities Act, and
is, therefore, unenforceable.
The Partnership Agreement also provides that the Partnership shall not incur
the cost of the portion of any insurance that insures any party against any
liability as to which such party is prohibited from being indemnified.
PRIOR ACTIVITIES
Reef Millennium Energy Fund is the first public drilling program sponsored
by Reef Partners LLC as managing general partner. Since its formation in
February 1999, Reef Partners LLC has sponsored four private joint ventures that
raised a total of $21,796,801.
The four private joint ventures previously sponsored by Reef Partners LLC
are:
<TABLE>
<CAPTION>
FUNDING FUNDS
NAME OF VENTURE DATE RAISED
- ---------------------------------------------------------------- --------- ------------
<S> <C> <C>
Reef Partners 1999-A Joint Venture.............................. 9/30/99 $ 2,373,670
Bell City #6 Joint Venture...................................... 8/10/99 $ 4,963,636
Domino #1 Joint Venture......................................... 8/30/99 $ 6,580,707
RAM Joint Venture............................................... 12/10/99 $ 7,878,788
</TABLE>
The Bell City #6, Domino #1, and RAM joint ventures each are general
partnerships formed to drill a single exploratory well. Reef Partners 1999-A
Joint Venture is a general partnership income fund formed to purchase producing
oil and gas properties. The income fund will not engage in any drilling
activities except drilling that is incidental to the development of proved,
producing properties.
Reef Exploration, as managing general partner, has previously sponsored
thirteen private joint ventures engaged in oil and gas drilling operations that
have raised a total of $55,772,317.
45
<PAGE>
The tables below set forth certain operating statistics with respect to the
thirteen ventures sponsored by Reef Exploration. The first table sets forth the
contributions to, distributions from and federal income taxable gain or loss
from each venture. The second table sets forth the gross revenues earned by the
venture and by Reef Exploration and its Affiliates from each prospect. The third
table sets forth the drilling results from each prospect.
TABLE ONE
INVESTOR PARTNERS' CONTRIBUTIONS, CASH DISTRIBUTIONS
AND FEDERAL INCOME TAX DEDUCTIONS
<TABLE>
<CAPTION>
FEDERAL INCOME TAXABLE
CASH DISTRIBUTIONS TO JOINT
VENTURE PARTNERS INCLUDING GAIN (LOSS)
INVESTOR MANAGING JOINT VENTURER --------------------------
PARTNERS' ---------------------------- INCEPTION
CONTRIBUTIONS INCEPTION THREE MONTHS DATE
AND MANAGING DATE THROUGH ENDED THROUGH
FUNDING NUMBER JOINT VENTURER'S DECEMBER 31, DECEMBER 31, INITIAL DECEMBER 31,
VENTURE DATE OF UNITS 1% INTEREST 1998 1998 YEAR 1998
- ------------------------ --------- --------- ---------------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Bell City 3-D Joint
Venture............... 10/17/95 50 $ 2,642,665 $ 366,650 $ 143,253 $ (13,832) $ (116,760)
Savoie-Fontenot Joint
Venture............... 04/22/96 48 3,248,499 3,012,407 218,720 (1,683,903) 711,656
Hardison Sadler Joint
Venture............... 05/21/96 35.5 2,694,154 192,619 -- (1,717,759) (2,474,059)
Holt #2-R Joint
Venture............... 06/17/96 22.76999 839,141 19,769 -- (618,964) (749,795)
Valle Morado Joint
Venture............... 10/04/96 48 5,886,061 11,791,635 212,798 (139,753) 5,905,622
Thunder Alley Joint
Venture............... 02/19/97 49 4,767,361 517,024 11,817 (2,729,950) (3,095,610)
West Bell City 3-D Joint
Venture............... 07/15/97 40 4,278,465 -- -- (19,858) (1,249,899)
Bell City #1 Joint
Venture............... 08/27/97 49 7,215,806 1,762,901 696,968 (4,280,492) (2,774,132)
Northwest Bell City
Joint Venture......... 11/24/97 48 6,293,565 103,704 60,438 (4,524,780) (4,881,224)
Bell City #2 Joint
Venture............... 03/10/98 35.5 5,478,036 -- -- (5,400,281) (5,400,281)
Bell City #3 Joint
Venture............... 08/31/98 26.5 3,672,792 -- -- (3,672,792) (3,643,990)
Bell City #4 Joint
Venture............... 10/06/98 35 6,142,100 -- -- (3,789,720) (3,789,720)
Bell City #5 Joint
Venture............... 12/23/98 23 2,613,673 -- -- (2,200,633) (2,200,633)
------------ ----------- ----------- ----------- -----------
$ 55,772,317 $17,776,709 $ 1,343,996 $(30,792,717) $(23,758,625)
============ =========== =========== =========== ===========
</TABLE>
46
<PAGE>
TABLE TWO
GROSS REVENUE FROM PROSPECT INCOME
<TABLE>
<CAPTION>
GROSS REVENUE TO JOINT GROSS REVENUE TO
INVESTOR VENTURE AND REEF AFFILIATES JOINT VENTURE ONLY
PARTNERS' ---------------------------- ----------------------------
CONTRIBUTIONS INCEPTION INCEPTION
AND MANAGING DATE THREE MONTHS DATE THREE MONTHS TURNKEY
JOINT THROUGH ENDED THROUGH ENDED COST OF
VENTURER'S DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, WELL TO
VENTURE 1% INTEREST 1998 1998 1998 1998 PARTNERSHIP
- ---------------------------- ------------- ------------- ------------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Bell City 3-D Joint
Venture................... $ 2,642,665 $ 597,516 $ 165,700 $ 597,716 $ 165,700 $ N/A
Savoie-Fontenot Joint
Venture................... 3,248,499 4,933,392 886,748 3,661,899 658,205 3,013,575
Hardison Sadler Joint
Venture................... 2,694,154 447,921 -- 331,275 -- 2,513,400
Holt #2-R Joint Venture..... 839,141 57,521 -- 39,171 -- 796,950
Valle Morado Joint
Venture................... 5,886,061 48,500,000 48,500,000 11,945,597 11,732,798 5,827,200
Thunder Alley Joint
Venture................... 4,767,361 967,503 32,921 720,692 24,523 4,579,540
West Bell City 3-D Joint
Venture................... 4,278,465 -- -- -- --
Bell City #1 Joint
Venture................... 7,215,806 4,139,223 1,142,699 2,939,448 811,482 7,103,432
Northwest Bell City Joint
Venture................... 6,293,565 213,524 55,023 158,492 40,842 6,285,792
Bell City #2 Joint
Venture................... 5,478,036 -- -- -- -- 5,400,118
Bell City #3 Joint
Venture................... 3,672,792 -- -- -- -- 3,643,750
Bell City #4 Joint
Venture................... 6,142,100 -- -- -- -- 6,079,823
Bell City #5 Joint
Venture................... 2,613,673 -- -- -- -- 4,197,500
----------- ----------- ----------- ----------- ----------- ---------
$55,772,317 $59,856,600 $50,783,091 $20,394,090 $13,433,550 4$9,441,080
=========== =========== =========== =========== =========== =========
<CAPTION>
OVERHEAD
REIMBURSEMENT LEASE
TO MANAGING OPERATING
VENTURE JOINT VENTURER EXPENSE
- ---------------------------- --------------- ---------
<S> <C> <C>
Bell City 3-D Joint
Venture................... $ 1,145 $ 58,774
Savoie-Fontenot Joint
Venture................... 26,313 110,786
Hardison Sadler Joint
Venture................... 12,339 434,091
Holt #2-R Joint Venture..... 2,310 31,908
Valle Morado Joint
Venture................... -- --
Thunder Alley Joint
Venture................... 13,474 249,579
West Bell City 3-D Joint
Venture................... -- --
Bell City #1 Joint
Venture................... 6,870 307,231
Northwest Bell City Joint
Venture................... 10,563 5,502
Bell City #2 Joint
Venture................... -- --
Bell City #3 Joint
Venture................... -- --
Bell City #4 Joint
Venture................... -- --
Bell City #5 Joint
Venture................... -- --
--------- ---------
$ 73,014 $1,197,871
========= =========
</TABLE>
TABLE THREE
DEVELOPMENT DRILLING RESULTS
<TABLE>
<CAPTION>
GROSS BARRELS & MCF SOLD
INCEPTION TO 12/98 NET BARRELS & MCF SOLD
(VENTURE AND REEF INCEPTION TO 12/98
AFFILIATES) (VENTURE ONLY)
-------------------------- --------------------------
VENTURE OIL (BARRELS) GAS (MCF) OIL (BARRELS) GAS (MCF)
- ------------------------------------------------------------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Bell City 3-D Joint Venture.................................. 11,336 197,211 11,336 197,211
Savoie-Fontenot Joint Venture................................ 48,233 1,604,730 35,802 1,191,140
Hardison Sadler Joint Venture................................ -- 95,911 -- 70,934
Holt #2-R Joint Venture...................................... 3,204 -- 2,378 --
Valle Morado Joint Venture(1)................................ -- -- -- --
Thunder Alley Joint Venture.................................. 38,769 100,882 28,879 75,146
West Bell City 3-D Joint Venture............................. -- -- -- --
Bell City #1 Joint Venture................................... 77,123 1,360,755 54,768 966,333
Northwest Bell City Joint Venture............................ 296 111,263 220 82,587
Bell City #2 Joint Venture................................... -- -- -- --
Bell City #3 Joint Venture................................... -- -- -- --
Bell City #4 Joint Venture................................... -- -- -- --
Bell City #5 Joint Venture................................... -- -- -- --
--------- --------- --------- ---------
178,961 3,470,752 133,383 2,583,351
========= ========= ========= =========
<CAPTION>
VENTURE DRY HOLE
- ------------------------------------------------------------- -----------------
<S> <C>
Bell City 3-D Joint Venture.................................. No
Savoie-Fontenot Joint Venture................................ No
Hardison Sadler Joint Venture................................ No
Holt #2-R Joint Venture...................................... No
Valle Morado Joint Venture(1)................................ No
1 Dry, 1
Thunder Alley Joint Venture.................................. Producing
West Bell City 3-D Joint Venture............................. Yes
Bell City #1 Joint Venture................................... No
2 Dry, 1
Northwest Bell City Joint Venture............................ Producing
Bell City #2 Joint Venture................................... Yes
Bell City #3 Joint Venture................................... Yes
Bell City #4 Joint Venture................................... No
Bell City #5 Joint Venture................................... No
</TABLE>
- ----------------------------------
(1) The well on this prospect was completed and the prospect was sold prior to
production commencing from the well.
The following is a brief narrative description of the thirteen ventures
previously sponsored by Reef Exploration and the three drilling ventures
previously sponsored by the Managing General Partner.
47
<PAGE>
BELL CITY 3-D JOINT VENTURE is a Texas general partnership formed to (i)
conduct and interpret three-dimensional seismic activities over a 14 square mile
area in Calcasieu Parish, Louisiana, and (ii) acquire oil and gas leasehold
interests over selected acreage within the 14 square mile area. As of December,
1999, six selected leasehold interests have been contributed to drilling
operations conducted by Bell City #1 Joint Venture, Bell City #2 Joint Venture,
Bell City #4 Joint Venture, Bell City #5 Joint Venture, and Bell City #6 Joint
Venture in exchange for 12.5% carried working interests in the wells drilled
upon such acreage. Five wells were completed as producing wells. Two of them
were subsequently plugged and abandoned. Reef Exploration purchased a 1%
interest in this partnership, and unrelated third parties purchased the
remaining 99%. No Reef Exploration affiliate has any carried interest in the
operations of this partnership.
SAVOIE-FONTENOT JOINT VENTURE is a Texas general partnership formed to drill
two exploratory oil and gas wells in Calcasieu Parish and Jefferson Davis
Parish, Louisiana, to depths of approximately 10,700 feet and 11,100 feet,
respectively. Both wells were successfully completed and are producing oil and
gas at December 1999. Reef Exploration purchased a 2.2614% interest in this
partnership, and unrelated third parties purchased the remaining 97.7386%. In
addition, an affiliate of Reef Exploration received a 25% carried working
interest (18.75% net revenue interest) in these wells. This venture owns a 72%
working interest (54% net revenue interest) in these wells.
HARDISON SADLER JOINT VENTURE is a Texas general partnership formed to drill
two exploratory oil and gas wells in Limestone County, Texas to depths of
approximately 11,300 feet. Both wells were completed as producing wells. Neither
well is producing at this time, and the venture has disposed of its interests in
both wells to third parties. Reef Exploration purchased a 1.8083% interest in
this partnership, and unrelated third parties purchased the remaining 98.1917%.
In addition, an affiliate of Reef Exploration received a 25% carried working
interest (18.75% net revenue interest) in these wells. This venture owns a 71%
working interest (53.25% net revenue interest) in these wells.
HOLT RANCH 2-R JOINT VENTURE is a Texas general partnership formed to
re-enter and sidetrack one oil and gas well in Limestone County, Texas to a
depth of approximately 12,500 feet. The well was completed as a producing well.
The well has subsequently been plugged and abandoned. Reef Exploration purchased
a 2.8549% interest in this partnership, and unrelated third parties purchased
the remaining 97.1451%. In addition, an affiliate of Reef Exploration received a
25% carried working interest (18.75% net revenue interest) in this well. This
venture owned a 53.3672% working interest (40.0254% net revenue interest) in
this well.
VALLE MORADO JOINT VENTURE is a Texas general partnership formed to drill an
exploratory well in Salta and Jujuy Provinces in the Republic of Argentina to a
depth of approximately 21,000 feet. The well was completed and shut-in to await
additional development of the reservoir and the construction of processing and
transportation facilities. The venture, Reef Exploration and its affiliates all
sold their interests to Compania General de Combustibles before the well was
placed into production. Reef Exploration purchased a 1% interest in this
partnership, and unrelated third parties purchased the remaining 99%. In
addition, an affiliate of Reef Exploration received a 25% carried working
interest (20% net revenue interest) in this well. This venture owned a 28.8%
working interest (23.04% net revenue interest) in this well.
THUNDER ALLEY JOINT VENTURE is a Texas general partnership formed to drill
two exploratory oil and gas wells in Jefferson Davis Parish, Louisiana and
Jasper County, Mississippi, to depths of approximately 10,900 feet and 15,500
feet, respectively. Both wells were successfully completed. Subsequently, the
well in Louisiana has been plugged and abandoned and the well in Mississippi has
been sold. Reef Exploration purchased a 2.3468% interest in this partnership,
and unrelated third parties purchased the remaining 97.6532%. In addition, an
affiliate of Reef Exploration received a 25% carried working interest (18.75%
net revenue interest) in these wells. This venture owned a 73.0053% working
interest (54.7504% net revenue interest) in these wells.
48
<PAGE>
WEST BELL CITY 3-D JOINT VENTURE is a Texas general partnership formed to
(i) conduct and interpret three-dimensional seismic activities over a 17 square
mile area in Calcasieu Parish, Louisiana, and (ii) acquire oil and gas leasehold
interests over selected acreage within the 17 square mile area. As of December
1999, one selected leasehold interest had been contributed to drilling
operations conducted by Bell City #3 Joint Venture in exchange for a 12.5%
carried working interest in the well drilled upon the acreage. The well was a
dry hole. Reef Exploration purchased a 1% interest in this partnership, and
unrelated third parties purchased the remaining 99%.
BELL CITY #1 JOINT VENTURE is a Texas general partnership formed to drill
two exploratory oil and gas wells in Calcasieu Parish, Louisiana, to depths of
approximately 14,200 feet and 12,000 feet, respectively. Both wells were
completed, but one was plugged and abandoned in the year subsequent to its
drilling. The other well is producing oil and gas at December 1999. Reef
Exploration purchased a 2.514% interest in this partnership, and unrelated third
parties purchased the remaining 97.486%. An affiliate of Reef Exploration
received a 25% carried working interest (18.75% net revenue interest) in these
wells. Bell City 3-D Joint Venture received a 12.5% carried working interest
(9.375% net revenue interest) in these wells. This venture owns a 61.25% working
interest (45.9375% net revenue interest) in these wells.
NORTHWEST BELL CITY JOINT VENTURE is a Texas general partnership formed to
drill three exploratory oil and gas wells, one in Calcasieu Parish, Louisiana
and two in Panola County, Texas. The Louisiana well was drilled to a depth of
approximately 14,200 feet and the Texas wells were drilled to depths of
approximately 6,500 feet (a re-entry well) and 9,700 feet. The Louisiana well
was a dry hole. The Texas wells were completed, but one was disposed of to a
third party and the other will be disposed of in December 1999. Reef Exploration
purchased a 4.35163% interest in this partnership, and unrelated third parties
purchased the remaining 95.34837%. An affiliate of Reef Exploration received a
25% carried working interest (18% net revenue interest) in the Louisiana well
and 18.75% carried working interests (9.375% net revenue interest) in the Texas
wells. This venture owned a 72% working interest (51.84% net revenue interest)
in the Louisiana well and 36% and 72% working interests (27% and 54% net revenue
interests) in the Texas wells.
BELL CITY #2 JOINT VENTURE is a Texas general partnership formed to drill
one exploratory oil and gas well in Calcasieu Parish, Louisiana, to a depth of
approximately 12,500 feet. The well was a dry hole. Reef Exploration purchased a
1% interest in this partnership, and unrelated third parties purchased the
remaining 99%. An affiliate of Reef Exploration received a 25% carried working
interest (18.125% net revenue interest) in these wells. Bell City 3-D Joint
Venture received a 12.5% carried working interest (9.0625% net revenue interest)
in this well. This venture owned a 59.1662% working interest (42.8958% net
revenue interest) in this well.
BELL CITY #3 JOINT VENTURE is a Texas general partnership formed to drill
one exploratory oil and gas well in Calcasieu Parish, Louisiana, to a depth of
approximately 12,500 feet. The well was a dry hole. Reef Exploration purchased
an 11.8711% interest in this partnership, and unrelated third parties purchased
the remaining 88.1289%. An affiliate of Reef Exploration received a 25% carried
working interest (18% net revenue interest) in these wells. West Bell City 3-D
Joint Venture received a 12.5% carried working interest (9% net revenue
interest) in this well. This venture owned a 72.72727% working interest
(42.8958% net revenue interest) in this well.
BELL CITY #4 JOINT VENTURE is a Texas general partnership formed to drill
one exploratory oil and gas well in Calcasieu Parish, Louisiana, to a depth of
approximately 12,600 feet. The well was completed but has subsequently been
plugged and abandoned. Reef Exploration purchased a 1% interest in this
partnership, and unrelated third parties purchased the remaining 99%. An
affiliate of Reef Exploration received a 12.5% carried working interest (9% net
revenue interest) in these wells. Bell City 3-D Joint Venture received a 12.5%
carried working interest (9% net revenue interest) in this well. This venture
owns a 72.91667% working interest (52.5% net revenue interest) in this well.
49
<PAGE>
BELL CITY #5 JOINT VENTURE is a Texas general partnership formed to drill
one exploratory oil and gas well in Calcasieu Parish, Louisiana, to a depth of
approximately 12,600 feet. The well was successfully completed and is producing
at December 1999. Reef Exploration purchased a 1% interest in this partnership,
and unrelated third parties purchased the remaining 99%. An affiliate of Reef
Exploration received an 18.75% carried working interest (13.59375% net revenue
interest) in these wells. Bell City 3-D Joint Venture received a 9.375% carried
working interest (6.796875% net revenue interest) in this well. This venture
owns a 44.9218745% working interest (36.568359% net revenue interest) in this
well.
DOMINO #1 JOINT VENTURE is a Texas general partnership formed to drill one
exploratory oil and gas well together with Burlington Resources, Inc. in St.
Mary Parish, Louisiana, to a depth of approximately 19,600 feet. The well is
being completed in December 1999. Reef Partners LLC purchased a 1% interest in
this partnership, and unrelated third parties purchased the remaining 99%. An
affiliate of Reef Partners LLC received a 12.5% carried working interest (9.375%
net revenue interest) in this well. This venture owns a 28.60467% working
interest (21.4535% net revenue interest) in this well.
BELL CITY #6 JOINT VENTURE is a Texas general partnership formed to drill
one exploratory oil and gas well in Calcasieu Parish, Louisiana, to a depth of
approximately 11,275 feet. The well is being completed in December 1999. Reef
Partners LLC purchased a 1% interest in this partnership, and unrelated third
parties purchased the remaining 99%. An affiliate of Reef Partners LLC received
an 18.75% carried working interest (13.59375% net revenue interest) in these
wells. Bell City 3-D Joint Venture received a 9.375% carried working interest
(6.796875% net revenue interest) in this well. This venture owns a 46.875%
working interest (33.984375% net revenue interest) in this well.
RAM JOINT VENTURE is a Texas general partnership formed to drill one
exploratory oil and gas well in Alberta, Canada, together with affiliates of
British Petroleum Co., Exxon, and Bunker Hunt, to a depth of approximately
19,030 feet. Drilling operations on this well will begin in the first quarter of
2000. Reef Partners LLC purchased a 1% interest in this partnership, and
unrelated third parties purchased the remaining 99%. An affiliate of Reef
Partners LLC received a 12.1875% carried working interest (8.896875% net revenue
interest) in this well. This venture owns a 36.5625% working interest
(26.690625% net revenue interest) in this well.
TAX CONSIDERATIONS
The full tax opinion of Arter & Hadden LLP is attached to the Prospectus as
Appendix D. All prospective investors should review Appendix D in its entirety
before investing in the Program.
The following is a summary of the opinions of Arter & Hadden LLP, counsel to
the Partnerships (collectively, the "Partnership"), which represent counsel's
opinions on all material federal income tax consequences to the Partnership and
to the Investor Partners. There may be aspects of a particular investor's tax
situation that are not addressed in the following discussion or in Appendix D.
Additionally, the resolution of certain tax issues depends upon future facts and
circumstances not known to counsel as of the date of this Prospectus; thus, no
assurance as to the final resolution of such issues should be drawn from the
following discussion.
The following statements are based upon the provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), existing and proposed regulations
thereunder, current administrative rulings, and court decisions. It is possible
that legislative or administrative changes or future court decisions may
significantly modify the statements and opinions expressed herein. Such changes
could be retroactive with respect to the transactions prior to the date of such
changes.
Moreover, uncertainty exists concerning some of the federal income tax
aspects of the transactions being undertaken by the Partnerships. Some of the
tax positions being taken by a Partnership may be challenged by the Internal
Revenue Service (the "IRS") and any such challenge could be successful. Thus,
there can be no assurance that all of the anticipated tax benefits of an
investment in a Partnership will be
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realized. Counsel's opinion is based upon the transactions described in this
Prospectus (the "Transactions") and upon facts as they have been represented to
counsel or determined by it as of the date of the opinion. Any alteration of the
facts may adversely affect the opinions rendered.
Because of the factual nature of the inquiry, and in certain cases the lack
of clear authority in the law, it is not possible to reach a judgment as to the
outcome on the merits (either favorable or unfavorable) of certain material
federal income tax issues as described more fully herein.
SUMMARY OF CONCLUSIONS
OPINIONS EXPRESSED. The following is a summary of the specific opinions
expressed by counsel with respect to the tax considerations discussed herein. TO
BE FULLY UNDERSTOOD, THE COMPLETE DISCUSSION OF THESE MATTERS SET FORTH IN THE
FULL TAX OPINION IN APPENDIX D SHOULD BE READ BY EACH PROSPECTIVE INVESTOR
PARTNER.
- The material federal income tax benefits in the aggregate from an
investment in the Partnerships will be realized.
- The Partnerships will be treated as partnerships for federal income tax
purposes and not as corporations and not as associations taxable as
corporations or as "publicly traded partnerships." See "--Partnership
Status;" "--Federal Taxation of Partnerships."
- To the extent a Partnership's wells are timely drilled and amounts are
timely paid, the Partners will be entitled to their pro rata share of the
Partnership's IDC paid in 2000 with respect to the Partnerships offered in
2000, in 2001 with respect to the Partnerships offered in 2001, and in
2002 with respect to the Partnerships offered in 2002. See "--Intangible
Drilling and Development Costs Deductions."
- The deductibility of losses generated from a Partnership will not be
limited by the at risk rules or the limitations related to an Investor's
adjusted basis in his Partnership interest to the extent the cash
contributed to a Partnership by an Investor constitutes "personal funds"
as defined in Treasury Regulation Section 1.465-9(f).
- Additional General Partners' interests will not be considered a passive
activity within the meaning of Code Section 469 and losses generated while
such general partner interest is so held will not be limited by the
passive activity provisions. See "--Passive Loss and Credit Limitations."
- Limited Partners' interests (other than those held by Additional General
Partners who convert their interests into Limited Partners' interests)
will be considered interests in a passive activity within the meaning of
Code Section 469 and losses generated therefrom will be limited by the
passive activity provisions. See "--Passive Loss and Credit Limitations."
- A Partnership will not be terminated solely as the result of the
conversion of Partnership interests from general partner interests to
limited partner interests. See "--Conversion of Interests."
- To the extent provided herein, the Partners' distributive shares of
Partnership tax items will be determined and allocated substantially in
accordance with the terms of the Partnership Agreement. See "--Partnership
Allocations."
- The Partnerships will not be required to register with the IRS as tax
shelters. See "--Registration as a Tax Shelter."
NO OPINION EXPRESSED. Due to the lack of authority, or the essentially
factual nature of the question, counsel expresses no opinion on the following:
Q The impact of an investment in a Partnership on an Investor's
alternative minimum tax, due to the factual nature of the issue. See
"--Alternative Minimum Tax."
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Q Whether, under Code Section 183, the losses of a Partnership will be
treated as derived from "activities not engaged in for profit," and
therefore nondeductible from other gross income, due to the inherently
factual nature of a Partner's interest and motive in engaging in the
Transactions. See "--Profit Motive."
Q Whether each Partner will be entitled to percentage depletion since such
a determination is dependent upon the status of the Partner as an
independent producer and on the Partner's other oil and gas production.
Due to the inherently factual nature of such a determination, counsel is
unable to render an opinion as to the availability of percentage
depletion. See "--Depletion Deductions."
Q Whether any interest incurred by a Partner with respect to any
borrowings will be deductible or subject to limitations on
deductibility, due to the factual nature of the issue. Without any
assistance of the Managing General Partner or any of its affiliates,
some Partners may choose to borrow the funds necessary to acquire a Unit
and may incur interest expense in connection with those loans. Based
upon the purely factual nature of any such loans, counsel is unable to
express an opinion with respect to the deductibility of any interest
paid or incurred thereon. See "--Interest Deductions."
Q Whether the fees to be paid to the Managing General Partner and to third
parties will be deductible, due to the factual nature of the issue. Due
to the inherently factual nature of the proper allocation of expenses
among nondeductible syndication expenses, amortizable organization
expenses, amortizable "start-up" expenditures, and currently deductible
items, and because the issues involve questions concerning both the
nature of the services performed and to be performed and the
reasonableness of amounts charged, counsel is unable to express an
opinion regarding such treatment. See "--Transaction Fees."
GENERAL INFORMATION. Certain matters contained herein are not considered to
address a material tax consequence and are for general information, including
the matters contained in sections dealing with gain or loss on the sale of Units
or of Property, Partnership distributions, tax audits, penalties, and state,
local, and self-employment tax. See "--General Tax Effects of Partnership
Structure," "--Gain or Loss on Sale of Properties or Units," "--Partnership
Distributions," "--Administrative Matters," "--Accounting Methods and Periods,"
"--Social Security Benefits; Self-Employment Tax," and "--State and Local Tax."
FACTS AND REPRESENTATIONS. The opinions of counsel are also based upon the
facts described in this Prospectus and upon certain representations made to it
by the Managing General Partner for the purpose of permitting counsel to render
its opinions, including the following representations with respect to the
Program:
- The Partnership Agreements to be entered into by and among the Managing
General Partner and Investor Partners and any amendments thereto will be
duly executed and will be made available to any Investor Partner upon
written request. The Partnership Agreements will be duly recorded in all
places required under the Act for the due formation of the Partnerships
and for the continuation thereof in accordance with the terms of the
Partnership Agreements. The Partnerships will at all times be operated in
accordance with the terms of the Partnership Agreements, the Prospectus,
and the Act.
- No election will be made by the Partnership, Investor Partners, or
Managing General Partner to be excluded from the application of the
provisions of Subchapter K of the Code and no election will be made by a
Partnership to be taxed as a corporation.
- Each Partnership will own an operating mineral interest, as defined in the
Code and in the Treasury Regulations, in all of the Drill Sites and none
of the Partnership's revenues will be from non-working interests.
- The respective amounts that will be paid to affiliates of the Managing
General Partner or to the Managing General Partner as Drilling Fees,
Operating Fees, and other fees will be amounts that
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would not exceed amounts ordinarily paid for similar transactions between
Persons having no affiliation and dealing with each other at "arms'
length."
- The Managing General Partner will cause each Partnership to properly elect
to deduct currently all Intangible Drilling and Development Costs.
- To the extent permitted by the Code, the Partnerships will have a
December 31 taxable year and will report income on the accrual basis.
- A Drilling and Operating Agreement (an "Operating Agreement") to be
entered into by and among an Operator and the Partnership will be duly
executed and will govern the drilling of the Partnership's wells. All
Partnership wells will be spudded by not later than March 31, 2001 for
Partnerships offered in 2000, March 31, 2002 for Partnerships offered in
2001, and March 31, 2003 for Partnerships offered in 2002. The entire
amount to be paid to the Operator under the Operating Agreement is
attributable to Intangible Drilling and Development Costs and does not
include a profit for services performed or materials provided by third
parties which are passed through as actual costs.
- An Operating Agreement will be duly executed and will govern the operation
of the Partnership's Wells.
- The Managing General Partner believes that the sum of (i) the aggregate
deductions, including depletion deductions, and (ii) 350 percent of the
aggregate credits from the Partnership will not, as of the close of any of
the first five years ending after the date on which Units are offered for
sale, exceed two times the cash invested by the Partners in the
Partnership as of such dates. The Managing General Partner believes that
no person could reasonably infer from the representations made in
connection with the offering of Units that such sums as of such dates will
exceed two times the Partner's cash investments as of such dates.
- The Managing General Partner believes that at least 90% of the gross
income of the Partnership will constitute income derived from the
exploration, development, production, and/or marketing of oil and gas. The
Managing General Partner does not believe that any market will ever exist
for the sale of Units and the Managing General Partner will not make a
market for the Units. Further, the Units will not be traded on an
established securities market or the substantial equivalent thereof.
- Each Partnership will have the objective of carrying on business for
profit and dividing the gain therefrom.
- The Managing General Partner will not permit the purchase of Units by
tax-exempt investors or foreign investors.
The opinions of counsel are also subject to all the assumptions,
qualifications, and limitations set forth in the following discussion and in the
opinion, including the assumptions that each of the Partners has full power,
authority, and legal right to enter into and perform the terms of the
Partnership Agreement and to take any and all actions thereunder in connection
with the transactions contemplated thereby.
Each prospective Investor should be aware that, unlike a ruling from the
IRS, an opinion of counsel represents only such counsel's best judgment. THERE
CAN BE NO ASSURANCE THAT THE IRS WILL NOT SUCCESSFULLY ASSERT POSITIONS THAT ARE
INCONSISTENT WITH THE OPINIONS OF COUNSEL SET FORTH IN THIS DISCUSSION AND
APPENDIX D OR IN THE TAX REPORTING POSITIONS TAKEN BY THE PARTNERS OR THE
PARTNERSHIP. EACH PROSPECTIVE INVESTOR SHOULD CONSULT HIS OWN TAX ADVISOR TO
DETERMINE THE EFFECT OF THE TAX ISSUES DISCUSSED HEREIN AND IN APPENDIX D ON HIS
INDIVIDUAL TAX SITUATION.
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GENERAL TAX EFFECTS OF PARTNERSHIP STRUCTURE
Each Partnership will be formed as a limited partnership pursuant to the
Partnership Agreement and the laws of the State of Nevada.
NO TAX RULING WILL BE SOUGHT FROM THE IRS AS TO THE STATUS OF THE
PARTNERSHIP AS A PARTNERSHIP FOR FEDERAL INCOME TAX PURPOSES.
The applicability of the federal income tax consequences described herein
depends on the treatment of the Partnerships as partnerships for federal income
tax purposes and not as corporations and not as associations taxable as
corporations. Any tax benefits anticipated from an investment in a Partnership
would be adversely affected or eliminated if the Partnership is treated as a
corporation for federal income tax purposes.
Counsel to the Partnerships is of the opinion that, at the time of its
formation, each of the Partnerships will be treated as a partnership for federal
income tax purposes. The opinion is based on the provisions of the Partnership
Agreement and applicable state law and representations made by the Managing
General Partner. The opinion of counsel is not binding on the IRS and is based
on existing law, which is to a great extent the result of administrative and
judicial interpretation. In addition, no assurance can be given that a
Partnership will not lose partnership status as a result of changes in the
manner in which it is operated or other facts upon which the opinion of counsel
is based.
Under the Code, a partnership is not a taxable entity and, accordingly,
incurs no federal income tax liability. Rather, a partnership is a
"pass-through" entity that is required to file an information return with the
IRS. In general, the character of a partner's share of each item of income,
gain, loss, deduction, and credit is determined at the partnership level. Each
partner is allocated a distributive share of such items in accordance with the
partnership agreement and is required to take such items into account in
determining the partner's income. Each partner includes such amounts in income
for any taxable year of the partnership ending within or with the taxable year
of the partner, without regard to whether the partner has received or will
receive any cash distributions from the Partnership.
INTANGIBLE DRILLING AND DEVELOPMENT COSTS DEDUCTIONS
Congress granted to the Treasury Secretary the authority to prescribe
regulations that would allow taxpayers the option of deducting, rather than
capitalizing, intangible drilling and development costs ("IDC"). The Secretary's
rules state that, in general, the option to deduct IDC applies only to
expenditures for drilling and development items that do not have a salvage
value.
CLASSIFICATION OF COSTS. In general, IDC consists of those costs that in
and of themselves have no salvage value. A partnership's classification of a
cost as IDC is not binding on the government, which might reclassify an item
labeled as IDC as a cost that must be capitalized. To the extent not deductible,
such amounts will be included in the Partnership's basis in mineral property and
in the Partners' bases of their interests in the Partnership.
TIMING OF DEDUCTIONS. Although the Partnership will elect to deduct IDC,
each investor has an option of deducting IDC, or capitalizing all or a part of
the IDC and amortizing it on a straight-line basis over a sixty-month period,
beginning with the taxable month in which the expenditure is made.
In order for the IDC to qualify for deduction in 2000, the wells for
Partnerships offered in 2000 must be spudded by March 31, 2001; in order for the
IDC to qualify for deduction in 2001, the wells for Partnerships offered in 2001
must be spudded by March 31, 2002; in order for the IDC to qualify for deduction
in 2002, the wells for Partnerships offered in 2002 must be spudded by
March 31, 2003; in each case certain other requirements must be met. Although
the Managing General Partner will attempt to satisfy each requirement of the IRS
and judicial authority for deductibility of IDC in 2000 for Partnerships offered
in 2000, in 2001 for Partnerships offered in 2001, and in 2002 for Partnerships
offered in 2002, no
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assurance can be given that the IRS will not successfully contend that the IDC
of a well is not deductible in whole or in part until a later year if drilling
is not completed during the year of a Partnership's offering. Further, to the
extent drilling of the Partnership's wells does not commence by March 31, 2001
for Partnerships offered in 2000 (or March 31, 2002 for Partnerships offered in
2001 or March 31, 2003 for Partnerships offered in 2002), the deductibility of
all or a portion of the IDC may be deferred. Notwithstanding the foregoing, no
assurance can be given that the IRS will not challenge the current deduction of
IDC because of the prepayment being made to a related party. If the IRS were
successful with such challenge, the Partners' deductions for IDC would be
deferred to later years.
RECAPTURE OF IDC. IDC previously deducted that is allocable to the property
(directly or through the ownership of an interest in a partnership) and that
would have been included in the adjusted basis of the property is recaptured to
the extent of any gain realized upon the disposition of the property. Treasury
Regulations provide that recapture is determined at the partner level (subject
to certain anti-abuse provisions). Where only a portion of recapture property is
disposed of, any IDC related to the entire property is recaptured to the extent
of the gain realized on the portion of the property sold. In the case of the
disposition of an undivided interest in a property (as opposed to the
disposition of a portion of the property), a proportionate part of the IDC with
respect to the property is treated as allocable to the transferred undivided
interest to the extent of any realized gain.
DEPLETION DEDUCTIONS
The owner of an economic interest in an oil and gas property is entitled to
claim the greater of percentage depletion or cost depletion with respect to oil
and gas properties that qualify for such depletion methods. Percentage depletion
is generally available only with respect to the domestic oil and gas production
of certain "independent producers." In order to qualify as an independent
producer, the taxpayer, either directly or through certain related parties, may
not be involved in the refining of more than 50,000 barrels of oil (or
equivalent of gas) on any day during the taxable year or in the retail marketing
of oil and gas products exceeding $5 million per year in the aggregate. In the
case of partnerships, the depletion allowance must be computed separately by
each partner and not by the partnership. For properties placed in service after
1986, depletion deductions, to the extent they reduce basis in an oil and gas
property, are subject to recapture under Code section 1254.
Cost depletion for any year is determined by multiplying the cost basis of
the mineral interest by a fraction, the numerator of which is the number of
units (e.g., barrels of oil or Mcf of gas) sold during the year, and the
denominator of which is the estimated recoverable units of reserves available at
the beginning of the depletion period. In no event can the cost depletion exceed
the adjusted basis of the property to which it relates.
Percentage depletion is a statutory allowance pursuant to which a deduction
is allowed in any taxable year, not to exceed 100% of the taxpayer's taxable
income from the property (computed without the allowance for depletion) with the
aggregate deduction limited to 65% of the taxpayer's taxable income for the year
(computed without regard to percentage depletion and net operating loss and
capital loss carrybacks). The percentage depletion deduction rate will vary with
the price of oil, but the rate will not be less than 15%. A percentage depletion
deduction that is disallowed in a year due to the 65% of taxable income
limitation may be carried forward and allowed as a deduction for the following
year, subject to the 65% limitation in that subsequent year. Percentage
depletion deductions reduce the taxpayer's adjusted basis in the property.
However, unlike cost depletion, deductions under percentage depletion are not
limited to the adjusted basis of the property; the percentage depletion amount
continues to be allowable as a deduction after the adjusted basis has been
reduced to zero.
The availability of depletion, whether cost or percentage, will be
determined separately by each Partner. Each Partner must separately keep records
of his share of the adjusted basis in an oil or gas property, adjust such share
of the adjusted basis for any depletion taken on such property, and use such
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adjusted basis each year in the computation of his cost depletion or in the
computation of his gain or loss on the disposition of such property. These
requirements may place an administrative burden on a Partner.
DEPRECIATION DEDUCTIONS
The Partnership will claim depreciation, cost recovery, and amortization
deductions with respect to its basis in Partnership Property as permitted by the
Code. For most tangible personal property placed in service after December 31,
1986, the "modified accelerated cost recovery system" ("MACRS") must be used in
calculating the cost recovery deductions. Thus, the cost of lease equipment and
well equipment, such as casing, tubing, tanks, and pumping units, and the cost
of oil or gas pipelines cannot be deducted currently but must be capitalized and
recovered under MACRS. The cost recovery deduction for most equipment used in
domestic oil and gas exploration and production and for most of the tangible
personal property used in natural gas gathering systems is calculated using the
200% declining balance method switching to the straight-line method, a
seven-year recovery period, and a half-year convention. If an accelerated
depreciation method is used, a portion of the depreciation will be a preference
item for AMT purposes.
INTEREST DEDUCTIONS
In the Transactions, the Investor Partners will acquire their interests by
remitting cash in the amount of $20,000 per Unit to the Partnership. In no event
will the Partnership accept notes in exchange for a Partnership interest.
Nevertheless, without any assistance from the Managing General Partner or any of
its Affiliates, some Partners may choose to borrow the funds necessary to
acquire a Unit and may incur interest expense in connection with those loans.
Based upon the purely factual nature of any such loans, counsel is unable to
express an opinion with respect to the deductibility of any interest paid or
incurred thereon.
TRANSACTION FEES
The Partnership may classify a portion of the fees to be paid to third
parties and to the Managing General Partner or to the Operator and its
Affiliates (as described in the Prospectus under "SOURCE OF FUNDS AND USE OF
PROCEEDS") as expenses that are deductible as organizational expenses or
otherwise. There is no assurance that the IRS will allow the deductibility of
such expenses and counsel expresses no opinion with respect to the allocation of
the Fees to deductible and nondeductible items.
Generally, expenditures made in connection with the creation of, and with
sales of interests in, a partnership will fit within one of several categories.
A partnership may elect to amortize and deduct its organizational expenses
ratably over a period of not less than 60 months commencing with the month the
partnership begins business. Examples of organizational expenses are legal fees
for services incident to the organization of the partnership, such as
negotiation and preparation of a partnership agreement, accounting fees for
services incident to the organization of the partnership, and filing fees.
No deduction is allowable for "syndication expenses," examples of which
include brokerage fees, registration fees, legal fees of the underwriter or
placement agent and the issuer (general partners or the partnership) for
securities advice and for advice pertaining to the adequacy of tax disclosures
in the prospectus or private placement memorandum for securities law purposes,
printing costs, and other selling or promotional material. These costs must be
capitalized. Payments for services performed in connection with the acquisition
of capital assets must be amortized over the useful life of such assets.
No deduction is allowable with respect to "start-up expenditures," although
such expenditures may be capitalized and amortized over a period of not less
than 60 months.
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Each Partnership intends to make payments to the Managing General Partner,
as described in greater detail in the Prospectus. To be deductible, compensation
paid to a general partner must be for services rendered by the partner other
than in his capacity as a partner or for compensation determined without regard
to partnership income. Fees that are not deductible because they fail to meet
this test may be treated as special allocations of income to the recipient
partner. If the IRS were to successfully challenge the Managing General
Partner's allocations, a Partner's taxable income could be increased, thereby
resulting in increased taxes and in liability for interest and penalties.
BASIS AND AT RISK LIMITATIONS
A Partner's share of Partnership losses will be allowed only to the extent
of the aggregate amount with respect to which the taxpayer is "at risk" for such
activity at the close of the taxable year. In general a Partnership is "at risk"
to the extent of the amount of cash and the adjusted basis of other property
contributed to the Partnership. Any such loss disallowed by the "at risk"
limitation shall be treated as a deduction allocable to the activity in the
first succeeding taxable year.
The Code provides that a taxpayer must recognize taxable income to the
extent that his "at risk" amount is reduced below zero. This recaptured income
is limited to the sum of the loss deductions previously allowed to the taxpayer,
less any amounts previously recaptured. A taxpayer may be allowed a deduction
for the recaptured amounts included in his taxable income if and when he
increases his amount "at risk" in a subsequent taxable year.
The Partners will purchase Units by tendering cash to the Partnership. To
the extent the cash contributed constitutes the "personal funds" of the
Partners, the Partners should be considered at risk with respect to those
amounts. To the extent the cash contributed constitutes "personal funds," in the
opinion of counsel, neither the at risk rules nor the adjusted basis rules will
limit the deductibility of losses generated from the Partnership. In no event,
however, may a partner utilize his distributive share of partnership loss where
such share exceeds the partner's basis in the partnership.
PASSIVE LOSS LIMITATIONS
INTRODUCTION. The deductibility of losses generated from passive activities
will be limited for certain taxpayers. The passive activity loss limitations
apply to individuals, estates, trusts, and personal service corporations as well
as, to a lesser extent, closely held C corporations.
The definition of a "passive activity" generally encompasses all rental
activities as well as all activities with respect to which the taxpayer does not
"materially participate." Notwithstanding this general rule, however, the term
"passive activity" does not include "any working interest in any oil or gas
property that the taxpayer holds directly or through an entity that does not
limit the liability of the taxpayer with respect to such interest." A taxpayer
will be considered as materially participating in a venture only if the taxpayer
is involved in the operations of the activity on a "regular, continuous, and
substantial" basis. In addition, no limited partnership interest will be treated
as an interest with respect to which a taxpayer materially participates.
A passive activity loss ("PAL") is the amount by which the aggregate losses
from all passive activities for the taxable year exceed the aggregate income
from all passive activities for such year.
Individuals and personal service corporations will be entitled to PALs only
to the extent of their passive income whereas closely held C corporations (other
than personal service corporations) can offset PALs against both passive and net
active income, but not against portfolio income. In calculating passive income
and loss, however, all activities of the taxpayer are aggregated. PALs
disallowed as a result of the above rules will be suspended and can be carried
forward indefinitely to offset future passive (or passive and active, in the
case of a closely held C corporation) income.
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Upon the disposition of an entire interest in a passive activity in a fully
taxable transaction not involving a related party, any passive loss that was
suspended by the provisions of the passive activity rules is deductible from
either passive or non-passive income. The deduction must be reduced, however, by
the amount of income or gain realized from the activity in previous years.
GENERAL PARTNER INTERESTS. An Additional General Partner's interest in the
Partnership will not be considered a passive activity and losses generated while
such general partner interest is held will not be limited by the passive
activity provisions, unless there is partnership income or losses from
non-working interests.
Notwithstanding this general rule, however, the economic performance rules
are applied in a different manner from that described above in "--Intangible
Drilling and Development Costs Deductions." Economic performance under the
passive loss rules is defined as economic performance, without regard to the
spudding rule. Accordingly, if an Additional General Partner's interest is
converted to that of a Limited Partner after the end of the year in which
economic performance is deemed to occur, but prior to the spudding date, any
post-conversion losses will be passive, notwithstanding the availability of such
losses in a year in which the taxpayer held the interest in an entity that did
not limit his liability. The "spudding rule" and "spudding date" refer to the
date that drilling commences.
If an Additional General Partner converts his interest to a Limited Partner
interest pursuant to the terms of the Partnership Agreement, the character of a
subsequently generated tax attribute will be dependent upon, among other things,
the nature of the tax attribute and whether there arose, prior to conversion,
losses to which the working interest exception applied.
Accordingly, any loss arising therefrom should be treated as a PAL with the
benefits thereof limited as described above. However, if a taxpayer has any loss
from any taxable year from a working interest in any oil or gas property that is
treated as a non-passive loss, then any net income from such property for any
succeeding taxable year is to be treated as income that is not from a passive
activity. Consequently, assuming that a converting Additional General Partner
has losses from working interests that are treated as non-passive, income from
the Partnership allocable to the Partner after conversion would be treated as
income that is not from a passive activity.
LIMITED PARTNER INTERESTS. If an Investor Partner invests in a Partnership
as a Limited Partner, his distributive share of the Partnership's losses will be
treated as PALs, the availability of which will be limited to the Partner's
passive income. If the Partner does not have sufficient passive income to
utilize the PAL, the disallowed PAL will be suspended and may be carried forward
to be deducted against passive income arising in future years. Further, upon the
disposition of the interest to an unrelated party, in a fully taxable
transaction such suspended losses will be available, as described above.
Limited Partners should generally be entitled to offset their distributive
shares of passive income from the Partnerships with deductions from other
passive activities.
CONVERSION OF INTERESTS
A Partnership, in the opinion of counsel, will not be terminated solely as a
result of the conversion by Additional General Partners of their Partnership
interests into limited partnership interests. In the event a constructive
termination does occur, however, there will be a deemed contribution of "old"
partnership's assets and liabilities to a "new" partnership in exchange for
"new" partnership interests followed immediately by a deemed "old" partnership
liquidating distribution of the "new" partnership interests to the partners. For
a discussion of the conversion feature of the Program, see "TERMS OF THE
OFFERING--Conversion of Units by Additional General Partners."
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ALTERNATIVE MINIMUM TAX
Tax benefits associated with oil and gas exploration activities similar to
that of the Program had for several years been subject to the AMT. Specifically,
prior to January 1, 1993, IDC was an AMT preference item to the extent that
"excess IDC" exceeded 65% of a taxpayer's net income from oil and gas properties
for the year. Excess IDC was the amount by which the taxpayer's IDC deduction
exceeded the deduction that would have been allowed if the IDC had been
capitalized and amortized on a straight-line basis over ten years. Percentage
depletion, to the extent it exceeded a property's basis, was also an AMT
preference item.
For independent producers in taxable years beginning after 1992, the Energy
Policy Act repealed the treatment of percentage depletion as a preference item
for AMT purposes and provided a limited benefit from the preference on expensing
IDC. However, their AMTI may not be reduced by more than 40% of the AMTI
determined without this benefit.
For corporations, other than integrated oil companies, the adjusted current
earning ("ACE") adjustments were also repealed.
GAIN OR LOSS ON SALE OF PROPERTY OR UNITS
In the event some or all of the property of the Partnership is sold, or upon
sale of a Unit, an investor will recognize gain to the extent the amount
realized exceeds his basis in the investment. In addition, there may be
recapture of IDCs and depletion that is treated as additional ordinary income
for tax purposes. If the gain exceeds the amount of the recaptured income, the
investor will recognize ordinary income to the extent of the recapture and
capital gains for the balance.
It is possible that an investor will be required to recognize ordinary
income pursuant to the recapture rules in excess of the taxable income of the
disposition transaction or in a situation where the disposition transaction
resulted in a taxable loss. To balance the excess income, the investor would
recognize a capital loss for the difference between the gain and the income.
Depending on an investor's particular tax situation, some or all of this loss
might be deferred to future years, resulting in a greater tax liability in the
year in which the sale was made and a reduced future tax liability.
Any partner who sells or exchanges interests in a partnership must generally
notify the partnership in writing within 30 days of such transaction in
accordance with Treasury Regulations and must attach a statement to his tax
return reflecting certain facts regarding the sale or exchange. The notice must
include names, addresses, and taxpayer identification numbers (if known) of the
transferor and transferee and the date of the exchange. The partnership also is
required to provide copies of the information it provides to the IRS to the
transferor and the transferee.
Any investor who is required to notify the Partnership of a transfer of his
Partnership interest, and, who fails to do so, may be fined $50 for each
failure, limited to $100,000, provided there is no intentional disregard of the
filing requirement. Similarly, the Partnership may be fined for failure to
report the transfer.
The tax consequences to an assignee purchaser of a Unit from a Partner are
not described herein. Any assignor of a Unit should advise his assignee to
consult his own tax advisor regarding the tax consequences of such assignment.
PARTNERSHIP DISTRIBUTIONS
Under the Code, any increase in a partner's share of partnership
liabilities, or any increase in such partner's individual liabilities by reason
of an assumption by him of partnership liabilities is considered to be a
contribution of money by the partner to the partnership. Similarly, any decrease
in a partner's share of partnership liabilities or any decrease in such
partner's individual liabilities by reason of the partnership's
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assumption of such individual liabilities will be considered as a distribution
of money to the partner by the partnership.
The Partners' adjusted bases in their Units will initially consist of the
cash they contribute to the Partnership. Their bases will be increased by their
share of Partnership income and additional contributions and decreased by their
share of Partnership losses and distributions. To the extent that such actual or
constructive distributions are in excess of a Partner's adjusted basis in his
Partnership interest (after adjustment for contributions and his share of income
and losses of the Partnership), that excess will generally be treated as gain
from the sale of a capital asset. In addition, gain could be recognized to a
distributee partner upon the disproportionate distribution to a partner of
unrealized receivables or substantially appreciated inventory. The Partnership
Agreement prohibits distributions to any Investor Partner to the extent such
would create or increase a deficit in the Partner's Capital Account.
PARTNERSHIP ALLOCATIONS
The Partners' distributive shares of partnership income, gain, loss, and
deduction should be determined and allocated substantially in accordance with
the terms of the Partnership Agreement.
The IRS could contend that the allocations contained in the Partnership
Agreement do not have substantial economic effect or are not in accordance with
the Partners' interests in the Partnership and may seek to reallocate these
items in a manner that will increase the income or gain or decrease the
deductions allocable to a Partner.
PROFIT MOTIVE
The existence of economic, nontax motives for entering into the Transactions
is essential if the Partners are to obtain the tax benefits associated with an
investment in a Partnership.
Where an activity entered into by an individual is not engaged in for
profit, the individual's deductions with respect to that activity are limited to
those not dependent upon the nature of the activity (e.g., interest and taxes);
any remaining deductions will be limited to gross income from the activity for
the year. Should it be determined that a Partner's activities with respect to
the Transactions are "not for profit," the IRS could disallow all or a portion
of the deductions generated by a Partnership's activities.
The Code generally provides for a presumption that an activity is entered
into for profit where gross income from the activity exceeds the deductions
attributable to such activity for three or more of the five consecutive taxable
years ending with the taxable year in question. At the taxpayer's election, such
presumption can relate to three or more of the taxable years in the 5-year
period beginning with the taxable year in which the taxpayer first engages in
the activity.
Due to the inherently factual nature of a Partner's intent and motive in
engaging in the Transactions, counsel does not express an opinion as to the
ultimate resolution of this issue in the event of a challenge by the IRS.
Partners must, however, seek to make a profit from their activities with respect
to the Transactions beyond any tax benefits derived from those activities or
risk losing those tax benefits.
ADMINISTRATIVE MATTERS
RETURNS AND AUDITS. While no federal income tax is required to be paid by
an organization classified as a partnership for federal income tax purposes, a
partnership must file federal income tax information returns, which are subject
to audit by the IRS. Any such audit may lead to adjustments, in which event the
Investor Partners may be required to file amended personal federal income tax
returns. Any such audit may also lead to an audit of an Investor Partner's
individual tax return and adjustments to items unrelated to an investment in
units.
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For purposes of reporting, audit, and assessment of additional federal
income tax, the tax treatment of "partnership items" is determined at the
partnership level. Partnership items will include those items that the Treasury
Regulations provide are more appropriately determined at the partnership level
than the partner level. 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 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 notice
to a partner appointed by that group to receive notice. All partners, whether or
not entitled to notice, are entitled to participate in the administrative
proceedings at the partnership level, although the Partnership Agreement
provides for waiver of certain of these rights by the Investor Partners. All
Investor Partners, including those not entitled to notice, may be bound by a
settlement reached by a Partnership's representative "tax matters partner",
which will be the Managing General Partner. If a proposed tax deficiency is
contested in any court by any Partner of a Partnership or by the Managing
General Partner, all Partners of that Partnership may be deemed parties to such
litigation and bound by the result reached therein.
CONSISTENCY REQUIREMENTS. An Investor Partner must generally treat
Partnership items on his federal income tax returns consistently with the
treatment of such items on the Partnership information return unless he 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.
COMPLIANCE PROVISIONS. Taxpayers are subject to several penalties and other
provisions that encourage compliance with the federal income tax laws, including
an accuracy-related penalty in an amount equal to 20% of the portion of an
underpayment of tax caused by negligence, intentional disregard of rules or
regulations or any "substantial understatement" of income tax. A "substantial
understatement" of tax is an understatement of income tax that exceeds the
greater of (a) 10% of the tax required to be shown on the return (the correct
tax), or (b) $5,000 ($10,000 in the case of a corporation other than an S
corporation or personal holding corporation).
Except in the case of understatements attributable to "tax shelter" items,
an item of understatement may 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, and there is a reasonable basis for the
tax treatment of such item by the taxpayer. In the case of partnerships, the
disclosure is to be made on the return of the partnership. Under the applicable
Treasury Regulations, however, an individual partner may make adequate
disclosure with respect to partnership items if certain conditions are met.
In the case of understatements attributable to "tax shelter" items, the
substantial understatement penalty may be avoided only if the taxpayer
establishes that, in addition to having substantial authority for his position,
he reasonably believed the treatment claimed was more likely than not the proper
treatment of the item. A "tax shelter" item is one that arises from a
partnership (or other form of investment) a significant purpose of which is the
avoidance or evasion of federal income tax. Under the GATT legislation, a
corporation is generally held to a higher standard to avoid the substantial
understatement penalty.
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ACCOUNTING METHODS AND PERIODS
Each Partnership will use the accrual method of accounting and will select
the calendar year as its taxable year to the extent permitted by law.
SOCIAL SECURITY BENEFITS; SELF-EMPLOYMENT TAX
A General Partner's share of any income or loss attributable to Units 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 the Units must be taken
into account in determining any reduction in benefits because of "excess
earnings."
TAXATION OF FOREIGN OPERATIONS
Some or all of the Partnerships may engage in oil and gas drilling
activities outside of the United States which could subject such Partnerships to
various taxes imposed by foreign countries. At this time it is not possible to
determine if or where any such foreign operations may take place so it is not
possible to describe specifically which foreign taxes may become applicable to a
Partnership.
The United States generally permits a credit for the amount of income tax
imposed on American taxpayers by foreign countries. This credit is available to
partners in a partnership where the partnership pays foreign income taxes.
Numerous limitations exist in the computation of the credit at the partner
level. The foreign income tax must be an income tax in the U.S. sense of the
word. Taxes eligible for the foreign tax credit do not include taxes paid or
accrued during the taxable year to any foreign country in connection with the
purchase and sale of oil and gas extracted in that country if: (i) the taxpayer
has no economic interest in the minerals; and (ii) either the purchase or the
sale is at a price which differs from the fair market value of the oil and gas
at the time of the purchase or sale. Taxes eligible for the foreign tax credit
do not include amounts paid or accrued to a foreign country to the extent that
the IRS determines that the foreign law imposing the amount is structured, or in
fact operates, so that the amount imposed with respect to the foreign oil
related income will generally be materially greater, over a reasonable period of
time, than the amount generally imposed on income that is neither foreign oil
related income nor foreign oil and gas extraction income.
STATE AND LOCAL TAXES
The opinions expressed herein are limited to issues of federal income tax
law and do not address issues of state or local law. Investors are urged to
consult their tax advisors regarding the impact of state and local laws on an
investment in the Partnership.
INDIVIDUAL TAX ADVICE SHOULD BE SOUGHT
The foregoing is only a summary of the material tax considerations that may
affect an investor's decision regarding the purchase of Units. The tax
considerations attendant to an investment in a Partnership are complex, vary
with individual circumstances, and depend in some instances upon whether the
investor acquires General Partner Interests or Limited Partner Interests. Each
prospective Investor Partner should review such tax consequences with his tax
advisor.
SUMMARY OF PARTNERSHIP AGREEMENT
The rights and obligations of the Partners in a Partnership will be governed
by the Limited Partnership Agreement (the "Partnership Agreement") of such
Partnership. The form of Partnership Agreement of
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each of the Partnerships is attached to this Prospectus as Appendix A. You
should study carefully the Partnership Agreement in its entirety before
subscribing for Units. The following summary of material terms of the
Partnership Agreement is not complete and in no way amends or modifies the
Partnership Agreement.
RESPONSIBILITY OF MANAGING GENERAL PARTNER
The Managing General Partner shall have the exclusive management and control
of all aspects of the business of the Partnership. No Investor Partner shall
have any voice in the day-to-day business operations of the Partnership. The
Managing General Partner is authorized to delegate and subcontract its duties
under the Partnership Agreement to others, including entities related to it.
LIABILITY OF GENERAL PARTNERS, INCLUDING ADDITIONAL GENERAL PARTNERS
General Partners, including Additional General Partners, will not be
protected by limited liability for Partnership activities. The Additional
General Partners will be jointly and severally liable for all obligations and
liabilities to creditors and claimants, whether arising out of contract or tort,
in the conduct of Partnership operations.
The Managing General Partner maintains general liability insurance. In
addition, the Managing General Partner has agreed to indemnify each of the
Additional General Partners for obligations related to casualty and business
losses that exceed available insurance coverage and Partnership assets.
The Additional General Partners, by execution of the Partnership Agreement,
grant to the Managing General Partner the exclusive authority to manage the
Partnership business in its sole discretion and to thereby bind the Partnership
and all Partners in its conduct of the Partnership business. The Additional
General Partners will not be authorized to participate in the management of the
Partnership business. The Partnership Agreement prohibits the Additional General
Partners from acting in a manner harmful to the assets or the business of the
Partnership or to do any other act that would make it impossible to carry on the
ordinary business of the Partnership. If an Additional General Partner acts in
contravention of the terms of the Partnership Agreement, losses caused by his
actions will be borne by such Additional General Partner alone and such
Additional General Partner may be liable to other Partners for all damages
resulting from his breach of the Partnership Agreement. Additional General
Partners who choose to assign their Units in the future may only do so as
provided in the Partnership Agreement and liability of Partners who have
assigned their Units may continue after such assignment unless a formal
assumption and release of liability is effected.
LIABILITY OF LIMITED PARTNERS
The Partnerships will be governed by the Nevada Uniform Limited Partnership
Act under which a Limited Partner's liability for the obligations of the
Partnership is limited to his Capital Contribution, his share of Partnership
assets and the return of distributions from the Partnership to the Partner that
were made a time when the Partner knew the liabilities of the Partnership
exceeded its assets. A Limited Partner will not otherwise be liable for the
obligations of the Partnership unless, in addition to the exercise of his rights
and powers as a Limited Partner, such person takes part in the control of the
business of the Partnership.
ALLOCATIONS AND DISTRIBUTIONS
GENERAL. Profits and losses are to be allocated and cash is to be
distributed in the manner described in the section of this prospectus entitled
"PARTICIPATION IN COSTS AND REVENUES."
TIME OF DISTRIBUTIONS. Cash available for distribution will be determined
and distributed by the Managing General Partner not less frequently than
quarterly. The Managing General Partner may, at its
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discretion, make distributions more frequently. Notwithstanding any other
provision of the Partnership Agreement to the contrary, no Partner will receive
any distribution to the extent such distribution will create or increase a
deficit in that Partner's Capital Account (as increased by his share of
Partnership Minimum Gain).
LIQUIDATING DISTRIBUTIONS. Liquidating distributions will be made in the
same manner as regular distributions; however, in the event of dissolution of
the Partnership, distributions will be made only after due provision has been
made for, among other things, payment of all Partnership debts and liabilities.
VOTING RIGHTS
Investor Partners owning 10% or more of the then outstanding Units entitled
to vote have the right to request that the Managing General Partner call a
meeting of the Partners. Except as otherwise provided herein or in the
Partnership Agreement, at any meeting of Investor Partners, a vote of a majority
of Units represented at such meeting, in person or by proxy, with respect to
matters considered at the meeting at which a quorum is present will be required
for approval of any such matters. A vote of a majority of the then outstanding
Units entitled to vote, without the concurrence of the Managing General Partner,
will be required to approve any of the following matters:
- the sale of all or substantially all of the assets of the Partnership;
- removal of the Managing General Partner and election of a new managing
general partner;
- dissolution of the Partnership;
- any non-ministerial amendment to the Partnership Agreement;
- election of a new managing general partner if the Managing General Partner
elects to withdraw from the Partnership;
- cancellation of contracts for services with the Managing General Partner
or Affiliates; and
- the appointment of a liquidating trustee in the event the Partnership is
to be dissolved by reason of the retirement, dissolution, liquidation,
bankruptcy, death, or adjudication of insanity or incapacity of the last
remaining General Partner.
The Managing General Partner, if it were removed by the Investor Partners,
may elect to retain its interest in the Partnership as a Limited Partner in the
successor limited partnership (assuming that the Investor Partners determined to
continue the Partnership and elected a successor managing general partner).
Each Investor Partner has the right to review the Partnership's books and
records and list of Investor Partners at any reasonable time and have a copy of
the list of Investor Partners mailed to him at his expense. Investor Partners
have the right to submit proposals to the Managing General Partner for inclusion
in the voting materials for the next meeting of Investor Partners for
consideration and approval by the Investor Partners.
RETIREMENT AND REMOVAL OF THE MANAGING GENERAL PARTNER
In the event that the Managing General Partner desires to withdraw from the
Partnership for whatever reason, it may do so only upon 120 days prior written
notice and with the written consent of the Investor Partners owning a majority
of the then outstanding Units.
In the event that the Investor Partners desire to remove the Managing
General Partner, they may do so at any time upon 90 days written notice, with
the consent of the Investor Partners owning a majority of the then outstanding
Units, and upon the selection of a successor managing general partner, within
such ninety-day period, by the Investor Partners owning a majority of the then
outstanding Units.
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TERM AND DISSOLUTION
The Partnership will continue for a maximum period ending thirty years after
the Partnership's Offering Termination Date, unless earlier dissolved upon the
occurrence of any of the following:
- the written consent of the Investor Partners owning a majority of the then
outstanding Units;
- the retirement, bankruptcy, adjudication of insanity or incapacity,
withdrawal, removal, or death (or, in the case of a corporate managing
general partner, the retirement, withdrawal, removal, dissolution,
liquidation, or bankruptcy) of a managing general partner, unless a
successor managing general partner is selected by the Partners pursuant to
the Partnership Agreement or the remaining managing general partner, if
any, continues the Partnership's business;
- the sale, forfeiture, or abandonment of all or substantially all of the
Partnership's property; or
- the occurrence of any event causing dissolution of the Partnership under
the laws of the State of Nevada.
INDEMNIFICATION
The Managing General Partner has agreed to indemnify each of the Additional
General Partners for obligations related to casualty and business losses that
exceed available insurance coverage and Partnership assets.
If obligations incurred by the Partnership are the result of the negligence
or misconduct of an Additional General Partner, or the contravention of the
terms of the Partnership Agreement by the Additional General Partner, then the
foregoing indemnification by the Managing General Partner will be unenforceable
as to such Additional General Partner and such Additional General Partner will
be liable to all other Partners for damages and obligations resulting therefrom.
The Managing General Partner will be entitled to reimbursement and
indemnification for all expenditures made (including amounts paid in settlement
of claims) or losses or judgments suffered by it in the ordinary and proper
course of the Partnership's business, provided that the Managing General Partner
has determined in good faith that the course of conduct that caused the loss or
liability was in the best interests of the Partnership, that the Managing
General Partner was acting on behalf of or performing services for the
Partnership, and that such expenditures, losses or judgments were not the result
of negligence or misconduct on the part of the Managing General Partner. The
Managing General Partner will have no liability to the Partnership or to any
Partner for any loss suffered by the Partnership that arises out of any action
or inaction of the Managing General Partner if the Managing General Partner, in
good faith, determined that such course of conduct was in the best interest of
the Partnership and such course of conduct did not constitute negligence or
misconduct of the Managing General Partner. The Managing General Partner will be
indemnified by the Partnership to the limit of the insurance proceeds and
tangible net assets of the Partnership against any losses, judgments,
liabilities, expenses and amounts paid in settlement of any claims sustained by
it in connection with the Partnership, provided that the same were not the
result of negligence or misconduct on the part of the Managing General Partner.
Notwithstanding the above, the Managing General Partner shall not be
indemnified for liabilities arising under Federal and state securities laws
unless (1) there has been a successful adjudication on the merits of each count
involving securities law violations; or (2) such claims have been dismissed with
prejudice on their merits by a court of competent jurisdiction; or (3) a court
of competent jurisdiction approves a settlement of such claims against a
particular indemnitee and finds that indemnification of the settlement and the
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 of the position of any state securities regulatory authority in
which securities of the Partnership were offered or sold as to indemnification
for violations of securities laws; provided, however, the court need only be
advised of the
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positions of the securities regulatory authorities of those states (i) that are
specifically set forth in the Prospectus and (ii) in which plaintiffs claim they
were offered or sold Units.
In any claim for indemnification for Federal or state securities laws
violations, the party seeking indemnification must place before the court the
position of the Securities and Exchange Commission and other respective state
securities division with respect to the issue of indemnification for securities
laws violations.
The Partnership will not incur the cost of the portion of any insurance that
insures any party against any liability as to which such party is prohibited
from being indemnified under the Partnership Agreement.
REPORTS TO PARTNERS
The Managing General Partner will furnish to the Investor Partners certain
semi-annual and annual reports that will contain financial statements (including
a balance sheet and statements of income, Partners' equity and cash flows),
which statements at fiscal year end will be audited by an independent accounting
firm and will include a reconciliation of such statements with information
provided to the Investor Partners for Federal income tax purposes. Financial
statements furnished in a Partnership's semi-annual reports will not be audited.
Semi-annually, all Investor Partners also will receive a summary itemization of
the transactions between the Managing General Partner or any Affiliate thereof
and the Partnership showing all items of compensation received by the Managing
General Partner and its Affiliates. Annually beginning with the fiscal year
ended December 31, 2000 with respect to Partnerships offered in 2000,
December 31, 2001 with respect to Partnerships offered in 2001, and
December 31, 2002 with respect to Partnerships offered in 2002, oil and gas
reserve estimates prepared by an independent petroleum engineer also will be
furnished to the Investor Partners. Annual reports will be provided to the
Investor Partners within 120 days after the close of each Partnership fiscal
year, and semi-annual reports will be provided within 75 days after the close of
the first six months of each Partnership fiscal year. In addition, the Investor
Partners will receive on a monthly basis while the Partnership is participating
in the drilling and completion activities, reports containing a description of
the Partnership's acquisition of interests in Prospects, including farmins and
farmouts, and the drilling, completion and abandonment of wells thereon. All
Investor Partners will receive a report containing information necessary for the
preparation of their federal income tax returns and any required state income
tax returns by March 15 of each calendar year. Investor Partners will also
receive in such monthly reports a summary of the status of wells drilled by the
Partnership, the amount of oil or gas from each well and the drilling schedule
for proposed wells, if known. The Managing General Partner may provide such
other reports and financial statements as it deems necessary or desirable.
POWER OF ATTORNEY
Each Partner will grant to the Managing General Partner a power of attorney
to execute certain documents deemed by the Managing General Partner to be
necessary or convenient to the Partnership's business or required in connection
with the qualification and continuance of the Partnership.
OTHER PROVISIONS
Other provisions of the Partnership Agreement are summarized in this
Prospectus under the headings "TERMS OF THE OFFERING," "SOURCE OF FUNDS AND USE
OF PROCEEDS," "PARTICIPATION IN COSTS AND REVENUES," "MANAGEMENT," "FIDUCIARY
RESPONSIBILITY OF THE MANAGING GENERAL PARTNER," and "TRANSFERABILITY OF UNITS."
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TRANSFERABILITY OF UNITS
NO MARKET FOR THE UNITS
An investment in the Partnerships is an illiquid investment. The Units will
not be traded on an established securities market or on the substantial
equivalent of an established securities market.
ASSIGNMENT OF UNITS; SUBSTITUTION
Units of the Partnership are assignable only with the written consent of the
Managing General Partner, which may be withheld in the sole discretion of the
Managing General Partner.
Units may be assigned only to a person otherwise qualified to become an
Investor Partner, including the satisfaction of any relevant suitability
requirements imposed by law or the Partnership. In no event may any assignment
be made that, in the opinion of counsel to the Partnership:
- would result in the Partnership being considered to have been terminated
for purposes of Section 708 of the Code;
- would result in the Partnership being treated as a publicly traded
partnership; or
- may not be effected without registration under the Securities Act, or
would result in the violation of any applicable state securities laws.
Transferees of Units may be admitted to the Partnership as Substituted
Investor Partners only with the consent of the Managing General Partner, which
consent can be withheld in its sole discretion.
A substituted Additional General Partner will have the same rights and
responsibilities, including unlimited liability, in the Partnership as every
other Additional General Partner. Upon receipt of notice of a purported transfer
or assignment of a Unit of general partnership interest, the Managing General
Partner, after having determined that the purported transferee satisfies the
suitability standards of an Additional General Partner and other conditions
established by the Managing General Partner, will promptly notify the purported
transferee of the Managing General Partner's consent to the transfer and will
include with the notice a copy of the Partnership Agreement, together with a
signature page. In such notification, the Managing General Partner will advise
the transferee that he will have the same rights and responsibilities, including
unlimited liability, as every other Additional General Partner and that he will
not become a Partner of record until he returns the executed signature page to
the Partnership Agreement and such other documents as the Managing General
Partner reasonably may request.
A Partnership will not be required to recognize any assignment until the
instrument of assignment has been delivered to the Managing General Partner. The
assignee of such interest has certain rights of ownership but may become a
Substituted Investor Partner and thus be entitled to all of the rights of an
Additional General Partner or Limited Partner only upon meeting certain
conditions, including (i) obtaining the consent of the Managing General Partner
to such substitution, (ii) paying all costs and expenses incurred in connection
with such substitution, and (iii) executing appropriate documents to evidence
its agreement to be bound by all of the terms and provisions of the applicable
Partnership Agreement.
PLAN OF DISTRIBUTION
DISTRIBUTION
Units are being offered for sale through Western American Securities
Corporation, the Dealer Manager, as principal distributor, and through
NASD-licensed broker-dealers. Units are being offered on a "best efforts
minimum-maximum" basis for each Partnership, to a select group of investors who
meet the suitability standards set forth under "TERMS OF THE OFFERING--Investor
Suitability." Units will not be sold to tax-exempt investors or to foreign
investors. "Best efforts minimum-maximum" means that (1) the
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various broker-dealers that will sell the Units (a) will not be obligated to
sell or to purchase any amount of Units but (b) will be obligated to make a
reasonable and diligent effort (that is, their "best efforts") to sell as many
Units as possible; and (2) the offering of Units in a Partnership will not close
unless the minimum number of Units (50 Units aggregating $1.0 million) is sold
within such Partnership's offering period. The term "maximum" refers to the
maximum proceeds of $10 million that can be raised with respect to any
Partnership.
RELATIONSHIP BETWEEN DEALER-MANAGER AND MANAGING GENERAL PARTNER
Michael J. Mauceli, a member and the Manager of the Managing General Partner
and a principal shareholder, director and the Chief Executive Officer of Reef
Exploration, is the brother of Paul Mauceli, the sole shareholder, director and
Chief Executive Officer of the Dealer Manager.
COMPENSATION
The Dealer Manager, an NASD member, will receive a sales commission equal to
6% of the Investor Partners' Subscriptions for an aggregate of $6,000,000 if the
maximum number of 5,000 Units is sold ($60,000 if the minimum number of 50 Units
is sold). The Dealer Manager may reallow this sum, in whole or in part, to
NASD-licensed broker-dealers for sale of the Units.
As provided in the soliciting dealer agreements between the Dealer Manager
and the various soliciting dealers, prior to the time that $1.0 million or more
of subscription funds have been received and cleared from suitable Investor
Partners in the Partnership in which Units are then being offered, the Managing
General Partner may advance to the various NASD-licensed broker-dealers from the
Managing General Partner's own funds the sales commissions that would otherwise
be payable in connection with subscription funds so received and cleared. In the
event that the minimum sale of 50 Units has not occurred as of such time as the
particular offering terminates or the Managing General Partner determines not to
organize and fund the Partnership for any reason, such broker-dealers that have
been advanced commissions and due diligence expenses by the Managing General
Partner with respect to the sale of Units in that Partnership are required by
the soliciting dealer agreements to return such commissions and due diligence
expenses to the Managing General Partner promptly.
No sales commissions will be paid on sales of Units to officers, directors,
employees, or registered representatives of a soliciting dealer if such
soliciting dealer, in its discretion, has elected to waive such sales
commissions. Any Units so purchased will be held for investment and not for
resale.
INDEMNIFICATION
The Managing General Partner, the Dealer Manager, and soliciting dealers
have agreed to indemnify one another against certain civil liabilities,
including liability under the Securities Act. Members of the selling group may
be deemed to be "underwriters" as defined under the Securities Act, and their
commissions and other payments may be deemed to be underwriting compensation.
QUALIFICATION TO SELL
The Dealer Manager may offer the Units and receive commissions in connection
with the sale of Units only in those states in which it is lawfully qualified to
do so.
MANAGING GENERAL PARTNER'S PURCHASE OF UNITS
The Managing General Partner and its Affiliates may elect to purchase Units
in a Partnership on the same terms and conditions as other investors, net of
commissions and the management fee. The purchase of Units by the Managing
General Partner and/or its Affiliates may have the effect of allowing the
offering of a Partnership's Units to be subscribed to the minimum, thereby
satisfying an express condition of the
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offering, and thus allow the offering to close. Any Units purchased by the
Managing General Partner and/or its Affiliates will be held for investment and
not for resale.
LEGAL OPINIONS
The validity of the Units offered hereby and certain federal income tax
matters discussed herein under "TAX CONSIDERATIONS" and in the tax opinion
attached as Appendix D to the Prospectus have been passed upon by Arter & Hadden
LLP, Dallas, Texas, counsel to the Managing General Partner.
EXPERTS
The Reef Partners LLC balance sheet at August 31, 1999 appearing in this
Prospectus and the Registration Statement has been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and is included in reliance upon such report given on the authority of
such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
A registration statement on Form S-1 (Reg. No. ) (the
"Registration Statement") with respect to the Units offered hereby has been
filed on behalf of the Partnerships with the Securities and Exchange Commission
(the "Commission"), under the Securities Act. 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
Commission. For further information with respect to the Partnerships or the
Units offered hereby, reference is made to the Registration Statement and the
schedules and exhibits filed as a part thereof. Statements contained in this
Prospectus regarding the contents of any contract or any other document are not
necessarily complete and, in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement. The Registration Statement, including exhibits thereto, may be
inspected without charge at the Commission's principal office in Washington,
D.C., and copies of all or any part thereof may be obtained from the Public
Reference Section, Securities and Exchange Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549 upon payment of the prescribed fees. This Registration
Statement, as well as all exhibits and amendments thereto, have been filed and
will be filed electronically with the Commission through the Electronic Data
Gathering Analysis and Retrieval ("EDGAR") system. Such Registration Statement
and all exhibits and amendments thereto are publicly available through the
Commission's website (http://www.sec.gov).
GLOSSARY OF TERMS
The following terms used in this Prospectus shall (unless the context
otherwise requires) have the following respective meanings:
ACT: The Nevada Uniform Limited Partnership Act.
ADDITIONAL GENERAL PARTNERS: Those Investor Partners who purchase Units as
additional general partners, and their transferees and assigns.
ADMINISTRATIVE COSTS: All customary and routine expenses incurred by the
Managing General Partner for the conduct of program administration, including
legal, finance, accounting, secretarial, travel, office rent, telephone, data
processing and other items of a similar nature.
AFFILIATE: An affiliate of a specified person means (a) any person directly
or indirectly owning, controlling, or holding with power to vote 10 percent
(10%) or more of the outstanding voting securities of such specified person;
(b) any person 10 percent (10%) or more of whose outstanding voting securities
are directly or indirectly owned, controlled, or held with power to vote, by
such specified person; (c) any
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person directly or indirectly controlling, controlled by, or under common
control with such specified person; (d) any officer, director, trustee or
partner of such specified person; and (e) if such specified person is an
officer, director, trustee or partner, any person for which such person acts in
any such capacity.
ASSESSMENTS: Additional amounts of capital that may be mandatorily required
of or paid voluntarily by an Investor Partner beyond his Subscription
commitment.
CAPITAL ACCOUNTS: The accounts to be maintained for each Partner on the
books and records of the Partnership pursuant to Section 3.01 of the Partnership
Agreement.
CAPITAL CONTRIBUTION: With respect to each Investor Partner, the total
investment, including the original investment, assessments and amounts
reinvested, by such Investor Partner to the capital of the Partnership pursuant
to Section 2.02 and Section 2.03 of the Partnership Agreement and, with respect
to the Managing General Partner and Initial Limited Partner, the total
investment, including the original investment, assessments and amounts
reinvested, to the capital of the Partnership pursuant to Section 2.01 and
Section 2.03 of the Partnership Agreement.
CARRIED INTEREST: An equity interest in a Program issued to a person
without consideration, in the form of cash or tangible property, in an amount
proportionately equivalent to that received from the Investor Partners.
CODE: The Internal Revenue Code of 1986, as amended.
COST: When used with respect to the sale of property to the Partnership,
means (a) the sum of the prices paid by the seller to an unaffiliated person for
such property, including bonuses; (b) title insurance or examination costs,
brokers' commissions, filing fees, recording costs, transfer taxes, if any, and
like charges in connection with the acquisition of such property; (c) a pro rata
portion of the seller's actual necessary and reasonable expenses for seismic and
geophysical services; and (d) rentals and ad valorem taxes paid by the seller
with respect to such property to the date of its transfer to the buyer, interest
and points actually incurred on funds used to acquire or maintain such property,
and such portion of the seller's reasonable, necessary and actual expenses for
geological, engineering, drafting, accounting, legal and other like services
allocated to the property cost in conformity with generally accepted accounting
principles and industry standards, except for expenses in connection with the
past drilling of wells which are not producers of sufficient quantities of oil
or gas to make commercially reasonable their continued operations, and provided
that the expenses enumerated in this subsection (d) hereof shall have been
incurred not more than 36 months prior to the purchase by the Partnership;
provided that such period may be extended, at the discretion of the state
securities administrator, upon proper justification. When used with respect to
services, "cost" means the reasonable, necessary and actual expense incurred by
the seller on behalf of the Partnership in providing such services, determined
in accordance with generally accepted accounting principles. As used elsewhere,
"cost" means the price paid by the seller in an arm's-length transaction.
DEALER MANAGER: Western American Securities Corporation, a Texas
corporation.
DEVELOPMENT WELL: A well drilled within the proved area of an oil or gas
reservoir to the depth of a stratigraphic horizon known to be productive.
DIRECT COSTS: All actual and necessary costs directly incurred for the
benefit of the Partnership and generally attributable to the goods and services
provided to the Partnership by parties other than the Managing General Partner
or its Affiliates. Direct costs shall not include any cost otherwise classified
as organization and offering expenses, administrative costs, operating costs or
property costs. Direct costs may include the cost of services provided by the
Managing General Partner or its Affiliates if such services
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are provided pursuant to written contracts and in compliance with
Section 5.07(e) of the Partnership Agreement.
DISTRIBUTABLE CASH: Cash remaining for distribution to the Managing General
Partner and the Investor Partners after the payment of all Partnership
obligations, including debt service and the establishment of contingency
reserves for anticipated future costs as determined by the Managing General
Partner.
DRILLING AND COMPLETION COSTS: All costs, excluding Operating Costs, of
drilling, completing, testing, equipping and bringing a well into production or
plugging and abandoning it, including all labor and other construction and
installation costs incident thereto, location and surface damages, cementing,
drilling mud and chemicals, drillstem tests and core analysis, engineering and
well site geological expenses, electric logs, costs of plugging back, deepening,
rework operations, repairing or performing remedial work of any type, costs of
plugging and abandoning any well participated in by the Partnership, and
reimbursements and compensation to well operators, including charges paid to the
Managing General Partner as unit operator during the drilling and completion
phase of a well, plus the cost of the gathering systems and of acquiring
leasehold interests.
DRY HOLE: Any well abandoned without having produced oil or gas in
commercial quantities.
ESCROW AGENT: Bank One Texas, N.A., or its successor.
EXPLORATORY WELL: A well drilled to find commercially productive
hydrocarbons in an unproved area, to find a new commercially productive horizon
in a field previously found to be productive of hydrocarbons at another horizon,
or to significantly extend a known prospect.
FARMOUT: An agreement whereby the owner of a leasehold or Working Interest
agrees to assign an interest in certain specific acreage to the assignees,
retaining an 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.
IDC: Intangible drilling and development costs.
INDEPENDENT EXPERT: A person with no material relationship to the Managing
General Partner 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 General Partner.
INITIAL LIMITED PARTNER: Michael J. Mauceli or any successor to his
interest.
INVESTOR PARTNER: Any investor participating in the Partnership as an
Additional General Partner or a Limited Partner, but excluding the Managing
General Partner and Initial Limited Partner.
LANDOWNERS' ROYALTY INTEREST: An interest in production, or the proceeds
therefrom, to be received free and clear of all costs of development, operation,
or maintenance, reserved by a landowner upon the creation of an oil and gas
lease.
LEASE: Full or partial interests in: (i) undeveloped oil and gas leases;
(ii) oil and gas mineral rights; (iii) licenses; (iv) concessions;
(v) contracts; (vi) fee rights; or (vii) other rights authorizing the owner
thereof to drill for, reduce to possession and produce oil and gas.
LIMITED PARTNERS: Those Investor Partners who purchase Units as Limited
Partners, transferees or assignees who become Limited Partners, or Additional
General Partners whose interests are converted to limited partnership interests
pursuant to the provisions of the Partnership Agreement.
LOSS: The excess of the Partnership's losses and deductions over the
Partnership's income and gains, computed in accordance with the provisions of
the Federal income tax laws.
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MANAGEMENT FEE: The fee to which the Managing General Partner is entitled
pursuant to Section 6.06 of the Partnership Agreement.
MANAGING GENERAL PARTNER: Reef Partners LLC, a Nevada limited liability
company or its successors.
NET SUBSCRIPTIONS: An amount equal to total Subscriptions of the Investor
Partners less the amount of Organization and Offering Costs of the Partnership.
OFFERING TERMINATION DATE: December 31, 2000 with respect to Partnerships
offered in 2000, December 31, 2001 with respect to Partnerships offered in 2001,
and December 31, 2002 with respect to Partnerships offered in 2002, or such
earlier date as the Managing General Partner, in its sole and absolute
discretion, shall select.
OIL AND GAS INTEREST: Any oil or gas royalty or lease, or fractional
interest therein, or certificate of interest or participation or investment
contract relative to such royalties, leases or fractional interests, or any
other interest or right that permits the exploration of, drilling for, or
production of oil and gas or other related hydrocarbons or the receipt of such
production or the proceeds thereof.
OPERATING COSTS: Expenditures made and costs incurred in producing and
marketing oil or 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 COSTS: All costs of organizing and selling the
offering including, but not limited to, total underwriting and brokerage
discounts and commissions (including fees of the underwriters' attorneys),
expenses for printing, engraving, mailing, salaries of employees while engaged
in sales activity, charges of transfer agents, registrars, trustees, escrow
holders, depositaries, engineers and other experts, expenses of qualification of
the sale of the securities under federal and state law, including taxes and
fees, accountants' and attorneys' fees and other front-end fees.
OVERRIDING ROYALTY INTEREST: An interest in the oil and gas produced
pursuant to a specified oil and gas 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: The Managing General Partner, the Additional General Partners
other than the Managing General Partner, and the Limited Partners. Reference to
a "Partner" shall mean any one of the Partners.
PARTNERSHIP OR PARTNERSHIPS: One or all of the limited partnerships to be
formed in the Reef Millennium Energy Fund comprised of a series of up to ten
limited partnerships to be designated as follows: Millennium Energy Fund A,
L.P.;. Millennium Energy Fund B, L.P.; Millennium Energy Fund C, L.P.;
Millennium Energy Fund D, L.P.; Millennium Energy Fund E, L.P.; Millennium
Energy Fund F, L.P.; Millennium Energy Fund G, L.P.; Millennium Energy Fund H,
L.P.; Millennium Energy Fund I, L.P.; and Millennium Energy Fund J, L.P. The
Partnerships will be governed by the Nevada Uniform Limited Partnership Act.
Together the Partnerships, for purposes of this offering, are referred to as the
Reef Millennium Energy Fund or the Program.
PARTNERSHIP AGREEMENT: The Limited Partnership Agreement as it may be
amended from time to time, the form of which is attached to the Prospectus as
Appendix A.
PARTNERSHIP MINIMUM GAIN: Partnership Minimum Gain as defined in Treas.
Reg. Section 1.704-2(d)(1).
PROFIT: The excess of the Partnership's income and gains over the
Partnership's losses and deductions, computed in accordance with the provisions
of the Federal income tax laws.
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PROGRAM: One or more limited partnerships formed, or to be formed, for the
primary purpose of exploring oil or gas. Herein, Reef Millennium Energy Fund.
PROSPECT: A contiguous oil and gas leasehold estate, or lesser interest
therein, upon which drilling operations may be conducted. In general, a Prospect
is an area in which a Partnership owns or intends to own one or more oil and gas
interests, which is geographically defined on the basis of geological data by
the Managing General Partner and that is reasonably anticipated by the Managing
General Partner to contain at least one reservoir. An area covering lands that
are believed by the Managing General Partner to contain subsurface structural or
stratigraphic conditions making it susceptible to the accumulations of
hydrocarbons in commercially productive quantities at one or more horizons. The
area, which may be different for different horizons, shall be designated by the
Managing General Partner in writing prior to the conduct of program 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 hydrocarbon 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: The Partnership's Prospectus, including a preliminary
prospectus, of which the Partnership Agreement is a part, pursuant to which the
Units are being offered and sold.
PROVED OIL AND GAS RESERVES: Proved oil and gas reserves are the estimated
quantities of crude oil, natural gas, and natural gas liquids that geological
and engineering data appear with reasonable certainty to be recoverable in the
future from known oil and gas reservoirs under existing economic and operating
conditions i.e., prices and costs as of the date the estimate is made. Proved
reserves are limited to those quantities of oil and gas which can be expected,
with little doubt, to be recoverable at current prices and costs, under existing
regulatory practices and with existing conventional equipment and operating
methods.
(i)Reservoirs are considered proved if economic producibility is supported
by either actual production or conclusive formation test. The area of a
reservoir considered proved includes (A) that portion delineated by
drilling and defined by gas-oil and/or oil-water contacts, if any, and
(B) the immediately adjoining portions not yet drilled, but which can be
reasonably judged as economically productive on the basis of available
geological and engineering data. In the absence of information on fluid
contacts, the lowest known structural occurrence of hydrocarbons controls
the lower proved limit of the reservoir.
(ii)Reserves that can be produced economically through application of
improved recovery techniques (such as fluid injection) are included in
the "proved" classification when successful testing by a pilot project,
or the operation of an installed program in the reservoir, provides
support for the engineering analysis on which the project or program was
based.
(iii)Estimates or proved reserves do not include the following: (A) oil that
may become available from known reservoirs but is classified separately
as "indicated additional reserves; (B) crude oil, natural gas, and
natural gas liquids, the recovery of which is subject to reasonable
doubt because of uncertainty as to geology, reservoir characteristics,
or economic factors; (C) crude oil, natural gas, and natural gas
liquids, that may occur in undrilled prospects; and (D) crude oil,
natural gas, and natural gas liquids, that may be recovered from oil
shales, coal, gilsonite and other such sources.
REEF EXPLORATION: Reef Exploration, Inc., a Texas corporation.
RESERVOIR: A separate structural or stratigraphic trap containing an
accumulation of oil or gas.
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ROYALTY: A fractional undivided interest in the production of oil and gas
wells, or the proceeds therefrom to be received free and clear of all costs of
development, operations or maintenance. Royalties may be reserved by landowners
upon the creation of an oil and gas lease ("landowner's royalty") or
subsequently carved out of a working interest ("overriding royalty").
SECURITIES ACT: Securities Act of 1933, as amended.
SPONSOR: Any person directly or indirectly instrumental in organizing,
wholly or in part, a program or any person who will manage or is entitled to
manage or participate in the management or control of a program. "Sponsor"
includes the managing and controlling general partner(s) and any other person
who actually controls or selects the person who controls 25% or more of the
exploratory, developmental or producing activities of the Partnership, or any
segment thereof, even if that person has not entered into a contract at the time
of 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 units.
SPUDDING DATE: The date that drilling commences.
SUBSCRIPTIONS: The Subscription Agreement(s) or the amount indicated on the
Subscription Agreements that the Additional General Partners and the Limited
Partners have agreed to pay to a Partnership.
TREASURY REGULATION: A regulation promulgated by the Treasury Department
under Title 26 of the United States Code.
UNIT: An undivided interest of a Partner in the aggregate interest in the
capital and profits of the Partnership, other than the Managing General
Partner's Carried Interest.
WORKING INTEREST: An interest in an oil and gas leasehold that is subject
to some portion of the costs of development, operation, or maintenance.
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INDEX TO AUDITED BALANCE SHEET
OF
REEF PARTNERS LLC
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Report of Independent Auditors............................................................................ F-2
Balance Sheet as of August 31, 1999....................................................................... F-3
Notes to Balance Sheet.................................................................................... F-4
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Members
Reef Partners LLC
We have audited the accompanying balance sheet of Reef Partners LLC (the
Company) as of August 31, 1999. 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. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Reef Partners LLC at August 31,
1999, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Dallas, Texas
September 29, 1999
F-2
<PAGE>
REEF PARTNERS LLC
BALANCE SHEET
AUGUST 31, 1999
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents.................................................... $7,706,049
Accounts receivable.......................................................... 182,446
Accounts receivable from affiliates.......................................... 1,581,247
----------
Total current assets........................................................... 9,469,742
Purchase deposits for oil and gas properties................................. 911,419
Investments in partnerships.................................................. 130,128
----------
Total assets................................................................... $10,511,289
==========
LIABILITIES AND MEMBERS' EQUITY
Current Liabilities:
Accounts payable............................................................. $ 43,797
Accounts payable to affiliates............................................... 196,088
----------
Total current liabilities...................................................... 239,885
Members' equity................................................................ 10,271,404
----------
Total liabilities and members' equity.......................................... $10,511,289
==========
</TABLE>
See accompanying notes
F-3
<PAGE>
REEF PARTNERS LLC
NOTES TO BALANCE SHEET
AUGUST 31, 1999
1. ORGANIZATION AND BASIS OF PRESENTATION
Reef Partners LLC (the Company) was formed on February 8, 1999, as a limited
liability company under the laws of the State of Nevada to serve as managing
general partner of certain partnerships formed for the purpose of acquiring
interests in producing oil and gas properties. A description of each of the
partnerships (the Partnerships) in which the Company held investments at
August 31, 1999 is included below.
Reef Partners 1999-A Joint Venture (1999-A), a Texas general partnership,
was formed in March 1999 for the purpose of holding working interests in certain
oil and gas producing properties in Arkansas, Mississippi, North Dakota,
Oklahoma, Texas, and Wyoming. The Company holds an approximately 2% ownership
interest in 1999-A and serves as the managing joint venturer. The Company also
holds a 10% profits interest in 1999-A.
Reef Partners Domino #1 Joint Venture (Domino #1) and Bell City #6 Joint
Venture (Bell City #6), Texas general partnerships, were formed in March 1999
and August 1999, respectively, for the purpose of holding working interests in
certain oil and gas exploratory properties in Louisiana. The Company holds a 1%
ownership interest in both the Domino #1 and the Bell City #6 and serves as the
managing joint venturer in such partnerships.
The partnership agreements require the affirmative vote of 60% of the
partners for the removal of Reef Partners LLC as the managing joint venturer and
substitution of a new managing venturer to operate and carry on the day to day
operations of the Partnerships.
An affiliate of the Company receives well management fees for the wells it
operates for the Partnerships. Also, an affiliate of the Company has been
awarded the contracts to drill and complete the exploratory wells for the Domino
#1 and Bell City #6 partnerships. Interests in the Partnerships are marketed to
investors by Western American Securities Corporation (Western), which receives a
commission on the interests it sells. The Manager of the Company is the brother
of the sole shareholder, director and Chief Executive Officer of Western.
As of August 31, 1999, all of the members' equity of the Company had been
contributed by two individuals.
The Company's Articles of Organization (the Articles) stipulate that the
term for which the Company is to exist is ninety-nine years, unless the Company
is dissolved sooner as provided in the Articles.
2. SUMMARY OF ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturity dates of
no more than three months from the purchase date to be cash equivalents. At
August 31, 1999, cash and cash equivalents consisted of demand deposits and
money market investments invested with a major national bank. The carrying value
of the Company's cash equivalents approximates fair value.
PURCHASE DEPOSITS FOR OIL AND GAS PROPERTIES
Purchase deposits for oil and gas properties consist of amounts paid by the
Company as of August 31, 1999 for the acquisition of certain oil and gas
properties effective September 1, 1999. Subsequent to the
F-4
<PAGE>
REEF PARTNERS LLC
NOTES TO BALANCE SHEET (CONTINUED)
AUGUST 31, 1999
2. SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
effective date of the purchase of these oil and gas properties, these properties
will be sold to one of the partnerships in which the Company holds an ownership
interest.
INVESTMENTS IN PARTNERSHIPS
The Company's investments in partnerships are accounted for under the equity
method as the Company does not own a controlling interest in the Partnerships.
As of August 31, 1999, the Partnerships had not generated any significant income
or loss since their formation.
GENERAL AND ADMINISTRATIVE EXPENSES
General and Administrative expenses consist of legal, accounting, and other
costs incurred by the Company directly related to the management of the
Partnerships. Through August 31, 1999, the Company has not been allocated any
general or administrative expenses incurred by affiliates.
INCOME TAXES
For federal income tax purposes, the earnings of the Company are taxable
directly to the members of the Company. Therefore, there is no provision for
federal income taxes in the accompanying statement of operations.
USE OF 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, the
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 these estimates.
3. CERTAIN TRANSACTIONS WITH AFFILIATES
At August 31, 1999, the Company had advanced an affiliate $1,000,000 to
purchase a certificate of deposit securing a bank letter of credit of the
affiliate. Accounts receivable from affiliates includes this amount plus related
accrued interest of approximately $29,000. The remaining accounts receivable
from affiliates consist of amounts due from one of the Partnerships managed by
the Company as result of a sale of oil and gas properties to that partnership.
F-5
<PAGE>
APPENDIX A TO PROSPECTUS
FORM OF
LIMITED PARTNERSHIP AGREEMENT
OF
MILLENNIUM ENERGY FUND , L.P.
A-1
<PAGE>
FORM OF
LIMITED PARTNERSHIP AGREEMENT
OF
MILLENNIUM ENERGY FUND , L.P.
A NEVADA LIMITED PARTNERSHIP
This LIMITED PARTNERSHIP AGREEMENT (the "Agreement") is made as of this
day of , 200 by and among Reef Partners LLC, a Texas limited
liability company, as managing general partner (the "Managing General Partner"),
, a , as the Initial Limited Partner, and the persons
whose names are set forth on attached Exhibit A, as additional general partners
(the "Additional General Partners") or as limited partners (the "Limited
Partners" and, collectively with Additional General Partners, the "Investor
Partners"), pursuant to the provisions of the Nevada Uniform Limited Partnership
Act (the "Act"), on the following terms and conditions:
ARTICLE I
THE PARTNERSHIP
1.01 ORGANIZATION. The parties to this Agreement hereby form a limited
partnership (the "Partnership") pursuant to the provisions of the Act and
subject to the provisions of this Agreement.
1.02 PARTNERSHIP NAME. The name of the Partnership shall be MILLENNIUM
ENERGY FUND , L.P., and all business of the Partnership shall be conducted
in such name. The Managing General Partner may change the name of the
Partnership upon ten days notice to the Investor Partners.
1.03 CHARACTER OF BUSINESS. The principal business of the Partnership
shall be
(i) to acquire Leases (as defined);
(ii) to drill for oil, gas, hydrocarbons, and other minerals;
(iii) to produce and sell oil, gas, hydrocarbons, and other minerals from
such properties; and
(iv) to invest and generally engage in any and all phases of the oil and gas
business.
Such business purpose shall include without limitation the purchase, sale,
acquisition, disposition, exploration, development, operation, and production of
oil and gas properties of any character. The Partnership shall not acquire
property in exchange for Units. Without limiting the foregoing, Partnership
activities may be undertaken as principal, agent, general partner, syndicate
member, joint venturer, participant, or otherwise.
1.04 PRINCIPAL PLACE OF BUSINESS. The principal place of business of the
Partnership shall be . The Managing General Partner may change the
principal place of business of the Partnership to any other place within the
State of Nevada upon ten days notice to the Investor Partners.
1.05 TERM OF PARTNERSHIP. The Partnership shall commence on the date the
Partnership is organized, and shall continue until terminated as provided in
Article IX. Notwithstanding the foregoing, if Investor Partners agreeing to
purchase at least 50 Units ($1,000,000) have not subscribed and paid for their
Units by the Offering Termination Date, then this Agreement shall be void in all
respects, and all investments of the Investor Partners shall be promptly
returned together with any interest earned thereon and without any deduction
therefrom. The Units so purchased by the Managing General Partner and/or its
Affiliates will be counted toward satisfying the minimum subscription amount.
1.06 FILINGS.
(a) A Certificate of Limited Partnership (the "Certificate") has been filed
in the office of the Secretary of State of Nevada in accordance with the
provisions of the Act. The Managing General Partner shall take any and all other
actions reasonably necessary to perfect and maintain the status of the
A-2
<PAGE>
Partnership as a limited partnership under the laws of Nevada. The Managing
General Partner shall cause amendments to the Certificate to be filed whenever
required by the Act.
(b) The Managing General Partner shall execute and cause to be filed
original or amended Certificates and shall take any and all other actions as may
be reasonably necessary to perfect and maintain the status of the Partnership as
a limited partnership or similar type of entity under the laws of any other
states or jurisdictions in which the Partnership engages in business.
(c) The agent for service of process on the Partnership shall be Michael J.
Mauceli or any successor as appointed by the Managing General Partner.
(d) Upon the dissolution of the Partnership, the Managing General Partner
(or any successor managing general partner) shall promptly execute and cause to
be filed certificates of dissolution in accordance with the Act and the laws of
any other states or jurisdictions in which the Partnership has filed
certificates.
1.07 INDEPENDENT ACTIVITIES. Each General Partner and each Limited Partner
may, notwithstanding this Agreement, engage in whatever activities they choose,
whether the same are competitive with the Partnership or otherwise, without
having or incurring any obligation to offer any interest in such activities to
the Partnership or any Partner. However, except as otherwise provided herein,
the Managing General Partner and its Affiliates may pursue business
opportunities that are consistent with the Partnership's investment objectives
for their own account only after they have determined that such opportunity
either cannot be pursued by the Partnership because of insufficient funds or
because it is not appropriate for the Partnership under the existing
circumstances. Neither this Agreement nor any activity undertaken pursuant to it
shall prevent the Managing General Partner from engaging in such activities, or
require the Managing General Partner to permit the Partnership or any Partner to
participate in any such activities, and as a material part of the consideration
for the execution of this Agreement by the Managing General Partner and the
admission of each Investor Partner, each Investor Partner hereby waives,
relinquishes, and renounces any such right or claim of participation.
Notwithstanding the foregoing, the Managing General Partner still has an
overriding fiduciary obligation to the Investor Partners.
1.08 DEFINITIONS. Capitalized words and phrases used in this Agreement
shall have the following meanings:
(a) "Act" shall mean the Nevada Uniform Limited Partnership, as set forth in
NEV. REV. STAT. SectionSection 88.010, et. seq., as amended from time to time
(or any corresponding provisions of succeeding law).
(b) "Additional General Partner" shall mean an Investor Partner who
purchases Units as an additional general partner, and such partner's transferees
and assigns. "Additional General Partners" shall mean all such Investor
Partners. "Additional General Partner" shall not include, after a conversion,
such Investor Partner who converts his interest into a Limited Partnership
interest pursuant to Section 7.10.
(c) "Administrative Costs" shall mean all customary and routine expenses
incurred by the Managing General Partner for the conduct of program
administration, including legal, finance, accounting, secretarial, travel,
office rent, telephone, data processing and other items of a similar nature.
(d) "Affiliate" shall mean an affiliate of a specified person means:
(1) Any person directly or indirectly owning, controlling, or holding
with power to vote 10% or more of the outstanding voting securities of such
specified person;
(2) Any person 10% or more of whose outstanding voting securities are
directly or indirectly owned, controlled, or held with power to vote, by
such specified person;
(3) Any person directly or indirectly controlling, controlled by, or
under common control with such specified person;
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(4) Any officer, director, trustee or partner of such specified person;
and
(5) If such specified person is an officer, director, trustee or
partner, any person for which such person acts in any such capacity.
(e) "Agreement" or "Partnership Agreement" shall mean this Limited
Partnership Agreement, as amended from time to time.
(f) "Assessment" shall mean additional amounts of capital that may be
requested from an Investor Partner in addition to its subscription commitment,
where the failure to contribute such additional amounts may result in a
reduction of the Investor Partner's interest in the Partnership pursuant to the
provisions of Section 2.03 of this Agreement.
(g) "Capital Account" shall mean, with respect to any Partner, the capital
account maintained for such Partner pursuant to Section 3.01.
(h) "Capital Available for Investment" shall mean the sum of all Capital
Contributions of the Investor Partners and the Managing General Partner, net of
total underwriting and brokerage discounts, commissions, and expenses, up to an
aggregate of 15% of Subscriptions (which includes the Management Fee).
(i) "Capital Contribution" shall mean, with respect to any Investor Partner,
the total investment, including the original investment, assessments, and
amounts reinvested, by an Investor Partner to the capital of the Partnership
pursuant to Sections 2.02 and 2.03, and, with respect to the Managing General
Partner and the Initial Limited Partner, the total investment, including the
original investment, assessments, and amounts reinvested, to the capital of the
Partnership pursuant to Section 2.01.
(j) "Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time (or any corresponding provisions of succeeding law).
(k) "Cost," when used with respect to the sale of property by the Managing
General Partner or any of its Affiliates to the Partnership, shall mean:
(1) The sum of the prices paid by the seller to an unaffiliated person
for such property, including bonuses;
(2) Title insurance or examination costs, brokers' commissions, filing
fees, recording costs, transfer taxes, if any, and like charges in
connection with the acquisition of such property;
(3) A pro rata portion of the seller's actual necessary and reasonable
expenses for seismic and geophysical services; and
(4) Rentals and ad valorem taxes paid by the seller with respect to such
property to the date of its transfer to the buyer, interest and points
actually incurred on funds used to acquire or maintain such property, and
such portion of the seller's reasonable, necessary and actual expenses for
geological, engineering, drafting, accounting, legal and other like services
allocated to the property cost in conformity with generally accepted
accounting principles and industry standards, except for expenses in
connection with the past drilling of wells that are not producers of
sufficient quantities of oil or gas to make commercially reasonable their
continued operations, and provided that the expenses enumerated in this
subsection (4) shall have been incurred not more than 36 months prior to the
purchase by the Partnership; provided that such period may be extended, at
the discretion of the state securities administrator, upon proper
justification, When used with respect to services, "cost" means the
reasonable, necessary and actual expense incurred by the seller on behalf of
the Partnership in providing such services, determined in accordance with
generally accepted accounting principles. As used elsewhere, "cost" means
the price paid by the seller in an arm's-length transaction.
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(l) "Depreciation" shall mean, for each fiscal year or other period, an
amount equal to the depreciation, amortization, or other cost recovery deduction
allowable with respect to an asset for such year or other period, except that if
the Gross Asset Value of an asset differs from its adjusted basis for federal
income tax purposes at the beginning of such year or other period, Depreciation
shall be an amount which bears the same ratio to such beginning Gross Asset
Value as the federal income tax depreciation, amortization, or other cost
recovery deduction for such year or other period bears to such beginning
adjusted tax basis; provided, however, that if the federal income tax
depreciation, amortization, or other cost recovery deduction for such year is
zero, Depreciation shall be determined with reference to such beginning Gross
Asset Value using any reasonable method selected by the Managing General
Partner.
(m) "Development Well" shall mean a well drilled within the proved area of
an oil or gas reservoir to the depth of a stratigraphic horizon known to be
productive.
(n) "Direct Costs" shall mean all actual and necessary costs directly
incurred for the benefit of the Partnership and generally attributable to the
goods and services provided to the Partnership by parties other than the
Managing General Partner or its Affiliates. Direct costs shall not include any
cost otherwise classified as Organization and Offering Costs, Administrative
Costs, Operating Costs or property costs. Direct Costs may include the cost of
services provided by the Managing General Partner or its Affiliates if such
services are provided pursuant to written contracts and in compliance with
Section 5.07(e) of the Partnership Agreement.
(o) "Drilling and Completion Costs" shall mean all costs, excluding
Operating Costs, of drilling, completing, testing, equipping and bringing a well
into production or plugging and abandoning it, including all labor and other
construction and installation costs incident thereto, location and surface
damages, cementing, drilling mud and chemicals, drillstem tests and core
analysis, engineering and well site geological expenses, electric logs, costs of
plugging back, deepening, rework operations, repairing or performing remedial
work of any type, costs of plugging and abandoning any well participated in by
the Partnership, and reimbursements and compensation to well operators,
including charges paid to the Managing General Partner as unit operator during
the drilling and completion phase of a well, plus the cost of the gathering
system and of acquiring leasehold interests.
(p) "Dry Hole" shall mean any well abandoned without having produced oil or
gas in commercial quantities.
(q) "Exploratory Well" shall mean a well drilled to find commercially
productive hydrocarbons in an unproved area, to find a new commercially
productive horizon in a field previously found to be productive of hydrocarbons
at another horizon, or to significantly extend a known prospect.
(r) "Farmout" shall mean an agreement whereby the owner of the leasehold or
working interest 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.
(s) "General Partners" shall mean the Additional General Partners and the
Managing General Partner.
(t) "Gross Asset Value" is a term used in certain tax matters, not in
defining the basic rights and obligations of the parties, and shall mean, with
respect to any asset, the asset's adjusted basis for federal income tax
purposes, except as follows:
(1) The initial Gross Asset Value of any asset contributed by a Partner
to the Partnership shall be the gross fair market value of such asset, as
determined by the contributing Partner and the Partnership;
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(2) The Gross Asset Values of all Partnership assets shall be adjusted
to equal their respective gross fair market values, as determined by the
Managing General Partner, as of the following times: (i) the acquisition of
an additional interest in the Partnership by any new or existing Partner in
exchange for more than a DE MINIMIS Capital Contribution; (ii) the
distribution by the Partnership Property as consideration for an interest in
the Partnership; and (iii) the liquidation of the Partnership within the
meaning of Treas. Reg. Section 1.704-1(b)(2)(ii)(g); provided, however, that
the adjustments pursuant to clauses (i) and (ii) above shall be made only if
the Managing General Partner reasonably determines that such adjustments are
necessary or appropriate to reflect the relative economic interests of the
Partners in the Partnership;
(3) The Gross Asset Value of any Partnership asset distributed to any
Partner shall be the gross fair market value of such asset on the date of
distribution; and
(4) The Gross Asset Values of Partnership assets shall be increased (or
decreased) to reflect any adjustments to the adjusted basis of such assets
pursuant to Code Section 734(b) or Code Section 743(b), but only to the
extent that such adjustments are taken into account in determining Capital
Accounts pursuant to Treas. Reg. Section 1.704-1(b)(2)(iv)(m) and
Section 3.02(g); provided, however, that Gross Asset Values shall not be
adjusted pursuant to this Section (4) to the extent the Managing General
Partner determines that an adjustment pursuant to Subsection (2) is
necessary or appropriate in connection with a transaction that would
otherwise result in an adjustment pursuant to this Subsection (4).
If the Gross Asset Value of an asset has been determined or adjusted pursuant to
Subsection (1), (2) or (4), such Gross Asset value shall thereafter be adjusted
by the Depreciation taken into account with respect to such asset for purposes
of computing Profits and Losses.
(u) "IDC" shall mean intangible drilling and development costs.
(v) "Independent Expert" shall mean a person with no material relationship
with the Managing General 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 General Partner.
(w) "Initial Limited Partner" shall mean Michael J. Mauceli or any successor
to his interest.
(x) "Investor Partner" shall mean any Person other than the Managing General
Partner (i) whose name is set forth on attached Exhibit A as an Additional
General Partner or as a Limited Partner, or who has been admitted as an
additional or Substituted Investor Partner pursuant to the terms of this
Agreement, and (ii) who is the owner of a Unit. "Investor Partners" means all
such Persons. All references in this Agreement to a majority in interest or a
specified percentage of the Investor Partners shall mean Investor Partners
holding more than 50% or such specified percentage, respectively, of the
outstanding Units then held.
(y) "Landowners Royalty Interest" shall mean an interest in production, or
the proceeds therefrom, to be received free and clear of all costs of
development, operation, or maintenance, reserved by a landowner upon the
creation of an oil and gas lease.
(z) "Lease" shall mean full or partial interests in: (i) undeveloped oil and
gas leases; (ii) oil and gas mineral rights; (iii) licenses; (iv) concessions;
(v) contracts; (vi) fee rights; or (vii) other rights authorizing the owner
thereof to drill for, reduce to possession and produce oil and gas.
(aa) "Limited Partner" shall mean an Investor Partner who purchases Units as
a Limited Partner, such partner's transferees or assignees, and an Additional
General Partner who converts his interest to a limited partnership interest
pursuant to the provisions of the Agreement. "Limited Partners" shall mean all
such Investor Partners.
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(bb) "Management Fee" shall mean that fee to which the Managing General
Partner is entitled pursuant to Section 6.06.
(cc) "Managing General Partner" shall mean Reef Partners LLC or its
successors, in their capacity as the Managing General Partner.
(dd) "Managing General Partner's Carried Interest" shall mean the interest
in the revenues and expenses of the Partnership allocable to the Managing
General Partner pursuant to the provisions of Section 3.02 of this Agreement.
(ee) "Mcf" shall mean one thousand cubic feet of natural gas. "Mmcf" shall
mean one million cubic feet of natural gas.
(ff) "Net Subscriptions" shall mean an amount equal to the total
Subscriptions of the Investor Partners less the amount of Organization and
Offering Costs of the Partnership.
(gg) "Nonrecourse Deductions" is a term used in certain tax matters, not in
defining the basic rights and obligations of the parties, and shall have the
meaning set forth in Treas. Reg. Section 1.704-2(b)(1). The amount of
Nonrecourse Deductions for a Partnership fiscal year shall equal the net
increase in the amount of Partnership Minimum Gain during that fiscal year
reduced (but not below zero) by the aggregate distributions during that fiscal
year of proceeds of a Nonrecourse Liability that are allocable to an increase in
Partnership Minimum Gain, determined according to the provisions of Treas. Reg.
Section 1.704-2(c).
(hh) "Nonrecourse Liability" is a term used in certain tax matters, not in
defining the basic rights and obligations of the parties, and shall have the
meaning set forth in Treas. Reg. Sections 1.704-2(b)(3) and 1.752-1(a)(2).
(ii) "Offering Termination Date" shall mean December 31, 200 or such
earlier date as the Managing General Partner, in its sole and absolute
discretion, shall elect.
(jj) "Oil and Gas Interest" shall mean any oil or gas royalty or lease, or
fractional interest therein, or certificate of interest or participation or
investment contract relative to such royalties, leases or fractional interests,
or any other interest or right which permits the exploration of, drilling for,
or production of oil and gas or other related hydrocarbons or the receipt of
such production or the proceeds thereof.
(kk) "Operating Costs" shall mean expenditures made and costs incurred in
producing and marketing oil or 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.
(ll) "Organization and Offering Costs" shall mean all costs of organizing
and selling the offering including, but not limited to, total underwriting and
brokerage discounts and commissions (including fees of the underwriters'
attorneys), expenses for printing, engraving, mailing, salaries of employees
while engaged in sales activity, charges of transfer agents, registrars,
trustees, escrow holders, depositaries, engineers and other experts, expenses of
qualification of the sale of the securities under federal and state law,
including taxes and fees, accountants' and attorneys' fees and other front-end
fees.
(mm)"Overriding Royalty Interest" shall mean an interest in the oil and gas
produced pursuant to a specified oil and gas 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.
(nn) "Partner Minimum Gain" is a term used in certain tax matters, not in
defining the basic rights and obligations of the parties, and shall mean an
amount, with respect to each Partner Nonrecourse Debt, equal to the Partnership
Minimum Gain that would result if such Partner Nonrecourse Debt were treated as
a Nonrecourse Liability, determined in accordance with Treas. Reg.
Section 1.704-2(i).
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(oo) "Partner Nonrecourse Debt" is a term used in certain tax matters, not
in defining the basic rights and obligations of the parties, and shall have the
meaning set forth in Treas. Reg. Section 1.704-2(b)(4).
(pp) "Partner Nonrecourse Deductions" is a term used in certain tax matters,
not in defining the basic rights and obligations of the parties, and shall have
the meaning set forth in Treas. Reg. Section 1.704-2(i)(2). The amount of
Partner Nonrecourse Deductions with respect to a Partner Nonrecourse Debt for a
Partnership fiscal year shall equal the net increase in the amount of Partner
Minimum Gain attributable to such Partner Nonrecourse Debt during that fiscal
year reduced (but not below zero) by proceeds of the liability distributed
during that fiscal year to the Partner bearing the economic risk of loss for
such liability that are both attributable to the liability and allocable to an
increase in Partner Minimum Gain attributable to such Partner Nonrecourse Debt,
determined in accordance with Treas. Reg. Section 1.704-2(i)(3).
(qq) "Partners" shall mean the Managing General Partner, the Initial Limited
Partner and the Investor Partners. "Partner" shall mean any one of the Partners.
All references in this Agreement to a majority in interest or a specified
percentage of the Partners shall mean Partners holding more than 50% or such
specified percentage, respectively, of the outstanding Units then held.
(rr) "Partnership" shall mean the partnership formed pursuant to this
Agreement and the partnership continuing the business of this Partnership in the
event of dissolution as provided in this Agreement.
(ss) "Partnership Minimum Gain" is a term used in certain tax matters, not
in defining the basic rights and obligations of the parties, and shall have the
meaning set forth in Treas. Reg. Sections 1.704-2(b)(2) and 1.704-2(d)(1).
(tt) "Payout" shall have the meaning set forth in Section 3.02(a) of this
Agreement.
(uu) "Permitted Transfer" shall mean any transfer of Units satisfying the
provisions of Section 7.03.
(vv) "Person" shall mean any natural person, partnership, corporation,
association, trust or other entity.
(ww)"Profits" and "Losses" shall mean, for each fiscal year or other period,
an amount equal to the Partnership's taxable income or loss for such year or
period, determined in accordance with Code Section 703(a)(for this purpose, all
items of income, gain, loss, or deduction required to be stated separately
pursuant to Code Section 703(a)(1) shall be included in taxable income or loss),
with the following adjustments:
(1) Any income of the Partnership that is exempt from federal income tax
and not otherwise taken into account in computing Profits or Losses pursuant
to this Section 1.08(vv) shall be added to such taxable income or loss;
(2) Any expenditures of the Partnership described in Code
Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures
pursuant to Treas. Reg. Section 1.704-1(b)(2)(iv)(i), and not otherwise
taken into account in computing Profits or Losses pursuant to this
Subsection (ww) shall be subtracted from such taxable income or loss;
(3) In the event the Gross Asset Value of any Partnership asset is
adjusted pursuant to Section 1.08(t)(2) or Section 1.08(t)(3), the amount of
such adjustment shall be taken into account as gain or loss from the
disposition of such asset for purposes of computing Profits or Losses.
(4) Gain or loss resulting from any disposition of Partnership Property
with respect to which gain or loss is recognized for federal income tax
purposes shall be computed by reference to the Gross Asset Value of the
property disposed of, notwithstanding that the adjusted tax basis of such
property differs from its Gross Asset Value;
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(5) In lieu of the depreciation, amortization, and other cost recovery
deductions taken into account in computing such taxable income or loss,
there shall be taken into account Depreciation for such fiscal year or other
period, computed in accordance with Section 1.08(t); and
(6) Notwithstanding any other provisions of this Subsection (ww), any
items that are specially allocated pursuant to this Agreement shall not be
taken into account in computing Profits or Losses.
(xx) "Prospect" shall mean a contiguous oil and gas leasehold estate (or a
non-contiguous group of geologically related oil and gas leasehold estates), or
lesser interest therein, upon which drilling operations may be conducted. In
general, a Prospect is an area in which the Partnership owns or intends to own
one or more oil and gas interests, which is geographically defined on the basis
of geological data by the Managing General Partner of such Partnership and which
is reasonably anticipated by the Managing General Partner to contain at least
one reservoir. An area covering lands that are believed by the Managing General
Partner to contain subsurface structural or stratigraphic conditions making it
susceptible to the accumulations of hydrocarbons in commercially productive
quantities at one or more horizons. The area, which may be different for
different horizons, shall be designated by the Managing General Partner 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 hydrocarbon 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.
(yy) "Prospectus" shall mean that Prospectus (including any preliminary
prospectus), of which this Agreement is a part, pursuant to which the Units are
being offered and sold.
(zz) "Proved Developed Oil and Gas Reserves" shall mean the proved reserves
that can be expected to be recovered through existing wells with existing
equipment and operating methods. Additional oil and gas expected to be obtained
through the application of fluid injection or other improved recovery techniques
for supplementing the natural forces and mechanisms of primary recovery should
be included as "Proved Developed Reserves" only after testing by a pilot project
or after the operation of an installed program has confirmed through production
response that increased recovery will be achieved.
(aaa) "Proved Oil and Gas Reserves" shall mean the estimated quantities of
crude oil, natural gas, and natural gas liquids that geological and engineering
data demonstrate with reasonable certainty to be recoverable in future years
from known reservoirs under existing economic and operating conditions, i.e.,
prices and costs as of the date the estimate is made. Prices include
consideration of changes in existing prices provided only by contractual
arrangements, but not on escalations based upon future conditions.
(1) Reservoirs are considered proved if economic producibility is
supported by either actual production or conclusive formation test. The area
of a reservoir considered proved includes (i) that portion delineated by
drilling and defined by gas-oil and/or oil-water contacts, if any, (ii) the
immediately adjoining portions not yet drilled, but which can be reasonably
judged as economically productive on the basis of available geological and
engineering data. In the absence of information on fluid contacts, the
lowest known structural occurrence of hydrocarbons controls the lower proved
limit of the reservoir.
(2) Reserves that can be produced economically through application of
improved recovery techniques (such as fluid injection) are included in the
"proved" classification when successful testing by a pilot project, or the
operation of an installed program in the reservoir, provides support for the
engineering analysis on which the project or program was based.
(3) Estimates or proved reserves do not include the following: (i) oil
that may become available from known reservoirs but is classified separately
as "indicated additional reserves;" (ii) crude oil, natural gas, and natural
gas liquids, the recovery of which is subject to reasonable doubt because of
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uncertainty as to geology, reservoir characteristics, or economic factors;
(iii) crude oil, natural gas, and natural gas liquids, that may occur in
undrilled prospects; and (iv) crude oil, natural gas, and natural gas
liquids, that may be recovered from oil shales, coal, gilsonite and other
such sources.
(bbb) "Proved Undeveloped Reserves" shall mean the reserves that are
expected to be recovered from new wells on undrilled acreage, or from existing
wells where a relatively major expenditure is required for recompletion.
Reserves on undrilled acreage shall be limited to those drilling units
offsetting productive units that are reasonably certain of production when
drilled. Proved reserves for other undrilled units can be claimed only where it
can be demonstrated with certainty that there is continuity of production from
the existing productive formation. Under no circumstances should estimates for
Proved Undeveloped Reserves be attributable to any acreage for which an
application of fluid injection or other improved recovery technique is
contemplated, unless such techniques have been proved effective by actual tests
in the area and in the same reservoir.
(ccc) "Reservoir" shall mean a separate structural or stratigraphic trap
containing an accumulation of oil or gas.
(ddd) "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:
(1) A transaction involving securities of the Partnership that have been
listed for at least 12 months on a national exchange or traded through the
National Association of Securities Dealers Automated Quotation National
Market System; or
(2) A transaction involving the conversion to corporate, trust or
association form of only the Partnership if, as a consequence of the
transaction, there will be no significant adverse change in any of the
following:
(i) voting rights;
(ii) the term of existence of the Partnership;
(iii) sponsor compensation; or
(iv) the Partnership's investment objectives.
(eee) "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.
(fff) "Subscription" shall mean the amount indicated on the Subscription
Agreement that an Investor Partner has agreed to pay to the Partnership as his
Capital Contribution.
(ggg) "Subscription Agreement" shall mean the Agreement, attached to the
Prospectus as Appendix B, pursuant to which an Investor subscribes to Units in
the Partnership.
(hhh) "Substituted Investor Partner" shall mean any Person admitted to the
Partnership as an Investor Partner pursuant to Section 7.03(c).
(iii) "Treas. Reg." or "Regulation" shall mean the income tax regulations
promulgated under the Code, as such regulations may be amended from time to time
(including corresponding provisions of succeeding regulations).
(jjj) "Unit" shall mean an undivided interest of the Partners in the
aggregate interest in the capital and profits of the Partnership. Each Unit
represents Capital Contributions of $20,000 to the Partnership.
(kkk) "Working Interest" shall mean an interest in an oil and gas leasehold
that is subject to some portion of the costs of development, operation, or
maintenance.
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ARTICLE II
CAPITALIZATION
2.01 CAPITAL CONTRIBUTIONS OF THE MANAGING GENERAL PARTNER AND INITIAL
LIMITED PARTNER.
(a) On or before the Offering Termination Date, the Managing General
Partner, directly or indirectly through an Affiliate, shall purchase at least 5%
of the total Units issued by the Partnership to all Investors Partners. The
Managing General Partner shall contribute to the capital of the Partnership the
sum of $17,000 for each Unit purchased (i.e., $20,000 less selling expenses,
management fees and offering expenses). In consideration of making such Capital
Contribution, becoming a General Partner, subjecting its assets to the
liabilities of the Partnership, and undertaking other obligations as herein set
forth, the Managing General Partner shall receive the Managing General Partner's
Carried Interest in the Partnership described in Article III.
(b) The Initial Limited Partner shall contribute $100 in cash to the capital
of the Partnership. Upon the earlier to occur of the conversion of an Additional
General Partner's interest into a Limited Partner's interest or the admission of
a Limited Partner to the Partnership, the Partnership shall redeem in full,
without interest or deduction, the Initial Limited Partner's Capital
Contribution, and the Initial Limited Partner shall cease to be a Partner.
2.02 INITIAL CAPITAL CONTRIBUTIONS OF THE INVESTOR PARTNERS.
(a) Upon execution of this Agreement, each Investor Partner (whose names and
addresses and number of Units to which Subscribed are set forth in Exhibit A)
shall contribute to the capital of the Partnership the sum of $20,000 for each
Unit purchased. The minimum subscription by an Investor Partner is one-quarter
Unit ($5,000).
(b) The contributions of the Investor Partners pursuant to Subsection
2.02(a) shall be in cash or by check subject to collection.
(c) Until the Offering Termination Date and until such subsequent time as
the contributions of the Investor Partners are invested in accordance with the
provisions of the Prospectus, all monies received from persons subscribing as
Investor Partners (i) shall continue to be the property of the investor making
such payment, (ii) shall be held in escrow for such investor in the manner and
to the extent provided in the Prospectus, and (iii) shall not be commingled with
the personal monies or become an asset of the Managing General Partner or the
Partnership.
(d) Upon the original sale of Units by the Partnership, subscribers shall be
admitted as Partners no later than 15 days after the release from the escrow
account of the Capital Contributions to the Partnership, in accordance with the
terms of the Prospectus; subscriptions shall be accepted or rejected by the
Partnership within 30 days of their receipt; if rejected, all subscription
monies shall be returned to the subscriber forthwith.
(e) Except as provided in Section 4.03, any proceeds of the offering of
Units for sale pursuant to the Prospectus not used, committed for use, or
reserved as operating capital in the Partnership's operations within one year
after the closing of such offering shall be distributed pro rata to the Investor
Partners as a return of capital and the Managing General Partner shall reimburse
such Investor Partners for selling expenses, management fees, and offering
expenses allocable to the return of capital.
(f) Until proceeds from the offering are invested in the Partnership's
operations, such proceeds may be temporarily invested in income producing
short-term, highly liquid investments, where there is appropriate safety of
principal, such as U.S. Treasury Bills. Any such income shall be allocated pro
rata to the Investor Partners providing such capital contributions.
2.03 ASSESSMENTS. Under the circumstances described in this Section 2.03,
the Managing General Partner may call for Initial Assessments or Secondary
Assessments (described below and collectively
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referred to as the "Assessments") to made upon the Investor Partners. In no case
shall the Investor Partners be required or obligated to pay money to the
Partnership in regard to the Assessments. However, if an Investor Partner fails
or refuses to pay an Assessment when called for by the Managing General Partner,
the interest of the Investor Partner in the Partnership (the "Non-Paying Units")
shall be subject to certain reductions or charges to be incurred or paid in
favor of any other Investor Partner or new Partner who pays such Assessments on
behalf of such Units.
(a) INITIAL ASSESSMENTS. Initial Assessments are the first Assessments
that may be made on an Investor Partner, and shall consist of all the dollars
assessed against an Investor Partner up to and including $5,000 per Unit.
(b) SECONDARY ASSESSMENTS. Secondary Assessments are the Assessments that
may be made on an Investor Partner subsequent to Initial Assessments, and shall
consist of all dollars assessed against an Investor Partner in excess of $5,000
per Unit up to a total of $20,000 per Unit.
(c) MAXIMUM ASSESSMENTS. Initial and Secondary Assessments combined shall
not exceed $20,000 per Unit.
(d) PURPOSE OF ASSESSMENTS. All Assessments shall be made solely for the
purpose of conducting subsequent operations on Prospects upon which evaluation
had begun during the Partnership's initial operations, or on leases sufficiently
related to such Prospects as to merit, in the Managing General Partner's
judgment, additional operations to fully develop those Prospects.
(e) CHARGES FOR REFUSAL OR FAILURE TO PAY ASSESSMENTS. In the event an
Investor Partner elects not to pay all or a portion of the payment of any
Assessment, the Investor Partner's percentage interest in the Partnership
represented by its Units are not subject to forfeiture, but may be subject to a
reduction or charge for the failure of the Investor Partner to pay such
Assessment.
(1) If an Investor Partner refuses or fails to pay any Initial
Assessment, then such Investor Partner's percentage interest in the revenues
of the Partnership shall be reduced proportionately based on the ratio of
its unpaid Initial Assessments to all Capital Contributions.
(2) If an Investor Partner refuses or fails to pay any Secondary
Assessment, then such Investor Partner's percentage interest in the revenues
derived from the wells drilled and/or completed with the proceeds of the
Secondary Assessments shall be reduced based on the ratio of the Investor
Partner's unpaid Secondary Assessment to all Capital Contributions used for
such drilling and/or completion.
(3) If an Assessment is made for a purpose other than for the drilling
of a well (such as for pipeline construction or for the purchase and
installation of pumping equipment), regardless of whether the Assessment is
an Initial Assessment or a Secondary Assessment, then in regard to an
Investor Partner who elects not to pay such Assessment, such Investor
Partner's percentage interest in the revenues of the Partnership shall be
reduced proportionately based on the ratio of his unpaid non-drilling
Assessments to all Capital Contributions and Assessments.
(f) CONDITIONS APPLICABLE TO ALL ASSESSMENTS. In order to make any
Assessment, the Managing General Partner shall include with the call for such
Assessment a statement of the purpose and intended use of the proceeds from such
Assessment, a statement of the reduction to be imposed for election of the
Investor Partner not to pay the Assessment, and to the extent practicable, a
summary of pertinent geological data on the relevant properties to which the
Assessments relate and any other information material to an Investor Partner's
decision to fund the Assessment.
2.04 ADDITIONAL CONTRIBUTIONS. Except as otherwise provided in this
Agreement, no Investor Partner shall be required or obligated (a) to contribute
any capital to the Partnership, or be subject to any charge for failure to make
any capital contribution, other than as provided in Section 2.02 and 2.03.
Furthermore, no Investor Partner shall be obligated to lend any funds to the
Partnership.
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2.05 NO INTEREST ON CAPITAL CONTRIBUTIONS OR ACCOUNTS. No interest shall
be paid on any capital contributed to the Partnership pursuant to this
Article II.
2.06 NO WITHDRAWALS OF CONTRIBUTIONS. Except as otherwise provided herein,
no Partner, other than the Initial Limited Partner as authorized herein, may
withdraw his Capital Contribution.
2.07 GENERAL PARTNERS ARE LIABLE FOR PARTNERSHIP OBLIGATIONS. 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 Nevada law.
ARTICLE III
CAPITAL ACCOUNTS AND ALLOCATIONS
3.01 CAPITAL ACCOUNTS.
(a) GENERAL. A separate Capital Account shall be established and
maintained for each Partner on the books and records of the Partnership. Capital
Accounts shall be maintained in accordance with Treas. Reg. Section 1.704-1(b)
and any inconsistency between the provisions of this Section 3.01 and such
regulation shall be resolved in favor of the regulation. In the event the
Managing General Partner shall determine that it is prudent to modify the manner
in which the Capital Accounts, or any debits or credits thereto (including,
without limitation, debits or credits relating to liabilities that are secured
by contributed or distributed property or that are assumed by the Partnership of
the Partners), are computed in order to comply with such regulations, the
Managing General Partner may make such modification, provided that it is not
likely to have a material effect on the amounts distributable to any Partner
pursuant to Section 9.03 upon the dissolution of the Partnership. The Managing
General Partner also shall:
(1) Make any adjustments that are necessary or appropriate to maintain
equality between the Capital Accounts of the Partners and the amount of
Partnership capital reflected on the Partnership's balance sheet, as
computed for book purposes, in accordance with Treas. Reg.
Section 1.704-1(b)(2)(iv)(q), and
(2) Make any appropriate modifications in the event unanticipated events
might otherwise cause this Agreement not to comply with Treas. Reg.
Section 1.704-1(b).
(b) INCREASES TO CAPITAL ACCOUNTS. Each Partner's Capital Account shall be
credited with:
(1) The amount of money contributed by him to the Partnership;
(2) The amount of any Partnership liabilities that are assumed by him
(within the meaning of Treas. Reg. Section 1.704-1(b)(2)(iv)(c)), but not by
increases in his share of Partnership liabilities within the meaning of Code
Section 752(a); and
(3) Allocations to him of Partnership Profits (or items thereof),
including income and gain exempt from tax and Income and gain described in
Treas. Reg. Section 1.704-1(b)(2)(iv)(g) (relating to adjustments to reflect
book value).
The Regulations also provide that each Partner's Capital Account shall be
credited with the Gross Asset Value of property contributed by him to the
Partnership (net of liabilities securing such contributed property that the
Partnership is considered to assume or take subject to under Code Section 752);
but under the terms of this Agreement all contributions by any Partner to the
Partnership must me made in cash, not in property.
(c) DECREASES TO CAPITAL ACCOUNTS. Each Partner's Capital Account shall be
debited with:
(1) The amount of money distributed to him by the Partnership;
(2) The amount of his individual liabilities that are assumed by the
Partnership (other than liabilities described in Treas. Reg.
Section 1.704-1(b)(2)(iv)(b)(2) that are assumed by the Partnership
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and other than decreases in his share of Partnership liabilities within the
meaning of Code Section 752(b));
(3) The Gross Asset Value of property distributed to him by the
Partnership (net of liabilities securing such distributed property that he
is considered to assume or take subject to under Code Section 752);
(4) Allocations to him of expenditures of the Partnership not deductible
in computing Partnership taxable income and not properly chargeable to
Capital Account (as described in Code Section 705(a)(2)(B)), and
(5) Allocations to him of Partnership Losses (or item thereof),
including loss and deduction described in Treas. Reg.
Section 1.704-1(b)(2)(iv)(g) (relating to adjustments to reflect book
value), but excluding items described in (iv) above and excluding loss or
deduction described in Treas. Reg. Section 1.704-1(b)(4)(iii) (relating to
excess percentage depletion).
(d) ADJUSTMENTS TO CAPITAL ACCOUNTS RELATED TO DEPLETION.
(1) Solely for purposes of maintaining the Capital Accounts, each year
the Partnership shall compute (in accordance with Treas. Reg.
Section 1.704-1(b)(2)(iv)(k)) a simulated depletion allowance for each oil
and gas property using that method, as between the cost depletion method and
the percentage depletion method (without regard to the limitations of Code
Section 613A(c)(3) which theoretically could apply to any Partner), which
results in the greatest simulated depletion allowance. The simulated
depletion allowance with respect to each oil and gas property shall reduce
the Partners' Capital Accounts in the same proportion as the Partners were
allocated adjusted basis with respect to such oil and gas property under
Section 3.03(a). In no event shall the Partnership's aggregate simulated
depletion allowance with respect to an oil and gas property exceed the
Partnership's adjusted basis in the oil and gas property (maintained solely
for Capital Account purposes).
(2) Upon the taxable disposition of an oil and gas property by the
Partnership, the Partnership shall determine the simulated (hypothetical)
gain or loss with respect to such oil and gas property (solely for Capital
Account purposes) by subtracting the Partnership's simulated adjusted basis
for the oil and gas property (maintained solely for Capital Account
purposes) from the amount realized by the Partnership upon such disposition.
Simulated adjusted basis shall be determined by reducing the adjusted basis
by the aggregate simulated depletion charged to the Capital Accounts of all
Partners in accordance with Section 3.01(d)(i). The Capital Accounts of the
Partners shall be adjusted upward by the amount of any simulated gain on
such disposition in proportion to such Partners' allocable share of the
portion of total amount realized from the disposition of such property that
exceeds the Partnership's simulated adjusted basis in such property. The
Capital Accounts of the Partners shall be adjusted downward by the amount of
any simulated loss in proportion to such Partners' allocable shares of the
total amount realized from the disposition of such property that represents
recovery of the Partnership's simulated adjusted basis in such property.
(e) RESTORATION OF NEGATIVE CAPITAL ACCOUNTS. Except as otherwise provided
in this Agreement, neither the Initial Limited Partner nor any other Limited
Partner shall be obligated to the Partnership or to any other Partner to restore
any negative balance in his Capital Account, except for those Limited Partners
who converted from General Partner status, and in such case only to the extent
such Partners had negative capital account balances in their Capital Accounts at
the time of such conversion and such negative balances have not been previously
restored through subsequent allocations of credits or contributions to the
Partnership by such Partner. The Managing General Partner and all Additional
General Partners shall be obligated to restore the deficit balance in their
Capital Accounts.
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3.02 ALLOCATION OF PROFITS, LOSSES, REVENUES, AND EXPENSES.
(a) GENERAL. Except as otherwise provided in this Section 3.02 or in
Section 3.03, Profits shall be allocated as follows:
(i) first to the Units in an amount equal to the excess, if any, of (A) the
cumulative Losses allocated to the Units pursuant to (a)(vi) below for
all prior fiscal years plus (B) the cumulative specially allocated
deductions allocated to the Units pursuant to Section 3.02(a)(i)-(vi)
below for all prior fiscal years; over the cumulative Profits allocated
to Units pursuant to this Section 3.02(a)(i) for all prior fiscal years.
(ii) next to the Managing General Partner in an amount equal to the excess,
if any, of the cumulative Losses and specially allocated deductions
allocated to the Managing General Partner for all prior fiscal years to
avoid the creation or increase of any Limited Partner Capital Account
Deficit pursuant to Section 3.02(b); over the cumulative Profits
allocated to the Managing General Partner pursuant to this
Section 3.02(a)(ii) for all prior fiscal years.
(iii) the balance shall be allocated 75% to the Units and 25% to the Managing
General Partner.
Except as otherwise provided in this Section 3.02 or in Section 3.03, Losses
shall be allocated as follows:
(iv) first 75% to the Units and 25% to the Managing General Partner in an
amount equal to the excess, if any, of the cumulative Profits allocated
pursuant to Section 3.02(a)(iii) above for all prior fiscal years over
the cumulative Losses allocated pursuant to this Section 3.02(a)(iv)
for all prior fiscal years.
(v) next to the Managing General Partner to extent necessary to prevent the
creation or increase of any Limited Partner Capital Account Deficit
pursuant to Section 3.02(b).
(vi) the balance shall be allocated 100% to the Units.
If the Partnership acquires producing oil and gas interests and the value of
such interests is materially in excess of the combined cost of (i) such
interests and (ii) related non-producing interests acquired by the Partnership
in the same acquisition transaction, the Managing Partner's Carried Interest
with respect to such producing interests shall be limited to 10% for the
producing life of such properties with no adjustment after Payout. These
provisions regarding interests that were producing oil or gas at the time of
their acquisition are referred to as "Production Acquisition" provisions.
Notwithstanding the foregoing allocations, the following special allocations
shall be made:
(1) IDC and recapture of IDC shall be allocated 100% to the Units issued
by the Partnership and 0% to the Managing General Partner's Carried Interest
(the Managing General Partner shall purchase at least 5% of the Units issued
by the Partnership and such Units shall bear their pro-rata shares of IDC).
(2) Deductions with respect to Organization and Offering Costs net of
commissions, due diligence expenses and wholesaling fees payable to the
dealer manager and the soliciting dealers shall be allocated by the Managing
General Partner. Deductions with respect to commissions, due diligence
expenses and wholesaling fees payable to the dealer manager and the
soliciting dealers shall be allocated 100% to the Units; except that
Organization and Offering Costs including such commissions, expenses and
fees, in excess of 15% of Subscriptions shall be allocated 100% to the
Managing General Partner and 0% to the Investor Partners.
(3) Deductions with respect to the Management Fee shall be allocated
100% to the Units.
(4) Deductions with respect to Costs of Leases and Costs of tangible
equipment, including depreciation or cost recovery benefits, and revenues
from the sale of equipment shall be allocated 100% to the Units.
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(5) Deductions with respect to Drilling and Completion Costs shall be
allocated 100% to the Units.
(6) Deductions with respect to Direct Costs and Operating Costs
attributable to oil or gas interests to which the Production Acquisition
provisions of Section 3.02(a) apply, shall always be allocated in the same
proportion in which Profits from such interests are allocated.
(7) In no case shall any expenditure be counted more than one time for
the purpose of any allocation described above.
(b) CAPITAL ACCOUNT DEFICITS. Notwithstanding anything to the contrary in
Section 3.02(a), no Limited Partner shall be allocated any item to the extent
that such allocation would create or increase a deficit in such Limited
Partner's Capital Account.
(1) OBLIGATIONS TO RESTORE. For purposes of this Section 3.02(b), in
determining whether an allocation would create or increase a deficit in a
Partner's Capital Account, such Capital Account shall be reduced for those
items described in Treas. Reg. Sections 1.704-1(b)(2)(ii)(d)(4), (5), and
(6) and shall be increased by any amounts which such Partner is obligated to
restore or is deemed obligated to restore pursuant to the penultimate
sentences of Treas. Reg. Sections 1.704-2(g)(1) and 1.704-2(i)(5). Further,
such Capital Accounts shall otherwise meet the requirements of Treas. Reg.
Section 1.704-1(b)(2)(ii)(d).
(2) REALLOCATIONS. Any loss or deduction of the Partnership, the
allocation of which to any Partner is prohibited by this Section 3.02(b),
shall be reallocated to those Partners not having a deficit in their Capital
Accounts (as adjusted in Section 3.02(b)(1)) (excluding any Capital Account
balances allocable to or attributable to the Managing General Partner's
Carried Interest) in the proportion that the positive balance of each such
Partner's adjusted Capital Account bears to the aggregate balance of all
such Partners' adjusted Capital Accounts, with any remaining losses or
deductions being allocated to the Managing General Partner. No reallocations
of losses shall be made to the Managing General Partners in regard to its
Managing General Partner's Carried Interest.
(3) QUALIFIED INCOME OFFSET. In the event any Investor Partner
unexpectedly receives any adjustments, allocations, or distributions
described in Treas. Reg. Section 1.704-1(b)(2)(ii)(d)(4), (5), or (6), items
of Partnership income and gain shall be specifically allocated to such
Partner in an amount and manner sufficient to eliminate (to the extent
required by the Regulations) the total of the deficit balance in his Capital
Account (as adjusted in Section 3.02(b)(1)) created by such adjustments,
allocations, or distributions, provided that an allocation pursuant to this
Section 3.02(b)(3) shall be made if and only to the extent that such Partner
would have a deficit in his Capital Account (as adjusted in
Section 3.02(b)(1)) after all other allocations provided for in this
Article III have been tentatively made as if this Section 3.02(b)(3) were
not in the Agreement.
(4) GROSS INCOME ALLOCATIONS. In the event a Limited Partner has a
deficit Capital Account at the end of any Partnership fiscal year which is
in excess of the sum of
(i) The amount such Partner is obligated to restore pursuant to any
provision of this Agreement and
(ii) The amount such Partner is deemed to be obligated to restore
pursuant to the penultimate sentences of Treas. Reg. Sections
1.704-2(g)(1) and 1.704-2(i)(5),
such Partner shall be specially allocated items of Partnership income and gain
in the amount of such excess as quickly as possible, provided that an allocation
pursuant to this Section 3.02(b)(4) shall be made only if and to the extent that
such Partner would have a deficit Capital Account in excess of such sum after
all other allocations provided for in this Article III have been made as if
Section 3.02(b)(3) and this Section 3.02(b)(4) were not in the Agreement.
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(c) MINIMUM GAIN CHARGEBACK. Notwithstanding any other provision of this
Section 3.02, if there is a net decrease in Partnership Minimum Gain during any
taxable year, pursuant to Treas. Reg. Section 1.704-2(f)(1), all Partners shall
be allocated items of Partnership income and gain for that year equal to that
Partner's share of the net decrease in Partnership Minimum Gain (within the
meaning of Treas. Reg. Section 1.704-2(g)(2)). Notwithstanding the preceding
sentence, no such chargeback shall be made to the extent one or more of the
exceptions and/or waivers provided for in Treas. Reg. Section 1.704-2(f)(2)-(5)
applies. Allocations pursuant to the previous sentence shall be made in
proportion to the respective amounts required to be allocated to each Partner
pursuant thereto. The items to be so allocated shall be determined in accordance
with Treas. Reg. Section 1.704-2(f)(6). This Section 3.02(c) is intended to
comply with the minimum gain chargeback requirement in such Section of the
Regulations and shall be interpreted consistently therewith. To the extent
permitted by such Section of the Regulations and for purposes of this
Section 3.02(c) only, each Partner's Capital Account (as adjusted in
Section 3.02(b)(1)) shall be determined prior to any other allocations pursuant
to this Article III with respect to such tax year and without regard to any net
decrease in Partner Minimum Gain during such fiscal year.
(d) PARTNER MINIMUM GAIN CHARGEBACK. Notwithstanding any other provision
of this Article III except Section 3.02(c), if there is a net decrease in
Partner Minimum Gain attributable to a Partner Nonrecourse Debt during any
Partnership fiscal year, rules similar to those contained in Section 3.02(c)
shall apply in a manner consistent with Treas. Reg. Section 1.704-2(i)(4). This
Section 3.02(d) is intended to comply with the minimum gain chargeback
requirement in such Section of the Regulations and shall be interpreted
consistently therewith. Solely for purposes of this Section 3.02(d), each
Person's Capital Account deficit (as so adjusted) shall be determined prior to
any other allocations pursuant to this Article III with respect to such fiscal
year, other than allocations pursuant to Section 3.02(c).
(e) NONRECOURSE DEDUCTIONS. Nonrecourse Deductions for any fiscal year or
other period shall be specially allocated to the Partners (in proportion to
their Units), in accordance with Treas. Reg. Section 1.704-2.
(f) PARTNER NONRECOURSE DEDUCTIONS. Any Partner Nonrecourse Deductions for
any fiscal year or other period shall be specially allocated to the Partner who
bears the economic risk of loss with respect to the Partner Nonrecourse Debt to
which such Partner Nonrecourse Deductions are attributable in accordance with
Treas. Reg. Section 1.704-2(i).
(g) CODE SECTION 754 ADJUSTMENTS. To the extent an adjustment to the
adjusted tax basis of any Partnership asset pursuant to Code Section 734(b) or
Section 743(b) is required, pursuant to Treas. Reg.
Section 1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital
Accounts, the amount of such adjustment to the Capital Accounts shall be treated
as an item of gain (if the adjustment increases the basis of the asset) or loss
(if the adjustment decreases such basis) and such gain or loss shall be
specially allocated to the Partners in a manner consistent with the manner in
which their Capital Accounts are required to be adjusted pursuant to such
Section of the Regulations.
(h) CURATIVE ALLOCATIONS.
(1) The "Regulatory Allocations" consist of the "Basic Regulatory
Allocations," as defined in Section 3.02(h)(2), the "Nonrecourse Regulatory
Allocations," as defined in Section 3.02(h)(3), and the "Partner Nonrecourse
Regulatory Allocations," as defined in Section 3.02(h)(4).
(2) The "Basic Regulatory Allocations" consist of allocations pursuant
to Section 3.02(b)(2), (3), and (4). Notwithstanding any other provision of
this Agreement, other than the Regulatory Allocations, the Basic Regulatory
Allocations shall be taken into account in allocating items of income, gain,
loss, and deduction among the Partners so that, to the extent possible, the
net amount of such allocations of other items and the Basic Regulatory
Allocations to each Partner shall be equal to the net amount that would have
been allocated to each such Partner if the Basic Regulatory Allocations had
not occurred. For purposes of applying the foregoing sentence, allocations
pursuant to this
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Section 3.02(h)(2) shall only be made with respect to allocations pursuant
to Section 3.02(g) to the extent the Managing General Partner reasonably
determines that such allocations will otherwise be inconsistent with the
economic agreement among the parties to this Agreement.
(3) The "Nonrecourse Regulatory Allocations" consist of all allocations
pursuant to Section 3.02(c) and 3.02(e). Notwithstanding any other provision
of this Agreement, other than the Regulatory Allocations, the Nonrecourse
Regulatory Allocations shall be taken into account in allocating items of
income, gain, loss, and deduction among the Partners so that, to the extent
possible, the net amount of such allocations of other items and the
Nonrecourse Regulatory Allocations to each Partner shall be equal to the net
amount that would have been allocated to each Partner if the Nonrecourse
Regulatory Allocations had not occurred. For purposes of applying the
foregoing sentence (i) no allocations pursuant to this
Section 3.02(h)(3) shall be made prior to the Partnership fiscal year during
which there is a net decrease in Partnership Minimum Gain, and then only to
the extent necessary to avoid any potential economic distortions caused by
such net decrease in Partnership Minimum Gain, and (ii) allocations pursuant
to this Section 3.02(h)(3) shall be deferred to the extent the Managing
General Partner reasonably determines that such allocations are likely to be
offset by subsequent allocations pursuant to Section 3.02(c).
(4) The "Partner Nonrecourse Regulatory Allocations" consist of all
allocations pursuant to Sections 3.02(d) and 3.02(f). Notwithstanding any
other provision of this Agreement, other than the Regulatory Allocations,
the Partner Nonrecourse Regulatory Allocations shall be taken into account
in allocating items of income, gain, loss, and deduction among the Partners
so that, to the extent possible, the net amount of such allocations of other
items and the Partner Nonrecourse Regulatory Allocations to each Partner
shall be equal to the net amount that would have been allocated to each such
Partner if the Partner Nonrecourse Regulatory Allocations had not occurred.
For purposes of applying the foregoing sentence (i) no allocations pursuant
to this Section 3.02(h)(4) shall be made with respect to allocations
pursuant to Section 3.02(f) relating to a particular Partner Nonrecourse
Debt prior to the Partnership fiscal year during which there is a net
decrease in Partner Minimum Gain attributable to such Partner Nonrecourse
Debt, and then only to the extent necessary to avoid any potential economic
distortions caused by such net decrease in Partner Minimum Gain, and
(ii) allocations pursuant to this Section 3.02(h)(4) shall be deferred with
respect to allocations pursuant to Section 3.02(f) relating to a particular
Partner Nonrecourse Debt to the extent the Managing General Partner
reasonably determines that such allocations are likely to be offset by
subsequent allocations pursuant to Section 3.02(d).
(5) The Managing General Partner shall have reasonable discretion with
respect to each Partnership fiscal year, to apply the provisions of Sections
3.02(h)(2), (3), and (4) among the Partners in a manner that is likely to
minimize such economic distortions.
(i) OTHER ALLOCATIONS. Except as otherwise provided in this Agreement, all
items of Partnership income, loss, deduction, and any other allocations not
otherwise provided for shall be divided among the Investor Partners in the same
proportions as they share Profits or Losses, as the case may be, for the year.
(j) AGREEMENT TO BE BOUND. The Partners are aware of the income tax
consequences of the allocations made by this Section 3.02 and hereby agree to be
bound by the provisions of this Section 3.02 in reporting their shares of
Partnership income and loss for income tax purposes.
(k) EXCESS NONRECOURSE LIABILITIES. Solely for purposes of determining a
Partner's proportionate share of the "excess nonrecourse liabilities" of the
Partnership within the meaning of Treas. Reg. Section 1.752-3(a)(3), the
Partners' interests in Partnership profits are as follows: the Partners, 90% (in
proportion to their Units) and the Managing General Partner, 10%.
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(l) ALLOCATION VARIATIONS. The Managing General Partner shall have the
authority to vary allocations to preserve and protect the intention of the
Partners as follows:
(1) It is the intention of the Partners that each Partner's distributive
share of income, gain, loss, deduction or credit (or any item thereof) shall
be determined and allocated in accordance with this Article III to the
fullest extent permitted by Code Section 704(b). In order to preserve and
protect the allocations provided for in this Article III, the Managing
General Partner shall have the authority to allocate income, gain, loss,
deduction or credit (or any item thereof) arising in any year differently
than that expressly provided for in this Article III, if and to the extent
that determining and allocating income, gain, loss, deduction or credit (or
any item thereof) in the manner expressly provided for in this Article III
would cause the allocations of each Partner's distributive share of income,
gain, loss, deduction or credit (or any item thereof) not to be permitted by
Code Section 704(b) and the Regulations promulgated thereunder. Any
allocation made pursuant to this Section 3.02(l) shall be deemed to be a
complete substitute for any allocation otherwise expressly provided for in
this Article III, and no amendment of this Agreement or further consent of
any Partner shall be required therefor.
(2) In making any such allocation (the "new allocation") under this
Section 3.02(l) the Managing General Partner shall be authorized to act only
after having been advised by the Partnership's accountants and/or counsel
that, under Code Section 704(b) and the Regulations thereunder, (i) the new
allocation is necessary, and (ii) the new allocation is the minimum
modification of the allocations otherwise expressly provided for in this
Article III which is necessary in order to assure that, either in the then
current year or in any preceding year, each Partner's distributive share of
income, gain, loss, deduction or credit (or any item thereof) is determined
and allocated in accordance with this Article III to the fullest extent
permitted by Code Section 704(b) and the Regulations thereunder.
(3) If the Managing General Partner is required by this Section 3.02(l)
to make any new allocation in a manner less favorable to the Investor
Partners than is otherwise expressly provided for in this Article III, then
the Managing General Partner shall have the authority, only after having
been advised by the Partnership's accountants and/or counsel that they are
permitted by Code Section 704(b), to allocate income, gain, loss, deduction
or credit (or any item thereof) arising in later years in such a manner as
will make the allocations of income, gain, loss, deduction or credit (or any
item thereof) to the Investor Partners as comparable as possible to the
allocations otherwise expressly provided for or contemplated by this
Article III.
(4) Any new allocation made by the Managing General Partner under this
Section 3.02(l) in reliance upon the advice of the Partnership's accountants
and/or counsel shall be deemed to be made pursuant to the fiduciary
obligation of the Managing General Partner to the Partnership and the
Investor Partners, and no such new allocation shall give rise to any claim
or cause of action by any Investor Partner.
(m) TAX ALLOCATIONS. Code Section 704(c). In accordance with Code
Section 704(c) and the Regulations thereunder, income, gain, loss, and deduction
with respect to any property contributed to the capital of the Partnership
shall, solely for tax purposes, be allocated among the Partners so as to take
account of any variation between the adjusted basis of such property to the
Partnership for federal income tax purposes and its initial Gross Asset Value
(computed in accordance with Section 1.08(t)(1)).
In the event the Gross Asset Value of any Partnership asset is adjusted
pursuant to Section 1.08(t)(1), subsequent allocations of income, gain, loss,
and deduction with respect to such asset shall take account of any variation
between the adjusted basis of such asset for federal income tax purposes and its
Gross Asset Value in the same manner as under Code Section 704(c) and the
Regulations thereunder.
Any elections or other decisions relating to such allocations shall be made
by the Managing General Partner in any manner that reasonably reflects the
purpose and intention of this Agreement. Allocations
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pursuant to this Section 3.02(m) are solely for purposes of federal, state, and
local taxes and shall not affect, or in any way be taken into account in
computing, any Person's Capital Account or share of Profits, Losses, other
items, or distributions pursuant to any provision of this Agreement.
3.03 DEPLETION.
(a) The depletion deduction with respect to each oil and gas property of the
Partnership shall be computed separately for each Partner in accordance with
Code Section 613A(c)(7)(D) for federal income tax purposes. For purposes of such
computation, the adjusted basis of each oil and gas property shall be allocated
in accordance with the Partners' interests in the capital of the Partnership.
Among the Investor Partners, such adjusted basis shall be apportioned among them
in accordance with the number of Units held.
(b) Upon the taxable disposition of an oil or gas property by the
Partnership, the amount realized from and the adjusted basis of such property
shall be allocated among the Partners (for purposes of calculating their
individual gain or loss on such disposition for federal income tax purposes) as
follows:
(1) The portion of the total amount realized upon the taxable
disposition of such property that represents recovery of its simulated
adjusted tax basis therein (as calculated pursuant to Section 3.01(d)) shall
be allocated to the Partners in the same proportion as the aggregate
adjusted basis of such property was allocated to such Partners (or their
predecessors in interest) pursuant to Section 3.03(a); and
(2) The portion of the total amount realized upon the taxable
disposition of such property that represents the excess over the simulated
adjusted tax basis therein shall be allocated in accordance with the
provisions of Section 3.02 as if such gain constituted an item of Profit.
3.04 APPORTIONMENT AMONG PARTNERS.
(a) Except as otherwise provided in this Agreement (especially in regard to
the Managing General Partner's Carried Interest), all allocations and
distributions to the Investor Partners and the Managing General Partner shall be
apportioned among them pro rata based on Units held by the Partners.
(b) For purposes of Section 3.04(a), an Investor Partner's pro rata share in
Units shall be calculated as of the end of the taxable year for which such
allocation has been made; provided, however, that if a transferee of a Unit is
admitted as an Investor Partner during the course of the taxable year, the
apportionment of allocations and distributions between the transferor and
transferee of such Unit shall be made in the manner provided in
Section 3.04(c).
(c) If, during any taxable year of the Partnership, there is a change in any
Partner's interest in the Partnership, each Partner's allocation of any item of
income, gain, loss, deduction, or credit of the Partnership for such taxable
year, other than "allocable cash basis items" shall be determined by taking into
account the varying interests of the Partners pursuant to such method as is
permitted by Code Section 706(d) and the regulations thereunder. Each Partner's
share of "allocable cash basis items" shall be determined in accordance with
Code Section 706(d)(2) by (i) assigning the appropriate portion of each item to
each day in the period to which it is attributable, and (ii) allocating the
portion assigned to any such day among the Partners in proportion to their
interests in the Partnership at the close of such day. "Allocable cash basis
item" shall have the meaning ascribed to it by Code Section 706(d)(2)(B) and the
regulations thereunder.
ARTICLE IV
DISTRIBUTIONS
4.01 TIME OF DISTRIBUTION. Cash available for distribution shall be
determined by the Managing General Partner. The Managing General Partner shall
distribute, in its discretion, such cash deemed available for distribution, but
such distributions shall be made not less frequently than quarterly.
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4.02 DISTRIBUTIONS.
(a) Except as otherwise provided below, all distributions (other than those
made to wind up the Partnership in accordance with Section 9.03) initially shall
be made 90% to the Investor Partners in regard to, and in proportion to, the
Units owned by them and 10% to the Managing General Partner in regard to its
Carried Interest. Once the Investor Partners have received distributions equal
to the amounts contributed by them as their Capital Contributions to the
Partnership (herein referred to as "Payout"), subsequent distributions shall be
made 75% to the Investor Partners in regard to, and in proportion to, the Units
owned by them and 25% to the Managing General Partner in regard to its Carried
Interest.
(b) The Partnership shall not require that Investor Partners reinvest their
share of cash available for distribution in the Partnership. 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 determination 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 General Partner
shall only be made in conjunction with distributions to Investor Partners and
only out of funds properly allocated to the Managing General Partner's account.
4.03 CAPITAL ACCOUNT DEFICITS. No distributions shall be made to any
Investor Partner to the extent such distribution would create or increase a
deficit in such Investor Partner's Capital Account (as adjusted in
Section 3.02(b)(1)). Any distribution which is hereby prohibited shall be made
to those Investor Partners not having a deficit in their Capital Accounts (as
adjusted in Section 3.02(b)(1)) in the proportion that the positive balance of
each such Investor Partner's adjusted Capital Account bears to the aggregate
balance of all such Investor Partners' adjusted Capital Accounts.
4.04 LIABILITY UPON RECEIPT OF DISTRIBUTIONS.
(a) If a Partner has received a return of any part of his Capital
Contribution without violation of the Partnership Agreement or the Act, he is
liable to the Partnership for a period of one year thereafter for the amount of
such returned contribution, but only to the extent necessary to discharge the
Partnership's liabilities to creditors who extended credit to the Partnership
during the period the Capital Contribution was held by the Partnership.
(b) If a Partner has received a return of any part of his Capital
Contribution in violation of either the Partnership Agreement or the Act, he is
liable to the Partnership for a period of six years thereafter for the amount of
the Capital Contribution wrongfully returned.
(c) A Partner receives a return of his Capital Contribution to the extent
that the distribution to him reduces his share of the fair value of the net
assets of the Partnership below the value, as set forth in the records required
to be kept by Nevada law, of his Capital Contribution which has not been
distributed to him.
ARTICLE V
ACTIVITIES
5.01 MANAGEMENT. The Managing General Partner shall conduct, direct, and
exercise full and exclusive control over all activities of the Partnership.
Investor Partners shall have no power over the conduct of the affairs of the
Partnership or otherwise commit or bind the Partnership in any manner. The
Managing General Partner shall manage the affairs of the Partnership in a
prudent and businesslike fashion and shall use its best efforts to carry out the
purposes and character of the business of the Partnership.
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5.02 CONDUCT OF OPERATIONS.
(a) Operations of the Partnership shall be conducted as follows:
(1) The Managing General Partner shall establish a program of operations
for the Partnership.
(2) The Investor Partners agree to participate in the Partnership's
program of operations as established by the Managing General Partner;
provided, that no well drilled to the point of setting casing need be
completed if, in the Managing General Partner's opinion, such well is
unlikely to be productive of oil or gas in quantities sufficient to justify
the expenditures required for well completion. The Partnership may
participate with others in the drilling of wells and it may enter into joint
ventures, partnerships, or other such arrangements.
(b) All transactions between the Partnership and the Managing General
Partner or its Affiliates shall be on terms no less favorable than those terms
which could be obtained between the Partnership and independent third parties
dealing at arm's-length, subject to the provisions of Section 5.07.
(c) The Partnership shall not participate in any joint operations on any
co-owned Lease unless there has been acquired or reserved on behalf of the
Partnership the right to take in kind or separately dispose of its proportionate
share of the oil and gas produced from such Lease exclusive of production which
may be used in development and production operations on the Lease and production
unavoidably lost, and, if the Managing General Partner is the operator of such
Lease, the Managing General Partner has entered into written agreements with
every other person or entity owning any working or operating interest reserving
to such person or entity a similar right to take in-kind, unless, in the opinion
of counsel to the Partnership, the failure to reserve such right to take in-kind
will not result in the Partnership being treated as a member of an association
taxable as a corporation for federal income tax purposes.
(d) The relationship of the Partnership and the Managing General Partner (or
any Affiliate retaining or acquiring an interest) as co-owners in Leases, except
to the extent superseded by an Operating Agreement consistent with the preceding
paragraph and except to the extent inconsistent with this Partnership Agreement,
shall be governed by the AAPL Form 610 Model Operating Agreement-1982, with a
provision reserving the right to take production in-kind, naming the Managing
General Partner as operator and the Partnership as a nonoperator, and with a
current accounting procedure promulgated by the Council of Petroleum Accountant
Societies of North America to govern as the accounting procedures under such
Operating Agreements.
(e) The Managing General Partner may act as the operator of any Partnership
wells but is not required to do so. The Managing General Partner may designate
or agree to such other Persons as it deems appropriate to conduct the actual
drilling and producing operations of the Partnership.
(f) When the Managing General Partner serves as operator of Partnership
wells, the Managing General Partner or its Affiliates shall receive per-well
charges for each producing well based on the Working Interest acquired by the
Partnership. These per-well charges shall be subject to annual adjustment
beginning January 1, 200 as provided in the accounting procedures of the
operating agreements.
(g) The Managing General Partner shall drill wells pursuant to drilling
contracts with the Partnership based upon competitive prices and terms in the
geographic area of operations, and to the extent that such prices exceed its
Costs, the Managing General Partner shall be deemed to have received
compensation.
(h) The Managing General Partner shall be reimbursed by the Partnership for
Direct Costs and Administrative Costs. All other expenses shall be borne by the
Partnership.
(i) The Managing General Partner and its Affiliates may enter into other
transactions (embodied in a written contract) with the Partnership, such as
providing services, supplies, and equipment, and shall be entitled to
compensation for such services at prices and on terms that are competitive in
the geographic area of operations.
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(j) The Partnership shall make no loans to the Managing General Partner or
any Affiliate thereof.
(k) Neither the Managing General Partner nor any Affiliate shall loan any
funds to the Partnership.
(l) The funds of the Partnership shall not be commingled with the funds of
any other Person.
(m) Notwithstanding any provision herein to the contrary, no creditor shall
receive, as a result of making any loan, a direct or indirect interest in the
profits, capital, or property of the Partnership other than as a secured
creditor.
(n) The Managing General 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 General Partner's possession or control, and shall not
employ or permit another to employ such funds or assets in any manner except for
the exclusive benefit of the Partnership.
5.03 ACQUISITION AND SALE OF LEASES.
(a) To the extent the Partnership does not acquire a full interest in a
Lease from the Managing General Partner, the remainder of the interest in such
Lease may be held by the Managing General Partner which may either retain and
exploit it for its own account or sell or otherwise dispose of all or a part of
such remaining interest. Profits from such exploitation and/or disposition shall
be for the benefit of the Managing General Partner to the exclusion of the
Partnership. Any Leases acquired by the Partnership from the Managing General
Partner shall be acquired only at the Managing General Partner's Cost, unless
the Managing General Partner shall have reason to believe that Cost is in excess
of the fair market value of such property, in which case the price shall not
exceed the fair market value. The Managing General Partner shall obtain an
appraisal from a qualified independent expert with respect to sales of
properties of the Managing General Partner and its Affiliates to the
Partnership. Neither the Managing General Partner nor any Affiliate shall
acquire or retain any carried, reversionary, or Overriding Royalty Interest on
the Lease interests acquired by the Partnership, nor shall the Managing General
Partner enter into any farmout arrangements with respect to its retained
interest, except as provided in Section 5.05.
(b) The Partnership shall acquire only Leases reasonably expected to meet
the stated purposes of the Partnership. No Leases shall be acquired for the
purpose of a subsequent sale or farmout unless the acquisition is made after a
well has been drilled to a depth sufficient to indicate that such an acquisition
would be in the Partnership's best interest.
(c) Neither the Managing General Partner nor its Affiliates, except other
partnerships sponsored by them, shall purchase any productive properties from
the Partnership.
5.04 TITLE TO LEASES.
(a) Record title to each Lease acquired by the Partnership may be
temporarily held in the name of the Managing General Partner, or in the name of
any nominee designated by the Managing General Partner, as agent for the
Partnership until a productive well is completed on a Lease. Thereafter, record
title to Leases shall be assigned to and placed in the name of the Partnership
if such assignment is practical and permissible under the circumstances and
local law and regulations. The Partnership may enter into written agreements
with the Managing General Partner to explore and/or develop mineral properties
located outside of the United States subject to concessions or production
sharing agreements or other agreements where it is not possible or practical to
cause record title of the Partnership's interest in such properties to be placed
in the name of the Partnership. In such case the record title (or concession or
production sharing agreement or other agreement) may be held by a special
nominee entity organized by the Managing General Partner provided that the sole
purpose of the entity is to hold record title to oil and gas properties and it
does not engage in any other business or incur any other liabilities. In
addition, the Managing General Partner shall obtain either a ruling from the
Internal Revenue Service or an opinion of tax counsel to the effect that such
arrangement shall not change the ownership status of the Partnership for federal
income tax purposes.
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(b) The Managing General Partner shall take the necessary steps in its best
judgment to render title to the Leases to be assigned to the Partnership
acceptable for the purposes of the Partnership. No operation shall be commenced
on any Prospect acquired by the Partnership unless the Managing General Partner
is satisfied that the undertaking of such operation would be in the best
interest of Investor Partners and the Partnership. The Managing General Partner
shall be free, however, to use its own best judgment in waiving title
requirements and shall not be liable to the Partnership or the Investor Partners
for any mistakes of judgment unless such mistakes were made in a manner not in
accordance with general industry standards in the geographic area and such
mistakes were not the result of negligence by the Managing General Partner; nor
shall the Managing General Partner or its Affiliates be deemed to be making any
warranties or representations, express or implied, as to the validity or
merchantability of the title to any Lease assigned to the Partnership or the
extent of the interest covered thereby.
5.05 FARMOUTS.
(a) No Partnership Lease shall be farmed out, sold, or otherwise disposed of
unless the Managing General Partner, exercising the standard of a prudent
operator, determines that:
(1) The Partnership lacks sufficient funds to drill on such Lease and is
unable to obtain suitable financing;
(2) The Leases have been downgraded by events occurring after assignment
to the Partnership;
(3) Drilling on the Leases would result in an excessive concentration of
Partnership funds creating, in the Managing General Partner's opinion, undue
risk to the Partnership; or
(4) The farmout is in the best interests of the Partnership.
(b) Farmouts between the Partnership and the Managing General Partner or its
Affiliates, including any other affiliated limited partnership, shall be
effected on terms deemed fair by the Managing General Partner. The Managing
General Partner, exercising the standard of a prudent operator, shall determine
that the farmout is in the best interest of the Partnership and the terms of the
farmout are consistent with and, in any case, no less favorable to the
Partnership than those utilized in the geographic area of operations for similar
arrangements. The respective obligations and revenue sharing of all affiliated
parties to the transactions shall be substantially the same, and the
compensation arrangement or any other interest or right of either the Managing
General Partner or its Affiliates shall be substantially the same in each
participating partnership or, if different, shall be reduced to reflect the
lower compensation arrangement.
5.06 RELEASE, ABANDONMENT, AND SALE OR EXCHANGE OF PROPERTIES. Except as
provided elsewhere in this Article V and in Section 6.03, the Managing General
Partner shall have full power to dispose of the production and other assets of
the Partnership, including the power to determine which Leases shall be released
or permitted to terminate, those wells to be abandoned, whether any Lease or
well shall be sold or exchanged, and the terms therefor. In the event the
Managing General Partner sells, transfers, or otherwise disposes of nonproducing
property of the Partnership, the sale, transfer, or disposition shall be made,
to the extent possible, at a price that is the higher of the fair market value
of the property on the date of the sale, transfer, or disposition or the Cost of
such property to the Partnership.
5.07 CERTAIN TRANSACTIONS.
(a) Whenever the Managing General Partner or its Affiliates sell, transfer,
or assign an interest in a Prospect to the Partnership, they shall assign to the
Partnership an equal proportionate interest in each of the Leases comprising the
Prospect. If the Managing General Partner or its Affiliates (except another
affiliated partnership in which the interest of the Managing General Partner or
its Affiliates is identical to or less than their interest in the Partnership)
subsequently propose to acquire an interest in a Prospect in which the
Partnership possesses an interest or in a Prospect abandoned by the Partnership
within one year preceding such proposed acquisition, the Managing General
Partner or its Affiliates shall offer an equivalent interest therein to the
Partnership; and, if funds, including borrowings, are not available to the
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Partnership to enable it to consummate a purchase of an equivalent interest in
such property and pay the development costs thereof, neither the Managing
General Partner nor any of its Affiliates shall acquire such interest or
property. The term "abandoned" shall mean the termination, either voluntarily or
by operation of the Lease or otherwise, of all of the Partnership's interest in
the Prospect. These limitations shall not apply after the lapse of five years
from the date of formation of the Partnership.
(b) The geological limits of a Prospect shall be enlarged or contracted on
the basis of subsequently acquired geological data that further defines the
productive limits of the underlying oil and/or gas reservoir and shall include
all of the acreage determined by such subsequent data to be encompassed by such
reservoir; further, where the Managing General Partner or Affiliate owns a
separate property interest in such enlarged area, such interest shall be sold to
the Partnership if the activities of the Partnership were material in
establishing the existence of Proved Undeveloped Reserves which are attributable
to such separate property interest; provided, however, that the Partnership
shall not be required to expend additional funds unless they are available from
the initial capitalization of the Partnership or if the Managing General Partner
believes it is prudent to borrow for the purpose of acquiring such additional
acreage.
(c) The Partnership shall not purchase properties from or sell properties to
any other affiliated partnership. This prohibition, however, shall not apply to
transactions among affiliated partnerships by which property is transferred from
one to another in exchange for the transferee's obligation to conduct drilling
activities on such property or to joint ventures among such affiliated
partnerships, provided that the respective obligations and revenue sharing of
all parties to the transaction are substantially the same and the compensation
arrangement or any other interest or right of either the Managing General
Partner or its Affiliates is the same in each affiliated partnership, or, if
different, the aggregate compensation of the Managing General Partner is reduced
to reflect the lower compensation arrangement.
(d) During the existence of the Partnership, and before it has ceased
operations, neither the Managing General Partner nor any of its Affiliates
(excluding another partnership where the Managing General Partner's or its
Affiliates' interest in such partnership is identical to or less than their
interest in the Partnership) shall acquire, retain, or drill for their own
account any oil and gas interest in any Prospect in which the Partnership
possesses an interest, except for transactions whereby the Managing General
Partner or such Affiliate acquires or retains a proportionate Working Interest,
the respective obligations of the Managing General Partner or the Affiliate and
the Partnership are substantially the same after the sale of the interest to the
Partnership, and the Managing General Partner's or Affiliate's interest in
revenues does not exceed the amount proportionate to its Working Interest.
(e) If the Managing General Partner or the Affiliate is engaged to a
substantial extent, as an ordinary and ongoing business, in providing such
services, equipment, or supplies to others in the industry, then the
compensation, price or rental for any oil field, equipage, or other services,
and any equipment and supplies rendered, sold or leased by such person to the
Partnership shall at prices competitive with those charged by others in the
geographical area of operations that reasonably could be available to the
Partnership. If neither the Managing General Partner is engaged in the business
as set forth above, then the compensation, price or rental shall be the cost of
such services, equipment or supplies to such entity, or the competitive rate
that could be obtained in the area, whichever is less. Subject to the forgoing,
any drilling services provided by the Managing General Partner or its Affiliates
shall be billed only on a per foot, per day, or per hour rate, or some
combination thereof. No turnkey drilling contracts shall be made between the
Managing General Partner or its Affiliates and the Partnership. Neither the
Managing General Partner nor its Affiliates shall profit by drilling in
contravention of its fiduciary obligations to the Partnership. Any such services
for which the Managing General Partner or an Affiliate is to receive
compensation shall be embodied in a written contract that precisely describes
the services to be rendered and all compensation to be paid.
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(f) Advance payments by the Partnership to the Managing General Partner are
prohibited, except where necessary to secure tax benefits of prepaid drilling
costs. These payments, if any, shall not include nonrefundable payments for
completion costs prior to the time that a decision is made that the well or
wells warrant a completion attempt.
(g) Neither the Managing General Partner nor its Affiliates shall make any
future commitments of the Partnership's production which do not primarily
benefit the Partnership, nor shall the Managing General Partner or any Affiliate
utilize Partnership funds as compensating balances for the benefit of the
Managing General Partner or the Affiliate.
(h) No rebates or give-ups may be received by the Managing General Partner
or any of its Affiliates, nor may the Managing General Partner or any Affiliate
participate in any reciprocal business arrangements that would circumvent these
restrictions.
(i) During a period of five years from the date of formation of the
Partnership, if the Managing General Partner or any of its Affiliates proposes
to acquire from an unaffiliated person an interest 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 shall apply:
(1) If the Managing General Partner or the Affiliate does not currently
own property in the Prospect separately from the Partnership, then neither
the Managing General Partner nor the Affiliate shall be permitted to
purchase an interest in the Prospect.
(2) If the Managing General Partner or the Affiliate currently owns a
proportionate interest in the Prospect separately from the Partnership, then
the interest to be acquired shall be divided between the Partnership and the
Managing General Partner or the Affiliate 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
General Partner nor the Affiliate shall be permitted to purchase any
additional interest in the Prospect.
(j) If the Partnership acquires property pursuant to a farmout or joint
venture from an affiliated program, the Managing General Partner's and/or its
Affiliates' aggregate compensation associated with the property and any direct
and indirect ownership interest in the property may not exceed the lower of the
compensation and ownership interest the Managing General Partner and/or its
Affiliates could receive if the property were separately owned or retained by
either one of the programs.
(k) Neither the Managing General Partner nor any Affiliate, including
affiliated programs, may purchase or acquire any property from the Partnership,
directly or indirectly, except pursuant to transactions that are fair and
reasonable to the Investor Partners of the Partnership and then subject to the
following conditions:
(1) A sale, transfer or conveyance, including a farmout, of an
undeveloped property from the Partnership to the Managing General Partner or
an Affiliate, other than an affiliated program, must be made at the higher
of cost or fair market value.
(2) A sale, transfer or conveyance of a developed property from the
Partnership to the Managing General Partner or an Affiliate, other than an
affiliated program in which the interest of the Managing General Partner is
substantially similar to or less than its interest in the subject
Partnership, shall not be permitted except in connection with the
liquidation of the Partnership and then only at fair market value.
(3) Except in connection with farmouts or joint ventures made in
compliance with Section 5.07(j) above, a transfer of an undeveloped property
from the Partnership to an affiliated drilling program must be made at fair
market value if the property has been held for more than two years.
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Otherwise, if the Managing General Partner deems it to be in the best
interest of the Partnership, the transfer may be made at cost.
(4) Except in connection with farmouts or joint ventures made in
compliance with Section 5.07(j) above, a transfer of any type of property
from the Partnership to an affiliated production purchase or income program
must be made at fair market value if the property has been held for more
than six months or there have been significant expenditures made in
connection with the property. Otherwise, if the Managing General Partner
deems it to be in the best interest of the Partnership, the transfer may be
made at cost as adjusted for intervening operations.
(l) 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:
(1) There will be no duplication or increase in organization and
offering expenses, the Managing General Partner's compensation, Partnership
expenses or other fees and costs;
(2) There will be no substantive alteration in the fiduciary and
contractual relationship between the Managing General Partner and the
Investor Partners; and
(3) There will be no diminishment in the voting rights of the Investor
Partners.
(m) In connection with a proposed Roll-Up, the following shall apply:
(1) 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 and the
Administrator 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.
(2) In connection with a proposed Roll-Up, Investor Partners who vote
"no" on the proposal shall be offered the choice of:
(i) Accepting the securities of the Roll-Up Entity offered in the
proposed Roll-Up; or
(ii) (aa) Remaining as Investor Partners in the Partnership and
preserving their interests therein on the same terms and
conditions as existed previously; or
(bb) Receiving cash in an amount equal to the Investor Partners'
pro-rata share of the appraised value of the net assets of the
Partnership.
(3) 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 7.07 and 7.08 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.
(4) 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
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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 Units held by that Investor Partner.
(5) 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 8.01 of this Agreement.
(6) 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 the Roll-Up is not approved by the Investor Partners.
(7) The Partnership shall not participate in a Roll-Up transaction
unless the Roll-Up transaction is approved by at least 66 2/3% in interest
of the Investor Partners.
ARTICLE VI
MANAGING GENERAL PARTNER
6.01 MANAGING GENERAL PARTNER. The Managing General Partner shall have the
sole and exclusive right and power to manage and control the affairs of and to
operate the Partnership and to do all things necessary to carry on the business
of the Partnership for the purposes described in Section 1.03 and to conduct the
activities of the Partnership as set forth in Article V. No financial
institution or any other person, firm, or corporation dealing with the Managing
General Partner shall be required to ascertain whether the Managing General
Partner is acting in accordance with this Agreement, but such financial
institution or such other person, firm, or corporation shall be protected in
relying solely upon the deed, transfer, or assurance of and the execution of
such instrument or instruments by the Managing General Partner. The Managing
General Partner shall devote so much of its time to the business of the
Partnership as in its judgment the conduct of the Partnership's business shall
reasonably require and shall not be obligated to do or perform any act or thing
in connection with the business of the Partnership not expressly set forth
herein. The Managing General Partner may engage in business ventures of any
nature and description independently or with others and neither the Partnership
nor any of its Investor Partners shall have any rights in and to such
independent ventures or the income or profits derived therefrom. However, except
as otherwise provided herein, the Managing General 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.
6.02 AUTHORITY OF MANAGING GENERAL PARTNER. The Managing General Partner
is specifically authorized and empowered, on behalf of the Partnership, and by
consent of the Investor Partners herein given, to do any act or execute any
document or enter into any contract or any agreement of any nature necessary or
desirable, in the opinion of the Managing General Partner, in pursuance of the
purposes of the Partnership. Without limiting the generality of the foregoing,
in addition to any and all other powers conferred upon the Managing General
Partner pursuant to this Agreement and the Act, and except as otherwise
prohibited by law or hereunder, the Managing General Partner shall have the
power and authority to:
(a) Acquire leases and other interests in oil and/or gas properties in
furtherance of the Partnership's business;
(b) Enter into and execute pooling agreements, farmout agreements, operating
agreements, unitization agreements, dry and bottom hole and acreage contribution
letters, construction contracts, and any and all documents or instruments
customarily employed in the oil and gas industry in connection with the
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acquisition, sale, exploration, development, or operation of oil and gas
properties, and all other instruments deemed by the Managing General Partner to
be necessary or appropriate to the proper operation of oil or gas properties or
to effectively and properly perform its duties or exercise its powers hereunder;
(c) Make expenditures and incur any obligations it deems necessary to
implement the purposes of the Partnership; employ and retain such personnel as
it deems desirable for the conduct of the Partnership's activities, including
employees, consultants, and attorneys; and exercise on behalf of the
Partnership, in such manner as the Managing General Partner in its sole judgment
deems best, of all rights, elections, and obligations granted to or imposed upon
the Partnership;
(d) Manage, operate, and develop any Partnership property, and enter into
operating agreements with respect to properties acquired by the Partnership,
including an operating agreement with the Managing General Partner as described
in the Prospectus, which agreements may contain such terms, provisions, and
conditions as are usual and customary within the industry and as the Managing
General Partner shall approve;
(e) Compromise, sue, or defend any and all claims in favor of or against the
Partnership;
(f) Subject to the provisions of Section 8.04, make or revoke any election
permitted the Partnership by any taxing authority;
(g) Perform any and all acts it deems necessary or appropriate for the
protection and preservation of the Partnership assets;
(h) Maintain at the expense of the Partnership such insurance coverage for
public liability, fire and casualty, loss of well control, and any and all other
insurance necessary or appropriate to the business of the Partnership in such
amounts and of such types as it shall determine from time to time;
(i) Buy, sell, or lease property or assets on behalf of the Partnership;
(j) Enter into agreements to hire services of any kind or nature;
(k) Assign interests in properties to the Partnership;
(l) Enter into soliciting dealer agreements and perform all of the
Partnership's obligations thereunder, to issue and sell Units pursuant to the
terms and conditions of this Agreement, the Subscription Agreements, and the
Prospectus, to accept and execute on behalf of the Partnership Subscription
Agreements, and to admit original and substituted Partners; and
(m) Perform any and all acts, and execute any and all documents it deems
necessary or appropriate to carry out the purposes of the Partnership.
6.03 CERTAIN RESTRICTIONS ON MANAGING GENERAL PARTNER'S POWER AND
AUTHORITY. Notwithstanding any other provisions of this Agreement to the
contrary, neither the Managing General Partner nor any Affiliate of the Managing
General Partner shall 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;
(b) Use any revenues from Partnership operations for the purposes of
acquiring Leases in new or unrelated Prospects or paying any Organization and
Offering Expenses; provided, however, that revenues from Partnership operations
may be used for other Partnership operations, including without limitation for
the purposes of drilling, completing, maintaining, recompleting, and operating
wells on existing Partnership Prospects and acquiring and developing new Leases
to the extent such Leases are considered by the Managing General Partner in its
sole discretion to be a part of a Prospect in which the Partnership then owns a
Lease;
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(c) Without having first received the prior consent of the holders of a
majority of the then outstanding Units entitled to vote,
(1) Sell all or substantially all of the assets of the Partnership
(except upon liquidation of the Partnership pursuant to Article IX), unless
cash funds of the Partnership are insufficient to pay the obligations and
other liabilities of the Partnership;
(2) Dispose of the good will of the Partnership;
(3) Do any other act which would make it impossible to carry on the
ordinary business of the Partnership; or
(4) Agree to the termination or amendment of any operating agreement to
which the Partnership is a party, or waive any rights of the Partnership
thereunder, except for amendments to the operating agreement which the
Managing General Partner believes are necessary or advisable to ensure that
the operating agreement conforms to any changes in or modifications to the
Code or that do not adversely affect the Investor Partners in any material
respect;
(d) 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 Person other
than the Partnership;
(e) Bind or obligate the Partnership with respect to any matter outside the
scope of the Partnership business;
(f) Use the Partnership name, credit, or property for other than Partnership
purposes;
(g) 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 benefit the
Partnership, including, among other things, utilization of funds of the
Partnership as compensating balances for its own benefit or the commitment of
future production;
(h) Benefit from any arrangement for the marketing of oil and gas production
or other relationships affecting the property of the Managing General Partner
and the Partnership, unless such benefits are fairly and equitably apportioned
among the Managing General Partner, its Affiliates, and the Partnership;
(i) Utilize Partnership funds to invest in the securities of another person
except in the following instances:
(1) Investments in working interests or undivided lease interests made
in the ordinary course of the Partnership's business;
(2) Temporary investments made in compliance with Section 2.02(f) of
this Agreement;
(3) Investments involving less than 5% of Partnership capital which are
a necessary and incidental part of a property acquisition transaction; and
(4) 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.
(j) Vote with respect to any Unit held by it; or
(k) Sell, transfer, or assign its interest (except for a collateral
assignment which may be granted to a bank or other financial institution) in the
Partnership, or any part thereof, or otherwise to withdraw as Managing General
Partner of the Partnership without 120 days prior written notice and the written
consent of Investor Partners owning a majority of the then outstanding Units.
6.04 INDEMNIFICATION OF MANAGING GENERAL PARTNER. The Managing General
Partner shall have no liability to the Partnership or to any Investor Partner
for any loss suffered by the Partnership which arises
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out of any action or inaction of the Managing General Partner if the Managing
General Partner, in good faith, determined that such course of conduct was in
the best interest of the Partnership, that the Managing General Partner was
acting on behalf of or performing services for the Partnership, and that such
course of conduct did not constitute negligence or misconduct of the Managing
General Partner. The Managing General Partner shall be indemnified by the
Partnership against any losses, judgments, liabilities, expenses, and amounts
paid in settlement of any claims sustained by it in connection with the
Partnership, provided that the Managing General Partner has determined in good
faith that the course of conduct which caused the loss or liability was in the
best interests of the Partnership, that the Managing General Partner was acting
on behalf of or performing services for the Partnership, and that the same were
not the result of negligence or misconduct on the part of the Managing General
Partner. Indemnification of the Managing General Partner is recoverable only
from the tangible net assets of the Partnership, including the insurance
proceeds from the Partnership's insurance policies and the insurance and
indemnification of the Partnership's subcontractors, and is not recoverable from
the Investor Partners. Notwithstanding the above, the Managing General Partner
and any person acting as a broker-dealer shall not be indemnified for
liabilities arising under federal and state securities laws unless (a) there has
been a successful adjudication on the merits of each count involving securities
law violations, (b) such claims have been dismissed with prejudice on the merits
by a court of competent jurisdiction, or (c) a court of competent jurisdiction
approves a settlement of such claims against a particular indemnitee and finds
that indemnification of the settlement and the 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 of any state securities
regulatory authority in which securities of the Partnership were offered or sold
as to indemnification for violations of securities laws; provided however, the
court need only be advised of the positions of the securities regulatory
authorities of those states (i) which are specifically set forth in the
Partnership Agreement and (ii) in which plaintiffs claim they were offered or
sold Units.
In any claim for indemnification for federal or state securities laws
violations, the party seeking indemnification shall place before the court the
position of the Securities and Exchange Commission, or respective state
securities division, as the case may be, with respect to the issue of
indemnification for securities law violations.
The advancement of Partnership funds to the Managing General Partner or its
Affiliates for legal expenses and other costs incurred as a result of any legal
action for which indemnification is being sought is permissible only if the
Partnership has adequate funds available and the following conditions are
satisfied:
(a) The legal action relates to acts or omissions with respect to the
performance of duties or services on behalf of the Partnership, and
(b) The legal action is initiated by a third party who is not a
participant, or the legal action is initiated by a participant and a court
of competent jurisdiction specifically approves such advancement, and
(c) The Managing General Partner or its Affiliates undertake to repay
the advanced funds to the Partnership, together with the applicable legal
rate of interest thereon, in cases in which such party is found not to be
entitled to indemnification.
The Partnership shall not incur the cost of the portion of any insurance that
insures the Managing General Partner against any liability as to which the
Managing General Partner is herein prohibited from being indemnified.
6.05 WITHDRAWAL.
(a) Notwithstanding the limitations contained in Section 6.03(k), the
Managing General Partner shall have the right, by giving written notice to the
other Partners, to substitute in its stead as managing general partner any
successor entity or any entity controlled by the Managing General Partner,
provided that the successor Managing General Partner must have a tangible net
worth of at least $5 million, and the Investor
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Partners, by execution of this Agreement, expressly consent to such a transfer,
unless it would adversely affect the status of the Partnership as a partnership
for federal income tax purposes.
(b) The Managing General Partner may not voluntarily withdraw from the
Partnership prior to the Partnership's completion of its primary drilling and/or
acquisition activities, and then only after giving 120 days written notice. The
Managing General Partner may not partially withdraw its property interests held
by the Partnership unless such withdrawal is necessary to satisfy the bona fide
request of its creditors or approved by a majority-in-interest vote of the
Investor Partners. The Managing General Partner shall fully indemnify the
Partnership against any additional expenses which may result from a partial
withdrawal of property interests and such withdrawal may not result in a greater
amount of direct costs or administrative costs being allocated to the Investor
Partners. The withdrawing Managing General Partner shall pay all expenses
incurred as a result of its withdrawal.
6.06 MANAGEMENT FEE. The Partnership shall pay the Managing General
Partner, on the date the Partnership is organized, a one-time management fee
equal to the difference between (i) 15% of the Total Subscriptions and (ii) the
total underwriting and brokerage discounts, commissions, and expenses incurred
in regard to the organization of the Partnership and the selling of the Units.
This Management Fee is included in the 15% of Total Subscriptions that is
payable to the Managing General Partner on the date the Partnership is
organized.
6.07 TAX MATTERS AND FINANCIAL REPORTING PARTNER. The Managing General
Partner shall serve as the Tax Matters Partner for purposes of Code Sections
6221 through 6233 and as the Financial Reporting Partner. The Partnership may
engage its accountants and/or attorneys to assist the Tax Matters Partner in
discharging its duties hereunder.
ARTICLE VII
INVESTOR PARTNERS
7.01 MANAGEMENT. No Investor Partner shall take part in the control or
management of the business or transact any business for the Partnership, and no
Investor Partner shall have the power to sign for or bind the Partnership. Any
action or conduct of Investor Partners on behalf of the Partnership is hereby
expressly prohibited. Any Investor Partner who violates this Section 7.01 shall
be liable to the remaining Investor Partners, the Managing General Partner, and
the Partnership for any damages, costs, or expenses any of them may incur as a
result of such violation. The Investor Partners hereby grant to the Managing
General Partner or its successors or assignees the exclusive authority to manage
and control the Partnership business in its sole discretion and to thereby bind
the Partnership and all Partners in its conduct of the Partnership business.
Investor Partners shall have the right to vote only with respect to those
matters specifically provided for in these Articles. No Investor Partner shall
have the authority to:
(a) Assign the Partnership property in trust for creditors or on the
assignee's promise to pay the debts of the Partnership;
(b) Dispose of the goodwill of the business;
(c) Do any other act that would make it impossible to carry on the ordinary
business of the Partnership;
(d) Confess a judgment;
(e) Submit a Partnership claim or liability to arbitration or reference;
(f) Make a contract or bind the Partnership to any agreement or document;
(g) Use the Partnership's name, credit, or property for any purpose;
(h) Do any act which is harmful to the Partnership's assets or business or
by which the interests of the Partnership shall be imperiled or prejudiced; or
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(i) Perform any act in violation of any applicable law or regulations
thereunder, or perform any act that is inconsistent with the terms of this
Agreement.
7.02 INDEMNIFICATION OF ADDITIONAL GENERAL PARTNERS. The Managing General
Partner agrees to indemnify each of the Additional General Partners for the
amounts of obligations, risks, losses, or judgments of the Partnership or the
Managing General Partner which exceed the amount of applicable insurance
coverage and amounts which would become available from the sale of all
Partnership assets. Such indemnification applies to casualty losses and to
business losses, such as losses incurred in connection with the drilling of an
unproductive well, to the extent such losses exceed the Additional General
Partners' interest in the undistributed net assets of the Partnership. If, on
the other hand, such excess obligations are the result of the negligence or
misconduct of an Additional General Partner, or the contravention of the terms
of the Partnership Agreement by the Additional General Partner, then the
foregoing indemnification by the Managing General Partner shall be unenforceable
as to such Additional General Partner and such Additional General Partner shall
be liable to all other Partners for damages and obligations resulting therefrom.
7.03 ASSIGNMENT OF UNITS.
(a) An Investor Partner may transfer all or any portion of his Units and the
transferee shall become a Substituted Investor Partner subject to all duties and
obligations of an Investor Partner, including those contained in Section 4.04,
except to the extent excepted in the Act, subject to the following conditions
(any transfer of such Units satisfying such conditions being referred to herein
as a "Permitted Transfer"):
(1) Except in the case of a transfer of Units at death or involuntarily
by operation of law, the transferor and transferee shall execute and deliver
to the Partnership such documents and instruments of conveyance as may be
necessary or appropriate in the opinion of counsel to the Partnership to
effect such transfer and to confirm the agreement of the transferee to be
bound by the provisions of this Article VII. In any case not described in
the preceding sentence, the transfer shall be confirmed by presentation to
the Partnership of legal evidence of such transfer, in form and substance
satisfactory to counsel to the Partnership. In all cases, the Partnership
shall be reimbursed by the transferor and/or transferee for all costs and
expenses that it reasonably incurs in connection with such transfer;
(2) The transferor and transferee shall furnish the Partnership with the
transferee's taxpayer identification number and sufficient information to
determine the transferee's initial tax basis in the Units transferred; and
(3) The written consent of the Managing General Partner to such transfer
shall have been obtained, the granting or denial of which shall be within
the absolute discretion of the Managing General Partner.
(b) A Person who acquires one or more Units but who is not admitted as a
Substituted Investor Partner pursuant to Section 7.03(c) shall be entitled only
to allocations and distributions with respect to such Units in accordance with
this Agreement, but shall have no right to any information or accounting of the
affairs of the Partnership, shall not be entitled to inspect the books or
records of the Partnership, and shall not have any of the rights of an
Additional General Partner or a Limited Partner under the Act or the Agreement.
(c) Subject to the other provisions of this Article VII, a transferee of
Units may be admitted to the Partnership as a Substituted Investor Partner only
upon satisfaction of the conditions set forth below in this Section 7.03(c):
(1) The Managing General Partner consents to such admission, which
consent can be withheld in its absolute discretion;
(2) The Units with respect to which the transferee is being admitted
were acquired by means of a Permitted Transfer;
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(3) The transferee becomes a party to this Agreement as a Partner and
executes such documents and instruments as the Managing General Partner may
reasonably request (including, without limitation, amendments to the
Certificate of Limited Partnership) as may be necessary or appropriate to
confirm such transferee as a Partner in the Partnership and such
transferee's agreement to be bound by the terms and conditions hereof;
(4) The transferee pays or reimburses the Partnership for all reasonable
legal, filing, and publication costs that the Partnership incurs in
connection with the admission of the transferee as a Partner with respect to
the transferred Units;
(5) If the transferee is not an individual of legal majority, the
transferee provides the Partnership with evidence satisfactory to counsel
for the Partnership of the authority of the transferee to become a Partner
and to be bound by the terms and conditions of this Agreement; and
(6) In any calendar quarter in which a Substituted Investor Partner is
admitted to the Partnership, the Managing General Partner shall amend the
certificate of limited partnership to effect the substitution of such
Substituted Investor Partners, although the Managing General Partner may do
so more frequently. 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 notice of assignment and required documentation.
(d) Each Investor Partner hereby covenants and agrees with the Partnership
for the benefit of the Partnership and all Partners that (i) he is not currently
making a market in Units and (ii) he will not transfer any Unit on an
established securities market or a secondary market (or the substantial
equivalent thereof) within the meaning of Code Section 7704(b) (and any
regulations, proposed regulations, revenue rulings, or other official
pronouncements of the Service or Treasury Department that may be promulgated or
published thereunder). Each Investor Partner further agrees that he will not
transfer any Unit to any Person unless such Person agrees to be bound by this
Section 7.03 and to transfer such Units only to Persons who agree to be
similarly bound.
7.04 PROHIBITED TRANSFERS.
(a) Any purported Transfer of Units that is not a Permitted Transfer shall
be null and void and of no effect whatever; provided, that, if the Partnership
is required to recognize a transfer that is not a Permitted Transfer (or if the
Managing General Partner, in its sole discretion, elects to recognize a transfer
that is not a Permitted Transfer), the interest transferred shall be strictly
limited to the transferor's rights to allocations and distributions as provided
by this Agreement with respect to the transferred Units, which allocations and
distributions may be applied (without limiting any other legal or equitable
rights of the Partnership) to satisfy the debts, obligations, or liabilities for
damages that the transferor or transferee of such Units may have to the
Partnership.
(b) In the case of a transfer or attempted transfer of Units that is not a
Permitted Transfer, the parties engaging or attempting to engage in such
transfer shall be liable to indemnify and hold harmless the Partnership and the
other Partners from all cost, liability, and damage that any of such indemnified
Persons may incur (including, without limitation, incremental tax liability and
lawyers fees and expenses) as a result of such transfer or attempted transfer
and efforts to enforce the indemnity granted hereby.
7.05 WITHDRAWAL BY INVESTOR PARTNERS. Neither a Limited Partner nor an
Additional General Partner may withdraw from the Partnership, except as
otherwise provided in this Agreement.
7.06 REMOVAL OF MANAGING GENERAL PARTNER.
(a) The Managing General Partner may be removed at any time, upon 90 days
prior written notice, with the consent of Investor Partners owning a majority of
the then outstanding Units, and upon the selection of a successor managing
general partner or partners, within such 90-day period by Investor Partners
owning a majority of the then outstanding Units.
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(b) Any successor Managing General Partner may be removed upon the terms and
conditions provided in this Section.
(c) In the event a managing general partner is removed, its respective
interest in the assets of the Partnership shall be determined by independent
appraisal by a qualified independent petroleum engineering consultant who shall
be selected by mutual agreement of the Managing General Partner and the incoming
sponsor. Such appraisal will take into account an appropriate discount to
reflect the risk of recovery of oil and gas reserves, and, at its election, the
removed managing general partner's interest in the Partnership assets may be
distributed to it or the interest of the managing general partner in the
Partnership may be retained by it as a Limited Partner in the successor limited
partnership; provided, however, that if immediate payment to the removed
managing general partner would impose financial or operational hardship upon the
Partnership, as determined by the successor managing general partner in the
exercise of its fiduciary duties to the Partnership, payment (plus reasonable
interest) to the removed managing general partner may be postponed to that time
when, in the determination of the successor managing general partner, payment
will not cause a hardship to the Partnership. The cost of such appraisal shall
be borne by the Partnership. The successor managing general partner shall have
the option to purchase at least 20% of the removed managing general partner's
interest for the value determined by the independent appraisal. The removed
managing general partner, at the time of its removal shall cause, to the extent
it is legally possible, its successor to be transferred or assigned all its
rights, obligations, and interests in contracts entered into by it on behalf of
the Partnership. In any event, the removed managing general partner shall cause
its rights, obligations, and interests in any such contract to terminate at the
time of its removal.
(d) Upon effectiveness of the removal of the managing general partner, the
assets, books, and records of the Partnership shall be surrendered to the
successor managing general partner, provided that the successor managing general
partner shall have first (i) agreed to accept the responsibilities of the
managing general partner, and (ii) made arrangements satisfactory to the
original managing general partner to remove such managing general partner from
personal liability on any Partnership borrowings or, if any Partnership creditor
will not consent to such removal, agreed to indemnify the original managing
general partner for any subsequent liabilities in respect to such borrowings.
Immediately after the removal of the managing general partner, the successor
managing general partner shall prepare, execute, file for recordation, and cause
to be published, such notices or certificates as may be required by the Act.
7.07 CALLING OF MEETINGS. Investor Partners owning 10% or more of the then
outstanding Units entitled to vote shall have the right to request that the
Managing General Partner call a meeting of the Partners. The Managing General
Partner shall call such a meeting and shall deposit in the United States mails
within 15 days after receipt of such request, written notice to all Investor
Partners of the meeting and the purpose of the meeting, which shall be held on a
date not less than 30 nor more than 60 days after the date of mailing of such
notice, at a reasonable time and place. Investor Partners shall have the right
to submit proposals to the Managing General Partner for inclusion in the voting
materials for the next meeting of Investor Partners for consideration and
approval by the Investor Partners. Investor Partners shall have the right to
vote in person or by proxy.
7.08 ADDITIONAL VOTING RIGHTS. Investor Partners shall be entitled to all
voting rights granted to them by and under this Agreement and as specified by
the Act. Each Unit is entitled to one vote on all matters; each fractional Unit
is entitled to that fraction of one vote equal to the fractional interest in the
Unit. Except as otherwise provided herein or in the Prospectus, at any meeting
of Investor Partners, a vote of a majority of Units represented at such meeting,
in person or by proxy, with respect to matters considered at the meeting at
which a quorum is present shall be required for approval of any such matters. In
addition, except as otherwise provided in this Section and in Section 5.07(m),
holders of a majority of the then outstanding Units may, without the concurrence
of the Managing General Partner, vote to (a) approve or disapprove the sale of
all or substantially all of the assets of the Partnership, (b) dissolve the
Partnership, (c) remove the Managing General Partner and elect a new managing
general partner, (d) amend the
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Agreement, (e) elect a new managing general partner if the managing general
partner elects to withdraw from the Partnership, and (f) cancel any contract for
services with the Managing General Partner or any Affiliates without penalty
upon 60 days' notice. The Partnership shall not participate in a Roll-Up unless
the Roll-Up is approved by at least 66 2/3% in interest of the Investor
Partners. A majority in interest of the then outstanding Units entitled to vote
shall constitute a quorum. In determining the requisite percentage in interest
of Units necessary to approve a matter on which the Managing General Partner and
its Affiliates may not vote or consent, any Units owned by the Managing General
Partner and its Affiliates shall not be included.
7.09 VOTING BY PROXY. The Investor Partners may vote either in person or
by proxy.
7.10 CONVERSION OF ADDITIONAL GENERAL PARTNER INTERESTS INTO LIMITED
PARTNER INTERESTS.
(a) As provided herein, Additional General Partners may elect to convert,
transfer, and exchange their interests for Limited Partner interests in the
Partnership upon receipt by the Managing General Partner of written notice of
such election. An Additional General Partner may request conversion of his
interests for Limited Partner interests at any time one year following the
closing of the securities offering which relates to the Agreement and the
disbursement to the Partnership of the proceeds of such securities offering.
(b) The Managing General Partner shall notify all Additional General
Partners at least 30 days prior to any material change in the amount of the
Partnership's insurance coverage. Within this 30-day period, and notwithstanding
Section 7.10(a), Additional General Partners shall have the right to immediately
convert their Units into Units of limited partnership interest by giving written
notice to the Managing General Partner.
(c) The Managing General Partner shall convert the interests of all
Additional General Partners in a particular Partnership to interests of Limited
Partners in that Partnership upon completion of drilling of that Partnership.
(d) The Managing General Partner shall cause the conversion to be effected
as promptly as possible as prudent business judgment dictates. Conversion of an
Additional General Partnership interest to a Limited Partnership interest in a
particular Partnership shall be conditioned upon a finding by the Managing
General Partner that such conversion will not cause a termination of the
Partnership for federal income tax purposes, and will be effective upon the
Managing General Partner's filing an amendment to its Certificate of Limited
Partnership. The Managing General Partner is obligated to file an amendment to
its Certificate at any time during the full calendar month after receipt of the
required notice of the Additional General Partner and a determination of the
Managing General Partner that the conversion will not constitute a termination
of the Partnership for tax purposes. Effecting conversion is subject to the
satisfaction of the condition that the electing Additional General Partner
provide written notice to the Managing General Partner of such intent to
convert. Upon such transfer and exchange, such Additional General Partners shall
be Limited Partners; however, they will remain liable to the Partnership for any
additional Capital Contribution(s) required for their proportionate share of any
Partnership obligation or liability arising prior to the conversion.
(e) Limited Partners may not convert and/or exchange their interests for
Additional General Partner interests.
7.11 LIABILITY OF PARTNERS. Except as otherwise provided in this Agreement
or as otherwise provided by the Act, each General Partner shall be jointly and
severally liable for the debts and obligations of the Partnership. In addition,
each Additional General Partner shall be jointly and severally liable for any
wrongful acts or omissions of the Managing General Partner and/or the
misapplication of money or property of a third party by the Managing General
Partner acting within the scope of its apparent authority to the extent such
acts or omissions are chargeable to the Partnership.
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ARTICLE VIII
BOOKS AND RECORDS
8.01 BOOKS AND RECORDS.
(a) For accounting and income tax purposes, the Partnership shall operate on
a calendar year.
(b) The Managing General 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 General Partner shall maintain for at least six years all records
necessary to substantiate the fact that Units were sold only to purchasers for
whom such Units 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.
(c) The Managing General Partner shall keep or cause to be kept complete and
accurate books and records with respect to the Partnership's business, which
books and records shall at all times be kept at the principal office of the
Partnership. 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 RAM disks, 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. The books
and records of the Partnership shall be made available for review by any
Investor Partner or his representative at any reasonable time.
(d) The Partner List shall be maintained as follows:
(1) An alphabetical list of the names, addresses and business telephone
numbers of the Investor Partners of the Partnership along with the number of
Units held by each of them (the "Partner List") shall be maintained as a
part of the books and records of the Partnership and shall be available for
the inspection by a Qualified Representative (as defined in
Section 8.01(e)) of any Investor Partner at the home office of the
Partnership upon the request of the Investor Partner;
(2) The Partner List shall be updated at least quarterly to reflect
changes in the information contained therein;
(3) A copy of the Partner List shall be mailed to the Qualified
Representative of any Investor Partner requesting the Partner List within
ten days of the request and the receipt by the Managing General Partner of a
confidentiality agreement executed by the Qualified Representative. The copy
of the Partner List shall 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;
(4) The purposes for which an Investor Partner may request a copy of the
Partner List include, without limitation, matters relating to voting rights
under the Partnership Agreement and the exercise of Investor Partners'
rights under federal proxy laws; and
(5) If the Managing General Partner of the Partnership neglects or
refuses to exhibit, produce, or mail a copy of the Partner List as
requested, the Managing General 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
Partner 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
Partner 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 General Partner may require the
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Investor Partners requesting the Partner 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 Partner 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.
(e) A Qualified Representative for the purposes of this Article is any law
firm or firm of Certified Public Accountants that (i) agrees to maintain the
confidentiality of the Partner List, (ii) agrees that stipulated or liquidated
damages in the event of its failure to maintain the confidentiality of the
Partner List shall be the sum of $1,000,000, and (iii) maintains adequate
insurance that covers any breach of the confidentiality agreement.
8.02 REPORTS. The Managing General Partner shall deliver to each Investor
Partner the following financial statements and reports at the times indicated
below:
(a) Within 75 days after the end of the first six months of each fiscal year
(for such six month period) and within 120 days after the end of each fiscal
year (for such year), 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. The annual
financial statements shall be accompanied by (i) a report of an independent
certified public accountant designated by the Managing General Partner stating
that an audit of such financial statements has been made in accordance with
generally accepted auditing standards and that in its opinion such financial
statements present fairly the financial condition, results of operations, and
cash flow of the Partnership in accordance with generally accepted accounting
principles and (ii) a reconciliation of such financial statements with the
information furnished to the Investor Partners for federal income tax reporting
purposes.
(b) Annually by March 15 of each year, a report containing such information
as may be deemed 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 (i) a summary
of the computations of the total estimated proved oil and gas 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 reported
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
General 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 proved oil and gas reserves as last reported to the Investor Partners, other
than a reduction resulting from production, a new summary conforming to the
requirements set forth above in this Section 8.02(c) shall be delivered to the
Investor Partners.
(d) Within 75 days after the end of the first six months of each fiscal year
and within 120 days after the end of each fiscal year, (i) a summary
itemization, by type and/or classification, of any transaction of the
Partnership since the date of the last such report with the Managing General
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 General Partner and its Affiliates, and (ii) a
schedule reflecting (A) the total costs of the Partnership (and, where
applicable, the costs pertaining to each Lease) and the costs paid by the
Managing General 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 General Partner and
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<PAGE>
the Investing Partners. Each semi-annual report delivered by the Managing
General Partner may contain summary estimates of the information described in
subdivision (i) of Section 8.02(c).
(e) Monthly within 15 days after the end of each calendar month while the
Partnership is participating in the drilling and completion of wells in which it
has an interest until the end of such activity, and thereafter for a period of
three years within 75 days after the end of the first six months of each fiscal
year and within 120 days after the end of each fiscal year, (i) a description of
each Prospect or field in which the Partnership owns Leases including the cost,
location, number of acres under lease, and the interest owned therein by the
program (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 farmins and farmouts of the Partnership made since the date of the last such
report, including the reason therefor, the location and timing thereof, the
person to whom made and the terms thereof, and (iii) a summary of the wells
drilled by the Partnership, indicating whether each of such wells has been
completed, 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 General Partner may contain summary estimates of the
information described in subsection (iii).
(f) The Managing General Partner shall cause the Partnership's independent
auditors to audit the financial statements of the Partnership in accordance with
generally accepted auditing standards. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, which would include an assessment as to whether or not the method
used to make allocations of costs was consistent with the method described in
the Prospectus. If the Managing General partner subsequently decides to allocate
expenses in a manner different from the manner described in the Prospectus, such
change shall be reported by the Managing General Partner to the Investor
Partners together with an explanation of why such change was made and the basis
for determining the reasonableness of the new allocation method.
(g) Such other reports and financial statements as the Managing General
Partner shall determine from time to time.
(h) Concurrently with their transmittal to Investor Partners and as
required, the Managing General Partner shall file a copy of each such report
with the California Commissioner of Corporations and with the securities
divisions of other states.
8.03 BANK ACCOUNTS. All funds of the Partnership shall be deposited in
such separate bank account or accounts, short-term obligations of the U.S.
Government or its agencies, or other interest-bearing investments and money
market or liquid asset mutual funds as shall be determined by the Managing
General Partner. All withdrawals therefrom shall be made upon checks signed by
the Managing General Partner or any person authorized to do so by the Managing
General Partner.
8.04 FEDERAL INCOME TAX ELECTIONS.
(a) Except as otherwise provided in this Section 8.04, all elections
required or permitted to be made by the Partnership under the Code shall be made
by the Managing General Partner in its sole discretion. Each Partner agrees to
provide the Partnership with all information necessary to give effect to any
election to be made by the Partnership.
(b) The Partnership shall elect to currently deduct IDC as an expense for
income tax purposes and shall require any partnership, joint venture, or other
arrangement in which it is a party to make such an election.
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<PAGE>
ARTICLE IX
DISSOLUTION; WINDING-UP
9.01 DISSOLUTION.
(a) Except as otherwise provided herein, the retirement, withdrawal,
removal, death, insanity, incapacity, dissolution, or bankruptcy of any Investor
Partner shall not dissolve the Partnership. The successor to the rights of such
Investor Partner shall have all the rights of an Investor Partner for the
purpose of settling or administering the estate or affairs of such Investor
Partner; provided, however, that no successor shall become a substituted
Investor Partner except in accordance with Article VII; provided, further, that
upon the withdrawal of an Additional General Partner, the Partnership shall be
dissolved and wound up unless at that time there is at least one other General
Partner, in which event the business of the Partnership shall continue to be
carried on. Neither the expulsion of any Investor Partner nor the admission or
substitution of an Investor Partner shall work a dissolution of the Partnership.
The estate of a deceased, insane, incompetent, or bankrupt Investor Partner
shall be liable for all his liabilities as an Investor Partner.
(b) The Partnership shall be dissolved upon the earliest to occur of:
(1) The written consent of the Investor Partners owning a majority of
the then-outstanding Units to dissolve and wind up the affairs of the
Partnership;
(2) Subject to the provisions of Subsection (c) below, the retirement,
withdrawal, removal, death, adjudication of insanity or incapacity, or
bankruptcy (or, in the case of a corporate managing general partner, the
withdrawal, removal, filing of a certificate of dissolution, liquidation, or
bankruptcy) of the Managing General Partner;
(3) The sale, forfeiture, or abandonment of all or substantially all of
the Partnership's property;
(4) The thirtieth anniversary of the Offering Termination Date;
(5) A dissolution event described in Subsection (a) above; or
(6) Any event causing dissolution of the Partnership under the Act.
(c) In the case of any event described in Subsection (b)(ii) above, if a
successor Managing General Partner is selected by Partners owning a majority of
the then outstanding Units within 90 days after such 9.01(b)(ii) event, and if
such Investor Partners agree, within such 90-day period to continue the business
of the Partnership, or if the remaining managing general partner, if any,
continues the business of the Partnership, then the Partnership shall not be
dissolved.
(d) If the retirement, withdrawal, removal, death, insanity, incapacity,
dissolution, liquidation, or bankruptcy of any Partner, or the assignment of a
Partner's interest in the Partnership, or the substitution or admission of a new
Partner, shall be deemed under the Act to cause a dissolution of the
Partnership, then, except as provided in Section 9.01(c), the remaining Partners
may, in accordance with the Act, continue the Partnership business as a new
partnership and all such remaining Partners agree to be bound by the provisions
of this Agreement.
9.02 LIQUIDATION. Upon a dissolution and final termination of the
Partnership, the Managing General Partner, or in the event there is no Managing
General Partner, any other person or entity selected by the Investor Partners
(hereinafter referred to as a "Liquidator") shall cause the affairs of the
Partnership to be wound up and shall take account of the Partnership's assets
(including contributions, if any, of the Managing General Partner pursuant to
Section 3.01(e)) and liabilities, and the assets shall, subject to the
provisions of Section 9.03(b), be liquidated as promptly as is consistent with
obtaining the fair market value thereof, and the proceeds therefrom (which
dissolution and liquidation may be accomplished over a period spanning one or
more tax years in the sole discretion of the Managing General
A-40
<PAGE>
Partner or Liquidator), to the extent sufficient therefor, shall be applied and
distributed in accordance with Section 9.03.
9.03 WINDING-UP.
(a) Upon the dissolution of the Partnership and winding up of its affairs,
the assets of the Partnership shall be distributed as follows:
(1) All of the Partnership's debts and liabilities to persons other than
the Managing General Partner shall be paid and discharged;
(2) All outstanding debts and liabilities to the Managing General
Partner shall be paid and discharged;
(3) Assets shall be distributed to the Partners to the extent of their
positive Capital Account balances, pro rata, in accordance with such
positive Capital Account balances; and
(4) Any assets remaining after the Partners' Capital Accounts have been
reduced to zero pursuant to Section 9.03(c) shall be distributed in
accordance with the provisions of Article III.
(b) Distributions pursuant to this Section 9.03 shall be made in cash or in
kind to the Partners, at the election of the Partners. Notwithstanding the
provision of this Section 9.03(b), in no event shall the Partners reserve the
right to take in kind and separately dispose of their share of production. Any
distribution made in kind shall be subject to the provisions of
Section 9.03(c).
(c) Any in kind property distributions to the Investor Partners shall be
made to a liquidating trust or similar entity for the benefit of the Investor
Partners, unless at the time of the distribution:
(1) The Managing General Partner shall offer the individual Investor
Partners the election of receiving in kind property distributions and the
Investor Partners accept such offer after being advised of the risks
associated with such direct ownership; or
(2) There are alternative arrangements in place which assure the
Investor Partners that they will not, at any time, be responsible for the
operation or disposition of Partnership properties.
The winding up of the affairs of the Partnership and the distribution of its
assets shall be conducted exclusively by the Managing General Partner or the
Liquidator, who is hereby authorized to do any and all acts and things
authorized by law for these purposes.
ARTICLE X
POWER OF ATTORNEY
10.01 MANAGING GENERAL PARTNER AS ATTORNEY-IN-FACT. The undersigned makes,
constitutes, and appoints the Managing General Partner the true and lawful
attorney for the undersigned, and in the name, place, and stead of the
undersigned from time to time to make, execute, sign, acknowledge, and file:
(a) Any notices or certificates as may be required under the Act and under
the laws of any other state or jurisdiction in which the Partnership shall
engage, or seek to engage, to do business and to do such other acts as are
required to constitute the Partnership as a limited partnership under such laws.
(b) Any amendment to the Agreement pursuant to and which complies with
Section 11.09.
(c) Such certificates, instruments, and documents as may be required by, or
may be appropriate under the laws of any state or other jurisdiction in which
the Partnership is doing or intends to do business and with the use of the name
of the Partnership by the Partnership.
(d) Such certificates, instruments, and documents as may be required by, or
as may be appropriate for the undersigned to comply with, the laws of any state
or other jurisdiction to reflect a change of name or address of the undersigned.
A-41
<PAGE>
(e) Such certificates, instruments, and documents as may be required to be
filed with the Department of Interior (including any bureau, office or other
unit thereof, whether in Washington, D.C. or in the field, or any officer or
employee thereof), as well as with any other federal or state agencies,
departments, bureaus, offices, or authorities and pertaining to (i) any and all
offers to lease, leases (including amendments, modifications, supplements,
renewals, and exchanges thereof) of, or with respect to, any lands under the
jurisdiction of the United States or any state including without limitation
lands within the public domain, and acquired lands, and provides for the leasing
thereof; (ii) all statements of interest and holdings on behalf of the
Partnership or the undersigned; (iii) any other statements, notices, or
communications required or permitted to be filed or which may hereafter be
required or permitted to be filed under any law, rule, or regulation of the
United States, or any state relating to the leasing of lands for oil or gas
exploration or development; (iv) any request for approval of assignments or
transfers of oil and gas leases, any unitization or pooling agreements and any
other documents relating to lands under the jurisdiction of the United States or
any state; and (v) any other documents or instruments which said
attorney-in-fact in its sole discretion shall determine should be filed.
(f) Any further document, including furnishing verified copies of the
Agreement and/or excerpts therefrom, which said attorney-in-fact shall consider
necessary or convenient in connection with any of the foregoing, hereby giving
said attorney-in-fact full power and authority to do and perform each and every
act and thing whatsoever requisite and necessary to be done in and about the
foregoing as fully as the undersigned might and could do if personally present,
and hereby ratifying and confirming all that said attorney-in-fact shall
lawfully do to cause to be done by virtue hereof.
10.02 NATURE AS SPECIAL POWER. The foregoing grant of authority:
(a) Is a special Power of Attorney coupled with an interest, is irrevocable,
and shall survive the death of the undersigned;
(b) Shall survive the delivery of any assignment by the undersigned of the
whole or any portion of his Units; except that where the assignee thereof has
been approved by the Managing General Partner for admission to the Partnership
as a substitute General or Limited Partner as the case may be, the Power of
Attorney shall survive the delivery of such assignment for the sole purpose of
enabling said attorney-in-fact to execute, acknowledge, and file any instrument
necessary to effect such substitution; and
(c) May be exercised by said attorney-in-fact with full power of
substitution and resubstitution and may be exercised by a listing of all of the
Partners executing any instrument with a single signature of said
attorney-in-fact.
ARTICLE XI
MISCELLANEOUS PROVISIONS
11.01 LIABILITY OF PARTIES. By entering into this Agreement, no party
shall become liable for any other party's obligations relating to any activities
beyond the scope of this Agreement, except as provided by the Act. If any party
suffers, or is held liable for, any loss or liability of the Partnership which
is in excess of that agreed upon herein, such party shall be indemnified by the
other parties, to the extent of their respective interests in the Partnership,
as provided herein.
11.02 NOTICES. Any notice, payment, demand, or communication required or
permitted to be given by any provision of this Agreement shall be deemed to have
been sufficiently given or served for all purposes if delivered personally to
the party or to an officer of the party to whom the same is directed or sent by
registered or certified mail, postage and charges prepaid, addressed as follows
(or to such other address as the party shall have furnished in writing in
accordance with the provisions of this Section): If to the Managing General
Partner, at Reef Partners LLC, 1901 N. Central Expressway, Suite 300,
Richardson, Texas 75080; if to an Investor Partner, at such Investor Partner's
address for purposes of notice which is set forth on attached Exhibit A. Unless
otherwise expressly set forth in this Agreement to the contrary, any
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<PAGE>
such notice shall be deemed to be given on the date on which the same was
deposited in a regularly maintained receptacle for the deposit of United States
mail, addressed and sent as aforesaid.
11.03 PARAGRAPH HEADINGS. The headings in this Agreement are inserted for
convenience and identification only and are in no way intended to describe,
interpret, define, or limit the scope, extent, or intent of this Agreement or
any provision hereof.
11.04 SEVERABILITY. Every portion of this Agreement is intended to be
severable. If any term or provision hereof is illegal or invalid by any reason
whatsoever, such illegality or invalidity shall not affect the validity of the
remainder of this Agreement.
11.05 SOLE AGREEMENT. This Agreement constitutes the entire understanding
of the parties hereto with respect to the subject matter hereof and no
amendment, modification, or alteration of the terms hereof shall be binding
unless the same be in writing, dated subsequent to the date hereof and duly
approved and executed by the Managing General Partner and such percentage of
Investor Partners as provided in Section 11.09 of this Agreement.
11.06 APPLICABLE LAW. This Agreement, which shall be governed exclusively
by its terms, is intended to comply with the Code and with the Act and shall be
interpreted consistently therewith.
11.07 EXECUTION IN COUNTERPARTS. This Agreement may be executed in any
number of counterparts with the same effect as if all parties hereto had all
signed the same document. All counterparts shall be construed together and shall
constitute one agreement.
11.08 WAIVER OF ACTION FOR PARTITION. Each of the parties irrevocably
waives, during the term of the Partnership, any right that it may have to
maintain any action for partition with respect to the Partnership and the
property of the Partnership.
11.09 AMENDMENTS.
(a) Unless otherwise specifically herein provided, this Agreement shall not
be amended without the consent of the Investor Partners owning a majority of the
then outstanding Units entitled to vote.
(b) The Managing General Partner may, without notice to, or consent of, any
Investor Partner, amend any provisions of the Certificate of Limited Partnership
or this Agreement, or consent to and execute any amendment to the Certificate of
Limited Partnership or this Agreement, to reflect:
(1) A change in the name or location of the principal place of business
of the Partnership;
(2) The admission of substituted or additional Investor Partners in
accordance with this Agreement;
(3) A reduction in, return of, or withdrawal of, all or a portion of any
Investor Partner's Capital Contribution;
(4) A correction of any typographical error or omission;
(5) A change which is necessary in order to qualify the Partnership as a
limited partnership under the laws of any other state or which is necessary
or advisable, in the opinion of the Managing General Partner, to ensure that
the Partnership will be treated as a partnership and not as an association
taxable as a corporation for federal income tax purposes;
(6) A change in the allocation provisions, in accordance with the
provisions of Section 3.02(l), in a manner that, in the sole opinion of the
Managing General Partner (which opinion shall be determinative), would
result in the most favorable aggregate consequences to the Investor Partners
as nearly as possible consistent with the allocations contained herein, for
such allocations to be recognized for federal income tax purposes due to
developments in the federal income tax laws or otherwise; or
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<PAGE>
(7) Any other amendment similar to the foregoing; provided, however,
that the Managing General Partner shall have no authority, right, or power
under this Section to amend the voting rights of the Investor Partners.
11.10 CONSENT TO ALLOCATIONS AND DISTRIBUTIONS. The methods herein set
forth by which allocations and distributions are made and apportioned are hereby
expressly consented to by each Partner as an express condition to becoming a
Partner.
11.11 RATIFICATION. The Investor Partner whose signature appears at the
end of this Agreement hereby specifically adopts and approves every provision of
this Agreement to which the signature page is attached.
11.12 SUBSTITUTION OF SIGNATURE PAGES. This Agreement has been executed in
duplicate by the undersigned Investor Partners and one executed copy of the
signature page is attached to the undersigned's copy of this Agreement. It is
agreed that the other executed copy of such signature page may be attached to an
identical copy of this Agreement together with the signature pages from
counterpart Agreements which may be executed by other Investor Partners.
11.13 INCORPORATION BY REFERENCE. Every exhibit, schedule, and other
appendix attached to this Agreement and referred to herein is hereby
incorporated in this Agreement by reference.
A-44
<PAGE>
SIGNATURE PAGE
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
day and year first written above.
<TABLE>
<CAPTION>
<S> <C>
MANAGING GENERAL PARTNER: INITIAL LIMITED PARTNER:
Reef Partners LLC
1901 North Central Expressway-Suite 300
Richardson, Texas 75080
By: ------------------------------------ By: ------------------------------------
Michael J. Mauceli, PRESIDENT (TYPED NAME OF INITIAL LIMITED PARTNER)
</TABLE>
A-45
<PAGE>
INVESTOR PARTNERS
COMPLETE TO INVEST AS ADDITIONAL GENERAL PARTNER
ADDITIONAL GENERAL PARTNER(S):
<TABLE>
<CAPTION>
<S> <C>
NUMBER OF UNITS
PURCHASED Name: ------------------------------------
(Print Name)
- ------------------------ -----------------------------------------
(Signature)
SUBSCRIPTION PRICE
$ ------------------------ Address: ----------------------------
-----------------------------------
-----------------------------------
</TABLE>
By: Reef Partners LLC
By:
- -------------------------------------------
its
- -------------------------------------------
ATTORNEY-IN-FACT
A-46
<PAGE>
COMPLETE TO INVEST AS LIMITED PARTNER
LIMITED PARTNER(S):
<TABLE>
<CAPTION>
<S> <C>
NUMBER OF UNITS
PURCHASED Name: ------------------------------------
(Print Name)
- ------------------------ -----------------------------------------
(Signature)
SUBSCRIPTION PRICE
$ ------------------------ Address: ----------------------------
-----------------------------------
-----------------------------------
</TABLE>
By: Reef Partners LLC
By:
- -------------------------------------------
its
- -------------------------------------------
ATTORNEY-IN-FACT
A-47
<PAGE>
EXHIBIT A
TO
AGREEMENT OF LIMITED PARTNERSHIP
OF
MILLENNIUM ENERGY FUND , L.P.,
A NEVADA LIMITED PARTNERSHIP
<TABLE>
<CAPTION>
NAMES AND ADDRESS OF INVESTORS NATURE OF INTEREST NUMBER OF UNITS
- ---------------------------------------------------------------------- -------------------- -------------------
<S> <C> <C>
</TABLE>
A-48
<PAGE>
APPENDIX B TO PROSPECTUS
SUBSCRIPTION AGREEMENT
I hereby agree to purchase ______ Unit(s) in the Reef Millennium Energy
Fund, in the following partnership (check the appropriate box): / / Millennium
Energy Fund A, L.P., / / Millennium Energy Fund B, L.P., / / Millennium Energy
Fund C, L.P., / / Millennium Energy Fund D, L.P., / / Millennium Energy Fund E,
L.P., / / Millennium Energy Fund F, L.P., / / Millennium Energy Fund G, L.P.,
/ / Millennium Energy Fund H, L.P., / / Millennium Energy Fund I, L.P., / /
Millennium Energy Fund J, L.P. (the "Partnership") at $20,000 per Unit. (Please
check only one box. Fill in a separate Subscription Agreement for each
Partnership in which you are subscribing if you are subscribing to multiple
Partnerships, together with a check payable to each such Partnership in the
amount of your subscription to that Partnership.)
Enclosed please find my check in the amount of $____________. My completion
and execution of this Subscription Agreement also constitutes my execution of
the Limited Partnership Agreement and the Certificate of Limited Partnership of
the Partnership. If this Subscription is accepted, I agree to be bound and
governed by the provisions of the Limited Partnership Agreement of the
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 and in
the Prospectus, I represent that:
(a) I have received a copy of the Prospectus for the Partnership.
(b) I have a net worth of not less than $225,000 (exclusive of home,
furnishings and automobiles); or I have a net worth of not less than $60,000
(exclusive of home, furnishings and automobiles) and had during my last tax year
or estimate that I will have at the end of the current taxable year, taxable
income as defined in Section 63 of the Internal Revenue Code of 1986 of at least
$60,000, without regard to an investment in the Partnership.
(c) If a resident of Arizona, California, Michigan, Mississippi, Missouri,
New Mexico, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Tennessee or
Texas, I am aware of and satisfy the additional suitability and other
requirements stated in Appendix C to the Prospectus.
(d) If a resident of California, I acknowledge and understand that the
offering may not comply with all the rules set forth in Title 10 of the
California Administrative Code; the following are some, but not necessarily all,
of the possible deviations from the California rules: Program selling expenses
may exceed the established limit; and the compensation formula varies from the
California rules. Even in light of such non-compliance, I affirmatively state
that I still want to invest in the Partnership.
(e) Except as set forth in (f) below, I am purchasing Units for my own
account.
(f) If a fiduciary, I am purchasing for a person or entity having the
appropriate income and/or net worth specified in (b) or (c) above.
(g) I certify that the number shown as my Social Security or Taxpayer
Identification Number on the signature page is correct.
THE ABOVE REPRESENTATIONS DO NOT CONSTITUTE A WAIVER OF ANY RIGHTS THAT I
MAY HAVE UNDER THE ACTS ADMINISTERED BY THE SECURITIES AND EXCHANGE COMMISSION
OR BY ANY STATE REGULATORY AGENCY ADMINISTERING STATUTES BEARING ON THE SALE OF
SECURITIES.
The Managing General Partner may not complete a sale of Units to an investor
until at least five business days after the date the investor receives a final
prospectus. In addition, the Managing General Partner will send each investor a
confirmation of purchase.
B-1
<PAGE>
NOTICES
(i) The purchase of Units as an Additional 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 General Partner, as described in "Risk Factors" in the
Prospectus.
(ii) 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 Units, including the following:
(A) the risks involved in the offering, including the speculative nature of
the investment and the speculative nature of drilling for oil and gas;
(B) the financial hazards involved in the offering, including the risk of
losing my entire investment; (C) the lack of liquidity of this investment;
(D) the restrictions of transferability of the Units; and (E) the tax
consequences of the investment.
(iii) THE INVESTMENT IN THE UNITS IS NOT LIQUID.
Investors are required to execute their own subscription agreements. The
Managing General Partner will not accept any subscription agreement that has
been executed by someone other than the investor or in the case of fiduciary
accounts by someone who does not have the legal power of attorney to sign on the
investor's behalf.
SIGNATURE AND POWER OF ATTORNEY
I hereby appoint Reef Partners LLC, 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 Limited
Partnership Agreement, and as more fully described in the Limited Partnership
Agreement.
If a resident of California, I am aware of and satisfy the additional
suitability requirements stated in Appendix C to the Prospectus and acknowledge
the receipt of California Rule 260.141.11 at pages C-4, C-5 and C-6 of
Appendix C to the Prospectus.
Date:
- -------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
- ------------------------------------ --------------------------------------
Signature Signature
- ------------------------------------ --------------------------------------
Please Print Name Please Print Name
- ------------------------------------ --------------------------------------
Social Security or Tax Social Security or Tax
Identification Number Identification Number
</TABLE>
B-2
<PAGE>
I utilize the calendar year as my Federal income tax year, unless indicated
otherwise as follows:
________________________________________________________________________________
Mailing Address:
________________________________________________________________________________
STREET
_____________________ _____________________ ____________________
CITY STATE ZIP CODE
Address for Distributions and Notices, if different from above:
________________________________________________________________________________
STREET
_____________________ _____________________ ____________________
CITY STATE ZIP CODE
Business Telephone No. ( ) __________ Home Telephone No. ( ) _________
Type of Units Purchased:
/ / Units as an Additional General Partner / / Units as a Limited Partner
IF NO SELECTION IS MADE, THE
PARTNERSHIP CANNOT ACCEPT YOUR
SUBSCRIPTION AND WILL HAVE TO
RETURN THIS SUBSCRIPTION
AGREEMENT AND YOUR MONEY TO YOU.
Title to Units to be held as follows:
/ / Individual Ownership
/ / Joint Tenants with Right
of Survivorship
(both persons must sign)
/ / Tenants in Common (both persons must sign)
/ / Other___________________________
(describe)
B-3
<PAGE>
TO BE COMPLETED BY REEF PARTNERS LLC
Reef Partners LLC, as the Managing General Partner of the Partnership,
hereby accepts this Subscription and agrees to hold and invest the same pursuant
to the terms and conditions of the Limited Partnership Agreement of the
Partnership.
REEF PARTNERS LLC
______________________________________
By: Michael J. Mauceli, Manager
Date: ________________________________
TO BE COMPLETED BY REGISTERED REPRESENTATIVE
(FOR COMMISSION AND OTHER PURPOSES)
I hereby represent that I have discharged my affirmative obligations under
Sections 3(b) and 4(d) of Appendix F to the NASD's Rules of Fair Practice and
specifically have obtained information from the above-named subscriber
concerning his/her net worth, annual income, federal income tax bracket,
investment portfolio and other financial information and have determined that an
investment in the Partnership is suitable for such subscriber, that such
subscriber is or will be in a financial position to realize the benefits of this
investment, and that such subscriber has a fair market net worth sufficient to
sustain the risks of this investment. I have also informed the subscriber of all
pertinent facts relating to the liquidity and marketability of an investment in
the Partnership, of the risks of unlimited liability regarding an investment as
an Additional General Partner, and of the passive loss limitations for tax
purposes of an investment as a Limited Partner.
________________________________________________________________________________
NAME OF BROKERAGE FIRM
____________________________________ ___________________________________
NAME OF REGISTERED REPRESENTATIVE OFFICE
ADDRESS
________________________________________________________________________________
_________________________ _________________________ _______________
AREA CODE TELEPHONE NUMBER SIGNATURE OF REGISTERED
REPRESENTATIVE DATE
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APPENDIX C TO PROSPECTUS
REEF MILLENNIUM ENERGY FUND
INSTRUCTIONS TO SUBSCRIBERS
Checks for Units should be made payable to "Bank One as Escrow Agent for
Millennium Energy Fund (circle as appropriate): [A, B, C, D, E, F, G, H, I, or
J], L.P." and should be given to the subscriber's broker for submission to the
Dealer Manager and Escrow Agent. The minimum subscription is $5,000.
Subscriptions are payable only in cash upon subscription. In the event that a
subscriber purchases Units in a particular Partnership on more than one occasion
during an offering period, the minimum purchase on each occasion is $5,000
(one-quarter Unit).
SIGNATURE REQUIREMENT.
Investors are required to execute their own subscription agreements. The
Managing General Partner will not accept any subscription agreement that has
been executed by someone other than the investor or, in the case of fiduciary
accounts, someone who does not have the legal power of attorney to sign on the
investor's behalf.
TRANSFER OF UNITS BY MISSOURI RESIDENTS.
The Commissioner of Securities of Missouri classifies the securities (the
Units) 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, the offer for sale or resale thereof in the
State of Missouri may be subject to the sanctions of the Act.
NOTICE TO MICHIGAN, OHIO OR PENNSYLVANIA INVESTORS.
If a Michigan, Ohio or Pennsylvania resident, your investment in the
Partnership must not equal or exceed 10% of your net worth.
SUBSCRIBERS FOR LIMITED PARTNERSHIP INTERESTS:
If a Michigan or North Carolina resident, you must have either: (1) a net
worth of not less than $225,000 (exclusive of home, furnishings and
automobiles), or (2) a net worth of not less than $60,000 (exclusive of home,
furnishings and automobiles) and estimated current year taxable income (as
defined in Section 63 of the Internal Revenue Code of 1986) of $60,000 or more,
without regard to your investment in a Partnership.
If a Pennsylvania resident, you must have either: (1) a net worth of at
least $225,000 (exclusive of home, furnishings and automobiles) or (2) a net
worth of at least $60,000 (exclusive of home, furnishings and automobiles) and a
taxable income in the year preceding the year of your investment in a
Partnership of $60,000 or estimate that you will have an annual taxable income
of $60,000 during your current tax year; or (3) you must be purchasing in a
fiduciary capacity for a person or entity having such net worth or such taxable
income.
If you are a resident of California who is purchasing Units of limited
partnership interest, you must represent (and do represent) that you (1) have a
net worth of not less than $250,000 (exclusive of home, furnishings and
automobiles) and expect to have gross income in the year of your investment of
$65,000 or more, or (2) have a net worth of not less than $500,000 (exclusive of
home, furnishings and automobiles), or (3) have a net worth of not less than
$1,000,000, or (4) expect to have gross income in the year of your investment of
not less than $200,000.
ADDITIONAL GENERAL PARTNER SUBSCRIBERS:
Except as otherwise provided below, if you are a resident of Arizona,
Michigan, Mississippi, Missouri, New Mexico, North Carolina, Ohio, Oklahoma,
Oregon, Pennsylvania, Tennessee or Texas, you must
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(i) have an individual or joint minimum net worth with your spouse of $225,000
without regard to the investment in the program, (exclusive of home, home
furnishings and automobiles) and a combined minimum gross income of $100,000
($120,000 for Arizona residents) or more for the current year and for the two
previous years. In addition, if you are an investor who is a resident of
Arizona, Michigan, Missouri, New Mexico, Ohio, Oklahoma or Oregon, you must
represent (and do represent) that you have an individual or joint minimum net
worth (exclusive of home, home furnishings, and automobiles) with your spouse of
$225,000, without regard to your investment in the Program, and an individual or
combined taxable income of $60,000 or more for the previous year and an
expectation of an individual or combined taxable income of $60,000 or more for
each of the current year and the succeeding year; or (ii) have an individual or
joint minimum net worth with your spouse in excess of $1,000,000, inclusive of
home, home furnishings and automobiles; or (iii) have an individual or joint
minimum net worth with your spouse in excess of $500,000, exclusive of home,
home furnishings and automobiles; or (iv) you and your spouse have a combined
minimum gross income of $200,000 in the current year and the two previous years.
If you are a resident of California who is purchasing Units of general
partnership interest, you must represent (and do represent) that you (i) have a
net worth of not less than $250,000 (exclusive of home, furnishings and
automobiles) and had annual gross income during the previous year of $120,000 or
more, or expect to have gross income for the current year of $120,000 or more,
or (ii) have a net worth of not less than $500,000 (exclusive of home,
furnishings and automobiles), or (iii) have a net worth of not less than
$1,000,000, or (iv) expect to have gross income in the current year of not less
than $200,000.
SPECIAL NOTICE TO CALIFORNIA RESIDENTS.
If a resident of California, you must represent (and do represent) that you
are 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.
As a condition of qualification of the Units for sale in the State of
California, the following rule is hereby delivered to each California purchaser.
CALIFORNIA ADMINISTRATIVE CODE, TITLE 10, CH. 3, RULE 260.141.11. RESTRICTION ON
TRANSFER.
(a) The issuer of a security upon which a restriction on transfer has been
imposed pursuant to Sections 260.102.6, 260.102.141.10, and 260.534.10 shall
cause a copy of this Section to be delivered to each issuer or transferee of
such security at the time the certificate evidencing the security is delivered
to the issuer or transferee.
(b) It is unlawful for the holder of any such security to consummate a sale
or transfer of such security, or any interest therein, without the prior written
consent of the Commissioner (until this condition is removed pursuant to
Section 260.141.12 of these rules), except:
(1) to the issuer;
(2) pursuant to the order or process of any court;
(3) to any person described in Subdivision (i) of Section 25102 of the Code
or Section 260.105.14 of these rules;
(4) to the transferor's ancestors, descendants or spouse, or any custodian
or trustee for the account of the transferor'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 intervivos or on death;
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(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; or
(16) by a trustee to a successor trustee when such transfer does not involve
a change in the beneficial ownership of the securities; provided that
any such transfer is on the condition that any certificate evidencing
the security issued to such transferee shall contain the legend
required by this section.
(c) The certificates representing all such securities subject to such a
restriction on transfer, whether upon initial issuance or upon any transfer
thereof, shall bear on their face a legend, prominently stamped or printed
thereon in capital letters of not less than 10-point size, reading as follows:
"IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY
INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR
WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA,
EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES."
As a condition of qualification of the Units for sale in the State of
California, each California subscriber through the execution of the Subscription
Agreement acknowledges his understanding that the California Department of
Corporations has adopted certain regulations and guidelines which apply to oil
and gas interests offered to the public in the State of California.
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APPENDIX D TO PROSPECTUS
[LETTERHEAD]
, 2000
Reef Partners LLC
Managing General Partner
Reef Millennium Energy Fund Partnerships
1901 N. Central Expressway, Suite 300
Richardson, Texas 75080
Re: REEF MILLENNIUM ENERGY FUND
Dear Sirs:
We have acted as counsel for Reef Millennium Energy Fund, in connection with
the offer and sale of securities (the "Units") in a series of limited
partnerships (the "Partnerships") to be organized as limited partnerships under
the Nevada Uniform Limited Partnership Act and in connection with the
preparation and filing of a registration statement on Form S-1 (the
"Registration Statement"). Capitalized terms used herein shall have the meaning
ascribed to such terms in the Registration Statement, unless otherwise provided.
We have examined and are familiar with: (i) the Registration Statement,
including a prospectus (the "Prospectus"), (ii) the Partnerships' form of
limited partnership agreement (the "Partnership Agreement"), and (iii) such
other documents and instruments as we have considered necessary for purposes of
the opinions hereinafter set forth.
In our examination we have assumed the authenticity of original documents,
the accuracy of copies and the genuineness of signatures. We have relied upon
the representations and statements of the Managing General Partner of the
Partnerships and its affiliates with respect to the factual determinations
underlying the legal conclusions set forth herein. We have not attempted to
verify independently such representations and statements.
Please note that we are opining only as to the matters expressly set forth
herein, and no opinion should be inferred as to any other matters. We are unable
to render opinions as to a number of federal income tax issues relating to an
investment in Units and the operations of the Partnerships. Finally, we are
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not expressing any opinion with respect to the amount of allowable losses or
credits that may be generated by the Partnerships or the amount of each Investor
Partner's share of allowable losses or credits from the Partnerships'
activities.
This Appendix D to the Prospectus constitutes our opinion as to all material
tax considerations of the offering. In our opinion, each of the legal
conclusions rendered in this Appendix D to the Prospectus is correct in all
material respects as of the date of this opinion. This opinion and the
statements set forth herein are based upon the provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), existing and proposed Treasury
Regulations thereunder (the "Regulations"), current administrative rulings, and
published court decisions. The federal income tax law is uncertain as to many of
the tax matters material to an investment in a Partnership, and it is not
possible to predict with certainty how the law will develop or how the courts
will decide various issues if they are litigated. While this opinion fairly
states our views as Counsel concerning the tax aspects of an investment in a
Partnership, both the Internal Revenue Service (the "Service") and the courts
may disagree with our position on certain issues.
Moreover, uncertainty exists concerning some of the federal income tax
aspects of the transactions being undertaken by the Partnerships. Some of the
tax positions being taken by the Partnerships may be challenged by the Service
and there is no assurance that any such challenge will not be successful. Thus,
there can be no guarantee that all of the anticipated tax benefits of an
investment in the Partnerships will be realized.
Our opinion is based upon the transactions described in the Prospectus (the
"Transactions") and upon facts as they have been represented to us or determined
by us as of the date of this opinion. Any alteration of the facts may adversely
affect the opinion rendered. In our opinion, the preponderance of the material
tax benefits, in the aggregate, will be realized by the Investor Partners. It is
possible, however, that some of the tax benefits will be eliminated or deferred
to future years.
Because of the factual nature of the inquiry, and in certain cases the lack
of clear authority in the law, it is not possible to reach a judgment as to the
outcome on the merits (either favorable or unfavorable) of certain material
federal income tax issues as described more fully herein.
SUMMARY OF CONCLUSIONS
OPINIONS EXPRESSED: The following is a summary of the specific opinions
expressed by us with respect to Tax Considerations discussed herein. TO BE FULLY
UNDERSTOOD, THE COMPLETE DISCUSSION OF THESE MATTERS SHOULD BE READ BY EACH
PROSPECTIVE INVESTOR PARTNER. OUR OPINION IS SUBJECT TO ALL OF THE ASSUMPTIONS,
QUALIFICATIONS AND LIMITATIONS SET FORTH IN THE FOLLOWING DISCUSSION.
1. The material federal income tax benefits in the aggregate from an
investment in the Partnerships will be realized.
2. The Partnerships will be treated as partnerships for federal income tax
purposes and not as corporations and not as associations taxable as,
corporations or as publicly traded partnerships.
3. To the extent a Partnership's wells are timely drilled and amounts are
timely paid, the Partners will be entitled to their pro rata share of the
Partnership's intangible drilling and development costs ("IDC") paid in 2000,
with respect to Partnerships designated "Millennium Energy Fund A, B and C",
2001 with respect to Partnerships designated "Millennium Energy Fund D, E and
F", and 2002 with respect to Partnerships designated "Millennium Energy Fund G,
H, I and J."
4. The deductibility of losses generated from a Partnership will not be
limited by the at risk rules or the limitations related to an Investor's
adjusted basis in his Partnership interest, to the extent the cash contributed
to a Partnership by a Partner constitutes "personal funds" as defined in
Regulation Section 1.465-9(f).
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5. Additional General Partners' interests will not be considered a passive
activity within the meaning of Code section 469 and losses generated while such
a general partner interest is so held will not be limited by the passive
activity provisions.
6. Limited Partners' interests (other than those held by Additional General
Partners who convert their interests into Limited Partners' interests) will be
considered interests in a passive activity within the meaning of Code
section 469 and losses generated therefrom will be limited by the passive
activity provisions.
7. A Partnership will not be terminated solely as the result of the
conversion of Partnership interests from general partner interests to limited
partner interests.
8. To the extent provided herein, the Partners' distributive shares of
Partnership tax items will be determined and allocated substantially in
accordance with the terms of the Partnership Agreement.
9. The Partnerships will not be required to register with the Service as
tax shelters.
NO OPINION EXPRESSED: Due to the lack of authority, or the essentially
factual nature of the question, we express no opinion on the following:
1. The impact of an investment in a Partnership on an Investor's
alternative minimum tax, due to the factual nature of the issue.
2. Whether, under Code section 183, the losses of a Partnership will be
treated as derived from "activities not engaged in for profit," and therefore
nondeductible from other gross income, due to the inherently factual nature of a
Partner's interest and motive in engaging in the Transactions.
3. Whether each Partner will be entitled to percentage depletion since such
a determination is dependent upon the status of the Partner as an independent
producer. Due to the inherently factual nature of such a determination, we are
unable to render an opinion as to the availability of percentage depletion.
4. Whether any interest expense incurred by a Partner with respect to any
borrowings will be deductible or subject to limitations on deductibility, due to
the factual nature of the issue. Without any assistance of the Managing General
Partner or any of its affiliates, some Partners may choose to borrow the funds
necessary to acquire a Unit and may incur interest expense in connection with
those loans. Based upon the purely factual nature of any such loans, we are
unable to express an opinion with respect to the deductibility of any interest
paid or incurred thereon.
5. Whether the fees to be paid to the Managing General Partner and to third
parties will be deductible, due to the factual nature of the issue. Due to the
inherently factual nature of the proper allocation of expenses among
nondeductible syndication expenses, amortizable organization expenses,
amortizable "start-up" expenditures, and currently deductible items, and because
the issues involve questions concerning both the nature of the services
performed and to be performed and the reasonableness of amounts charged, we are
unable to express an opinion regarding such treatment.
GENERAL INFORMATION: Certain matters contained herein are not considered to
address a material tax consequence and are for general information, including
the matters contained in sections dealing with gain or loss on the sale of Units
or of property, Partnership distributions, tax audits, penalties, and state,
local, and self-employment tax.
Our opinions are also based upon the facts described in this Prospectus and
upon certain representations made to us by the Managing General Partner for the
purpose of permitting us to render our opinions, including the following
representations with respect to the Program:
1. The Partnership Agreements to be entered into by and among the Managing
General Partner and Investor Partners and any amendments thereto will be duly
executed and will be made available to any Investor Partner upon written
request. The Partnership Agreements will be duly recorded in all places
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required under the Nevada Uniform Limited Partnership Act (the "Act") for the
due formation of the Partnerships and for the continuation thereof in accordance
with the terms of the respective Partnership Agreements. The Partnerships will
at all times be operated in accordance with the terms of the respective
Partnership Agreements, the Prospectus, and the Act.
2. No election will be made by a Partnership, Investor Partner, or Managing
General Partner to be excluded from the application of the provisions of
Subchapter K of the Code, and no election will be made by a Partnership to be
taxed as a corporation.
3. The Partnerships will each own an operating mineral interest, as defined
in the Code and in the Regulations, in all of the Drill Sites and none of a
Partnership's revenues will be from non-working interests.
4. The respective amounts that will be paid to affiliates of the Managing
General Partner or the Managing General Partner as Drilling Fees, Operating
Fees, and other fees will be amounts that would not exceed amounts ordinarily
paid for similar transactions between Persons having no affiliation and dealing
with each other at "arms' length."
5. The Managing General Partner will cause each Partnership to properly
elect to deduct currently all Intangible Drilling and Development Costs.
6. To the extent permitted by the Code, the Partnerships will each have a
December 31 taxable year and each will report its income on the accrual basis.
7. A Drilling and Operating Agreement (the "Operating Agreement") to be
entered into by and among an Operator and a Partnership will be duly executed
and will govern the drilling of the Partnership's Wells. All Partnership wells
will be spudded by not later than March 31, 2001 with respect to Partnerships
designated "Millennium Energy Fund A, B and C", March 31, 2002 with respect to
Partnerships designated "Millennium Energy Fund D, E and F" and March 31, 2003
with respect to Partnerships designated "Millennium Energy Fund G, H, I and J."
The entire amount to be paid to the Operator under an Operating Agreement is
attributable to Intangible Drilling and Development Costs and does not include a
profit for services performed or materials provided by third parties that are
passed through at actual cost.
8. An Operating Agreement will be duly executed and will govern the
operation of a Partnership's Wells.
9. The Managing General Partner believes that the sum of (i) the aggregate
deductions, including depletion deductions, and (ii) 350 percent of the
aggregate credits from a Partnership will not, as of the close of any of the
first five years ending after the date on which Units are offered for sale,
exceed two times the cash invested by the Partners in the Partnership as of such
dates. The Managing General Partner believes that no person could reasonably
infer from representations made, or to be made, in connection with the offering
of Units that such sums as of such dates will exceed two times the Partners'
cash investments as of such dates.
10. The Managing General Partner believes that at least 90% of the gross
income of the Partnership will constitute income derived from the exploration,
development, production, and/or marketing of oil and gas. The Managing General
Partner does not believe that any market will ever exist for the sale of Units
and the Managing General Partner will not make a market for the Units. Further,
the Units will not be traded on an established securities market or the
substantial equivalent thereof.
11. Each Partnership will have the objective of carrying on business for
profit and dividing the gain therefrom.
12. The Managing General Partner does not anticipate the purchase of Units
by tax-exempt investors or foreign investors.
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Our opinion is also subject to all the assumptions, qualifications, and
limitations set forth in the following discussion, including the assumptions
that each of the Partners has full power, authority, and legal right to enter
into and perform the terms of the Partnership Agreement and to take any and all
actions thereunder in connection with the transactions contemplated thereby.
Each prospective Investor Partner should be aware that, unlike a ruling from
the Service, an opinion of counsel represents only such counsel's best judgment.
THERE CAN BE NO ASSURANCE THAT THE SERVICE WILL NOT SUCCESSFULLY ASSERT
POSITIONS WHICH ARE INCONSISTENT WITH OUR OPINION SET FORTH IN THIS LETTER OR IN
THE TAX REPORTING POSITIONS TAKEN BY THE PARTNERS OR THE PARTNERSHIPS. EACH
PROSPECTIVE INVESTOR SHOULD CONSULT HIS OWN TAX ADVISOR TO DETERMINE THE EFFECT
OF THE TAX ISSUES DISCUSSED HEREIN ON HIS OR HER INDIVIDUAL TAX SITUATION.
PARTNERSHIP STATUS
Each Partnership will be formed as a limited partnership pursuant to the
Partnership Agreement and the laws of the State of Nevada. The characterization
of the Partnership as a partnership by state or local law, however, will not be
determinative of the status of the Partnership for federal income tax purposes.
The availability of any federal income tax benefits to an investor is dependent
upon classification of the Partnership as a partnership rather than as a
corporation for federal income tax purposes.
We are of the opinion that each Partnership will be treated as a partnership
for federal income tax purposes, and not as a corporation or as an association
taxable as a corporation. However, there can be no assurance that the Service
will not attempt to treat a Partnership as a corporation for federal income tax
purposes. If the Service were to prevail on this issue, the tax benefits
associated with taxation as a partnership would not be available to the
Partners.
As discussed below, our opinion that a Partnership will not be classified a
corporation is based in part on newly promulgated entity classification
regulations and in part on the fact that in our opinion the Partnership will not
constitute a "publicly traded partnership."
A. Association Taxable as a Corporation
Our opinion that the Partnership will not be treated as a corporation is
based on regulations issued by the Service on December 17, 1996, generally
effective as of January 1, 1997, regarding the tax classification of certain
business organizations (the "Check the Box Regulations").
Under the Check the Box Regulations, in general, a business entity that is
not otherwise required to be treated as a corporation under such regulations
will be classified as a partnership if it has two or more members, unless the
business entity elects to be treated as a corporation. The Partnership is not
required under the Check the Box Regulations to be treated as a corporation and
the Managing General Partner will not elect that the Partnership be treated as a
corporation. Accordingly, in our opinion the Partnership will not be treated as
a corporation.
B. Publicly Traded Partnerships
The Revenue Act of 1987 (the "1987 Act") added Code section 7704, "Certain
Publicly Traded Partnerships Treated as Corporations." In treating certain
"publicly traded partnerships" ("PTPs") as corporations for federal income tax
purposes, Congress defined a PTP as any partnership, interests in which are
either traded on an established securities market or readily tradable on a
secondary market or the substantial equivalent thereof. Code section 7704(b).
Regulation Section1.7704-1(b) provides that an "established securities market"
includes a national securities exchange registered under section 6 of the
Securities Exchange Act of 1934 (the "1934 Act"), a national securities exchange
exempt under the 1934 Act because of the limited volume of transactions, certain
foreign securities laws, regional or local exchanges, and an interdealer
quotation system that regularly disseminates firm buy or sell quotations by
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identified brokers or dealers. The Managing General Partner has represented that
the Units will not be traded on an established securities market.
Notwithstanding the above general treatment of PTPs, Code section 7704(c)
creates an exception to the treatment of PTPs as corporations for any taxable
year if 90% or more of the gross income of the partnership for such taxable year
consists of "qualifying income." Code section 7704(c)(2). For this purpose,
qualifying income is defined to include, INTER ALIA, "income and gains derived
from the exploration, development, mining or production, processing,
refining...or the marketing of any mineral or natural resource..." Code
section 7704(d)(1)(E). The Managing General Partner has represented that it
believes that, for all taxable years of a Partnership, 90% or more of the
Partnership's gross income will consist of such qualifying income.
Regarding the definition of PTPs contained in the Code, the Committee
Reports to the 1987 Act provide that PTPs include entities with respect to
which, inter alia, (i) "the holder of an interest has a readily available,
regular and ongoing opportunity to sell or exchange his interest through a
public means of obtaining or providing information of offers to buy, sell or
exchange interests," (ii) "prospective buyers and sellers have the opportunity
to buy, sell or exchange interests in a time frame and with the regularity and
continuity that the existence of a market maker would provide," and (iii) there
exists a "regular plan of redemptions or repurchases, or similar acquisitions of
interests in the partnership such that holders of interests have readily
available, regular and ongoing opportunities to dispose of their interests."
The Service issued Regulation Section1.7704-1 to clarify when partnership
interests that are not traded on an established securities market will be
treated as readily tradable on a secondary market or the substantial equivalent
thereof. Essentially, the Regulation provides that such a situation occurs if
partners are readily able to buy, sell, or exchange their partnership interests
in a manner that is comparable, economically, to trading on an established
securities market. The Regulation also provides "safe harbors" for transactions
that will be disregarded in determining whether partnership interests are
readily tradeable on secondary markets or a substantial equivalent thereof. It
is unclear whether the Units would qualify for safe harbor treatment under the
Regulation and we express no opinion regarding this matter. However, the
Managing General Partner's obligation to offer to purchase any Units is
conditioned upon the receipt by the Partnership from its counsel of an opinion
that such offers or obligations to offer will not cause the Partnership to be
treated as "publicly traded."
Due to the presence of the opinion of counsel condition, a Partnership, in
our opinion, will not be treated as a PTP prior to the time any such offers are
made to Investor Partners. Accordingly, the Partnership, in our opinion, will
not be treated as a corporation for federal income tax purposes under Code
section 7704 in the absence of the Partnership's interests being "readily
tradable on a secondary market (or the substantial equivalent thereof)."
Notwithstanding the above, the Service may promulgate Regulations or release
announcements which take the position that interests in partnerships such as the
Partnerships are readily tradable on a secondary market or the substantial
equivalent thereof. However, should this occur, treatment of a Partnership as a
PTP still should not result in its treatment as a corporation for federal income
tax purposes due to the exception contained in Code section 7704(c) relating to
PTPs meeting the 90% of gross income test so long as such gross income test is
satisfied.
C. Summary
Based on the above, in our opinion a Partnership will not be treated as a
corporation for federal income tax purposes by reason of the Check the Box
Regulations. Further, since any right of the Managing General Partner to offer
to purchase Units is conditioned upon the receipt of an opinion of counsel that
the Partnership will not be treated as a PTP, and assuming the Partnership
satisfies the 90% gross income test of Code Section 7704, the Partnership, in
our opinion, will not be treated as a corporation for federal income tax
purposes. Accordingly, each Partnership in our opinion will be treated as a
partnership for
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federal income tax purposes and each Partner should be required to report his
proportionate share of the Partnership's tax items on his individual federal
income tax return. If challenged by the Service on this issue, the Partners
should prevail on the merits.
If in any taxable year a Partnership were to be treated for federal income
tax purposes as a corporation, the Partnership income, gain, loss, deductions,
and credits would be reflected only on its "corporate" tax return rather than
being passed though to the Partners. In such event, the Partnership would be
required to pay income tax at corporate rates on its net income, thereby
reducing the amount of cash available to be distributed to the Partners.
Additionally, all or a portion of any distribution made to Partners would be
taxable as dividends, which would not be deductible by the Partnership and which
would generally be treated as ordinary portfolio income to the Partners,
regardless of the source from which such distributions were generated.
The discussion that follows is based on the assumption that each Partnership
will be classified as a partnership for federal income tax purposes.
FEDERAL TAXATION OF THE PARTNERSHIP
Under the Code, a partnership is not a taxable entity and, accordingly,
incurs no federal income tax liability. Rather, a partnership is a
"pass-through" entity that is required to file an information return with the
Service. In general, the character of a partner's share of each item of income,
gain, loss, deduction, and credit is determined at the partnership level. Each
partner is allocated a distributive share of such items in accordance with the
partnership agreement and is required to take such items into account in
determining the partner's income. Each partner includes such amounts in income
for any taxable year of the partnership ending within or with the taxable year
of the partner, without regard to whether the partner has received or will
receive any cash distributions from the partnership.
REGISTRATION AS A TAX SHELTER
The Code provides that certain investments must be registered as tax
shelters with the Service. Registration numbers for such tax shelters must be
supplied to investors who are required to report the numbers on their personal
tax returns. Any organizer of a "potentially abusive tax shelter" and any person
selling an interest in such shelter are required to maintain a list of investors
in such tax shelter to whom interests were sold (together with other identifying
information) and to make the list available to the Service upon request. Any tax
shelter that is required to be registered and any other entity, investment plan
or arrangement that is of a type described by the Regulations as having a
potential for tax avoidance or evasion is considered a potentially abusive tax
shelter for this purpose. Code section 6122(b).
The registration requirements apply only to an investment with respect to
which any person could reasonably infer from the representations made, or to be
made, in connection with the offering for sale of interests in the investment
that the "tax shelter ratio" for any investor is greater than two to one as of
the close of any of the first five years ending after the date on which such
investment is offered for sale. Code section 6111(c).
The Managing General Partner has represented that it does not believe that a
Partnership will have anticipated deductions and credits that would cause, in
our opinion, a Partnership's tax shelter ratio to be greater than two to one.
Based on the foregoing representation, we are of the opinion that the
Partnership will not be required to register with the Service as a tax shelter.
Accordingly, the Managing General Partner does not intend to cause a Partnership
to register with the Service as a tax shelter.
If it is subsequently determined that a Partnership was required to be
registered with the Service as a tax shelter, the Partnership would be subject
to certain penalties under Code section 6707, including a penalty ranging from
$500 to 1% of the aggregate amount invested in Units for failing to register and
$100 for each failure to furnish to a Partner a tax shelter registration number,
and each Partner would be liable
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for a $250 penalty for failure to include the tax registration number on his tax
return, unless such failure was due to reasonable cause. A Partner also would be
liable for a penalty of $100 for failing to furnish the tax shelter registration
number to any transferee of his Partnership interest. Code section 6707(b)(1).
We can give no assurance that, if a Partnership is determined to be a tax
shelter that must be registered with the Service, the above penalties will not
apply.
INTANGIBLE DRILLING AND DEVELOPMENT COSTS DEDUCTIONS
Under Code section 263(a), taxpayers are denied deductions for capital
expenditures, which expenditures are those that generally result in the creation
of an asset having a useful life that extends substantially beyond the close of
the taxable year. See also Regulation Section1.461-1(a)(2). In INDOPCO, INC. V.
COMMISSIONER, 503 U.S. 79, 92-1 USTC PARA50,113 (1992), the Supreme Court stated
that the costs should be capitalized when they provide benefits that extend
beyond one tax year. Notwithstanding these statutory and judicial rules,
Congress has granted to the Treasury Secretary the authority to prescribe
Regulations that would allow taxpayers the option of deducting, rather than
capitalizing, IDC. Code section 263(c). The Secretary's rules are embodied in
Regulation Section1.612-4 and state that, in general, the option to deduct IDC
applies only to expenditures for drilling and development items that do not have
a salvage value.
With respect to IDC incurred by a partnership, Code section 703 and
Regulation Section1.703-1(b) provide that the option to deduct such costs is to
be exercised at the partnership level and in the year in which the deduction is
to be taken. All partners are bound by the partnership's election. The Managing
General Partner has represented that each Partnership will elect to deduct IDC
in accordance with Regulation Section1.612-4. In this regard, Additional General
Partners will be entitled to deduct IDC against any form of income in the year
in which the investment is made, provided wells are spudded within the first 90
days of the following year; subject to the same provision, Limited Partners will
be entitled to deduct IDC against passive income.
A. Classification of Costs
In general, IDC consists of those costs that in and of themselves have no
salvage value. Regulation Section1.612-4(a) provides examples of items to which
the option to deduct IDC applies, including all amounts paid for labor, fuel,
repairs, hauling, and supplies, or any of them that are used (i) in the
drilling, shooting, and cleaning of wells, (ii) in such clearing of ground,
draining, road making, surveying, and geological works as are necessary in the
preparation for the drilling of wells, and (iii) in the construction of such
derricks, tanks, pipelines, and other physical structures as are necessary for
the drilling of wells and the preparation of wells for the production of oil or
gas. The Service, in Rev. Rul. 70-414, 1970-2 C.B. 132, set forth further
classifications of items subject to the option and those considered capital in
nature. The ruling provides that the following items are not subject to the
election of Regulation Section1.612-4(a): (i) oil well pumps (upon initial
completion of the well), including the necessary housing structures; (ii) oil
well pumps (after the well has flowed for a time), including the necessary
housing structures; (iii) oil well separators, including the necessary housing
structures; (iv) pipelines from the wellhead to oil storage tanks on the
producing lease; (v) oil storage tanks on the producing lease; (vi) salt water
disposal equipment, including any necessary pipelines; (vii) pipelines from the
mouth of a gas well to the first point of control, such as a common carrier
pipeline, natural gasoline plant, or carbon black plant; (viii) recycling
equipment, including any necessary pipelines; and (ix) pipelines from oil
storage tanks on the producing leasehold to a common carrier pipeline.
A partnership's classification of a cost as IDC is not binding on the
Service, which might reclassify an item labeled as IDC as a cost which must be
capitalized. In BERNUTH V. COMMISSIONER, 57 T.C. 225 (1971), AFF'D, 470 F.2d 710
(2nd Cir. 1972), the Tax Court denied taxpayers a deduction for that portion of
a turnkey drilling contract price that was in excess of a reasonable cost for
drilling the wells in question under a turnkey contract, holding that the amount
specified in the turnkey contract was not controlling.
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Similarly, the Service, in Rev. Rul. 73-211, 1973-1 C.B. 303, concluded that
excessive turnkey costs are not deductible as IDC:
[O]nly that portion of the amount of the taxpayer's total investment that is
attributable to intangible drilling and development costs that would have
been incurred in an arm's-length transaction with an unrelated drilling
contractor (in accordance with the economic realities of the transaction) is
deductible [as IDC].
To the extent the Partnership's prices meet the reasonable price standards
imposed by BERNUTH, supra, and Rev. Rul 73-211, supra, and to the extent such
amounts are not allocable to tangible property, leasehold costs, and the like,
the amounts paid to the Operator under the Operating Agreement should qualify as
IDC and should be deductible at the time described below under "B. Timing of
Deductions." That portion of the amount paid to the Operator that is in excess
of the amount that would be charged by an independent driller under similar
conditions will not qualify as IDC and will be required to be capitalized.
We are unable to express an opinion regarding the reasonableness or proper
characterization of the payments under the Operating Agreement, since the
determination of whether the amounts are reasonable or excessive is inherently
factual in nature. No assurance can be given that the Service will not
characterize a portion of the amount paid to the Operator as an excessive
payment, to be capitalized as a leasehold cost, assignment fee, syndication fee,
organization fee, or other cost, and not deductible as IDC. To the extent not
deductible, such amounts will be included in the Partners' bases of their
interests in the Partnership.
B. Timing of Deductions
As described above, Code section 263(c) and Regulation Section1.612-4 allow
the Partnership to expense IDC as opposed to capitalizing such amounts. Even if
a Partnership elects to expense the IDC, assuming a taxpayer is otherwise
entitled to such a deduction, the taxpayer may elect to capitalize all or a part
of the IDC and amortize same on a straight-line basis over a sixty month period,
beginning with the taxable month in which such expenditure is made. Code
sections 59(e)(1) and (2)(c).
For taxpayers entitled to deduct IDC, the timing of such deduction can vary,
depending, in part, upon the taxpayer's method of accounting. The Managing
General Partner has represented that the Partnership will use the accrual method
of accounting. Under the accrual method, income is recognized when all the
events have occurred that fix the right to receive such income and the amount
thereof can be determined with reasonable accuracy. Regulation
Section1.451-1(a). With respect to deductions, recognition results when all
events which establish liability have occurred and the amount thereof can be
determined with reasonable accuracy. Regulation Section1.461-1(a)(2). Regarding
deductions, Code section 461(h)(1) provides that "the all events test shall not
be treated as met any earlier than when economic performance with respect to
such item occurs."
Code section 461(i)(2) provides that, in the case of a "tax shelter,"
economic performance with respect to the act of drilling an oil or gas well will
"be treated as having occurred within a taxable year if drilling of the well
commences before the close of the 90th day after the close of the taxable year."
"Tax shelter," for purposes of Code section 461, is defined in a manner under
which the Partnerships will qualify. Code section 461(i)(3). However, with
respect to a tax shelter that is a partnership, the maximum deduction that would
be allowable for any prepaid expenses under this exception would be limited to
the partner's "cash basis" in the partnership. Code section 461(i)(2)(B)(i).
Such "cash basis" equals the partner's adjusted basis in the partnership,
determined without regard to (i) any liability of the partnership and (ii) any
amount borrowed by the partner with respect to the partnership that (I) was
arranged by the partnership or by any person who participated in the
organization, sale, or management of the partnership (or any person related to
such person within the meaning of Code section 465(b)(3)(C)) or (II) was secured
by any assets of the partnership. Code section 461(i)(2)(C). The Managing
General Partner has represented that the Operator, will commence drilling
operations by spudding each well on or before
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March 31, 2001 for Partnerships designated "Millennium Energy Fund A, B and C",
March 31, 2002 for Partnerships designated "Millennium Energy Fund D, E and F"
and March 31, 2003 for Partnerships designated "Millennium Energy Fund G, H, I
and J" and will complete each well, if completion is warranted, with due
diligence thereafter. Further, the Managing General Partner has represented
that, in any event, the Partnership will not have any such liability referred to
in Code section 461(i)(2)(C), and the Partners will not so incur any such debt
so as to result in application of the limiting provisions contained in Code
section 461(i)(2)(B)(i).
Notwithstanding the above, the deductibility of any prepaid IDC will be
subject to the limitations of case law. These limitations provide that prepaid
IDC is deductible when paid if (i) the expenditure constitutes a payment that is
not merely a deposit, (ii) the payment is made for a business purpose, and
(iii) deductions attributable to such outlay do not result in a material
distortion of income. See KELLER V. COMMISSIONER, 79 T.C. 7 (1982), aff'd, 725
F.2d 1173 (8th Cir. 1984), Rev. Rul. 71-252, 1971-1 C.B. 146, PAULEY V. U.S.,
63-1 U.S.T.C. PARA9280 (S.D. Cal. 1963), Rev. Rul. 80-71, 1980-1 C.B. 106,
JOLLEY V. COMMISSIONER, 47 T.C.M. 1082 (1984), DILLINGHAM V. U.S., 81-2 U.S.T.C.
PARA9601 (W.D. Okla. 1981), and STRADLINGS BUILDING MATERIALS, INC. V.
COMMISSIONER, 76 T.C. 84 (1981). Generally, these requirements may be met by a
showing of a legally binding obligation (i.e., the payment was not merely a
deposit), of a legitimate business purpose for the payment, that performance of
the services was required within a reasonable time, and of an arm's-length
price. Similar requirements apply to cash basis taxpayers seeking to deduct
prepaid IDC.
The Managing General Partner is unable to represent that all of the Wells
will be completed in 2000 for Partnerships designated "Millennium Energy Fund A,
B and C," 2001 for Partnerships designated "Millennium Energy Fund D, E and F"
and 2002 for Partnerships designated "Millennium Energy Fund G, H, I and J";
however, the Managing General Partner has represented that any Well that is not
completed in 2000 with respect to Partnerships designated "Millennium Energy
Fund A, B and C," in 2001 with respect to Partnerships designated "Millennium
Energy Fund D, E and F" and in 2002 with respect to Partnerships designated
"Millennium Energy Fund G, H, I and J" will be spudded by not later than
March 31, 2001 for Partnerships designated "Millennium Energy Fund A, B and C,"
March 31, 2002 for Partnerships designated "Millennium Energy Fund D, E and F,"
and March 31, 2003 for Partnerships designated "Millennium Energy Fund G, H, I
and J," respectively.
The Service has challenged the timing of the deduction of IDC when the wells
giving rise to such deduction have been completed in a year subsequent to the
year of prepayment. The decisions noted above hold that prepayments of IDC by a
cash basis taxpayer are, under certain circumstances, deductible in the year of
prepayment if some work is performed in the year of prepayment even though the
well is not completed that year.
In KELLER V. COMMISSIONER, supra, the Eighth Circuit Court of Appeals
applied a three-part test for determining the current deductibility of prepaid
IDC by a cash basis taxpayer, namely, whether (i) the expenditure was a payment
or a mere deposit, (ii) the payment was made for a valid business purpose and
(iii) the prepayment resulted in a material distortion of income. The facts in
that case dealt with two different forms of drilling contracts: "footage and day
work contracts" and "turnkey contracts." Under the turnkey contracts, the
prepayments were not refundable in any event, but in the event work was stopped
on one well the remaining unused amount would be applied to another well to be
drilled on a turnkey basis. Contrary to the Service's argument that this
substitution feature rendered the payment a mere deposit, the court in KELLER
concluded that the prepayments were indeed "payments" because the taxpayer could
not compel a refund. The court further found that the deduction clearly
reflected income because under the unique characteristics of the turnkey
contract the taxpayer locked in the price and shifted the drilling risk to the
contractor, for a premium, effectively getting its bargained for benefit in the
year of payment. Therefore, the court concluded that the cash basis taxpayers in
that case properly could deduct turnkey payments in the year of payment. With
respect to the prepayments under the footage or day-work contracts, however, the
court found that the payments were mere deposits on the facts of the case,
because the partnership had the power to compel a refund. The court was also
unconvinced as to the business purpose for prepayment under the footage and day
work contracts, primarily because the testimony indicated that the drillers
would have provided the required services with or without prepayment.
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Under the terms of the Partnerships' Operating Agreement, if amounts paid by
the Partnership prior to the commencement of drilling exceed amounts due the
Operator thereunder, the Operator will not refund any portion of amounts paid by
the Partnership, but rather will create a credit once the actual costs incurred
by the Operator are compared to the amounts paid. Further, the Operator will
expend such credit for additional IDC on additional wells selected by the
Managing General Partner.
The Service has adopted the position that the relationship between the
parties may provide evidence that the drilling contract between the parties
requiring prepayment may not be a bona fide arm's-length transaction, in which
case a portion of the prepayment may be disallowed as being a "non-required
payment." Revenue Ruling 80-71, 1980-1 C.B. 106; Internal Revenue
Manual-Examination Technique Guidelines, Examination Tax Shelters Handbook,
section 4236 (6-27-85).
The Service has formally adopted its position on prepayments to related
parties in Revenue Ruling 80-71. supra. In this ruling, a subsidiary
corporation, which was a general partner in an oil and gas limited partnership,
prepaid the partnership's drilling and completion costs under a turnkey contract
entered into with the corporate parent of the general partner. The agreement did
not provide for any date for commencing drilling operations and the contractor,
which did not own any drilling equipment, was to arrange for the drilling
equipment for the wells through subcontractors. Revenue Ruling 71-252, supra,
was factually distinguished on the grounds of the business purpose of the
transaction, immediate expenditure of prepaid receipts, and completion of the
wells within two and one-half months. Revenue Ruling 80-71 found that the
prepayment was not made in accordance with customary business practice and held
on the facts that the payment was deductible in the tax year that the related
general contractor paid the independent subcontractor.
However, in TOM B. DILLINGHAM V. UNITED STATES, 1981-2 USTC PARA9601 (W.D.
Okla. 1981), the court held that, on the facts before it, a contract between
related parties requiring a prepaid IDC did give rise to a deduction in the year
paid. In that case, Basin Petroleum Corp. ("Basin") was the general partner of
several drilling partnerships and also served as the partnership operator and
general contractor. As general contractor, Basin was to conduct the drilling of
the wells at a fixed price on a turnkey basis under an agreement that required
payment prior to the end of the year in question. The stated reason for the
prepayment was to provide Basin with working capital for the drilling of the
wells and to temporarily provide funds to Basin for other operations. The
agreement required drilling to commence within a reasonable period of time, and
all wells were completed within the following year. Some of the wells were
drilled by Basin with its own rigs and some were drilled by subcontractors. The
court stated:
The fact that the owner and contractor is the general partner of the
partnership-owner does not change this result where, as here, the Plaintiffs
have shown that prepayment was required for a legitimate business purpose
and the transaction was not a sham to merely permit plaintiff to control the
timing of the deduction. IRC, Sec. 707(a). Plaintiffs were entitled to rely
upon Revenue Ruling 71-252 by reason of Income Tax Regulations 26 C.F.R.
Section 601.601(d)(2)(v)(e).
Notwithstanding the foregoing, no assurance can be given that the Service will
not challenge the current deduction of IDC because of the prepayment being made
to a related party. If the Service were successful with such challenge, the
Partners' deductions for IDC would be deferred to later years.
The timing of the deductibility of prepaid IDC is inherently a factual
determination which is to a large extent predicated on future events. The
Managing General Partner has represented that the Operating Agreement to be
entered into by the Partnerships will be duly executed by and delivered to the
Partnership and Reef Partners LLC, attorney-in-fact for the Partners, and will
govern the drilling, and, if warranted, the completion of each of the Wells. The
Operating Agreement requires the Operator to commence drilling operations by
spudding each Well on or before March 31, 2001 for Partnerships designated
"Millennium Energy Fund A, B and C", March 31, 2002 for Partnerships designated
"Millennium Energy Fund D, E and F" and March 31, 2003 for Partnerships
designated "Millennium Energy Fund G, H, I and J," and to complete each Well, if
completion is warranted, with due diligence thereafter. Also, under the terms of
the
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Operating Agreement, the Operator, will not refund any portion of amounts paid
in the event actual costs are less than the amounts paid but will apply any such
amounts solely for payment of additional drilling services to the Partners.
Based upon this representation and others included within the opinion and
assuming that the Operating Agreement will be performed in accordance with its
terms, we are of the opinion that the payment for IDC under the Operating
Agreement, if made in 2000 for Partnerships designated "Millennium Energy Fund
A, B and C," 2001 for Partnerships designated "Millennium Energy Fund D, E and
F" and 2002 for Partnerships designated "Millennium Energy Fund G, H, I and J,"
will be allowable as a deduction in 2000 for Partnerships designated "Millennium
Energy Fund A, B and C," 2001 for Partnerships designated "Millennium Energy
Fund D, E and F" and 2002 for Partnerships designated "Millennium Energy Fund G,
H, I and J", subject to the other limitations discussed in this opinion.
Although the Managing General Partners will attempt to satisfy each requirement
of the Service and judicial authority for the timing of deductibility as
described above, no assurance can be given that the Service will not
successfully contend that the IDC of a well which is not completed until 2001
for Partnerships designated "Millennium Energy Fund A, B and C," 2002 for
Partnerships designated "Millennium Energy Fund D, E and F," and 2003 for
Partnerships designated "Millennium Energy Fund G, H, I and J" are not
deductible in whole or in part until 2001, 2002 or 2003, respectively. Further,
to the extent drilling of the Partnership's wells does not commence by
March 31, 2001 for Partnerships designated "Millennium Energy Fund A, B and C,"
March 31, 2002 for Partnerships designated "Millennium Energy Fund D, E and F,"
and March 31, 2003 for Partnerships designated "Millennium Energy Fund G, H, I
and J," the deductibility of all or a portion of the IDC may be deferred under
Code section 461.
C. Recapture of IDC
IDC that has been deducted is subject to recapture as ordinary income upon
certain dispositions (other than by abandonment, gift, death, or tax-free
exchange) of an interest in an oil or gas property. IDC previously deducted that
is allocable to the property (directly or through the ownership of an interest
in a partnership) and that would have been included in the adjusted basis of the
property is recaptured to the extent of any gain realized upon the disposition
of the property. Regulations provide that recapture is determined at the partner
level (subject to certain anti-abuse provisions). Regulations
Section1.1254-5(b). Where only a portion of recapture property is disposed of,
any IDC related to the entire property is recaptured to the extent of the gain
realized on the portion of the property sold. In the case of the disposition of
an undivided interest in a property (as opposed to the disposition of a portion
of the property), a proportionate part of the IDC with respect to the property
is treated as allocable to the transferred undivided interest to the extent of
any realized gain. Regulation Section1.1254-1(c).
DEPLETION DEDUCTIONS
The owner of an economic interest in an oil and gas property is entitled to
claim the greater of percentage depletion or cost depletion with respect to oil
and gas properties that qualify for such depletion methods. In the case of
partnerships, the depletion allowance must be computed separately by each
partner and not by the partnership. Code section 613A(c)(7)(D). Notwithstanding
this requirement, however, a Partnership, pursuant to Section 3.01(d)(i) of the
Partnership Agreement, will compute a "simulated depletion allowance" at the
Partnership level, solely for the purposes of maintaining Capital Accounts.
Cost depletion for any year is determined by multiplying the cost basis of
the mineral interest by a fraction, the numerator of which is the number of
units (e.g., barrels of oil or Mcf of gas) sold during the year and the
denominator of which is the estimated recoverable units of reserve available as
of the beginning of the depletion period. See Regulation Section1.611-2(a). In
no event can the cost depletion exceed the adjusted basis of the property to
which it relates.
Percentage depletion is generally available only with respect to the
domestic oil and gas production of certain "independent producers." In order to
qualify as an independent producer, the taxpayer, either
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directly or through certain related parties, may not be involved in the refining
of more 50,000 barrels of oil (or equivalent amount of gas) on any day during
the taxable year or in the retail marketing of oil and gas products exceeding
$5 million per year in the aggregate. Code sections 613A(d)(2) and 613A(d)(4).
In general, (i) component members of a controlled group of corporations,
(ii) corporations, trusts, or estates under common control by the same or
related persons and (iii) members of the same family (an individual, his spouse
and minor children) are aggregated and treated as one taxpayer in determining
the quantity of production (barrels of oil or cubic feet of gas per day)
qualifying for percentage depletion under the independent producer's exemption.
Code section 613A(c)(8). No aggregation is required among partners or between a
partner and a partnership. An individual taxpayer is related to an entity
engaged in refining or retail marketing if he owns 5% or more of such entity.
Code section 613A(d)(3).
Percentage depletion is a statutory allowance pursuant to which, under
current law, a minimum deduction equal to 15% of the taxpayer's gross income
from the property is allowed in any taxable year, in general, not to exceed
(i) 100% of the taxpayer's taxable income from the property (computed without
the allowance for depletion) or (ii) 65% of the taxpayer's taxable income for
the year (computed without regard to percentage depletion and net operating loss
and capital loss carrybacks). Code sections 613A(c)(1), 613(a) and 613A(d)(1).
In the case of "stripper well property," as that term is defined in Code
section 613A(c)(6)(E), the 100% of taxable income limitation has been eliminated
for taxable years beginning before 2002. Code section 613A(c)(6)(H). It is
anticipated that the properties of the Partnerships will likely constitute
"stripper well properties" for this purpose. The rate of the percentage
depletion deduction will vary with the price of oil. In the case of production
from marginal properties, the percentage depletion rate may be increased. Code
section 613A(c)(6). For purposes of computing the percentage depletion
deduction, "gross income from the property" does not include any lease bonus,
advance royalty, or other amount payable without regard to production from the
property. Code section 613A(d)(5). Depletion deductions reduce the taxpayer's
adjusted basis in the property. However, unlike cost depletion, deductions under
percentage depletion are not limited to the adjusted basis of the property; the
percentage depletion amount continues to be allowable as a deduction after the
adjusted basis has been reduced to zero.
Percentage depletion will be available, if at all, only to the extent that a
taxpayer's average daily production of domestic crude oil or domestic natural
gas does not exceed the taxpayer's depletable oil quantity or depletable natural
gas quantity, respectively. Generally, the taxpayer's depletable oil quantity
equals 1,000 barrels and depletable natural gas quantity equals 6,000,000 cubic
feet. Code section 613A(c)(3) and (4). In computing his individual limitation, a
Partner will be required to aggregate his share of a Partnership's oil and gas
production with his share of production from all other oil and gas investments.
Code section 613A(c). Taxpayers who have both oil and gas production may
allocate the deduction limitation between the two types of production.
The availability of depletion, whether cost or percentage, will be
determined separately by each Partner. Each Partner must separately keep records
of his share of the adjusted basis in an oil or gas property, adjust such share
of the adjusted basis for any depletion taken on such property, and use such
adjusted basis each year in the computation of his cost depletion or in the
computation of his gain or loss on the disposition of such property. These
requirements may place an administrative burden on a Partner. For properties
placed in service after 1986, depletion deductions, to the extent they reduce
the basis of an oil and gas property, are subject to recapture under Code
section 1254.
SINCE THE AVAILABILITY OF PERCENTAGE DEPLETION FOR A PARTNER IS DEPENDENT
UPON THE STATUS OF THE PARTNER AS AN INDEPENDENT PRODUCER, WE ARE UNABLE TO
RENDER ANY OPINION AS TO THE AVAILABILITY OF PERCENTAGE DEPLETION. EACH
PROSPECTIVE INVESTOR IS URGED TO CONSULT WITH HIS PERSONAL TAX ADVISOR TO
DETERMINE WHETHER PERCENTAGE DEPLETION WOULD BE AVAILABLE TO HIM.
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DEPRECIATION DEDUCTIONS
The Partnership will claim depreciation, cost recovery, and amortization
deductions with respect to its basis in Partnership Property as permitted by the
Code. For most tangible personal property placed in service after December 31,
1986, the "modified accelerated cost recovery system" ("MACRS") must be used in
calculating the cost recovery deductions. Code section 168. Thus, the cost of
lease equipment and well equipment, such as casing, tubing, tanks, and pumping
units, and the cost of oil or gas pipelines cannot be deducted currently but
must be capitalized and recovered under "MACRS." The cost recovery deduction for
most equipment used in domestic oil and gas exploration and production and for
most of the tangible personal property used in natural gas gathering systems is
calculated using the 200% declining balance method switching to the
straight-line method, a seven-year recovery period, and a half-year convention.
Code section 168(b)-(d) and (i).
INTEREST DEDUCTIONS
In the Transactions, the Investor Partners will acquire their interests by
remitting cash in the amount of $20,000 per Unit to the Partnership. In no event
will the Partnership accept notes in exchange for a Partnership interest.
Nevertheless, without any assistance of the Managing General Partner or any of
its affiliates, some Partners may choose to borrow the funds necessary to
acquire a Unit and may incur interest expense in connection with those loans.
Based upon the purely factual nature of any such loans, we are unable to express
an opinion with respect to the deductibility of any interest paid or incurred
thereon.
TRANSACTION FEES
The Partnership may classify a portion of the fees (the "Fees") to be paid
to third parties and to the Managing General Partner or to the Operator and its
affiliates (as described in the Prospectus under "Source of Funds and Use of
Proceeds") as expenses that are deductible as organizational expenses or
otherwise. There is no assurance that the Service will allow the deductibility
of such expenses and counsel expresses no opinion with respect to the allocation
of the Fees to deductible and nondeductible items.
Generally, expenditures made in connection with the creation of, and with
sales of interests in, a partnership will fit within one of several categories.
A partnership may elect to amortize and deduct its organizational expenses
(as defined in Code section 709(b)(2) and in Regulation Section1.709-2(a))
ratably over a period of not less than 60 months commencing with the month the
partnership begins business. Organizational expenses are expenses which (i) are
incident to the creation of the partnership, (ii) are chargeable to capital
account, and (iii) are of a character which, if expended incident to the
creation of a partnership having an ascertainable life, would (but for Code
section 709(a)) be amortized over such life. Id. Examples of organizational
expenses are legal fees for services incident to the organization of the
partnership, such as negotiation and preparation of a partnership agreement,
accounting fees for services incident to the organization of the partnership,
and filing fees. Regulation Section1.709-2(a).
Under Code section 709, no deduction is allowable for "syndication
expenses," examples of which include brokerage fees, registration fees, legal
fees of the underwriter or placement agent and the issuer (i.e., the general
partners or the partnership) for securities advice and for advice pertaining to
the adequacy of tax disclosures in the prospectus or private placement
memorandum for securities law purposes, printing costs, and other selling and
promotional material. These costs must be capitalized. Regulation
Section1.709-2(b). Payments for services performed in connection with the
acquisition of capital assets must be amortized over the useful life of such
assets. Code section 263.
Under Code section 195, no deduction is allowable with respect to "start-up
expenditures," although such expenditures may be capitalized and amortized over
a period of not less than 60 months. Start-up expenditures are defined as
amounts (i) paid or incurred in connection with (I) investigating the creation
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or acquisition of an active trade or business, (II) creating an active trade or
business, or (III) any activity engaged in for profit and for the production of
income before the day on which the active trade or business begins, in
anticipation of such activity becoming an active trade or business, and
(ii) which, if paid or incurred in connection with the operation of an existing
active trade or business (in the same field as the trade or business referred to
in (i) above), would be allowable as a deduction for the taxable year in which
paid or incurred. Code section 195(c)(1).
The Partnership intends to make payments to the Managing General Partner, as
described in greater detail in the Prospectus. To be deductible, compensation
paid to a general partner must be for services rendered by the partner other
than in his capacity as a partner or for compensation determined without regard
to partnership income. Code sections 707(a), (c). Fees which are not deductible
because they fail to meet this test may decrease the net loss or increase the
net income among all partners.
To the extent the expenditures described in the Prospectus are considered
syndication costs (such as the fees paid to brokers and broker-dealers, and the
fees paid for printing the Prospectus and possibly all or a portion of the
Managing General Partner's management fee), they will be nondeductible by a
Partnership. To the extent attributable to organization fees (such as the
amounts paid for legal services incident to the organization of the
Partnership), the expenditures may be amortizable over a period of not less than
60 months, commencing with the month the Partnership begins business, if the
Partnership so elects; if no election is made, no deduction is available.
Finally, to the extent any portion of the expenditures would be treated as
"start-up," they could be amortized over a 60 month or longer period, provided
the proper election was made.
Due to the inherently factual nature of the proper allocation of expenses
among nondeductible syndication expenses, amortizable organization expenses,
amortizable "start-up" expenditures, and currently deductible items, and because
the issues involve questions concerning both the nature of the services
performed and to be performed and the reasonableness of amounts charged, we are
unable to express an opinion regarding such treatment. If the Service were to
successfully challenge the Managing General Partner's allocations, a Partner's
taxable income could be increased, thereby resulting in increased taxes and in
liability for interest and penalties.
BASIS AND AT RISK LIMITATIONS
A Partner's share of Partnership losses will not be allowed as a deduction
to the extent such share exceeds the amount of the Partner's adjusted tax basis
in his Units. A Partner's initial adjusted tax basis in his Units will generally
be equal to the cash he has invested to purchase his Units. Such adjusted tax
basis will generally be increased by (i) additional amounts invested in the
Partnership, including his share of net income, (ii) additional capital
contributions, if any, and (iii) his share of Partnership borrowings, if any,
based on the extent of his economic risk of loss for such borrowings. Such
adjusted tax basis will generally be reduced, but not below zero by (i) his
share of loss, (ii) his depletion deductions on his share of oil and gas income
(until such deductions exhaust his share of the basis of property subject to
depletion), (iii) distributions of cash and the adjusted basis of property other
than cash made to him, and (iv) his share of reduction in the amount of
indebtedness previously included in his basis.
In addition, Code section 465 provides, in part, that, if an individual or a
closely held C (i.e., regularly taxed) corporation engages in any activity to
which Code section 465 applies, any loss from that activity is allowed only to
the extent of the aggregate amount with respect to which the taxpayer is "at
risk" for such activity at the close of the taxable year. Code
section 465(a)(1). A closely held C corporation is a corporation, more than
fifty percent (50%) of the stock of which is owned, directly or indirectly, at
any time during the last half of the taxable year by or for not more than five
individuals. Code sections 465(a)(1)(B), 542(a)(2). For purposes of Code
section 465, a loss is defined as the excess of otherwise allowable deductions
attributable to an activity over the income received or accrued from that
activity.
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Code section 465(d). Any such loss disallowed by Code section 465 shall be
treated as a deduction allocable to the activity in the first succeeding taxable
year. Code section 465(a)(2).
Code section 465(b)(1) provides that a taxpayer will be considered as being
"at risk" for an activity with respect to amounts including (i) the amount of
money and the adjusted basis of other property contributed by the taxpayer to
the activity, and (ii) amounts borrowed with respect to such activity to the
extent that the taxpayer (I) is personally liable for the repayment of such
amounts, or (II) has pledged property, other than property used in the activity,
as security for such borrowed amounts (to the extent of the net fair market
value of the taxpayer's interest in such property). No property can be taken
into account as security if such property is directly or indirectly financed by
indebtedness that is secured by property used in the activity. Code
section 465(b)(2). Further, amounts borrowed by the taxpayer shall not be taken
into account if such amounts are borrowed (i) from any person who has an
interest (other than an interest as a creditor) in such activity, or (ii) from a
related person to a person (other than the taxpayer) having such an interest.
Code section 465(b)(3).
Related persons for purposes of Code section 465(b)(3) are defined to
include related persons within the meaning of Code section 267(b) (which
describes relationships between family members, corporations and shareholders,
trusts and their grantors, beneficiaries and fiduciaries, and similar
relationships), Code section 707(b)(1) (which describes relationships between
partnerships and their partners) and Code section 52 (which describes
relationships between persons engaged in businesses under common control). Code
section 465(b)(3)(C).
Finally, no taxpayer is considered at risk with respect to amounts for which
the taxpayer is protected against loss through nonrecourse financing,
guarantees, stop loss agreements, or other similar arrangements. Code
section 465(b)(4).
The Code provides that a taxpayer must recognize taxable income to the
extent that his "at risk" amount is reduced below zero. This recaptured income
is limited to the sum of the loss deductions previously allowed to the taxpayer,
less any amounts previously recaptured. A taxpayer may be allowed a deduction
for the recaptured amounts included in his taxable income if and when he
increases his amount "at risk" in a subsequent taxable year. Code
section 465(e).
The Treasury has published proposed regulations relating to the at risk
provisions of Code section 465. These proposed regulations provide that a
taxpayer's at risk amount will include "personal funds" contributed by the
taxpayer to an activity. Regulation Section1.465-22(a). "Personal funds" and
"personal assets" are defined in Regulation Section1.465-9(f) as funds and
assets which (i) are owned by the taxpayer, (ii) are not acquired through
borrowing, and (iii) have a basis equal to their fair market value.
In addition to a taxpayer's amount at risk being increased by the amount of
personal funds contributed to the activity, the excess of the taxpayer's share
of all items of income received or accrued from an activity during a taxable
year over the taxpayer's share of allowable deductions from the activity for the
year will also increase the amount at risk. Regulation Section1.465-22. A
taxpayer's amount at risk will be decreased by (i) the amount of money withdrawn
from the activity by or on behalf of the taxpayer, including distributions from
a partnership, and (ii) the amount of loss from the activity allowed as a
deduction under Code section 465(a). Id.
The Partners will purchase Units by tendering cash to the Partnership. To
the extent the cash contributed constitutes the "personal funds" of the
Partners, the Partners should be considered at risk with respect to those
amounts. To the extent the cash contributed constitutes "personal funds," in our
opinion, neither the at risk rules nor limitations related to the adjusted basis
rules will limit the deductibility of losses generated from the Partnerships.
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PASSIVE LOSS AND CREDIT LIMITATIONS
A. Introduction
Code section 469 provides that the deductibility of losses generated from
passive activities will be limited for certain taxpayers. The passive activity
loss limitations apply to individuals, estates, trusts, and personal service
corporations as well as, to a lesser extent, closely held C corporations. Code
section 469(a)(2).
The definition of a "passive activity" generally encompasses all rental
activities as well as all activities with respect to which the taxpayer does not
"materially participate." Code section 469(c). Notwithstanding this general
rule, however, the term "passive activity" does not include "any working
interest in any oil or gas property which the taxpayer holds directly or through
an entity which does not limit the liability of the taxpayer with respect to
such interest." Code section 469(c)(3).
A passive activity loss ("PAL") is defined as the amount (if any) by which
the aggregate losses from all passive activities for the taxable year exceed the
aggregate income from all passive activities for such year. Code
section 469(d)(1).
Classification of an activity as passive will result in the income and
expenses generated therefrom being treated as "passive" except to the extent
that any of the income is "portfolio" income and except as otherwise provided in
Regulations. Code section 469(e)(1)(A). Portfolio income is income from, inter
alia, interest, dividends, and royalties not derived in the ordinary course of a
trade or business. Income that is neither passive nor portfolio is "net active
income." Code section 469(e)(2)(B).
With respect to the deductibility of PALs, individuals and personal service
corporations will be entitled to deduct such amounts only to the extent of their
passive income, whereas closely held C corporations (other than personal service
corporations) can offset PALs against both passive and net active income, but
not against portfolio income. Code section 469(a)(1), (e)(2). In calculating
passive income and loss, however, all activities of the taxpayer are aggregated.
Code section 469(d)(1). PALs disallowed as a result of the above rules will be
suspended and can be carried forward indefinitely to offset future passive (or
passive and active, in the case of a closely held C corporation) income. Code
section 469(b).
Upon the disposition of an entire interest in a passive activity in a fully
taxable transaction not involving a related party, any passive loss that was
suspended by the provisions of the Code section 469 passive activity rules is
deductible from either passive or non-passive income. The deduction must be
reduced, however, by the amount of income or gain realized from the activity in
previous years. Code section 469(g).
As noted above, a passive activity includes an activity with respect to
which the taxpayer does not "materially participate." A taxpayer will be
considered as materially participating in a venture only if the taxpayer is
involved in the operations of the activity on a "regular, continuous, and
substantial" basis. Code Section 469(h)(1). With respect to the determination as
to whether a taxpayer's participation in an activity is material, temporary
regulations issued by the Service provide that, except for limited partners in a
limited partnership, an individual will be treated as materially participating
in an activity if and only if (i) the individual participates in the activity
for more than 500 hours during such year, (ii) the individual's participation in
the activity for the taxable year constitutes substantially all of the
participation in such activity of all individuals for such year, (iii) the
individual participates in the activity for more than 100 hours during the
taxable year, and such individual's participation in such activity is not less
than the participation in the activity of any other individual for such year,
(iv) the activity is a trade or business activity of the individual, the
individual participates in the activity for more than 100 hours during such
year, and the individual's aggregate participation in all significant
participation activities of this type during the year exceeds 500 hours,
(v) the individual materially participated in the activity for 5 of the last
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10 years, or (vi) the activity is a personal service activity and the individual
materially participated in the activity for any 3 preceding years. Regulation
Section1.469-5T(a).
Notwithstanding the above, and except as may be provided in Regulations,
Code section 469(h)(2) provides that no limited partnership interest will be
treated as an interest with respect to which a taxpayer materially participates.
The Regulations create several exceptions to this rule and provide that a
limited partner will not be treated as not materially participating in an
activity of the partnership of which he is a limited partner if the limited
partner would be treated as materially participating for the taxable year under
paragraph (a)(1), (5), or (6) of Regulation Section1.469-5T (as described in
(i), (v), and (vi) of the above paragraph) if the individual were not a limited
partner for such taxable year. Regulation Section1.469-5T(e). For purposes of
this rule, a partnership interest of an individual will not be treated as a
limited partnership interest for the taxable year if the individual is an
Additional General Partner in a Partnership at all times during the
Partnership's taxable year ending with or within the individual's taxable year.
ID.
B. General Partner Interests
Due to the factual nature of the applicability of the material participation
factors to an Additional General Partner's participation in the activities of a
Partnership, we cannot express an opinion with respect to whether such
participation will be material. However, the "working interest" exception to the
passive activity rules applies without regard to the level of the taxpayer's
participation. Nevertheless, the presence or absence of material participation
may be relevant for purposes of determining whether the investment interest
expense rules of Code Section 163(d) apply to limit the deductibility of
interest incurred in connection with any borrowings of an Additional General
Partner.
As noted above, the term "passive activity" does not include any working
interest in any oil or gas property which the taxpayer holds directly or through
an entity which does not limit the taxpayer's liability with respect to such
interest. Regulation Section1.4691-T(e)(4)(v) describes an interest in an entity
that limits a taxpayer's liability with respect to the drilling or operation of
a well as (i) a limited partnership interest in a partnership in which the
taxpayer is not a general partner, (ii) stock in a corporation, or (iii) an
interest in any other entity that, under applicable state law, limits the
interest holder's potential liability. For purposes of this provision
indemnification agreements, stop loss arrangements, insurance, or any similar
arrangements or combinations thereof are not taken into account in determining
whether a taxpayer's liability is limited. Id.
The Joint Committee on Taxation's General Explanation of the Tax Reform Act
of 1986 (the "Blue Book") indicates that a "working interest" is an interest
with respect to an oil and gas property that is burdened with the cost of
development and operation of the property, and that generally has
characteristics such as responsibility for signing authorizations for
expenditures with respect to the activity receiving periodic drilling and
completion reports and reports regarding the amount of oil extracted, voting
rights proportionate to the percentage of the working interest possessed by the
taxpayer, the right to continue activities if the present operator decides to
discontinue operations, a proportionate share of tort liability with respect to
the property and some responsibility to share in further costs with respect to
the property in the event a decision is made to spend more than amounts already
contributed. The Regulations define a working interest as "a working or
operating mineral interest in any tract or parcel of land" Regulation
Section1.469-1(e)(4)(iv). Under Regulation Section1.614-2(b), an operating
mineral interest is defined as
a separate mineral interest as described in section 614(a), in respect of
which the costs of production are required to be taken into account by the
taxpayer for purposes of computing the limitation of 50 percent of the
taxable income from the property in determining the deduction for percentage
depletion computed under section 613, or such costs would be so required to
be taken into account if the...well...were in the production stage. The term
does not include royalty interests or similar interests, such as production
payments or net profits interests. For the purpose of determining whether a
mineral interest is an operating mineral interest, "costs of production" do
not include
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intangible drilling and development costs, exploration expenditures under
section 615, or development expenditures under section 616. Taxes, such as
production taxes, payable by holders of nonoperating interests are not
considered costs of production for this purpose. A taxpayer may not
aggregate operating mineral interests and nonoperating mineral interests
such as royalty interests.
The Managing General Partner has represented that the Partnership will
acquire and hold only operating mineral interests, as defined in Code
section 614(d) and the Regulations thereunder, and that none of the
Partnership's revenues will be from non-working interests.
To the extent that the Additional General Partners (in their capacity as
general partners) have working interests in the activities of a Partnership for
purposes of Code section 469, we are of the opinion that an Additional General
Partner's interest in the Partnership (as a general partner) will not be
considered a passive activity within the meaning of Code section 469 and losses
generated while such general partner interest is held will not be limited by the
passive activity provisions.
Notwithstanding this general rule, however, for purposes of Code
section 469, the economic performance rules of Code section 461 are applied in a
different manner from that described above in "Intangible Drilling and
Development Costs Deductions." Economic performance under the passive loss rules
is defined in Regulation Section1.4691-T(e)(4)(ii)(C)(2)(ii) as economic
performance within the meaning of Code section 461(h), without regard to Code
section 461(i)(2) (which contains the spudding rule). Accordingly, if an
Additional General Partner's interest is converted to that of a limited partner
after the end of the year in which economic performance is deemed to occur
(under Code section 461), but prior to the spudding date provided in Code
section 461(i)(2), any post-conversion losses will be passive, notwithstanding
the availability of such losses (under Code section 461) in a year in which the
taxpayer held the interest in an entity that did not limit his liability.
Notwithstanding the above, there can be no assurance that the Service will
not contend that all general partner interests should be regarded as interests
in a passive activity from the Partnership's inception due to the conversion
feature contained in the Partnership Agreement. However, due to the exposure to
unlimited liability for Partnership obligations incurred prior to such
conversion, an attack by the Service with respect to the foregoing should not be
successful. In addition, Regulation Section1.469-lT(e)(4)(iii), example (1),
respects the nature of a general partnership interest prior to its conversion
into limited partnership form:
A, a calendar year individual, acquires on January 1, 1987, a general
partnership interest in P, a calendar year partnership that holds a working
interest in an oil or gas property. Pursuant to the partnership agreement, A
is entitled to convert the general partnership interest into a limited
partnership interest at any time. On December 1, 1987, pursuant to a
contract with D, an independent drilling contractor, P commences drilling a
single well pursuant to the working interest. Under the drilling contract, P
pays D for the drilling only as the work is performed. All drilling costs
are deducted by P in the year in which they are paid. At the end of 1987, A
converts the general partnership interest into a limited partnership
interest, effective immediately. The drilling of the well is completed on
February 28, 1988.
Since, in the example, A holds the working interest through an entity that does
not limit A's liability throughout 1987 and through an entity that does limit
A's liability in 1988, the example in the Regulation concludes that A's interest
in P's well is not an interest in a passive activity for 1987 but is an interest
in a passive activity for 1988.
If an Additional General Partner converts his interest to a Limited Partner
interest pursuant to the terms of the Partnership Agreement, the character of a
subsequently generated tax attribute will be dependent upon, inter alia, the
nature of the tax attribute and whether there arose, prior to conversion, losses
to which the working interest exception applied.
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Assuming the activities of a converting Partner will not result in the
Partner's being treated as materially participating under Regulation
Section1.469-5T(a)(1), (5), or (6), as described above, the Limited Partner's
activity after conversion should be treated as a passive activity. Code
section 469(c)(1). Accordingly, any loss arising therefrom should be treated as
a PAL under Code section 469(d), with the benefits thereof limited by Code
section 469(a)(1), as described above. However, Code section 469(c)(3)(B)
provides that, if a taxpayer has any loss from any taxable year from a working
interest in any oil or gas property that is treated as a non-passive loss, then
any net income from such property for any succeeding taxable year is to be
treated as income that is not from a passive activity. Consequently, assuming
that a converting Additional General Partner has losses from working interests
which are treated as non-passive, income from the Partnership allocable to the
Partner after conversion would be treated as income that is not from a passive
activity.
C. Limited Partner Interests
If an Investor Partner (other than an Additional General Partner who
converts his interest into that of a Limited Partner) invests in a Partnership
as a Limited Partner, in our opinion, his distributive share of the
Partnership's losses will be treated as PALs, the availability of which will be
limited to the Partner's passive income for such year. If the Partner does not
have sufficient passive income to utilize the PAL, the disallowed PAL will be
suspended and may be carried forward (but not back) to be deducted against
passive income arising in future years. Further, upon the complete disposition
of the interest to an unrelated party in a fully taxable transaction, such
suspended losses will be available as described above.
Regarding Partnership income, Limited Partners should generally be entitled
to offset their distributive shares of such income with deductions from other
passive activities, except to the extent such Partnership income is portfolio
income. Since gross income from interest, dividends, annuities, and royalties
not derived in the ordinary course of a trade or business is not passive income,
a Limited Partner's share of income from royalties, income from the investment
of the Partnership's working capital, and other items of portfolio income will
not be treated as passive income. In addition, Code section 469(l)(3) grants the
Secretary of the Treasury 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.
D. Publicly Traded Partnerships
Notwithstanding the above, Code section 469(k) treats net income from PTPs
as portfolio income under the PAL rules. Further, each partner in a PTP is
required to treat any losses from a PTP as separate from income and loss from
any other PTP and also as separate from any income or loss from passive
activities. Id. Losses attributable to an interest in a PTP that are not allowed
under the passive activity rules are suspended and carried forward, as described
above. Further, upon a complete taxable disposition of an interest in a PTP, any
suspended losses are allowed (as described above with respect to the passive
loss rules). As noted above, we have opined that the Partnership will not be a
PTP.
In the event a Partnership were treated as a PTP, any net income would be
treated as portfolio income and each Partner's loss therefrom would be treated
as separate from income and loss from any other PTP and also as separate from
any income or loss from passive activities. Since the Partnerships should not be
treated as PTPs, the provisions of Code section 469(k), in our opinion, will not
apply to the Partners in the manner outlined above prior to the time that a
Partnership becomes a PTP. However, unlike the PTP rules of Code section 7704,
the passive activity rules of Code section 469 do not provide an exception for
partnerships that pass the 90% test of Code section 7704. Accordingly, if a
Partnership were to be treated as a PTP under the passive activity rules, losses
could be used only to offset income from the Partnership.
CONVERSION OF INTERESTS
Code section 708 provides that a partnership will be considered as
terminated for federal income tax purposes if, inter alia, there is "a sale or
exchange of 50 percent or more of the total interest in partnership
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capital and profits" within a 12 month period. If a conversion of an Additional
General Partner's interest into a Limited Partner interest were treated as a
"sale or exchange" for purposes of Code section 708, the Partnership would be
terminated for federal income tax purposes if such a conversion would cause 50%
or more of the profits and capital interests in the Partnership to be deemed
sold or exchanged within a 12 month period.
In Revenue Ruling 84-52, 1984-1 C.B. 157, the Service ruled that the
conversion of a general partnership interest into a limited partnership interest
in the same partnership will not give rise to the recognition of gain or loss
under Code section 741 or section 1001. The holding of Revenue Ruling 84-52 was
confirmed in Revenue Ruling 95-37, 1995-1, C.B. 130. The ruling noted that,
under Code section 721, no gain or loss is recognized by a partnership or any of
its partners upon the contribution of property to the partnership in exchange
for an interest therein. Consequently, the partnership will not be terminated
under Code section 708 since (i) the business of the partnership will continue
after the conversion and (ii) pursuant to Regulation Section1.708-1(b)(1)(ii) a
transaction governed by Code section 721 is not treated as a sale or exchange
for purposes of Code section 708.
Based on the authority of Revenue Ruling 84-52 and Revenue Ruling 95-37,
supra, a Partnership, in our opinion, will not be terminated under Code
section 708 as a result of the conversion of Partnership interests.
Code section 752(b) treats any decrease in a partner's share of partnership
liabilities as a distribution of money to the partner by the partnership. If,
under the applicable regulatory or statutory provisions, a converting partner's
share of liabilities is deemed to decrease, such decrease will result in gain to
the partner to the extent it exceeds the partner's basis in his partnership
interest.
Code section 1245(a) provides that, inter alia, when section 1245 property
is disposed of, the amount by which the lower of (i) the property's recomputed
basis or (ii) the amount realized on the sale, exchange, or involuntary
conversion of the property or the fair market value on any other disposition of
the property exceeds the property's adjusted basis is to be treated as ordinary
income. Code section 1245(b)(3) provides that, if the basis of the property in
the hands of the transferee is determined by reference to its basis in the hands
of the transferor by reason of, inter alia, Code section 721, then the gain
taken into account for purpose of Code section 1245(a) is not to exceed the gain
taken into account by the transferor of such property (without regard to Code
section 1245(b)). Therefore, to the extent the conversion of General Partner
interests to Limited Partner interests is governed by Code section 721, the
converting Partner will only be required to include in ordinary income the
amount of gain he otherwise would recognize with respect to the "Section 1245"
property attributable to him.
Code section 1254(a) provides, in part, that when a property is disposed of,
the taxpayer must recapture as ordinary income any gain on disposition in an
amount equal to the aggregate of amounts deductible as IDC, in excess of the
amount deductible without regard to Code section 263, and depletion. Code
section 1254 (a)(1). Code section 1254(b) provides that rules similar to the
rules of subsections (b) and (c) of Code section 1245 are to be applied for
purposes of Code section 1254. Consequently, to the extent that a Partner could
recognize ordinary income under Code section 1245 upon conversion, the Partner
could also recognize ordinary income under Code section 1254.
Losses arising from the holding of working interests in oil and gas
properties directly or through an entity that does not limit the holder's
liability are not subject to the passive loss rules. Regulations provide that,
if the form of ownership is converted from a type that does not limit liability
to a type that does limit liability, the portion of any losses (including those
arising from the deduction of IDC) attributable to services or materials that
have not yet been provided at the time of such conversion will constitute losses
from a passive activity. Thus, in our opinion, if a Partner were to convert his
General Partner interest to that of a Limited Partner prior to the time that all
of the services or materials comprising the IDC of a well had been provided, at
the time of the conversion such services and materials will constitute losses
from a passive activity and be subject to the passive loss limitations.
Similarly in such a situation, a portion of the
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income from the well would constitute passive income. If the conversion were to
occur after the filing of the Partnership's information tax return but prior to
the completion of the drilling and development of a well, an amended return
might have to be filed, which might also require the converting Partner to file
an amended return. Further, the Code provides that if a taxpayer has any loss
attributable to a working interest which is treated in any taxable year as a
loss which is not from a passive activity, then any net income attributable to
the working interest in any succeeding taxable year is treated as income of the
taxpayer which is not from a passive activity. Code section 469(c)(3)(B).
Accordingly, if an Additional General Partner converts his interest into a
Limited Partner interest, any income from that interest with respect to which he
claimed deductions will be treated as nonpassive income.
ALTERNATIVE MINIMUM TAX
Code section 55 imposes on noncorporate taxpayers a two-tiered, graduated
rate schedule for alternative minimum tax ("AMT") equal to the sum of (i) 26% of
so much of the "taxable excess" as does not exceed $175,000, plus (ii) 28% of so
much of the "taxable excess" as exceeds $175,000. Code section 55(b)(1)(A)(i).
"Taxable excess" is defined as so much of the alternative minimum taxable income
("AMTI") for the taxable year as exceeds the exemption amount. Code
section 55(b)(1)(A)(ii). AMTI is generally defined as the taxpayer's taxable
income, increased or decreased by certain adjustments and items of tax
preference. Code section 55(b)(2).
The exemption amount for noncorporate taxpayers is (i) $45,000 in the case
of a joint return or a surviving spouse, (ii) $33,750 in the case of an
individual who is neither a married individual nor a surviving spouse, and
(iii) $22,500 in the case of a married individual who files a separate return or
an estate or trust. Such amounts are phased out as a taxpayer's AMTI increases
above certain levels. Code section 55(d)(1) and (3).
The corporate AMT is similar to that of the individual AMT, with the
corporation's regular taxable income increased or decreased by certain
adjustments and items of tax preference, resulting in AMTI. The AMTI is reduced
by $40,000 (which amount is phased-out as AMTI increases above certain levels)
with the balance being taxed at twenty percent (20%). Code sections 55(b)(1)(B)
and 55(d)(2) and (3). The excess of this figure over the regular tax liability
is the AMT.
Individuals subject to the AMT are generally allowed a credit, equal to the
portion of the AMT imposed by Code section 55 arising as a result of deferral
preferences (or, with certain adjustments, equal to the entire AMT in the case
of corporate AMT for use against the taxpayer's future regular tax liability
(but not the minimum tax liability)). Code section 53.
Under the AMT provisions, adjustments and items of tax preference that may
arise from a Partner's acquisition of an interest in a Partnership include the
following:
1. Taxpayers that do not meet the definition of an integrated oil company
as defined in Code section 291(b)(4) are not subject to the preference item for
"excess IDC." Code section 57(a)(2)(E)(i). However, the benefit of the
elimination of the preference is limited in any taxable year to an amount equal
to 40 percent of the AMTI for the year computed as if the prior law "excess IDC"
preference item has not been eliminated. Code section 57(a)(2)(E)(ii). Excess
IDC is defined as the excess of (i) IDC paid or incurred (other than costs
incurred in drilling a nonproductive well) with respect to which a deduction is
allowable under Code section 263(c) for the taxable year over (ii) the amount
that would have been allowable for the taxable year if such costs had been
capitalized and (I) amortized over a 120 month period beginning with the month
in which production from such well begins or (II) recovered through cost
depletion. Code section 57(a)(2)(B). However, any portion of the IDC to which an
election under Code section 59(e) applies will not be treated as an item of tax
preference under Code section 57(a). Code section 59(e)(6). With respect to IDC
paid or incurred, corporate and individual taxpayers are allowed to make the
Code section 59(e) election and, for regular tax and AMT purposes, deduct such
expenditures
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over the 60 month period beginning with the month in which such expenditure is
paid or incurred. Code section 59(e)(1).
2. Excess depletion constitutes a preference only in the case of integrated
oil companies. Code section 57(a)(1).
3. Each Partner's AMTI will be increased (or decreased) by the amount by
which the depreciation deductions allowable under Code sections 167 and 168 with
respect to such property exceeds (or is less than) the depreciation determined
under the alternative depreciation system using the one hundred fifty percent
(150%) declining balance method switching to the straight-line method, when that
produces a greater deduction. Code section 56(a)(1). No adjusted current
earnings ("ACE") depreciation adjustment is necessary with respect to a
corporate Partner for property placed in service in taxable years beginning
after December 31, 1993. Code section 56(g)(4)(A)(i).
4. AMTI for a corporate Partner will be increased by 75% of the excess of
the taxpayer's ACE over the AMTI amount (computed without the ACE adjustment and
without the net operating loss deduction). Code section 56(g)(1). As noted
above, both corporate and individual taxpayers may elect this method of
amortization for regular tax purposes. For years beginning after December 31,
1992, for corporations other than integrated oil companies, the ACE adjustments
for percentage depletion and IDC are repealed. Code sections 56(g)(4)(F) and
(D)(i), respectively. The IDC modification applies to IDCs paid or incurred in
taxable years beginning after December 31, 1992.
Due to the inherently factual nature of the applicability of the AMT to a
Partner, we are unable to express an opinion with respect to such issues. Due to
the potentially significant impact of a purchase of Units on an investor's tax
liability, investors should discuss the implications of an investment in a
Partnership on their regular and AMT liabilities with their tax advisors prior
to acquiring Units.
GAIN OR LOSS ON SALE OF PROPERTIES
Gain from the sale or other disposition of property is realized to the
extent of the excess of the amount realized therefrom over the property's
adjusted basis; conversely, LOSS IS realized in an amount equal to the excess of
the property's adjusted basis over the amount realized from such a disposition.
Code section 1001(a). The amount realized is defined as the sum of any money
received plus the fair market value of the property (other than money) received.
Code section 1001(b). Accordingly, upon the sale or other disposition of a
Partnership's properties, the Partners will realize gain or loss to the extent
of their pro rata share of the difference between the Partnership's adjusted
basis in the property at the time of disposition and the amount realized upon
disposition. In the absence of nonrecognition provisions, any gain or loss
realized will be recognized for federal income tax purposes.
Gain or loss recognized upon the disposition of property used in a trade or
business and held for more than one year will be treated as long term capital
gain or as ordinary loss. Code section 1231(a).
Notwithstanding the above, however, any gain realized may be taxed as
ordinary income under one of several "recapture" provisions of the Code or under
the characterization rules relating to "dealers" in personal property.
Code section 1254 generally provides for the recapture of capital gains,
arising from the sale of property which was placed in service after 1986, as
ordinary income to the extent of the lesser of (i) the gain realized upon sale
of the property, or (ii) the sum of (I) all IDC previously deducted and
(II) all depletion deductions that reduced the property's basis. Code
section 1254(a)(1).
Ordinary income may also result from the recapture of depreciation on a
Partnership's properties, pursuant to Code section 1245. The amount recaptured
as ordinary income is generally the amount by which (i) the lower of (I) the
recomputed basis or (II) the amount realized on the sale of the property exceeds
the property's adjusted basis. Code section 1245(a)(1). A property's recomputed
basis is generally
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the property's adjusted basis increased by amortization deductions previously
claimed with respect to the property. Code section 1245(a)(2).
GAIN OR LOSS ON SALE OF UNITS
If the Units are capital assets in the hands of the Partners, gain or loss
realized by any such holders on the sale or other disposition of a Unit will be
characterized as capital gain or capital loss. Code section 1221. Such gain or
loss will be a long term capital gain or loss if the Unit is held for more than
one year, and short term capital gain if held one year or less. Code
section 1222. However, the portion of the amount realized by a Partner in
exchange for a Unit that is attributable to the Partner's share of the
Partnership's "unrealized receivables" or "inventory items" will be treated as
an amount realized from the sale or exchange of property other than a capital
asset. Code section 751.
Unrealized receivables are defined in Code section 751(c) to include: oil
[or] gas...property...to the extent of the amount which would be treated as gain
to which section...1245(a)...or 1254(a) would apply if...such property had been
sold by the partnership at its fair market value." A sale by a Partnership of
its properties could give rise to treatment of the gain thereunder as ordinary
income as a result of Code sections 1245(a) or 1254(a). Accordingly, gain
recognized by a Partner on the sale of a Unit would be taxed as ordinary income
to the Partner to the extent of his share of the Partnership's potential gain on
property that would be recaptured, upon sale, under those statutes.
Property treated as an "inventory item" for purposes of Code section 751
includes (i) stock in trade of the partnership or other property of a kind which
would properly be included in its inventory if on hand at the end of the taxable
year, (ii) property held by the partnership primarily for sale to customers in
the ordinary course of its trade or business, and (iii) any other partnership
property which, on a sale or exchange by the Partnership, would not be
considered a capital asset or property used in a trade or business under Code
section 1231. Code sections 751(d)(2) and 1221(l).
Under the aforementioned provisions, a Partner would recognize ordinary
income with respect to any deemed sale of assets under Code section 751;
further, this ordinary income may be recognized even if the total amount
realized on the sale of a Unit is equal to or less than the Partner's basis in
the Unit.
Any partner who sells or exchanges interests in a partnership holding
unrealized receivables (which include IDC recapture and other items) or certain
inventory items must notify the partnership of such transaction in accordance
with Regulations under Code section 6050K and must attach a statement to his tax
return reflecting certain facts regarding the sale or exchange. Regulations
promulgated by the Service provide that such notice to the partnership must be
given in writing within 30 days of the sale or exchange (or, if earlier, by
January 15 of the calendar year following the calendar year in which the
exchange occurred), and must include names, addresses, and taxpayer
identification numbers (if known) of the transferor and transferee and the date
of the exchange. Regulation Section1.6050K-1(d). Code section 6721 provides that
persons who fail to furnish this information to the partnership will be
penalized $50 for each such failure, or, if such failure is due to intentional
disregard to the filing requirement, the person will be penalized the greater of
(i) $100 or (ii) 5% of the aggregate amount to be reported. Code
section 6721(e)(2)(B). Furthermore, a partnership is required to notify the
Service of any sale or exchange of interests of which it has notice, and to
report the names and addresses of the transferee and the transferor, along with
all other required information. The partnership also is required to provide
copies of the information it provides to the Service to the transferor and the
transferee.
The tax consequences to an assignee purchaser of a Unit from a Partner are
not described herein. Any assignor of a Unit should advise his assignee to
consult his own tax advisor regarding the tax consequences of such assignment.
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PARTNERSHIP DISTRIBUTIONS
Under the Code, any increase in a partner's share of partnership
liabilities, or any increase in such partner's individual liabilities by reason
of an assumption by him of partnership liabilities, is considered to be a
contribution of money by the partner to the partnership. Code section 752(a).
Similarly, any decrease in a partner's share of partnership liabilities or any
decrease in such partner's individual liabilities by reason of the partnership's
assumption of such individual liabilities will be considered as a distribution
of money to the partner by the partnership. Code section 752(b).
The Partners' adjusted bases in their Units will initially consist of the
cash they contribute to the Partnership. Their bases will be increased by their
share of Partnership income and additional contributions and decreased by their
share of Partnership losses and distributions. To the extent that such actual or
constructive distributions are in excess of a Partner's adjusted basis in his
Partnership interest (after adjustment for contributions and his share of income
and losses of the Partnership), that excess will generally be treated as gain
from the sale of a capital asset. In addition, gain could be recognized to a
distributee Partner upon the disproportionate distribution to a Partner of
unrealized receivables, substantially appreciated inventory or, in some cases,
Code section 731(c) marketable securities (i.e., actively traded financial
instruments, foreign currencies or interests in certain defined properties).
Further, the Partnership Agreement prohibits distributions to any Investor
Partner to the extent such would create or increase a deficit in the Partner's
Capital Account.
PARTNERSHIP ALLOCATIONS
A. Allocations--General
Generally, a partner's taxable income is increased or decreased by his
ratable share of partnership income or loss. Code section 701. However, the
availability of these losses may be limited by the at risk rules of Code
section 465, the passive activity rules of Code section 469, and the adjusted
basis provisions of Code section 704(d).
Code section 704(b) provides that if a partnership agreement does not
provide for the allocation of each partner's distributive share of partnership
income, gain, loss, deduction, or credit, or if the allocation of such items
under the partnership agreement lacks "substantial economic effect," then each
partner's share of those items must be allocated "in accordance with the
partner's interest in the partnership."
As discussed below, Regulations under Code section 704(b) define substantial
economic effect and prescribe the manner in which partners' capital accounts
must be maintained in order for the allocations contained in the partnership
agreement to be respected. Notwithstanding these provisions, special rules apply
with respect to nonrecourse deductions since, under the Regulations, allocations
of losses or deductions attributable to nonrecourse liabilities cannot have
economic effect.
The Service may contend that the allocations contained in the Partnership
Agreement do not have substantial economic effect or are not in accordance with
the Partners' interests in the Partnership and may seek to reallocate these
items in a manner that will increase the income or gain or decrease the
deductions allocable to a Partner. We are of the opinion that, to the extent
provided herein, if challenged by the Service on this matter, the Partners'
distributive shares of Partnership income, gain, loss, deduction, or credit will
be determined to have substantial economic effect and allocated substantially in
accordance with the terms of the Partnership Agreement.
B. Substantial Economic Effect
Although a partner's share of partnership income, gain, loss, deduction, and
credit is generally determined in accordance with the partnership agreement,
this share will be determined in accordance with the partner's interest in the
partnership (determined by taking into account all facts and circumstances) and
not by the partnership agreement if the partnership allocations do not have
"substantial
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economic effect" and if the allocations are not respected under the nonrecourse
deduction provisions of the Regulations. Code section 704(b);
Regulation SectionSection1.704-1(b)(2)(i) and 1.704-2.
In order for an allocation to have "economic effect," it must be consistent
with the underlying economic arrangement of the partners. This means that in the
event there is an economic benefit or economic burden that corresponds to an
allocation, the partner to whom the allocation is made must receive such
economic benefit or bear such economic burden.
Regulation Section1.704-1(b)(2)(ii). The Regulations further provide that an
allocation will have economic effect only if, throughout the full term of the
partnership, the partnership agreement provides (i) for the determination and
maintenance of a partner's capital account in accordance with specified rules
contained therein, (ii) upon liquidation of the partnership or a partner's
interest in the partnership, liquidating distributions are required to be made
in accordance with the positive capital account balances of the partners after
taking into account all capital account adjustments for the taxable year of the
liquidation, and (iii) either (I) a partner with a deficit balance in his
capital account following the liquidation is unconditionally obligated to
restore the amount of such deficit balance to the partnership by the end of the
taxable year of liquidation, or (II) the partnership agreement contains a
qualified income offset provision as provided in
Regulation SectionSection1.704-1(b)(2)(ii)(b) and 1.704-1(b)(2)(ii)(d).
The capital account maintenance rules generally mandate that each partner's
capital account be increased by (i) money contributed by the partner to the
partnership, (ii) the fair market value (net of liabilities) of property
contributed by the partner to the partnership, and (iii) allocations to the
partner of partnership income and gain. Further, such capital account must be
decreased by (i) money distributed to the partner from the partnership,
(ii) the fair market value (net of liabilities) of property distributed to the
partner from the partnership, and (iii) allocations to the partner of
partnership losses and deductions. Regulation Section1.704-1(b)(2)(iv).
Regulation Section1.704-1(b)(2)(iii) provides that an economic effect of an
allocation is "substantial" if there is a reasonable possibility that the
allocation will affect substantially the dollar amounts to be received by the
partners from the partnership, independent of tax consequences. The economic
effect of an allocation is not substantial if:
at the time the allocation becomes part of the partnership agreement,
(1) the after-tax economic consequences of at least one partner may, in
present value terms, be enhanced compared to such consequences if the
allocation (or allocations) were not contained in the partnership
agreement, and (2) there is a strong likelihood that the after-tax
economic consequences of no partner will, in present value terms, be
substantially diminished compared to such consequences if the allocation
(or allocations) were not contained in the partnership agreement. In
determining the after-tax economic benefit or detriment to a partner,
tax consequences that result from the interaction of the allocation with
such partner's tax attributes that are unrelated to the partnership will
be taken into account. Regulation Section1.704-1(b)(2)(iii)(a).
While the Service stated that it will not rule on whether an allocation
provision in a partnership agreement has substantial economic effect, several
Technical Advice Memoranda ("TAMs") shed light on the Service's position on this
issue. Notwithstanding the potential similarity between a TAM and a taxpayer's
particular fact pattern, it should be noted that TAMs may not be used or cited
as precedent. Code section 6110(k)(3), Regulation SectionSection301.6110-2(a)
and 301.6110-7(b). Nevertheless, TAMs do serve to illustrate the Service's
position on certain specific cases. The TAMs relating to substantial economic
effect focus on the tax avoidance purpose of allocations and on the partnership
plan for distributions upon liquidation.
Illustrative of the Service's approach is TAM 8008054, in which the Service
concluded that an allocation to the partners solely of items that the
partnership had elected to expense (IDC) had as its principal purpose tax
avoidance. The Service suggested that, had the allocation affected the parties'
liquidation rights, the allocation would have had substantial economic effect:
"In general, substantial
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economic effect has been found where all allocations of items of income, gain,
loss, deduction or credit increase or decrease the respective capital accounts
of the partners and distribution of assets made upon liquidation is made in
accordance with capital accounts." The ruling noted that the investors "should
have been allocated their share of costs other than intangible drilling costs."
Id. The question whether economic effect is "substantial" is one of fact which
may depend in part on the timing of income and deductions and on consideration
of the investors' tax attributes unrelated to their investment in Units, and
thus is not a question upon which a legal opinion can ordinarily be expressed.
However, to the extent the tax brackets of all Partners do not differ at the
time the allocation becomes part of the partnership agreement, the economic
effect of the allocation provisions should be considered to be substantial.
Code section 613A(c)(7)(D) requires that the basis of oil and gas properties
owned by a partnership be allocated to the partners in accordance with their
interests in the capital or income of the partnership. Regulations issued under
Code section 613A(c)(7)(D) indicate that such basis must be allocated in
accordance with the partners' interests in the capital of the partnership if
their interests in partnership income vary over the life of the partnership for
any reason other than for reasons such as the admission of a new partner.
Regulation Section1.613A-3(e)(2). The terms "capital" and "income" are not
defined in the Code or in the Regulations under section 613A. The Regulations
under Code section 704 indicate that if all partnership allocations of income,
gain, loss, and deduction (or items thereof) have substantial economic effect,
an allocation of the adjusted basis of an oil or gas property among the partners
will be deemed to be made in accordance with the partners' interests in
partnership capital or income and will accordingly be recognized.
Pursuant to the Partnership Agreement, (i) allocations will be made as
mandated by the Regulations, (ii) liquidating distributions will be made in
accordance with positive capital account balances, and (iii) a "qualified income
offset" provision applies. However, IDC and certain other tax items will be
allocated 100% to the Investor Partners. Except with respect to those excess
allocations, under the Partnership Agreement the basis in oil and gas properties
will be allocated in proportion to each Partner's respective share of the costs
that entered into the Partnership's adjusted basis for each depletable property.
Such allocations of basis to the Investors of 100% of such tax items appear
reasonable and in compliance with the Regulations under section 704.
Nevertheless, the Service may contend that the allocation to the Investor
Partners of 100% of such tax items is invalid and may reallocate such items to
the Partners in a different ratio. Any such reallocation could increase an
Investor Partner's tax liability.
C. Nonrecourse Deductions
As noted above, an allocation of loss or deduction attributable to
nonrecourse liabilities of a partnership cannot have economic effect because the
creditor alone bears any economic burden that corresponds to such an allocation.
Nevertheless, the Regulations provide a test under which certain allocations of
nonrecourse deductions will be deemed to be in accordance with the partners'
interests in the partnership. Regulation Section1.704-2(b).
Nonrecourse deduction allocations will be deemed to be made in accordance
with partners' partnership interests if, and only if, four requirements are
satisfied. First, the partners' capital accounts must be maintained properly and
the distribution of liquidation proceeds must be in accordance with the
partners' capital account balances. Second, beginning in the first taxable year
in which there are nonrecourse deductions, and thereafter throughout the full
term of the partnership, the partnership agreement must provide for allocation
of nonrecourse deductions among the partners in a manner that is reasonably
consistent with allocations, which have substantial economic effect, of some
other significant partnership item attributable to the property securing
nonrecourse liabilities of the partnership. Third, beginning in the first
taxable year of the partnership in which the partnership has nonrecourse
deductions or makes a distribution of proceeds of a nonrecourse liability that
are allocable to an increase in minimum gain, and thereafter throughout the full
term of the partnership, the partnership agreement contains a "minimum gain
chargeback." A partnership agreement contains a minimum gain chargeback if, and
only if, it provides
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that, subject to certain exceptions, in the event there is a net decrease in
partnership minimum gain during a partnership taxable year, the partners must be
allocated items of partnership income and gain for that year equal to each
partner's share of the net decrease in partnership minimum gain during such
year. A partner's share of the net decrease in partnership minimum gain is the
amount of the total net decrease multiplied by the partner's percentage share of
the partnership's minimum gain at the end of the immediately preceding taxable
year. A partner's share of any decrease in partnership minimum gain resulting
from a revaluation of partnership property (which would not cause a minimum gain
chargeback) equals the increase in the partner's capital account attributable to
the revaluation to the extent the reduction in minimum gain is caused by such
revaluation. Similar rules apply with regard to partner nonrecourse liabilities
and associated deductions. The fourth requirement of the nonrecourse allocation
test provides that all other material allocations and capital account
adjustments under the partnership agreement must be recognized under the general
allocation requirements of the Regulations under Code section 704(b).
Under the Regulations, partners generally share nonrecourse liabilities in
accordance with their interests in partnership profits. However, the Regulations
generally require that nonrecourse liabilities be allocated among the partners
first to reflect the partners' share of minimum gain and Code section 704(c)
minimum gain. Any remaining nonrecourse liabilities are generally to be
allocated in proportion to the partner's interests in partnership profits.
The Partnership Agreement, at Section 3.02, contains a minimum gain
chargeback. Further, the Partnership Agreement provides for the allocation of
nonrecourse liabilities and deductions attributable thereto among the Partners
first, in accordance with their respective shares of partnership minimum gain
(within the meaning of Regulation Section1.704-2(b)(2); second, to the extent of
each such Partner's gain under Code section 704(c) if the Partnership were to
dispose of (in a taxable transaction) all Partnership property subject to one or
more nonrecourse liabilities of the Partnership in full satisfaction of such
liabilities and for no other consideration; and third, in accordance with the
Partners' proportionate shares in the Partnership's profits. For this purpose,
the Partnership Agreement provides for the allocation of excess nonrecourse
deductions of 75% to the Investor Partners and 25% to the Managing General
Partner.
D. Retroactive Allocations
To prevent retroactive allocations of partnership tax attributes to partners
entering into a partnership late in the tax year, Code section 706(d) provides
that a partner's distributive share of such attributes is to be determined by
the use of methods prescribed by the Treasury Secretary which take into account
the varying interests of the partners during the taxable year.
The Partnership Agreement, at Section 3.04(c), provides that each Partner's
allocation of tax items other than "allocable cash basis items" is to be
determined under a method permitted by Code section 706(d) and the Regulations
thereunder. With respect to "allocable cash basis items," Section 3.04(c)
requires an allocation in accordance with the requirements of Code
section 706(d). Accordingly, the Partnership allocations should be considered to
be in accordance with the provisions of Code section 706(d).
PROFIT MOTIVE
The existence of economic, nontax motives for entering into the Transactions
is essential if the Partners are to obtain the tax benefits associated with an
investment in a Partnership. Code section 183(a) provides that where an activity
entered into by an individual is not engaged in for profit, no deduction
attributable to that activity will be allowed except as provided therein. Should
it be determined that a Partner's activities with respect to the Transactions
fall within the "not for profit" ambit of Code section 183, the Service could
disallow all or a portion of the deductions and credits generated by the
Partnership's activities.
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Code section 183(d) generally provides for a presumption that an activity is
entered into for profit within the meaning of the statute where gross income
from the activity exceeds the deductions attributable to such activity for three
or more of the five consecutive taxable years ending with the taxable year in
question. At the taxpayer's election, such presumption can relate to three or
more of the taxable years in the five-year period beginning with the taxable
year in which the taxpayer first engages in the activity. Whether an activity is
engaged in for profit is determined under Code sections 162 (relating to trade
or business deductions) and 212(l) and (2) (relating to income producing
deductions) except insofar as the above-described presumption applies.
Regulation Section1.183-1(a).
To establish that he is engaged in either a trade or business or an income
producing activity, a Partner must be able to prove that he is engaged in the
Transactions with an "actual and honest profit objective," FOX V. COMMISSIONER,
80 T.C. 972, 1006 (1983), aff'd sub nom., BARNARD V. COMMISSIONER, 731 F.2d 230
(4th Cir. 1984), and that his profit objective is bona fide. BESSENYEY V.
COMMISSIONER, 45 T.C. 261, 274 (1965), aff'd, 379 F.2d 252 (2d Cir. 1967), cert.
denied, 389 U.S. 931 (1967). The inquiry turns on whether the primary purpose
and intention of the Partner in engaging in the activity is, in fact, to make a
profit apart from tax considerations. HAGER V. COMMISSIONER, 76 T.C. 759, 784
(1981). Such objective need not be reasonable, only honest, and the question of
objective is to be determined from all the facts and circumstances. SUTTON V.
COMMISSIONER, 84 T.C. 210 (1985), aff'd, 788 F.2d 695 (11th Cir. 1986). Among
the factors that will normally be considered are: (i) the manner in which the
taxpayer carries on the activity, (ii) the expertise of the taxpayer or his
advisors, (iii) the time and effort expended by the taxpayer in carrying on the
activity, (iv) whether an expectation exists that the assets used in the
activity may appreciate in value, (v) the success of the taxpayer in carrying on
similar or dissimilar activities, (vi) the taxpayer's history of income or
losses with respect to the activity, (vii) the amount of occasional profits, if
any, which are earned, and (viii) the financial status of the taxpayer.
Regulation Section1.183-2(b). Where application of such factors to a particular
activity is difficult, however, the Court will consider the totality of the
circumstances instead. ESTATE OF BARON V. COMMISSIONER, 83 T.C. 542 (1984),
AFF'D, 798 F.2d 65 (2d Cir. 1986).
As noted, the issue is one of fact to be resolved not on the basis of any
one factor but on the basis of all the facts and circumstances.
Regulation Section1.183-2(b). Greater weight is given to objective facts than
the parties' mere statements of their intent. SIEGEL V. COMMISSIONER, 78 T.C.
659 (1982); ENGDAHL V. COMMISSIONER, 72 T.C. 659 (1979). Nevertheless, the
Courts have recognized, in applying Code section 183, that "a taxpayer has the
right to engage in a venture which has economic substance even though his
motivation in the early years of the venture may have been to obtain a deduction
to offset taxable income." LEMMEN V. COMMISSIONER, 77 T.C. 1326, 1346 (1981),
acq., 1983-1 C.B. 1.
Due to the inherently factual nature of a Partner's intent and motive in
engaging in the Transactions, we do not express an opinion as to the ultimate
resolution of this issue in the event of a challenge by the Service. Partners
must, however, seek to make a profit from their activities with respect to the
Transactions beyond any tax benefits derived from those activities or risk
losing those tax benefits.
TAX AUDITS
Subchapter C of Chapter 63 of the Code provides that administrative
proceedings for the assessment and collection of tax deficiencies attributable
to a partnership must be conducted at the partnership, rather than the partner,
level. Partners will be required to treat Partnership items of income, gain,
loss, deduction, and credit in a manner consistent with the treatment of each
such item on the Partnership's returns unless such Partner files a statement
with the Service identifying the inconsistency. If the Partnership is audited,
the tax treatment of each item will be determined at the Partnership level in a
unified partnership proceeding. Conforming adjustments to the Partners' own
returns will then occur unless such partner can establish a basis for
inconsistent treatment (subject to waiver by the Service).
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Reef Partners LLC is designated as the "tax matters partner" ("TMP") for the
Partnership and will receive notice of the commencement of a Partnership
proceeding and notice of any administrative adjustments of Partnership items.
The TMP is entitled to invoke judicial review of administrative determinations
and to extend the period of limitations for assessment of adjustments
attributable to Partnership items. Each Partner will receive notice of the
administrative proceedings from the TMP and will have the right to participate
in the administrative proceeding pursuant to tax requirements of
Regulation Section301.6223(g)1(t) unless the Partner waives such rights.
The Code provides that, subject to waiver, partners will receive notice of
the administrative proceedings from the Service and will have the right to
participate in the administrative proceedings. Code sections 6223(a) and
6224(a). However, the Code also provides that if a partnership has 100 or more
partners, the partners with less than a 1% profits interest will not be entitled
to receive notice from the Service or participate in the proceedings unless they
are members of a "notice group" (a group of partners having in the aggregate a
5% or more profits interest in the partnership that requires the Service to send
notice to the group and that designates one of their members to receive notice).
Code section 6223(b). Any settlement agreement entered into between the Service
and one or more of the partners will be binding on such partners but will not be
binding on the other partners, except that settlement by the TMP may be binding
on certain partners, as described below. The Service must, on request, offer
consistent settlement terms to the partners who had not entered into the earlier
settlement agreement. Code section 6224(c)(2). If a partnership has more than
100 partners, the TMP is empowered under the Code to enter into binding
settlement agreements on behalf of the partners with a less than 1% profits
interest unless the partner is a member of a notice group or notifies the
Service that the TMP does not have the authority to bind the partner in such a
settlement. Code section 6224(c)(3).
BY EXECUTING THE PARTNERSHIP AGREEMENT EACH PARTNER RESPECTIVELY REPRESENTS,
WARRANTS, AND AGREES THAT HE WILL NOT FORM OR EXERCISE ANY RIGHT AS A MEMBER OF
A NOTICE GROUP AND WILL NOT FILE A STATEMENT NOTIFYING THE SERVICE THAT THE TMP
DOES NOT HAVE BINDING SETTLEMENT AUTHORITY. SUCH WAIVER IS PERMITTED UNDER THE
PARTNERSHIP AUDIT PROVISIONS OF THE CODE AND WILL BE BINDING ON THE PARTNERS.
The costs incurred by a Partner in responding to an administrative
proceeding will be borne solely by such Partner.
PENALTIES
Under Code section 6662, a taxpayer will be assessed a penalty equal to 20%
of the portion of an underpayment of tax attributable to negligence, the
disregard of a rule or regulation or a substantial understatement of tax.
"Negligence" includes any failure to make a reasonable attempt to comply with
the tax laws. Code section 6662(c). The Regulations further provide that a
position with respect to an item is attributable to negligence if it lacks a
reasonable basis. Regulation Section1.6662-3(b)(1). Negligence is strongly
indicated where, for example, a partner fails to comply with the requirements of
Code Section6662, which requires that a partner treat partnership items on its
return in a manner that is consistent with the treatment of such items on the
partnership return. Regulation Section1.6662-3(b)(1)(iii). The term "disregard"
includes any careless, reckless or intentional disregard of rules or
regulations. Regulation Section1.6662-3(b)(2). A taxpayer who takes a position
contrary to a revenue ruling or a notice will be subject to a penalty for
intentional disregard if the contrary position fails to possess a realistic
possibility of being sustained on its merits. Regulation Section1.6662-3(b)(2).
An "understatement" is defined as the excess of the amount of tax required to be
shown on the return of the taxable year over the amount of the tax imposed that
is actually shown on the return, reduced by any rebate. Code
section 6662(d)(2)(A). An understatement is "substantial" if it exceeds the
greater of ten percent of the tax required to be shown on the return for the
taxable year or $5,000 ($10,000 in the case of certain corporations). Code
section 6662(d)(1)(A) and (B).
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<PAGE>
Generally, the amount of an understatement is reduced by the portion thereof
attributable to (i) the tax treatment of any item by the taxpayer if there is or
was substantial authority for such treatment, or (ii) any item if the relevant
facts affecting the item's tax treatment are adequately disclosed in the return
or in a statement attached to the return, and there is a reasonable basis for
the tax treatment of such item by the taxpayer. Code section 6662(d). Disclosure
will generally be adequate if made on a properly completed Form 8275 (Disclosure
Statement) or Form 8275R (Regulation Disclosure Statement).
Regulation Section1.6662-4(f).
However, in the case of "tax shelters," there will be a reduction of the
understatement only to the extent it is attributable to the treatment of an item
by the taxpayer with respect to which there is or was substantial authority for
such treatment and only if the taxpayer reasonably believed that the treatment
of such item by the taxpayer was more likely than not the proper treatment.
Moreover, a corporation must generally satisfy a higher standard to avoid a
substantial understatement penalty in the case of a tax shelter. Code
section 6662(d)(2)(C)(ii). The term "tax shelter" is defined for purposes of
Code section 6662 as a partnership or other entity, any investment plan or
arrangement, or any other plan or arrangement, a significant purpose of which is
the avoidance or evasion of federal income tax. Code
section 6662(d)(2)(C)(iii). It is important to note that this definition of "tax
shelter" differs from that contained in Code sections 461 and 6111, as discussed
above.
The existence of substantial authority is determined as of the time the
taxpayer's return is filed or on the last day of the taxable year to which the
return relates and not when the investment is made.
Regulation Section1.6662-4(d)(3)(iv)(C). Substantial authority exists if the
weight of authorities supporting a position is substantial compared with the
weight of authorities supporting contrary treatment.
Regulation Section1.6662-4(d)(3)(i). Relevant authorities included statutes,
Regulations, court cases, revenue rulings and procedures, and Congressional
intent. However, among other things, conclusions reached in legal opinions are
not considered authority. Regulation Section1.6662-4(d)(3)(iii). The Secretary
may waive all or a portion of the penalty imposed under Code section 6662 upon a
showing by the taxpayer that there was reasonable cause for the understatement
and that the taxpayer acted in good faith. Code section 6664(c).
Although not anticipated by Reef Partners LLC, there may not be substantial
authority for one or more reporting positions that the Partnership may take in
its federal income tax returns. In such event, if a Partnership does not
disclose or if it fails to adequately disclose any such position, or if such
disclosure is deemed adequate but it is determined that there was no reasonable
basis for the tax treatment of such a Partnership item, the penalty will be
imposed with respect to any substantial understatement determined to have been
made, unless the provisions of the Regulations pertaining to waiver of the
penalty become final and the Partnership is able to show reasonable cause and
good faith in making the understatement as specified in such provisions. If the
Partnership makes a disclosure for the purposes of avoiding the penalty, the
disclosure is likely to result in an audit of such return and a challenge by the
Service of such position taken.
If it were determined that a Partner had underpaid tax for any taxable year,
such Partner would have to pay the amount of underpayment plus interest on the
underpayment from the date the tax was originally due. The interest rate on
underpayments is determined by the Service based upon the federal short term
rate of interest (as defined in Code section 1274(d)) plus 3%, or 5% for large
corporate underpayments, and is compounded daily. The rate of interest is
adjusted quarterly. Code section 6621(b).
A partnership, for federal income tax purposes, is required to file an
annual information tax return. The failure to properly file such a return in a
timely fashion, or the failure to show on such return all information required
under the Code to be shown on such return, unless such failure is due to
reasonable cause, subjects the partnership to civil penalties under the Code in
an amount equal to $50 per month multiplied by the number of partners in the
partnership, up to a maximum of $250 per partner per year. Code
section 6698(a), (b). In addition, upon any willful failure to file a
partnership information return, a
D-31
<PAGE>
fine or other criminal penalty may be imposed on the party responsible for
filing the return. Code section 7203.
ACCOUNTING METHODS AND PERIODS
The Partnerships will each use the accrual method of accounting and will
each select the calendar year as its taxable year.
As discussed above, a taxpayer using the accrual method of accounting will
recognize income when all events have occurred which fix the right to receive
such income and the amount thereof can be determined with reasonable accuracy.
Deductions will be recognized when all events which establish liability have
occurred and the amount thereof can be determined with reasonable accuracy.
However, all events which establish liability are not treated as having occurred
prior to the time that economic performance occurs. Code section 461(h).
All partnerships are required to conform their tax years to those of their
owners; i.e., unless the partnership establishes a business purpose for a
different tax year, the tax year of a partnership must be (i) the taxable year
of one or more of its partners who have an aggregate interest in partnership
profits and capital of greater than 50%, (ii) if there is no taxable year so
described, the taxable year of all partners having interests of 5% or more in
partnership profits or capital, or (iii) if there is no taxable year described
in (i) or (ii), the calendar year. Code section 706. Until the taxable years of
the Partners can be identified, no assurance can be given that the Service will
permit the Partnership to adopt a calendar year.
SOCIAL SECURITY BENEFITS; SELF-EMPLOYMENT TAX
The Social Security Act and the Code exclude from the definition of "net
earnings from self-employment" a limited partner's (but not a general partner's)
distributive share of any item of income or loss from a partnership other than a
guaranteed payment for personal services actually rendered. The determination of
whether a particular activity is a trade or business for the purposes of the
self-employment tax is based on all of the facts and circumstances surrounding
the activity. Because of the present uncertainty in the law, there can be no
assurance that a General Partner's share of a Partnership's income will not
constitute self-employment income. Reef Partners LLC, in the preparation of the
information tax returns for the Partnerships, will make the determination of
whether, and to what extent, to report Partnership income as income from
self-employment based upon guidance from its tax advisors. Thus, a General
Partner's share of any income or loss attributable to his investment in Units
may constitute "net earnings from self-employment" for both social security and
self-employment tax purposes and, if any General Partners are receiving Social
Security benefits, their taxable income attributable to their investment in the
Units must be taken into account in determining any reduction in benefits
because of "excess earnings."
STATE AND LOCAL TAXES
The opinions expressed herein are limited to issues of federal income tax
law and do not address issues of state or local law. Investors are urged to
consult their respective tax advisors regarding the impact of state and local
laws on an investment in the Partnership.
FOREIGN TAXES
Some or all of the Partnerships may engage in oil and gas drilling
activities outside of the United States that could subject such Partnerships to
various taxes imposed by foreign countries. At this time it is not possible to
determine if or where any such foreign operations may take place so it is not
possible to describe specifically which foreign taxes may become applicable to a
Partnership.
D-32
<PAGE>
The United States generally permits a credit for the amount of income tax
imposed on American taxpayers by foreign countries. Code section 901. This
credit is available to partners in a partnership where the partnership pays
foreign income taxes. Code section 901(b)(5). Numerous limitations exist in the
computation of the credit at the partner level. The foreign income tax must be
an income tax in the U.S. sense of the word. Taxes eligible for the foreign tax
credit do not include taxes paid or accrued during the taxable year to any
foreign country in connection with the purchase and sale of oil and gas
extracted in that country if: (i) the taxpayer has no economic interest in the
minerals; and (ii) either the purchase or the sale is at a price which differs
from the fair market value of the oil and gas at the time of the purchase or
sale. Code section 901(f). Taxes eligible for the foreign tax credit do not
include amounts paid or accrued to a foreign country to the extent that the IRS
determines that the foreign law imposing the amount is structured, or in fact
operates, so that the amount imposed with respect to the foreign oil related
income will generally be materially greater, over a reasonable period of time,
than the amount generally imposed on income that is neither foreign oil related
income nor foreign oil and gas extraction income. Code section 907(b).
PROPOSED LEGISLATION AND REGULATIONS
There can be no assurances that subsequent changes in the tax laws (through
new legislation, court decisions, Service pronouncements, Regulations, or
otherwise) will or will not occur that may have an impact, adverse or positive,
on the tax effect and consequences of these Transactions, as described above.
We express no opinion as to any federal income tax issue or other matter
except those set forth or confirmed above.
We hereby consent to the filing of this opinion as Appendix D to the
Prospectus and to all references to our Firm in the Prospectus.
We call your attention to the fact that the opinions set forth in this
letter are an expression of professional judgment and not a guarantee of a
result.
Sincerely,
ARTER & HADDEN LLP
D-33
<PAGE>
PART II.
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemization of all expenses (subject to future
contingencies) incurred or to be incurred by the Registrant in connection with
the issuance and distribution of the securities being offered, other than
underwriting:
<TABLE>
<CAPTION>
<S> <C>
SEC registration fee.............................................. $ 26,400
NASD filing fee................................................... 10,500
Printing expenses................................................. 100,000*
Accounting fees and expenses...................................... 20,000*
Legal fees and expenses........................................... 200,000*
Blue sky fees and expenses........................................ 40,000*
Miscellaneous..................................................... 28,100*
---------
Total......................................................... $ 425,000*
=========
</TABLE>
- ------------------------
* Estimated
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article VI, Section 6.04 of the Partnership Agreement filed herewith,
pursuant to which each Partnership of Registrant will be formed, provides that
the Managing General Partner shall have no liability to the Partnership or its
Partners for any loss suffered which arises out of any action or inaction of the
Managing General Partner if (i) the Managing General Partner, in good faith,
determined that such course of conduct was in the best interest of the
Partnership, (ii) the Managing General Partner was acting on behalf of or
performing services for the Partnership, and (iii) such course of conduct did
not constitute negligence or misconduct of the Managing General Partner.
Section 6.04 provides that the Managing General Partner shall be indemnified by
the Partnership against any losses, judgments, liabilities, expenses and amounts
paid in settlement of any claims sustained by it in connection with the
Partnership, provided the conditions set forth in the foregoing clauses (i),
(ii) and (iii) are satisfied.
The Managing General Partner will be indemnified to the limit of the
insurance proceeds and tangible net assets of the Partnership. Section 6.04
provides that the Managing General Partner may be indemnified for liabilities
arising under Federal and State Securities Laws only if (a) there has been a
successful adjudication on the merits of each count involving securities law
violations, (b) such claims have been dismissed with prejudice on the merits by
a court of competent jurisdiction, or (c) a court of competent jurisdiction
approves a settlement of such claims against a particular indemnitee and finds
that indemnification of the settlement and the 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 of any state securities
regulatory authority in which securities of the Partnership were offered or sold
as to indemnification for violations of securities laws; provided however, the
court need only be advised of the positions of the securities regulatory
authorities of those states (i) which are specifically set forth in the
Partnership Agreement and (ii) in which plaintiffs claim they were offered or
sold Units. In any claim for indemnification for federal or state securities
laws violations, the party seeking indemnification shall place before the court
the position of the Securities and Exchange Commission and the respective state
securities division, as the case may be, with respect to the issue of
indemnification for securities law violations.
II-1
<PAGE>
Section 6.04 of the Partnership Agreement further provides that the
Partnership will not incur the cost of the portion of any insurance that insures
the Managing General Partner against any liability as to which the Managing
General Partner is prohibited from being indemnified by the Partnership
Agreement.
Pursuant to Section 7.02 of the Partnership Agreement, the Managing General
Partner has agreed to indemnify the Additional General Partners for obligations
related to casualty and business losses that exceed available insurance coverage
and Partnership assets. Such indemnification will not be available to any
Additional General Partner if the obligations incurred result from the
negligence or misconduct of such Additional General Partner or the contravention
of the terms of the Partnership Agreement by such Additional General Partner.
The Soliciting Dealer Agreement, filed herewith, contains provisions
(Section 8(b)) by which each of the Soliciting Dealers agree to indemnify the
Managing General Partner and the Partnerships for liabilities arising from
statements or omissions made in this Registration Statement in reliance on
written information furnished by such Soliciting Dealer and for liabilities
arising from the failure of the Soliciting Dealer to comply with federal or
state securities laws.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ---------------------------------------------------------------------------------
<S> <C>
1.1 Dealer Manager Agreement
1.2 Soliciting Dealer Agreement
3.1 Form of Limited Partnership Agreement (included as Appendix A to the Prospectus
filed as a part of this Registration Statement)
5.1 Opinion of Arter & Hadden LLP as to legality of the securities being registered*
8.1 Opinion of Arter & Hadden LLP as to various tax matters (included as Appendix D
to the Prospectus filed as a part of this Registration Statement)
10.1 Form of Drilling and Operating Agreement with Reef Exploration, Inc.*
10.2 Escrow Agreement with Bank One Texas, N.A.*
23.1 Consent of Arter & Hadden LLP (included in Exhibits 5.1 and 8.1)
23.2 Consent of Ernst & Young LLP
24.1 Powers of Attorney (contained on page S-1)
</TABLE>
- ------------------------
* To be filed by amendment.
(B) FINANCIAL STATEMENT SCHEDULES
None.
ITEM 16. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(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 of 1933;
II-2
<PAGE>
(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.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, 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) 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.
(b) The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreement certificates
in such denominations and registered in such names as required by the
underwriter to permit prompt delivery to each purchaser.
(c) Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
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, the registrant 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 Act and will be governed by the final adjudication of
such issue.
II-3
<PAGE>
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 Richardson, State of
Texas, on December 22, 1999.
<TABLE>
<S> <C> <C>
REEF MILLENNIUM ENERGY FUND
(Registrant)
By: Reef Partners LLC,
a Nevada limited liability company
By: /s/ MICHAEL J. MAUCELI
-----------------------------------------
Michael J. Mauceli
MANAGER
</TABLE>
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Michael J. Mauceli, Daniel C. Sibley and Joel
Held, and each or any one of them, his true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capabilities, to sign any and all
amendments (including post-effective amendments) to this Registration Statement,
and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully and to all intents and purposes as he might
or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ MICHAEL J. MAUCELI Manager and Member
- ------------------------------ (Principal Executive December 22, 1999
Michael J. Mauceli Officer)
General Counsel and Chief
/s/ DANIEL C. SIBLEY Financial Officer
- ------------------------------ (Principal Financial December 22, 1999
Daniel C. Sibley Officer and Principal
Accounting Officer)
</TABLE>
S-1
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NO. DESCRIPTION OF EXHIBIT NUMBERED PAGE
- ------------- ------------------------------------------------------------------------------------- -------------------
<C> <S> <C>
1.1.. Dealer Manager Agreement
1.2.. Soliciting Dealer Agreement
3.1 Form of Limited Partnership Agreement (included as Appendix A to the Prospectus filed
as a part of this Registration Statement)
5.1.. Opinion of Arter & Hadden LLP as to legality of the securities being registered*
8.1.. Opinion of Arter & Hadden LLP as to various tax matters discussed in the prospectus
(included as Appendix D to the Prospectus filed as a part of this Registration
Statement)
10.1.. Form of Drilling and Operating Agreement with Reef Exploration, Inc.*
10.2.. Escrow Agreement with Bank One Texas, N.A.*
23.1.. Consent of Arter & Hadden LLP (included in Exhibits 5.1 and 8.1)
23.2.. Consent of Ernst & Young LLP
24.1.. Powers of Attorney (contained on page S-1)
</TABLE>
- ------------------------
* To be filed by amendment.
<PAGE>
EXHIBIT 1.1
DEALER MANAGER AGREEMENT
_________________, 2000
Western American Securities Corporation
1901 N. Central Expressway
Suite 400
Richardson, Texas 75080
Ladies and Gentlemen:
The undersigned, Reef Partners LLC, a Nevada limited liability
company ("Reef Partners"), the Managing General Partner of Reef Millennium
Energy Fund, a series of limited partnerships to be organized under the laws
of Nevada (referred to herein as the "Partnerships"), hereby confirms and
agrees as follows:
1. GENERAL.
This Agreement sets forth the understandings and agreements between
Reef Partners and you whereby, subject to the terms and conditions contained
herein, you will offer to sell, on a best efforts basis, preformation
partnership interests in the Partnerships (the "Units") which are described
more fully in a Prospectus (the "Prospectus"). The date as of which you are
notified by Reef Partners that Units may be offered and sold in a Partnership
shall constitute the "Effective Date" of the offering of Units in such
Partnership under this Agreement. The "Termination Date" of each such
offering shall be the earlier of the following dates:
(a) Any date specified by Reef Partners after the minimum number of
Units has been subscribed for in such Partnership;
(b) The date upon which subscriptions for the maximum number of
Units to be offered in such Partnership have been sold in accordance with the
procedures set forth in the Prospectus; or
(c) December 31, 2000 with respect to the Millennium Energy Fund A,
B and C partnerships, December 31, 2001 with respect to the Millennium Energy
Fund D, E and F partnerships, and December 31, 2002 with respect to the
Millennium Energy Fund G, H, I and J partnerships.
The period from the Effective Date through the Termination Date for
each Partnership shall constitute an "Offering Period" for the offering and
sale of Units by you pursuant to this Agreement. During the Offering Period
for each Partnership you, and Reef Partners shall designate certain dates,
each of which shall constitute a "Closing Date" for such Partnership under
this Agreement. The first such Closing Date (the "Initial Closing Date")
shall occur on or before the tenth business day following the receipt of
Subscriptions from suitable investors acceptable to Reef Partners for a
minimum of 50 Units ($1,000,000) (the "Minimum Offering") in such
Partnership. Subsequent Closing Dates shall be dates mutually agreed upon by
you and Reef Partners during the Offering Period for such Partnership.
2. REPRESENTATIONS AND WARRANTIES OF REEF PARTNERS.
Reef Partners represents and warrants to you that:
(a) Reef Partners has prepared and reviewed the Prospectus, and the
Prospectus does not include and will not include during any Offering Period
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading; provided, however, that no representations or warranties are made
with respect to statements or
DEALER MANAGER AGREEMENT - Page 1
<PAGE>
omissions made in reliance upon and in conformity with written information
furnished to Reef Partners with respect to you, by you or on your behalf
expressly for use in the Prospectus or any amendment or supplement thereof;
(b) Each Partnership, upon the due execution of the Partnership
Agreement in the Prospectus (the "Partnership Agreement") and the filing of a
certificate of limited partnership as required under the laws of the State of
Nevada, will be a limited partnership duly formed and validly existing
pursuant to the Uniform Limited Partnership Act of the State of Nevada (the
"Nevada Act"), with all authority necessary to acquire, own and manage the
investments which are described as proposed investments of the Partnership in
the Prospectus and to conduct the business which it proposes to conduct, all
as described in the Prospectus; the Partnership Agreement pursuant to which
the partnership will be organized provides for the issuance and sale of the
Units; all action required to be taken by Reef Partners or the Partnership as
a condition to the offering or sale of the Units to qualified subscribers has
been or, prior to the Effective Date, will have been taken; upon payment of
the consideration therefor specified in the Subscription Agreement contained
in the Prospectus and the due execution and delivery to Reef Partners of the
Subscription Documents (as hereinafter described) by each subscriber for the
Units (the "Subscription"), acceptance of such Subscription by Reef Partners,
the execution of the Partnership Agreement by Reef Partners as managing
general partner and on behalf of such subscribers pursuant to the terms of
the Partnership Agreement and execution and filing for record of a
certificate of limited partnership of the Partnership (the "Certificate") as
shall be required or appropriate to organize the Partnership with the
accepted subscribers for the Units as additional general or limited partners
in accordance with the requirements of the Nevada Act, such subscribers will
become additional general or limited partners of the Partnership (the
"Partners") entitled to all the benefits of Partners under the Partnership
Agreement and the Nevada Act;
(c) The Units, when issued, will constitute valid partnership
interests in accordance with the terms of, and shall be entitled to the
rights provided in, the Partnership Agreement and the Nevada Act, will be
fully paid upon payment in cash of the consideration therefor specified in
the Subscription Agreement contained in the Prospectus, and the liability of
a Partner to make payments to the Partnership or on behalf of the Partnership
may or may not be limited to the amount which such Partner has agreed to pay
in accordance with the terms of his Subscription and the Partnership
Agreement, depending on whether he chooses to be an additional general or
limited partner;
(d) Reef Partners has been, and on each Closing Date will be, duly
and validly organized and validly existing as a limited liability company in
good standing under the laws of the State of Nevada; has all requisite power
and authority to act as a Managing General Partner of each Partnership; is or
will be qualified to do business and in good standing as a foreign limited
liability company in each other jurisdiction in which its acting in such
capacity requires or may require such qualification if the failure to so
qualify might result in material adverse consequences to the Partnership; has
the requisite power and authority and all necessary authorization, approvals
and orders required as of the date hereof to enter into this Agreement and
the Limited Partnership Agreement and to be bound by the provisions and
conditions hereof and thereof; and its audited balance sheet included in the
Prospectus presents fairly its financial position as at the date indicated;
said balance sheet has been prepared in conformity with generally accepted
accounting principles applied on a consistent basis; and the certified public
accountants whose report thereon is included in the Prospectus are
independent accountants as required by the Securities Act of 1933, as amended
(the "Act");
(e) Except to the extent disclosed in the Prospectus there is no
litigation or governmental proceeding pending or, to Reef Partners'
knowledge, threatened against, or involving the business or proposed business
of, the Partnership or Reef Partners, which might materially and adversely
affect the proposed operations and business of the Partnership;
(f) The condition, financial or otherwise, of Reef Partners, and the
proposed business of the
DEALER MANAGER AGREEMENT - Page 2
<PAGE>
Partnership, conform in all material respects to the descriptions thereof
contained in the Prospectus;
(g) Neither the execution and delivery of this Agreement and the
Partnership Agreement, the incurrence of the obligations herein and therein
set forth, the consummation of the transactions herein and therein
contemplated, nor compliance with the terms and provisions hereof or thereof,
will conflict with or result in a breach or violation of any of the terms,
provisions or conditions of any agreement or instrument to which Reef
Partners is a party or by which it is bound, or any order, rule or regulation
applicable to Reef Partners of any court or any governmental body or
administrative agency having jurisdiction over Reef Partners;
(h) The Units, when issued, will conform to the descriptions thereof
contained in the Prospectus;
(i) This Agreement has been duly and validly authorized, executed
and delivered by or on behalf of Reef Partners and constitutes the valid and
binding agreement of Reef Partners; and
(j) The Partnership Agreement, upon its execution by Reef Partners,
will have been duly and validly authorized, executed and delivered by or on
behalf of Reef Partners as the Managing General Partner and will constitute
the valid and binding agreement of the Managing General Partner.
3. OFFERING AND SALE OF UNITS.
(a) On the basis of the representations, warranties and agreements
herein contained, but subject to the terms and conditions herein set forth,
Reef Partners hereby appoints you as the Dealer Manager during each Offering
Period to offer all of the Units to potential investors in the Partnership in
accordance with the terms of the Prospectus, and you agree to use your best
efforts as Dealer Manager, promptly following the Effective Date, to offer
the Units to suitable investors at the price and in accordance with the terms
stated in the Prospectus.
(b) The offering of Units by you and the Soliciting Dealers will
only be made to potential investors residing in the states designated to you
by Reef Partners.
(c) All sales of Units will be conditioned upon receipt of
Subscriptions from suitable investors acceptable to Reef Partners for the
Minimum Offering on or before each Termination Date. All checks received with
Subscription Documents shall be made payable to "Bank One as Escrow Agent for
Millennium Energy Fund __, L.P." and shall be transferred to the Escrow Agent
by noon of the next business day after receipt for deposit in the Escrow
Account established pursuant to the Prospectus.
(d) All sales of Units will be conditioned upon acceptance by Reef
Partners of the Subscription Documents of each subscriber (consisting of the
Subscription Agreement, all in the form as may be approved by you, the
Soliciting Dealers and Reef Partners, or as may be required by the Prospectus
and the Partnership Agreement), which shall be duly executed by each
subscriber and be accompanied by payment in cash of the purchase price of
Units subscribed to by each such subscriber. Reef Partners shall have the
right, in its sole discretion, to reject the Subscription of any potential
purchaser of Units.
(e) The Units will be sold only to persons who warrant or represent
that they or their beneficiaries meet the financial suitability requirements
as set forth in the Prospectus and such other requirements as may be required
by the states in which the Units are sold.
(f) In consideration of your execution of this Agreement, and the
performance of your obligations hereunder, and in further consideration of
your supervising the offering of Units in each Partnership, Reef Partners
agrees to cause each Partnership to pay to you, upon each Closing Date for
such Partnership, six percent (6%) of the Partnership Subscriptions (as
defined in the Partnership Agreement)
DEALER MANAGER AGREEMENT - Page 3
<PAGE>
received and accepted by Reef Partners as of such Closing Date, out of which
you may pay commissions, reimbursement of due diligence expenses, marketing
support fees, and other compensation, totaling no more than six percent (6%)
to the Soliciting Dealers as provided in the Soliciting Dealer Agreement. In
the event the Minimum Offering is not achieved on or before the Termination
Date for a Partnership and this Agreement is terminated with respect to such
Partnership, neither you nor the Soliciting Dealers shall receive any sales
commissions or fees. Prior to the time a partnership reaches the Minimum
Offering, the Managing General Partner may advance from its own funds sales
commissions and due diligence expenses which would otherwise be payable in
connection with subscription funds received and cleared from subscribers that
the Managing General Partner deems suitable to be Investor Partners.
4. SUITABILITY.
(a) As Dealer Manager, you are aware of the suitability standards,
as set forth in the Prospectus, that an offeree must meet and represent. As
such, you will make reasonable inquiry and cause the Soliciting Dealers to
make reasonable inquiry to assure that there is compliance with such
standards.
(b) In recommending the purchase of Units in the Partnership, you
shall (and you shall cause the Soliciting Dealers to):
(1) Have reasonable grounds to believe, on the basis of
information obtained from the offeree concerning his investment
objectives, other investments, financial situation and needs, and any
other information known by you or any associated person, that:
(i) the offeree is or will be in a financial position
appropriate to enable him to realize to a
significant extent the benefits described in the
Prospectus;
(ii) the offeree has a fair market net worth sufficient
to sustain the risks inherent in the program,
including loss of investment and lack of liquidity;
(iii) the program is otherwise suitable for the offeree;
and
(2) Maintain in your file documents disclosing the basis upon
which the determination of suitability was reached as to each offeree.
(c) Notwithstanding the provisions of subsection (b) above, you
shall not execute any transaction of Units of the Partnership in any
discretionary account without prior written approval of the transaction by
the offeree.
(d) Prior to executing a purchase transaction of Units of the
Partnership, you shall inform the offeree of all the pertinent facts relating
to the liquidity and marketability of the Units during the term of the
Partnership.
5. DISCLOSURE.
(a) Prior to participating in the offering, you shall have reasonable
grounds to believe, based on information made available to you by Reef Partners
through a prospectus or other materials, that all material facts are adequately
and accurately disclosed and provide a basis for evaluating the program.
(b) In determining the adequacy of disclosed facts pursuant to
subsection (a) hereof, you shall obtain information on material facts relating
at a minimum to the following, if relevant in view of the nature of the program:
(1) items of compensation;
DEALER MANAGER AGREEMENT - Page 4
<PAGE>
(2) physical properties;
(3) tax aspects;
(4) financial stability and experience of Reef Partners;
(5) the program's conflicts and risk factors; and
(6) appraisals and other pertinent reports.
(c) For the purposes of subsections (a) or (b) hereof, you may rely
upon the results of an inquiry conducted by another NASD member or members,
provided that:
(1) the member or persons associated with a member has
reasonable grounds to believe that such inquiry was conducted with due
care;
(2) the results of the inquiry were provided to you with the
consent of the member or members conducting or directing the inquiry;
and
(3) no member that participated in the inquiry is a sponsor
of the program or an affiliate of such sponsor.
6. COVENANTS OF REEF PARTNERS.
Reef Partners covenants that it will:
(a) During each Offering Period and prior to each Closing Date,
notify you and the Soliciting Dealers immediately, and confirm the notice in
writing, of any event relating to or affecting the Partnership or Reef
Partners which might reasonably result in the Prospectus containing an untrue
statement of a material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the circumstances
existing at the time they were made, not misleading; and if in the opinion of
counsel to Reef Partners, the content of such disclosure to you requires an
amendment or supplement to the Prospectus, Reef Partners will forthwith
prepare and furnish to you and the Soliciting Dealers, at Reef Partners'
expense, a reasonable number of copies of such amendment or amendments, or
supplement or supplements, to the Prospectus so as to render it not
misleading prior to the consummation of any sale of Units to an Investor or
any prospective investor;
(b) Qualify or register the Units for offering and sale or make
filings under the securities laws of the states designated by Reef Partners
and such additional states as you or the Soliciting Dealers may reasonably
designate; provided, however, neither the Partnership nor Reef Partners shall
be obligated to file any general consent to service of process under the laws
of any such jurisdiction or subject themselves to taxation as doing business
in such jurisdiction;
(c) File registration statements with the Securities and Exchange
Commission and applicable regulatory authorities of the States, as and when
such filings are required under the securities laws of those States, and
promptly furnish to you two signed or conformed copies thereof;
(d) Deliver promptly to you and the Soliciting Dealers, upon
request, true and complete copies of such contracts, notes, mortgages,
commitments, loan agreements and other documents relating to the formation of
the Partnership, the acquisition, ownership, operation and management of any
oil and gas properties or interests acquired or to be acquired by the
Partnership, the business experience and financial condition of Reef
Partners, and such other information, financial or otherwise, relating to the
business,
DEALER MANAGER AGREEMENT - Page 5
<PAGE>
assets and liabilities of the Partnership or Reef Partners, as you or the
Soliciting Dealers may reasonably request prior to each Closing Date;
(e) Deliver to you and the Soliciting Dealers one copy of each
report, letter, statement or other written information furnished by the
Partnership to the Partners during the term of the Partnership;
(f) Apply the proceeds of the sale of the Units substantially
as set forth in the Prospectus;
(g) From and after each Closing Date, not offer or sell interests in
the Partnership or other securities which offers or sales, in the opinion of
counsel to Reef Partners, would be integrated with offers and sales of
interest in the Partnership pursuant to this Agreement.
7. COVENANTS OF WESTERN AMERICAN SECURITIES CORPORATION.
Western American Securities Corporation agrees:
(a) To offer the Units for sale and to sell the Units solely on the
basis of the information furnished to prospective investors in the
Prospectus. If you prepare any materials or presentations supplementary to
the Prospectus, you assume complete responsibility for such materials and
presentations and agree to deliver no written information other than the
Prospectus to any potential subscriber unless authorized to do so in writing
by the Partnership;
(b) To obtain written evidence sufficient to permit you and Reef
Partners to reasonably determine that a subscriber purporting to qualify is,
in fact, so qualified;
(c) Prior to obtaining a Subscription from any potential subscriber
to obtain evidence satisfactory to you and Reef Partners that each subscriber
meets the financial suitability requirements established in the Prospectus;
(d) Not to commence the offer or sale of Units in any State until
you have received advice from Reef Partners or its counsel that the Units may
be offered and sold in such state; and
(e) To furnish to Reef Partners or its designee at Reef Partners'
request during each Offering Period, and in any event within five (5) days
after the Termination Date, the Subscription Documents (or true copies
thereof) of subscribers solicited by you to permit Reef Partners or its
designee to review such Subscription Documents and to evaluate the
qualifications of such subscribers as potential Partners.
8. PAYMENT OF EXPENSES.
Reef Partners will pay all expenses incident to the performance of
its obligations under this Agreement, including:
(a) the preparation of the Prospectus;
(b) the preparation of this Agreement;
(c) the fees and disbursements of Reef Partners' counsel,
accountants and consultants related to the preparation of the Prospectus;
(d) the qualification of the Units for the offer and sale thereof
under the securities laws of the States that you or the Soliciting Dealers
may reasonably designate, including filing fees and the fees and
disbursements of counsel in connection therewith; and
DEALER MANAGER AGREEMENT - Page 6
<PAGE>
(e) the printing and delivery to you of such quantities of the
Prospectus as you may reasonably request and all amendments or supplements
thereto.
9. CLOSING CONDITIONS.
Your obligation to deliver the Subscriptions Documents to Reef
Partners for acceptance by it and funds received for Subscriptions is subject
to the satisfaction on or before each Closing Date (as above defined) of the
following conditions:
(a) On the Effective Date and during each Offering Period no order
suspending the offering or sale of the Units shall have been issued, and on
the Effective Date and during each Offering Period no proceedings for that
purpose shall have been instituted, or to your knowledge or that of Reef
Partners, shall be contemplated.
(b) You and the Soliciting Dealers shall have received a sworn
certificate, dated the Closing Date, signed by an officer of Reef Partners,
to the effect that he has carefully read the Prospectus and that:
(i) as of its date, the Prospectus did not contain an untrue
statement of a material fact and, to the best of his
knowledge after reasonable inquiry, did not omit to state
a material fact necessary to make the statements made
therein, in light of the circumstances under which they
were made, not misleading;
(ii) since the date of the Prospectus, no event has occurred
which should have been set forth in an amendment or
supplement to the Prospectus which has not been so set
forth;
(iii) since the date of the Prospectus, there has not been any
adverse change in the business or proposed business,
interests, oil and gas properties or proposed oil and
gas properties or condition, financial or otherwise, of
the Partnership or Reef Partners, whether or not arising
from transactions in the ordinary course of business,
which might materially and adversely affect the
properties or operations or proposed properties and
operations of the Partnership or Reef Partners or the
ability of Reef Partners to perform the services
proposed to be performed by it as described in the
Prospectus; and
(iv) to the best of his knowledge, based upon reasonable
investigation, the representations and warranties of
Reef Partners in Section 2 of this Agreement are true
and correct as if made at and as of the Closing Date.
If any condition to your obligations hereunder shall not have been
fulfilled when and as required by this Agreement to be fulfilled, you may
waive any such condition which has not been fulfilled, extend the time for
its fulfillment or terminate this Agreement. In the event that you elect to
terminate this Agreement, all Subscription Documents, checks and other
documents and instruments delivered to you for the purchase of the Units
shall be returned to the subscribers solicited by you, accompanied by a
notice from you of the cancellation and termination of the offering of the
Units.
10. REPRESENTATIONS AND AGREEMENTS TO SURVIVE.
Except as the context otherwise requires, all representations,
warranties and agreements contained in this Agreement shall remain operative
and in full force and effect and shall survive the Closing Dates.
11. EFFECTIVE DATE, TERM AND TERMINATION OF THIS AGREEMENT.
DEALER MANAGER AGREEMENT - Page 7
<PAGE>
(a) This Agreement shall become effective on the Effective Date. You
or Reef Partners may elect to prevent this Agreement from becoming effective
without liability of any party to any other party by giving notice of such
election to the other parties hereto before the time this Agreement otherwise
would become effective.
(b) You shall have the right to terminate this Agreement at any time
during each Offering Period if any representation or warranty hereunder shall
be found to have been incorrect or misleading or Reef Partners shall fail,
refuse or be unable to perform any of its agreements hereunder or to fulfill
any condition of your obligations hereunder or if the Prospectus shall have
been amended or supplemented despite your objection to such amendment or
supplement or
(i) if all trading on the New York Stock Exchange or the
American Stock Exchange (in this Section collectively
called "Exchange") shall have been suspended, or
minimum or maximum prices for trading generally shall
have been fixed, or maximum ranges for prices for all
securities shall have been required on the Exchange
by the Exchange or by order of the Securities and
Exchange Commission or any other governmental
authority having jurisdiction; or
(ii) if the United States shall have become involved in a war
or major hostilities; or
(iii) if a banking moratorium has been declared by a state
or federal authority; or
(iv) if Reef Partners or its properties shall have
sustained a material or substantial loss by fire,
flood, accident, earthquake or other calamity or
malicious act which, whether or not said loss shall
have been insured, will in your opinion make it
inadvisable to proceed with the offering and sale of
the Units; or if there shall have been such change in
the condition or prospects of the Partnership or Reef
Partners or in the levels of the prime interest rate
or long-term mortgage rate or in the condition of
securities markets generally as in your judgment
would make it inadvisable to proceed with the
offering and sale of the Units.
12. NOTICES.
(a) All communications hereunder, except as herein otherwise
specifically provided, shall be in writing and if sent to you shall be
mailed, delivered, or telegraphed and confirmed to you at Western American
Securities Corporation, 1901 N. Central Expressway, Suite 400, Richardson,
Texas 75080, Attention: Paul Mauceli; if sent to Reef Partners and/or the
Partnership shall be mailed, delivered or telegraphed and confirmed to Reef
Partners at Reef Partners, LLC; c/o Reef Exploration, 1901 N. Central
Expressway, Suite 300, Richardson, Texas 75080, Attention: Michael J. Mauceli.
(b) Notice shall be deemed to be given by you to Reef Partners or the
Partnership or by Reef Partners or the Partnership to you as of the third
business day after it is mailed, delivered, or telegraphed, and confirmed as
provided.
13. PARTIES.
This Agreement shall inure solely to the benefit of you and shall be
binding upon you and Reef Partners and your respective successors and
assigns. Nothing expressed or mentioned in this Agreement is intended or
shall be construed to give any person or corporation, other than the parties
hereto and their respective successors and assigns any legal or equitable
right, remedy or claim under or in respect of this Agreement or any provision
herein contained. No purchaser of any of the Units from you or Reef Partners
shall be construed a successor or assign by reason merely of such purchase.
DEALER MANAGER AGREEMENT - Page 8
<PAGE>
14. CONSTRUCTION.
This Agreement shall be construed in accordance with the laws of the
State of Texas.
DEALER MANAGER AGREEMENT - Page 9
<PAGE>
If the foregoing correctly sets forth the understanding between us,
please so indicate in the space provided below for that purpose, whereupon this
letter shall constitute a binding agreement between us.
Very truly yours,
REEF PARTNERS LLC
By:___________________________________________
Name:__________________________________
Title:_________________________________
ACCEPTED AS OF THE DATE
FIRST ABOVE WRITTEN.
WESTERN AMERICAN SECURITIES
CORPORATION
By:___________________________________
Name:________________________
Title:_______________________
DEALER MANAGER AGREEMENT - Page 10
<PAGE>
EXHIBIT 1.2
WESTERN AMERICAN SECURITIES CORPORATION
1901 N. Central Expressway
Suite 400
Richardson, Texas 75080
SOLICITING DEALER AGREEMENT
_____________, 2000
Re: REEF MILLENNIUM ENERGY FUND
Ladies and Gentlemen:
We have entered into a Dealer Manager Agreement (the "Dealer Manager
Agreement") with Reef Partners LLC, a Nevada limited liability company ("Reef
Partners"), the proposed Managing General Partner of Reef Millennium Energy
Fund, a series of limited partnerships to be formed under the laws of Nevada
(individually a "partnership" and sometimes collectively the "Partnership"),
under which we have agreed to use our best efforts to place with qualified
investors pre-formation partnership interests in the Partnership ("Units").
Reef Partners and the Partnership are offering up to $100,000,000 of Units
consisting of 5,000 Units at a price of $20,000 per Unit with fractional
Units available as described in the Partnership's Prospectus (the
"Prospectus"), a copy of which has previously been furnished to you.
In connection with the performance of our obligations under the
Dealer Manager Agreement, we are authorized to engage you as a soliciting
dealer for the offer and sale of Units, and to pay you all or a portion of
our commissions and fees for Units sold by you, all as is more fully set
forth herein. In further consideration of your participation in the offering
and sale of the Units, and as an inducement to you to become a soliciting
dealer, Reef Partners, by its execution of this Agreement, agrees to extend
to you certain of the benefits provided to us in the Dealer Manager
Agreement, and to indemnify you against certain civil liabilities under the
Securities Act of 1933, as amended (the "Act"). Unless the context otherwise
requires, all of the capitalized terms used herein shall have the meaning
given to such terms in the Dealer Manager Agreement or in the Prospectus. You
are hereby invited to become a soliciting dealer and, as such, to use your
best efforts to procure purchasers of Units in accordance with the terms and
provisions of this Agreement.
1. REPRESENTATIONS AND WARRANTIES OF REEF PARTNERS.
All of the representations and warranties contained in Section 2 of
the Dealer Manager Agreement are incorporated herein by this reference and
given to you by Reef Partners as though fully set forth herein.
2. OFFERING AND SALE OF UNITS.
(a) On the basis of the representations, warranties and agreements
herein contained, but subject to the terms and conditions herein set forth,
we hereby appoint you as a soliciting dealer during the Offering Periods to
offer to potential investors in the Partnership in accordance with the terms
of the Prospectus up to 5,000 Units, and you agree to use your best efforts
as soliciting dealer, promptly following the Effective Date, to offer and
sell such number of Units to potential investors at the price and in
accordance with the terms stated in the Prospectus.
(b) All sales of Units will be conditioned upon acceptance by Reef
Partners of the Subscription Documents of each subscriber for Units,
consisting of the Subscription Agreement, duly executed by each such
subscriber and accompanied by payment of the purchase price for the Units
subscribed for by each such subscriber. Reef Partners shall have the right,
in its sole discretion, to reject the Subscription of any potential purchaser
of Units.
SOLICITING DEALER AGREEMENT - Page 1
<PAGE>
(c) The offering of Units by you will be made to potential investors
solely in the states in which you are registered to sell and listed in
Exhibit A to this Agreement.
(d) The Units will be offered and sold by you only to persons who
warrant or represent that they or their beneficiaries meet the financial
suitability requirements as set forth in the Prospectus and such other
conditions as may be required by the states in which the Units are offered or
sold.
(e) Subject to the terms and conditions herein set forth, we agree
that we shall pay to you commissions equal to 6% of the Partnership
Subscriptions of subscribers whose Subscriptions were obtained by you in your
capacity as soliciting dealer pursuant to this Agreement, such commissions to
be paid within three (3) business days of the dates upon which commissions
are paid to us pursuant to the Dealer Manager Agreement. Prior to the time a
partnership has been formed and funded, the Managing General Partner may
advance funds for payment of sales commissions and selling expenses for Units
which have been accepted and cleared from its own funds.
(f) Notwithstanding the provisions of Section 2(e) of this
Agreement, you understand and agree that no commissions, fees or other
compensation shall be payable to us or to you if Reef Partners has not
received and accepted Subscriptions aggregating at least $1,000,000 for each
partnership by the Termination Date for such partnership.
3. SUBSCRIPTION PAYMENTS.
(a) Payments received by us or you for Subscriptions shall be made
payable to "Bank One as Escrow Agent for Millennium Energy Fund __, L.P."
(b) You shall transfer all such funds to us by noon of the next
business day after their receipt by you so that we may transfer them to the
Escrow Agent by noon of the next business day after their receipt by us for
deposit in escrow in accordance with the Prospectus. In the event that the
Minimum Offering is not achieved on or before the Termination Date for a
Partnership, all funds held in the Escrow Account shall, within 10 days after
the Termination Date for such Partnership, be returned directly to the
respective subscribers, together with a pro rata share of any interest earned
thereon. In the event the Minimum Offering is achieved on or before the
Termination Date, all funds held in the Escrow Account attributable to
subscribers whose Subscriptions are rejected by Reef Partners, together with
any interest earned thereon, as well as any interest earned on the funds of
subscribers whose Subscriptions are accepted by Reef Partners, shall, within
10 days after the filing of the Certificate, be returned or disbursed, as the
case may be, to such subscribers.
4. SUITABILITY.
(a) As a soliciting dealer, you are aware of the suitability
standards, as set forth in the Prospectus, that an offeree must meet and
represent. As such, you will make reasonable inquiry to assure that there is
compliance with such standards.
(b) In recommending the purchase of Units in the Partnership, you
shall:
(1) Have reasonable grounds to believe, on the basis of
information obtained from the offeree concerning his investment
objectives, other investments, financial situation and needs, and any
other information known by you or any associated person, that:
(i) the offeree is or will be in a financial
position appropriate to enable him to realize to
a significant extent the benefits described in
the Prospectus;
SOLICITING DEALER AGREEMENT - Page 2
<PAGE>
(ii) the offeree has a fair market net worth
sufficient to sustain the risks inherent in the
program, including loss of investment and lack
of liquidity;
(iii) the program is otherwise suitable for the
offeree; and
(2) Maintain in your file documents disclosing the basis upon
which the determination of suitability was reached as to each offeree.
(c) Notwithstanding the provisions of subsection (b) above, you
shall not execute any transaction of Units of the Partnership in any
discretionary account without prior written approval of the transaction by
the offeree.
(d) Prior to executing a purchase transaction of Units of the
Partnership, you shall inform the offeree of all the pertinent facts relating
to the liquidity and marketability of the Units during the term of the
Partnership.
5. DISCLOSURE.
(a) Prior to participating in the offering, you shall have
reasonable grounds to believe, based on information made available to you by
Reef Partners through a prospectus or other materials, that all material
facts are adequately and accurately disclosed and provide a basis for
evaluating the program.
(b) In determining the adequacy of disclosed facts pursuant to
subsection (a) hereof, you shall obtain information on material facts
relating at a minimum to the following, if relevant in view of the nature of
program:
(1) items of compensation;
(2) physical properties;
(3) tax aspects;
(4) financial stability and experience of Reef Partners;
(5) the program's conflicts and risk factors; and
(6) appraisals and other pertinent reports.
(c) For the purpose of subsections (a) or (b) hereof, you may rely
upon the results of an inquiry conducted by another NASD member or members,
provided that:
(1) the member or persons associated with a member has
reasonable grounds to believe that such inquiry was conducted with
due care;
(2) the results of the inquiry were provided to you with
the consent of the member or members conducting or directing the
inquiry; and
(3) no member that participated in the inquiry is a
sponsor of the program or an affiliate of such sponsor.
6. COVENANTS AND UNDERTAKINGS OF THE SOLICITING DEALER.
(a) You agree to comply with all of the covenants applicable
to us in Section 6 of the Dealer Manager Agreement.
(b) You expressly represent and undertake that you will fully
comply with Sections 8, 24, 25 and 36 of the Rules of Fair Practice of the
National Association of Securities Dealers, Inc.
SOLICITING DEALER AGREEMENT - Page 3
<PAGE>
7. CLOSING CONDITIONS.
Your obligation to deliver Subscription Documents to Reef Partners
for acceptance by it is subject to the satisfaction on or before each Closing
Date of the conditions set forth in Section 9 of the Dealer Manager
Agreement. If any condition to your obligations hereunder shall not have been
fulfilled when it is required by this Agreement to be fulfilled, you may
waive any such condition which has not been fulfilled, extend the time for
its fulfillment or terminate this Agreement. In the event that you elect to
terminate this Agreement, all Subscription Documents, Subscription funds
held, checks and other documents and instruments delivered to you for the
purchase of the Units shall be returned to the subscribers together with
their pro rata share of any interest earned on Subscription funds,
accompanied by a notice from you of the cancellation and termination of the
offering of the Units.
8. INDEMNIFICATION.
(a) Subject to the conditions set forth below, Reef Partners and
Western American Securities Corporation agree to indemnify and hold harmless
you, each of your officers, directors and employees and each person, if any,
who controls you within the meaning of Section 15 of the Act, against any and
all loss, liability, claim, damage and expense whatsoever (including but not
limited to any and all expenses whatsoever reasonably incurred in
investigating, preparing for, defending against or settling an litigation,
commenced or threatened, or any claim whatsoever) arising out of or based
upon:
(i) any alleged untrue statement of a material fact
contained in the Prospectus as from time to time
amended or supplemented or the omission or alleged
omission therefrom a material fact required to be
stated therein or necessary to make the statements
therein, in the light of the circumstances under
which they were made, not misleading, unless such
statement or omission was made in reliance upon and
in conformity with written information furnished to
Reef Partners with respect to you, by you or on your
behalf expressly for use in the Prospectus or any
amendment or supplement thereof; and
(ii) the failure or alleged failure of Western American
Securities Corporation or Reef Partners to comply
with requirements of federal and state securities law.
If any action is brought against you or any such officer, director,
employee or controlling person in respect of which indemnity may be sought
against Reef Partners pursuant to the foregoing paragraph, you or such
officer, director, employee or controlling person shall promptly notify Reef
Partners in writing of the institution of such action and Reef Partners shall
assume the defense of such action, including the employment of counsel
(reasonably satisfactory to you or such officer, director, employee or
controlling person) and payment of expenses. You or any such officer,
director, employee or controlling person shall have the right to employ
personal counsel in any such case, but the fees and expenses of such counsel
shall be at the expense of you or such officer, director, employee or
controlling person unless the employment of such counsel shall have been
authorized in writing on behalf of Reef Partners in connection with the
defense of such action or Reef Partners shall not have employed such counsel
to have charge of the defense of such action or such indemnified party or
parties shall have reasonably concluded that there may be defenses available
to it or them which are different from or additional to those available to
Reef Partners (in which case Reef Partners shall not have the right to direct
the defense of such action on behalf of the indemnified party or parties), in
any of which events the reasonable fees and expenses of not more than one
additional counsel for you and such officers, directors, employees and
controlling person (which firm shall be designated in writing by you) shall
be borne by Reef Partners. Anything in this paragraph to the contrary
notwithstanding, Reef Partners shall not be liable for any settlement of any
such claim or action effected without its written consent, which shall not be
withheld unreasonably. The indemnity agreement contained in this Section 8(a)
and the warranties and representations contained in this Agreement shall
remain in full force and effect regardless of any investigation made by or on
behalf of you or any such
SOLICITING DEALER AGREEMENT - Page 4
<PAGE>
officer, director, employee or controlling person, and shall survive any
termination of this Agreement. You agree promptly to notify Reef Partners of
the assertion of any claim or of the commencement of any litigation or
proceedings against you or Reef Partners or the Partnership in connection
with the issuance and sale of the Units or in connection with the Prospectus.
(b) You agree to indemnify and hold harmless, Western American
Securities Corporation, Reef Partners, the Partnership and each of the
officers and directors of Reef Partners and each other person, if any, who
controls Reef Partners or the Partnership within the meaning of Section 15 of
the Act to the same extent as the foregoing indemnity from Reef Partners to
you but only with respect to:
(i) the statements or omissions, if any, made in the
Prospectus or any amendment or supplement thereof in
reliance upon, and in conformity with, written
information furnished with respect to you, by you or
on your behalf expressly for use in such Prospectus
or any amendment or supplement thereof; and
(ii) the failure or alleged failure of you to comply
with the requirements of federal or state
securities law. In case any action shall be
commenced based on such Prospectus or amendment or
supplement thereof and in respect of which
indemnity may be sought against you, you shall have
the rights and duties given to Reef Partners and
each other person so indemnified shall have the
rights and duties given to you by the provisions of
the second paragraph of Section 8(a) above. The
indemnity agreements contained in this Section
8(b) shall remain in full force and effect
regardless of any investigation made by or on
behalf of any person indemnified herein, and
shall survive any termination of this Agreement.
Reef Partners agrees promptly to notify you of the
assertion of any claim, or of the commencement of
any litigation or proceeding against Reef
Partners or the Partnership or any officer or
director of Reef Partners or any person who controls
the Partnership within the meaning of Section 15
of the Act, in connection with the issuance and
sale of the Units or in connection with the
Prospectus.
9. REPRESENTATIONS AND AGREEMENT TO SURVIVE.
Except as the context otherwise requires, all representations,
warranties and agreements contained in this Agreement shall remain operative and
in full force and effect and shall survive the Closing Dates.
10. EFFECTIVE DATE, TERM AND TERMINATION OF THIS AGREEMENT.
(a) This Agreement shall become effective on the Effective Date. We,
you or Reef Partners may elect to prevent this Agreement from becoming
effective without liability of any party to any other party, except as
provided in subsection (c) of this Section 10, by giving notice of such
election to the other parties hereto before the time this Agreement otherwise
would become effective.
(b) You shall have the right to terminate this Agreement at any time
during each Offering Period if any representation or warranties hereunder
shall be found to have been incorrect or misleading or Reef Partners shall
fail, refuse or be unable to perform any of its agreements hereunder or to
fulfill any condition of your obligations hereunder of if the Prospectus
shall have been amended or supplemented despite your objection to such
amendment or supplement; or
(i) if all trading on the New York Stock Exchange or the
American Stock Exchange (in this Section collectively
called "Exchange") shall have been suspended, or
minimum or maximum prices for trading generally shall
have been required on the Exchange by Exchange or by
order of the Securities and Exchange Commission or
any other governmental authority having jurisdiction;
or
SOLICITING DEALER AGREEMENT - Page 5
<PAGE>
(ii) if the United States shall have become involved in a
war or major hostilities; or
(iii) if a banking moratorium has been declared by a state
or federal authority; or
(iv) if Reef Partners or its properties shall have
sustained a material or substantial loss by fire,
flood, accident, earthquake or other calamity or
malicious act which, whether or not said loss shall
have been insured, will in your opinion make it
inadvisable to proceed with the offering and sale of
the Units; or if there shall have been such change in
the condition or prospects of the Partnership or Reef
Partners or in the levels of the prime interest rate
or long-term mortgage rate or in the condition of
securities markets generally as in your judgment
would make it inadvisable to proceed with the
offering and sale of the Units.
(c) If for any reason this Agreement shall not become effective or
the offering hereunder is terminated, Reef Partners shall not have any
liability to you except for such liabilities, if any, as may exist or
thereafter arise under Section 8 hereof.
11. NOTICES.
(a) All communications hereunder, except as herein otherwise
specifically provided, shall be in writing and if sent to you shall be
mailed, delivered or telegraphed and confirmed to you at the address on the
signature page of this agreement; if sent to us or Reef Partners and/or the
Partnership shall be mailed, delivered, telegraphed and confirmed to us or
Reef Partners and/or the Partnership at 1901 N. Central Expressway, Suite
400, Richardson, Texas 75080.
(b) Notice shall be deemed to be given by you to us or Reef Partners
or the Partnership or by us, Reef Partners or the Partnership to you as of
the third business day after the same is mailed or telegraphed as provided in
Section 10 (a) above.
12. PARTIES.
This Agreement shall inure solely to the benefit of and shall be
binding upon you, us and, to the extent provided herein, Reef Partners and
the respective successors and assigns of such parties. Nothing expressed or
mentioned in this Agreement is intended or shall be construed to give any
person or corporation, other than the parties hereto and their respective
successors and assigns and the controlling persons, officers, directors and
employees, any legal or equitable right, remedy or claim under or in respect
of this Agreement or any provision herein contained; this Agreement and all
conditions and provisions hereof being intended to be and being for the sole
and exclusive benefit of the parties hereto and their respective successors
and assigns and said controlling persons and said officers, and directors and
employees, and for the benefit of no other person or corporation. No
purchaser of any of the Units from you or us shall be construed a successor
or assign by reason merely of such purchase.
13. CONSTRUCTION.
This Agreement shall be construed in accordance with the laws of the
State of Texas.
If the foregoing correctly sets forth the understanding between us,
please so indicate in the space provided below for that purpose, whereupon
this letter shall constitute a binding agreement between us.
Very truly yours,
SOLICITING DEALER AGREEMENT - Page 6
<PAGE>
WESTERN AMERICAN SECURITIES CORPORATION
By:____________________________________
Name:____________________________
Title:___________________________
Address: 1901 N. Central Expressway
Suite 400
Richardson, Texas 75080
ACCEPTED AS OF THE DATE
FIRST ABOVE WRITTEN.
_________________________________
[Name of Soliciting Dealer]
By:___________________________________
Name:________________________
Title:_______________________
Address:______________________________
______________________________
______________________________
Reef Partners hereby agrees to be bound by the terms and provisions
contained in this Agreement which are applicable to it including the
indemnification provisions of Section 8.
REEF PARTNERS LLC
By:____________________________________
Name:____________________________
Title:___________________________
SOLICITING DEALER AGREEMENT - Page 7
<PAGE>
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated September 29, 1999, in the Registration Statement
on Form S-1 and related Prospectus of Reef Millenium Energy Fund for the
registration of 5,000 Units of Preformation Limited Partner and Additional
Limited General Partner Interests.
/s/Ernst & Young LLP
Dallas, Texas
December 22, 1999
