SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. 1)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss. 240.14a-11(c) or ss. 240.14a-12
Swift Energy Income Partners 1990-C, Ltd.
(Name of Registrant as Specified In Its Charter)
Swift Energy Company
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
[ ] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(4).
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
$15.29-$20.91. Estimate based on estimated value of the underlying
assets.
4) Proposed maximum aggregate value of transaction:
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5) Total fee paid:
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[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
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2) Form, Schedule or Registration Statement No.:
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3) Filing Party:
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4) Date Filed:___________________________________________________
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August 19, 1997
Dear Limited Partner:
Enclosed is a proxy statement and related information pertaining to a
proposal to sell all of the Partnership's properties and dissolve and liquidate
the Partnership. In order for the sale and liquidation to take place, Limited
Partners holding a majority of the outstanding Units must approve this proposal.
The Managing General Partner recommends that you vote in favor of such sale and
liquidation for a number of reasons.
Swift Energy Income Partners 1990-C, Ltd. has been in existence for
over six years, and most of its properties were purchased by 1991. All
economically feasible enhancement opportunities have already been implemented on
the Partnership's properties. Consequently, the Partnership's proved reserves
that can be produced without requiring further expenditures is quite low. Thus,
even if oil and gas prices were unusually high, there would be no impact upon
the Partnership's ultimate economic performance. To continue operation of the
Partnership means that Partnership administrative expenses (such as costs of
audits, reserve reports, and Securities and Exchange Commission filings), as
well as the cost of operating the Partnership's properties, will continue while
revenues decrease, which may decrease the ultimate funds available for Limited
Partners. Liquidation of the Partnership's remaining assets at this time is
likely to result in a greater percentage of sales proceeds being paid to Limited
Partners, rather than being used to fund future general and administrative and
operating expenses, and will accelerate the receipt by the partners of the
remaining cash value of the Partnership.
If Limited Partners holding a majority of the Units approve this
proposal, the Managing General Partner will attempt to complete the sale of all
Partnership properties by the end of 1997.
Included in this package are the most recent financial and other
information prepared regarding the Partnership. If you need any further material
or have questions regarding this proposal, please feel free to contact the
Managing General Partner at (800) 777-2750.
We urge you to complete your Proxy and return it immediately, as your
vote is important in reaching a quorum necessary to have an effective vote on
this proposal. Enclosed is a green Proxy, along with a postage-paid envelope
addressed to the Managing General Partner for your use in voting and returning
your Proxy.
Thank you very much.
SWIFT ENERGY COMPANY,
Managing General Partner
By:
---------------------------------
A. Earl Swift
Chairman
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Swift Energy Income Partners 1990-C, Ltd.
16825 Northchase Drive, Suite 400
Houston, Texas 77060
(281) 874-2700
NOTICE OF SPECIAL MEETING OF LIMITED PARTNERS
To be held September 30, 1997
Notice is hereby given that a special meeting of limited partners of
Swift Energy Income Partners 1990-C, Ltd. (the "Partnership") will be held at
16825 Northchase Drive, Houston, Texas, on Tuesday, September 30, 1997 at 4:00
p.m. Central Time to consider and vote upon:
The adoption of a proposal for (a) sale of substantially all of the
assets of the Partnership and (b) the dissolution, winding up and
termination of the Partnership (the "Termination"). All asset sales and
the Termination comprise a single proposal (the "Proposal"), and a vote
in favor of the Proposal will constitute a vote in favor of each of
these matters.
A record of limited partners of the Partnership has been taken as of
the close of business on August 15, 1997, and only limited partners of record on
that date will be entitled to notice of and to vote at the meeting, or any
adjournment thereof.
If you do not expect to be present in person at the meeting or prefer
to vote by proxy in advance, please sign and date the enclosed proxy and return
it promptly in the enclosed postage-paid envelope which has been provided for
your convenience. The prompt return of the proxy will ensure a quorum and save
the Partnership the expense of further solicitation.
SWIFT ENERGY COMPANY,
Managing General Partner
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JOHN R. ALDEN
Secretary
August 19, 1997
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TABLE OF CONTENTS
SUMMARY ......................................................................1
GENERAL INFORMATION............................................................5
Documents Included....................................................5
Vote Required.........................................................5
Proxies; Revocation...................................................5
Dissenters' Rights....................................................6
Solicitation..........................................................6
RISK FACTORS...................................................................6
Uncertainty of Liquidating Distributions..............................6
Undetermined Sales Prices; Volatility of Oil and Gas Prices...........6
Dependence on Pension Partnership.....................................7
THE PROPOSAL...................................................................7
General .............................................................7
Partnership Financial Performance and Condition.......................8
Estimates of Liquidating Distribution Amount..........................9
Comparison of Sale Versus Continuing Operations......................12
Reasons for the Proposal.............................................12
Simultaneous Proposal to Pension Partnership.........................14
Steps to Implement the Proposal......................................14
Impact on the Managing General Partner...............................16
Recommendation of the Managing General Partner.......................17
FEDERAL INCOME TAX CONSEQUENCES...............................................17
General ............................................................17
Taxable Gain or Loss Upon Sale of Properties.........................17
Liquidation of the Partnership.......................................18
Capital Gain Tax.....................................................18
Passive Loss Limitations.............................................19
BUSINESS OF THE PARTNERSHIP...................................................20
Reserves ............................................................20
The Managing General Partner.........................................21
Transactions Between the Managing General Partner and the
Partnership.......................................................21
No Trading Market....................................................22
Principal Holders of Limited Partner Units...........................22
Approvals............................................................22
Legal Proceedings....................................................22
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INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
AND ATTACHMENT OF SUCH INFORMATION HERETO.....................................22
OTHER BUSINESS................................................................23
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Swift Energy Income Partners 1990-C, Ltd.
16825 Northchase Drive, Suite 400
Houston, Texas 77060-9468
(281) 874-2700
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PROXY STATEMENT
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SUMMARY
This Proxy Statement is being provided by Swift Energy Company, a Texas
corporation (the "Managing General Partner") in its capacity as the Managing
General Partner of Swift Energy Income Partners 1990-C, Ltd. a Texas limited
partnership (the "Partnership"), to holders of units of limited partnership
interests representing an initial investment of $100 per Unit in the Partnership
(the "Units"). This Proxy Statement and the enclosed proxy are provided for use
at a special meeting of limited partners (the "Limited Partners"), and any
adjournment of such meeting (the "Meeting") to be held at 16825 Northchase
Drive, Houston, Texas, at 4:00 p.m. Central Time on Tuesday, September 30, 1997.
The Meeting is called for the purpose of considering and voting upon a proposal
to (a) sell substantially all of the assets of the Partnership and (b) dissolve,
wind up and terminate the Partnership (the "Proposal"), in accordance with the
terms and provisions of Article XVI of the Partnership's Limited Partnership
Agreement dated September 30, 1990 (the "Partnership Agreement"), and the Texas
Revised Limited Partnership Act (the "Texas Act"). This Proxy Statement and the
enclosed proxy are first being mailed to Limited Partners on or about August 19,
1997.
Under Article XVI.C of the Partnership Agreement, the affirmative vote
of Limited Partners holding at least 51% of the Units then held by Limited
Partners as of the Record Date (as defined) is required for approval of the
Proposal. Each Limited Partner appearing on the Partnership's records as of
August 15, 1997 (the "Record Date"), is entitled to notice of the Meeting and is
entitled to one vote for each Unit held by such Limited Partner. Under Article
XX.H of the Partnership Agreement, the General Partners may not vote any limited
partnership Units owned by them for matters such as the Proposal. VJM
Corporation, a California corporation, the Special General Partner of the
Partnership, owns a 1% interest in the Partnership as a General Partner, but
owns no Units. The Managing General Partner currently owns approximately 6.26%
of all outstanding Units. Therefore, the affirmative vote of holders of 51% of
the remaining Units is required to approve the proposed sale.
The Partnership's assets consist of working interests in producing oil
and gas properties (the "Property Interests"). The Property Interests are
burdened by a single net profits interest in the producing oil and gas
properties granted to an affiliated companion partnership, Swift Energy Managed
Pension Assets Partnership 1990-C, Ltd. (the "Pension Partnership"). Upon
approval
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of the Proposal by the Limited Partners, the Managing General Partner intends to
sell substantially all of the Partnership's Property Interests, together with
the Pension Partnership's net profits interest in the same properties, in a sale
or series of sales, use the proceeds to pay or provide for the payment of
liabilities, and then wind up the affairs of the Partnership. The Partnership's
Property Interests currently cover 70 wells. The total PV-10 value of the
Partnership's remaining reserves as of December 31, 1996 was $1,187,752. The
most significant property owned by the Partnership is the Velrex Field in
Schleicher County, Texas, which accounts for approximately 33% of the value of
the Partnership's remaining reserves. During 1996, approximately 80% of the
Partnership's revenue was attributable to natural gas production. For more
information, see the attached Annual Report on Form 10-K for the year ended
December 31, 1996 and the Form 10-Q for the second quarter of 1997.
It is highly likely that the Property Interests will be sold in a
series of sales rather than in a single transaction. The Managing General
Partner anticipates that most of the Partnership's Property Interests will be
sold in auctions (together with the net profits interest owned by the Pension
Partnership) conducted by the Oil & Gas Asset Clearinghouse (the "O&G
Clearinghouse"), or a similar company engaged in auctions of oil and gas
properties, although some of the Partnership's Property Interests may be sold in
negotiated transactions with third parties. The Managing General Partner will
not purchase any of the Partnership's properties, although properties with no
appreciable value may be conveyed to it in order to complete plugging and
abandoning of wells. See "Steps to Implement the Proposal--Negotiated Sale." The
Managing General Partner will not begin the sales process until the Proposal has
been approved by the Limited Partners. The Managing General Partner is asking
for approval of the Proposal prior to offering the Partnership's Property
Interests for sale to avoid delay in selling the Property Interests.
Furthermore, as the Managing General Partner must sell the Partnership's
Property Interests in its oil and gas properties together with the net profits
interests in those same properties owned by the Pension Partnerships and several
other Partnerships which it manages, solicitation of approval of each purchase
offer from all of the partnerships would be impractical.
It is possible, though unlikely, that less than all of the
Partnership's Property Interests will be sold. See "The Proposal--Steps to
Implement the Proposal--Negotiated Sale." The Managing General Partner
anticipates that the majority of sales will be made by the end of 1997. The sale
of Partnership Property Interests that account for at least 66% of the total
value of the Partnership Property Interests will cause the Partnership to
dissolve automatically under the terms of the Partnership Agreement and the
Texas Act.
Currently there are no buyers for the Property Interests and the price
at which they will be sold has not yet been determined. The Managing General
Partner cannot accurately predict the prices at which the Property Interests
ultimately will be sold. See "The Proposal--Estimates of Liquidating
Distribution Amount." In addition to the foregoing, there are some risks
involved in the Proposal. See "Risk Factors." Any Partnership Property Interests
that are not sold at auction may be sold pursuant to negotiated sales to third
parties.
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THE PROPOSAL INVOLVES CERTAIN RISKS. SEE "RISK FACTORS."
o If the Proposal is approved, the Limited Partners will not have an
opportunity to approve the specific terms of any particular sale of the
Property Interests.
o Currently there are no buyers for the Property Interests and the price
at which they will be sold has not yet been determined. The Managing
General Partner cannot accurately predict the prices at which the
Property Interests ultimately will be sold.
o No minimum prices will be established for most of the Property
Interests, so there is no guarantee that the Property Interests will be
sold at or above their fair market value.
o The sale of the Property Interests is dependent upon the simultaneous
sale of the Pension Partnership's interest in the same properties. The
failure of the Pension Partnership to approve the proposal could
significantly adversely affect the likelihood of the sale of the
Property Interests.
o If the Proposal is adopted, the receipt of a final liquidating
distribution or the amount thereof is not assured. See "The
Proposal--Estimates of Liquidating Distribution Amount."
If the Proposal is not approved by Limited Partners holding 51% or more
of the Units held by Limited Partners, the Partnership will continue to exist.
In that event, however, due to the expected decline in revenues, the Managing
General Partner estimates that a portion of the Partnership's Property Interests
ranging from an average of 10% to 15% will need to be sold each year in order to
cover future direct costs, operating costs and administrative costs.
The Managing General Partner receives operating fees for wells in which
the Partnership has a working interest and for which the Managing General
Partner or its affiliates serve as operator. It is anticipated that, due to the
sale of interests in wells by the Partnership, the Managing General Partner will
no longer serve as operator for a number of the wells in which the Partnership
has a working interest. To the extent that the operator changes because of a
change in ownership of the properties, the Managing General Partner will lose
the revenues it currently earns as operator. The Managing General Partner
believes, however, that it will be positively affected, on the other hand, by
liquidation of the Partnership, on the basis of its ownership interest in the
Partnership. See "The Proposal--Estimates of Liquidating Distribution Amount,"
and "The Proposal--Impact on the Managing General Partner."
LIMITED PARTNERS ARE URGED TO COMPLETE, SIGN AND DATE THE
ENCLOSED PROXY AND TO RETURN IT TO THE MANAGING GENERAL
PARTNER NO LATER
THAN SEPTEMBER 15, 1997.
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GLOSSARY OF TERMS
Btu means British Thermal Unit, which is a heating equivalent measure for
natural gas.
Mcf means thousand cubic feet of natural gas.
Mcfe means thousand cubic feet of natural gas equivalent, which is determined
using the ratio of one barrel of oil, condensate or natural gas liquids to six
Mcf of natural gas.
Mmbtu means million British Thermal Units, which is a heating equivalent measure
for natural gas.
Net Profits Interest means an interest in oil and gas property which entitles
the owner to a specified percentage share of the Gross Proceeds generated by
such property, net of aggregate operating costs. Under the NP/OR Agreement, the
Pension Partnership received a Net Profits Interest entitling it to a specified
percentage of the aggregate Gross Proceeds generated by, less the aggregate
operating costs attributable to, those depths of all Producing Properties
acquired pursuant to such agreement that are evaluated at the respective dates
of acquisition to contain Proved Reserves, to the extent such depths underlie
specified surface acreage.
NP/OR Agreement means the form of Net Profits and Overriding Royalty Interest
Agreement entered into between the Partnership and the Pension Partnership
pursuant to which the Pension Partnership acquired a Net Profits Interest from
the Partnership in a group of Producing Properties. The Working Interest in such
group of properties is held by the Partnership.
PV-10 Value means the estimated future net revenue to be generated from the
production of proved reserves discounted to present value using an annual
discount rate of 10%; these amounts are calculated net of estimated production
costs and future development costs, using prices and costs in effect as of a
certain date, without escalation and without giving effect to non-property
related expenses such as general and administrative expenses, debt service,
future income tax expense or depreciation, depletion and amortization.
Producing Properties means Properties (or interests in properties) producing oil
and gas in commercial quantities, or containing shut-in wells capable of such
production, or properties which are acquired as an incidental part of the
acquisition of such properties. Producing Properties shall include associated
well machinery and equipment gathering systems, storage facilities or processing
installations or other equipment and property associated with the production and
field processing of oil or gas. Interests in Producing Properties may include
Working Interests, production payments, Royalty Interests, Overriding Royalty
Interest, Net Profits Interests, and other nonoperating interests. Producing
Properties may include gas gathering lines or pipelines. The geographical limits
of a Producing Property may be enlarged or contracted on the basis of
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subsequently acquired geological data to define the productive limits of a
reservoir, or as a result of action by a regulatory agency employing such
criteria as the regulatory agency may determine.
Proved Reserves means those quantities of crude oil, natural gas, and natural
gas liquids which, upon analysis of geologic 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. Proved Reserves are
limited to those quantities of oil and gas which can be reasonably expected to
be recoverable commercially at current prices and costs, under existing
regulatory practices and with existing conventional equipment and operating
methods.
Royalty Interest means a fractional interest in the gross production, or the
Gross Proceeds therefrom, of oil and gas and other minerals under a lease; free
of any expenses of exploration, development, operation and maintenance.
Working Interest means the operating interest under an oil, gas and mineral
lease or other property interest covering a specific tract or tracts of land.
The owner of a Working Interest has the right to explore for, drill and produce
the oil, gas and other minerals covered by such lease or other property interest
and the obligation to bear the costs of exploration, development, operation or
maintenance applicable to his interest.
GENERAL INFORMATION
Documents Included
The Partnership's Annual Report on Form 10-K for the year ended
December 31, 1996 and its quarterly report on Form 10-Q for the second quarter
of 1997 are included with this Proxy Statement and incorporated herein by
reference. See "Incorporation of Certain Information By Reference and Attachment
of Such Information Hereto." Additionally, a reserve report dated May 20, 1997,
prepared as of December 31, 1996, and audited by H. J. Gruy & Associates, is
attached hereto.
Vote Required
According to the terms of the Partnership Agreement, approval of the
Proposal requires the affirmative vote by the holders of at least 51% of the
Units held by Limited Partners. Therefore, an abstention by a Limited Partner
will have the same effect as a vote against the Proposal. This solicitation is
being made for votes in favor of the Proposal (which will result in liquidation
and dissolution). As of the Record Date, 53,405 Units were outstanding and were
held of record by 502 Limited Partners (excluding the Managing General Partner's
Units). Each Limited Partner is entitled to one vote for each Unit held in his
name on the Record Date. Accordingly, the affirmative vote of holders of at
least 27,236.55 Units is required to approve the Proposal. The Managing General
Partner holds 3,547 Units, but, in accordance with Article XX.H of the
Partnership Agreement, the Managing General Partner may not vote its Units. The
Managing
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General Partner's non-vote, in contrast to abstention by Limited Partners, will
not affect the outcome, because for purposes of adopting the Proposal its Units
are excluded from the total number of voting Units.
The Limited Partners should be aware that once they approve the
Proposal pursuant to this Proxy Solicitation, they will have no opportunity to
evaluate the actual terms of any specific purchase offers for the Partnership's
Property Interests. See "The Proposal - General" herein. See "The Proposal --
Reasons for the Proposal" and "The Partnership -- Transactions Between the
Managing General Partner and the Partnership." Proxies; Revocation
If a proxy is properly signed and is not revoked by a Limited Partner,
the Units it represents will be voted in accordance with the instructions of the
Limited Partner. If no specific instructions are given, the Units will be voted
FOR the Proposal. A Limited Partner may revoke his proxy at any time before it
is voted at the Meeting. Any Limited Partner who attends the Meeting and wishes
to vote in person may revoke his proxy at that time. Otherwise, a Limited
Partner must advise the Managing General Partner of revocation of his proxy in
writing, which revocation must be received by the Managing General Partner at
16825 Northchase Drive, Suite 400, Houston Texas 77060 prior to the time the
vote is taken.
Dissenters' Rights
Limited Partners are not entitled to any dissenters' or appraisal
rights in connection with the approval of the Proposal. Dissenting Limited
Partners are protected under state law by virtue of the fiduciary duty of
general partners to act with prudence in the business affairs of the
Partnership.
Payment of Liquidating Distributions
Following the approval of the Proposal at the Meeting, Limited Partners
will receive a final liquidating distribution in cash from the Partnership as
soon as practicable after the affairs of the Partnership have been wound up. The
Managing General Partner expects that such payment will be made by year-end
1997. It will not be necessary for Limited Partners to surrender any certificate
or other documents representing their ownership of Units. Payment will be made
to each Limited Partner identified on the Partnership's records as of the Record
Date, or, upon appropriate written instruction from a Limited Partner, to his
assignee.
Solicitation
The solicitation is being made by the Partnership. The Partnership will
bear the costs of the preparation of this Proxy Statement and of the
solicitation of proxies and such costs will be allocated 90% to the Limited
Partners and 10% to the General Partners with respect to their general
partnership interests pursuant to Article VIII.A(v). As the Managing General
Partner
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holds approximately 6.26% of the Units held by all Limited Partners, 6.26% of
the costs borne by the Limited Partners will be borne by the Managing General
Partner, in addition to its portion borne as a General Partner. Solicitations
will be made primarily by mail. In addition to solicitations by mail, a number
of regular employees of the Managing General Partner may, if necessary to ensure
the presence of a quorum, solicit proxies in person or by telephone. The
Managing General Partner also may retain a proxy solicitor to assist in
contacting brokers or Limited Partners to encourage the return of proxies,
although it does not anticipate doing so. The costs of this proxy solicitation,
including legal and accounting fees and expenses, printing and mailing costs,
and related costs are estimated to be approximately $30,000.
RISK FACTORS
A Limited Partner considering whether to vote in favor of the Proposal
should give careful consideration to the risks involved, including those
summarized below:
Uncertainty of Liquidating Distributions
While the Managing General Partner is not aware of any unknown
liabilities at this time, should any unexpected liabilities come to light prior
to making the final liquidating distribution, such liabilities could
significantly reduce, or eliminate altogether, such final distribution.
Undetermined Sales Prices; Volatility of Oil and Gas Prices
Limited Partners will not have an opportunity to approve the specific
terms of any particular sale of the Property Interests and anticipated sales
prices for the Property Interests may not be achieved. Should domestic gas
prices strengthen after the sales of the assets, it is possible that more
advantageous sales prices for the properties might have been realized at a later
date.
Dependence on Pension Partnership
If the Partnership approves the proposal to sell its properties but the
Pension Partnership does not approve the sale of its Property Interests and
actually sell its interests in the same properties, then the Partnership will be
forced to sell its working interests burdened by the net profits interest owned
by the Pension Partnership. Because this may affect the saleability of the
Partnership's Property Interests, it may be necessary for the Managing General
Partner to purchase the Partnership's interests in such properties. Therefore,
the likelihood of sale of the Partnership's Property Interests will be
significantly affected by the ability of the Partnership and its companion
Pension Partnership to sell their ownership interests in the same properties
together, which in turn is dependent upon approval of the proposal being made to
the Partnership and the similar proposal being made simultaneously to the
companion Pension Partnership. Failure to approve the proposal by either
partnership could significantly adversely affect the sale of properties by the
other partnership. See "The Proposal--Simultaneous Proposal to Pension
Partnerships."
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THE PROPOSAL
General
The Managing General Partner has proposed that the Partnership's
properties be sold, the Partnership be dissolved and that the Managing General
Partner, acting as liquidator, wind up its affairs and make final distributions
to its partners. The Partnership's assets consist of working interests (the
"Property Interests") in producing oil and gas properties, which are burdened by
a single net profits interest owned by an affiliated partnership (the "Pension
Partnership") also managed by the Managing General Partner and formed at
approximately the same time as the Partnership was organized. The non-operating
net profits interest was granted to Swift Energy Managed Pension Assets
Partnership 1990-C, Ltd. pursuant to a Net Profits and Overriding Royalty
Interest Agreement ("NP/OR Agreement") dated September 30, 1990. The NP/OR
Agreement gives the Pension Partnership a net profits interest in the group of
producing properties in which the Partnership owns working interests, and
entitles the Pension Partnership to receive a portion of the net profits from
operation of the group of producing properties owned by the Partnership which
are subject to the NP/OR Agreement. The net profits percentage to which the
Pension Partnership is entitled is based upon a percentage of the gross proceeds
(reduced by certain costs) from the sale of oil and gas production from these
properties.
The Managing General Partner intends to sell most of the Partnership's
Property Interests through auction conducted by the O&G Clearinghouse or a
similar company, although some of the Partnership's Property Interests might be
sold to a third party in negotiated transactions. The Managing General Partner
expects to sell all properties not sold by auction pursuant to negotiated sales
conducted by the Managing General Partner or a third party engaged to dispose of
the Partnership's assets. The Partnership, if not terminated earlier, will
terminate automatically, pursuant to the terms of the Partnership Agreement, on
January 1, 2021.
The Managing General Partner is an independent oil and gas company
engaged in the exploration, development, acquisition and operation of oil and
gas properties, both directly and through partnership and joint venture
arrangements, and therefore holds various interests in numerous oil and gas
properties. Furthermore, the Managing General Partner is the managing general
partner of a number of oil and gas partnerships.
Partnership Financial Performance and Condition
The Partnership owns Property Interests in producing oil and gas
properties within the continental United States. By the end of 1991 the
Partnership had expended all of its original capital contributions for the
purchase of oil and gas producing properties. During 1996 approximately 80% of
the Partnership's revenue was attributable to natural gas production. The
Partnership has, from time to time, performed workovers and recompletions of
Partnership wells, using funds advanced by the Managing General Partner to
perform these operations, a portion of which amounts has been subsequently
repaid from production.
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The Limited Partners have made contributions of $5,695,200, in the
aggregate to the Partnership. The Managing General Partner has made capital
contributions with respect to its general partnership interest of $48,087.
Additionally, pursuant to the presentment right set forth in Article XVIII of
the Partnership Agreement, it purchased 3,547 Units from Limited Partners.
From inception through January 31, 1997, the Partnership has made cash
distributions to its Limited Partners totaling $2,534,900. Through January 31,
1997, the Managing General Partner has received cash distributions from the
Partnership of $286,628 with respect to its general partnership interest, and
distributions related to its limited partnership interests of $11,051. On a per
Unit basis, Limited Partners had received, as of January 31, 1997, $44.51 per
$100 Unit, or approximately 44.51% of their initial capital contributions.
The Partnership acquired its Property Interests at a time when oil and
gas prices and industry projections of future prices were much higher than
actually occurred in subsequent years. As detailed in the Designated Properties
Supplement dated September 12, 1990 regarding Property Interests to be acquired
by the Partnership, when the Managing General Partner projected future oil and
gas prices to evaluate the economic viability of an acquisition, it compared its
forecasts with those made by banks, oil and gas industry sources, the U.S.
government, and other companies acquiring producing properties. Acquisition
decisions for the Partnership were based upon a range of increasing prices that
were within the mainstream of the forecasts made by these outside parties. At
the time that the Partnership's Property Interests covering producing properties
were acquired, prices averaged about $22.87 per barrel of oil and $2.04 per Mcf
of natural gas. Oil and gas prices were expected to escalate during subsequent
years of the Partnership's operations. In general, in 1990 and early 1991, all
of these sources forecasted increases in product prices that were based upon oil
and gas prices at the time, which reflected the invasion of Kuwait by Iraq in
the summer of 1990 and the commencement of hostilities in the Gulf War in 1991.
The majority of the Partnership's Property Interests were acquired during the
fourth quarter of 1990 and the first quarter of 1991 when current prices were
predicted to escalate according to certain parameters from that level. Thus the
majority of properties were bought upon an evaluated weighted average price of
$2.04 per Mcf. The predicted price increases did not occur and prices fell
precipitously from late 1991 to 1992. The bulk of the Partnership's reserves
were produced from 1991-1995 during which time the Partnership's oil prices in
fact averaged $16.41 per barrel and natural gas prices averaged approximately
$1.75 per Mcf.
The following graphs illustrate the above factors with respect to gas
revenues only, due to the fact that a substantial majority of the Partnership's
production to date being natural gas, the bulk of which was produced during the
years when gas prices were the lowest.
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<TABLE>
<CAPTION>
GAS PER MCF
------------------------
YEAR ACTUAL EXPECTED YEAR MCFE
- - ---- ------ -------- ---- ------
<S> <C> <C> <C> <C>
1990 1.86 2.04 1990 253497
1991 1.63 2.24 1991 806323
1992 1.80 2.68 1992 704598
1993 1.96 3.19 1993 527436
1994 1.89 3.38 1994 463380
1995 1.44 3.58 1995 357960
1996 2.02 3.79 1996 305494
</TABLE>
[GRAPHIC OMITTED -- Represented by table above.] (Comparison of Gas Prices
Expected in 1990 to Gas Prices Actually Received)
[GRAPHIC OMITTED -- Represented by table above.] (Amounts of Production to Date
Produced by Year)
10
<PAGE>
In addition to the effect of prices, Partnership performance has been
impacted by subsequent enhancement activities which were undertaken shortly
after partnership formation on properties in which the Partnership held a
working interest. Six successful development wells were drilled in the San
Salvador Field, Hidalgo County, Texas, between December 1990 and July 1991 by a
third party operator. In addition, further development drilling activities were
undertaken on other properties in which the Partnership held a working interest.
Between July, 1991 and the end of 1993 eleven development wells were drilled, of
which ten were successful in Andrews, Irion, Schieicher, and Webb Counties,
Texas. The benefit of these enhancement activities, however, was reduced by the
need to repay the costs incurred for these enhancements.
Lower prices also had an effect on the Partnership's interest in proved
reserves. Estimates of proved reserves represent quantities of oil and gas
which, upon analysis of engineering and geologic data, appear with reasonable
certainty to be recoverable in the future from known oil and gas reservoirs
under existing economic and operating conditions. When economic or operating
conditions change, proved reserves can be revised either up or down. If prices
had risen as predicted, the volumes of oil and gas reserves that are
economically recoverable might have been higher than the year-end levels
actually reported because higher prices typically extend the life of reserves as
production rates from mature wells remain economical for a longer period of
time. Production enhancement projects that are not economically feasible at low
prices can also be implemented as prices rise. At present, because of the small
remaining amount of reserves, further price increases would not have a
significant impact on the Partnership's performance.
As required by the Partnership Agreement, the Partnership expended all
of the partners' net commitments available for property acquisitions many years
ago to acquire Property Interests in producing oil and gas properties. The
Partnership's net revenues available for distribution have been reduced by
amounts used to pay operating and enhancement costs to the third party operator.
The Managing General Partner advanced most of these costs because it felt that
such expenditures would increase the value of the properties in which the
Partnership has an interest. The Partnership's partnership agreement does not
allow additional assessments to be made against any Limited Partners. No
material funds are available at the current time from Partnership revenues or
other sources to enable the Partnership to make additional capital expenditures
and no new capital expenditures are planned. The Managing General Partner
anticipates that if sales of the Partnership's properties occur, there will be
sufficient cash generated by the sales of the Partnership's properties to make a
final liquidating distribution.
Estimates of Liquidating Distribution Amount
It is not possible to accurately predict the prices at which the
Property Interests will be sold. The sales price of the Partnership's properties
may vary. Certain Property Interests might sell for a higher price and others
for a lower price than those estimated below. The projected range of sales
prices below has been based upon estimated future net revenues for the
Partnership's Property Interests, using an estimate of 1997 average prices
without any escalation of $2.25 per Mmbtu. The future net revenues from
production of such properties have then been discounted
11
<PAGE>
to present value at 10% per annum. The 1997 price estimate grew out of the
pricing scenarios determined by the Managing General Partner, which scenarios
are used in various circumstances, including economic modeling of partnership
returns and evaluating the economics of property sales or property acquisitions
for the Managing General partner or for partnerships managed by the Managing
General Partner. These pricing assumptions vary from those mandated by the
Securities and Exchange Commission ("SEC") for reserves disclosures under
applicable SEC rules, which require use of prices at year-end, although the
discount rate and lack of escalation are the same. If estimates of reserves and
future net revenues had been prepared using December 31, 1996 prices, as
mandated by the SEC, reserves, future net revenues and the present value thereof
would be significantly higher. The Managing General Partner has determined not
to use these higher prices because current estimates of 1997 average prices more
accurately reflect prices purchasers of properties are willing to pay, rather
than higher values which do not reflect the decrease in prices since year-end
1996. For example, the weighted average price of gas received by the Partnership
for the first six months of 1997 was $2.35 per Mcf, as compared to $4.72 per Mcf
at December 31, 1996. For the lower end of such projected sales proceeds, the
estimated sales proceeds have been further discounted to 70% of those shown for
the higher end of the range. On July 1, the Managing General Partner's estimated
weighted average price of gas for the remainder of 1997 was $2.58 per Mcf.
Set forth in the table below are estimated proceeds that the
Partnership may realize from sales of the Partnership's properties, estimated
expenses of the related dissolution and liquidation of the Partnership, and the
estimated amount of net distributions available for Limited Partners as a result
of such sales.
Range of Limited Partners' Share of Estimated Distributions
from Property Sales and Liquidation
<TABLE>
<CAPTION>
Projected Range
------------------------------
Low High
----------- -----------
<S> <C> <C>
Net Sales Proceeds(1) $ 759,192 $1,107,046
Partnership Dissolution Expenses(2) (27,000) (27,000)
---------- ----------
Net Distributions payable to Limited Partners $ 732,192 $1,080,046
========== ==========
Net Distributions per $100 Unit $ 18.96 $ 12.86
========== ==========
</TABLE>
12
<PAGE>
(1) Includes cash and net receivables and payables of the Partnership, net
of selling expenses estimated to be 7% of sales proceeds.
(2) Includes Limited Partners' share of all costs associated with
dissolution and liquidation of the Partnership.
If, on the other hand, the Partnership were to retain its Property
Interests and continue to produce those properties until depletion, the table
below estimates the return to Limited Partners, discounted to present value,
based upon the same pricing and discount assumptions used above. The estimates
of the present value of future net distributions have been further reduced by
continuing audit, tax return preparation and reserve engineering fees associated
with continued operations of the Partnership, along with direct and general and
administrative expenses estimated to occur during this time. Such estimates do
not take into account any sale of a portion of the Partnership's Property
Interests necessary in order to generate sufficient cash proceeds to pay
general, administrative and operating expenses, which would reduce the revenues
of the Partnership.
Estimated Share of Limited Partners'
Net Distributions from Continued Operations
<TABLE>
<CAPTION>
Projected
Cash Flows
----------
<S> <C>
Future Net Revenues (over 20 years)(1) $1,902,168
Partnership Direct and Administrative Expenses(2) (105,540)
Net Distributions to Limited Partners (payable over 20 years)(3) $1,796,628
==========
Net Distributions per $100 Unit(4) $ 31.55
Present Value of Net Distributions per $100 Unit(5) $ 19.93
</TABLE>
(1) Includes cash and net receivables and payables of the Partnership.
Limited Partners' future net revenues are based on the reserve
estimates at December 31, 1996 assuming unescalated prices based on
predictions of 1997 average prices. To a limited extent, future net
revenues may be influenced by a material change in the selling prices
of oil or gas. For further discussion of this, see "--Reasons for the
Proposal." The actual prices that will be received and the associated
costs may be more or less than those projected. See "The Partnership--
Partnership Financial Condition and Performance."
(2) Includes Limited Partners' share of general and administrative
expenses, and audit, tax, and reserve engineering fees.
13
<PAGE>
(3) Based upon the Partnership's reserves having a projected 20-year life,
assuming flat pricing. To a limited extent, net distributions may be
influenced by a material change in the selling prices of oil or gas.
For further discussion of this, see "--Reasons for the Proposal." The
actual prices that will be received and the associated costs may be
more or less than those projected.
(4) Does not reflect effect of intermittent sales of Property Interests to
pay administrative costs once the properties no longer generate
sufficient revenues to cover such costs. The Managing General Partner
estimates that Property Interests ranging from an average of 10% to 15%
of the value of the Partnership's properties would have to be sold each
year to cover such costs.
(5) Discounted at 10% per annum.
Among factors which can affect the ultimate sales price received for
Partnership Property Interests are the following:
(1) The above cases presume that 100% of the Partnership's
Property Interests will be sold.
(2) In certain instances, the Partnership, together with the
Pension Partnerships which will be offering its net profits
interest in the properties in which the Partnership owns
Property Interests, will own a large enough interest in the
properties to allow the purchaser to designate a new operator
of the properties, which normally increases the amount that a
purchaser is willing to pay.
(3) Changes in the market for gas or oil may affect the pricing
assumptions used by purchasers in evaluating property value
and possible purchase prices.
(4) Different evaluations of the amount of money required to be
spent to enhance or maintain production may have a significant
effect upon the ultimate purchase price.
(5) In certain instances, the Managing General Partner may set
minimum bidding prices for those properties offered at
auction, which may not be met.
(6) The Managing General Partner may choose to package certain
less attractive properties together with other properties in
order to enhance the likelihood of their sale. Such packaging
could result in a significant discount by prospective
purchasers of the value of the Partnership's more productive
properties contained in such packages.
The Partnership Agreement authorizes the Managing General Partner to
sell the Partnership Property Interests at a price that the Managing General
Partner deems reasonable. The proceeds of all sales, to the extent available for
distribution, are to be distributed to the Limited Partners and the General
Partners in accordance with Article XVI.E of the Partnership Agreement as
follows. After use of available proceeds from property sales to reserves for
contingent or unforeseen liabilities of the Partnership, the proceeds are to be
used to repay the capital accounts of the Partners whose capital accounts have
not yet been repaid. The amounts finally distributed will depend on the actual
sales prices received for the Partnership assets, results of operations until
such sales and other contingencies and circumstances.
14
<PAGE>
Comparison of Sale Versus Continuing Operations
Based on the above tables, it is estimated that a Limited Partner could
expect to receive from $12.86 to $18.96 per $100 Unit upon immediate sale of the
Partnership Property Interests. In comparison, it is estimated that a Limited
Partner could expect to receive approximately $19.93 per $100 Unit, discounted
to present value ($31.55 per $100 Unit in actual dollars on an undiscounted
basis) over the life of its Property Interests, approximately 20 years, if the
Partnership continued operations.
Such estimates are based on December 31, 1996 reserve estimates
assuming unescalated pricing throughout the remaining life of the properties in
which the Partnership owns an interest. The actual prices that will be received
and the associated costs may be more or less than those projected. See
"--Estimate of Liquidating Distribution Amount."
Reasons for the Proposal
The Managing General Partner believes that it is in the best interest
of the Partnership and the Limited Partners for the Partnership to sell its
properties at this time and to dissolve the Partnership and make a final
liquidating cash distribution to its partners for the reasons discussed below.
Potential Liquidating Distribution. After the sale of the Partnership's
Property Interests, there will be funds available for a liquidating
distribution. The Managing General Partner believes that the ability to receive
the estimated liquidating distribution in one lump sum currently, rather than
the estimated distributions from continued operations over the remaining life of
the Partnership, is one of the benefits of the proposal. Current estimates of
the high range of such liquidating distributions are slightly lower than the net
present value discounted at 10% per annum, of the Limited Partners' estimated
distributions to be received from continued operations of the Partnership for
the 20 years currently estimated as the remaining life of the Partnership's
reserves. As discussed below, however, over such a long period of time, prices
of gas are expected to vary and the likelihood of receiving the estimated price
over the life of the Partnership is subject to significant uncertainty. A vote
in favor of the proposal thus might have the effect of making additional funds
currently available to the Limited Partners.
Small Amount of Remaining Assets in Relation to Expenses. As of
December 31, 1996, approximately 72% of the Partnership's ultimate recoverable
reserves had been produced, and the Limited Partners' share of the Partnership's
interest in remaining reserves, before any reduction for costs, is estimated to
be less than 1,376,000 Mcfe. The Partnership's share of oil and gas reserves are
expected to continue to decline as remaining reserves are produced.
Distributions to partners in recent years have declined and are not expected to
increase appreciably. Declines in well production are based principally upon the
maturity of the wells, not on market factors. Each producing well requires a
certain amount of overhead costs, as operating and other costs are incurred
regardless of the level of production. Likewise, general and
15
<PAGE>
administrative expenses such as compliance with the securities laws, producing
reports to partners and filing partnership tax returns do not decline as
revenues decline. As a result of the depletion of the Partnership's oil and gas
reserves, the Managing General Partner believes the Partnership's asset base and
future net revenues no longer justify the continuation of operations.
Consequently, the Managing General Partner expects that the Partnership will
have to start selling a portion of its Property Interests to pay the expenses of
future operations and administration. By accelerating the liquidation of the
Partnership, those future administrative costs can be avoided and the receipt of
the remaining cash value of the interests of the Limited Partners in the
Partnership can be accelerated.
Effect of Gas Prices on Value. The Managing General Partner believes
that the key factor affecting the Partnership's long-term performance has been
the decrease in oil and gas prices that occurred subsequent to the purchase of
the Partnership's properties. Additionally, prices are expected to continue to
vary widely over the remaining life of the Partnership, and such changes in gas
prices will affect future estimates of revenues from continued operations of the
Partnership. Based on 1996 year-end reserve calculations, the Partnership had
only about 28% of its ultimate recoverable reserves, before any reduction for
costs, remaining for future production. Because of this small amount of
remaining reserves, even if oil and gas prices were to increase in the future,
such increases would be unlikely to have a net positive impact on the total
return on investment to the partners in view of the expenses of the Partnership
as described above.
Potential of the Properties. Recovery in amounts great enough to
significantly impact the results of the Partnership's operations and the
ultimate cash distributions can only occur with the investment of new capital.
As provided in the Partnership Agreement, the Partnership expended all of the
partners' net commitments for the acquisition of Property Interests many years
ago, and it no longer has capital to invest in improvement of the properties
through secondary or tertiary recovery. No additional development activities are
contemplated by the Partnership on the properties in which the Partnership has
an interest.
Orderly Sale of Properties Through Approval of the Proposal. The oil
and gas market is volatile, making the sale of the properties at optimal prices
very time sensitive. Therefore, the Managing General Partner believes that the
Partnership should liquidate and have the flexibility to sell its properties
when such sales appear to be most advantageous to the Partnership. The approval
of the Proposal as it is set forth will provide the Managing General Partner the
flexibility to sell the remaining properties in an orderly fashion to maximize
the potential return to the Limited Partners. The approval of the Proposal would
also allow the Managing General Partner to begin the winding up and dissolution
of the Partnership following the final sale of Partnership property. The
approval of the Proposal will act as the approval of all future asset sales
without the approval by the Limited Partners of the specific terms of such
future sales.
Limited Partners' Tax Reporting. Limited Partners will continue to have
a partnership income tax reporting obligation with respect to their Units as
long as the Partnership continues to exist. There is no trading market for the
Units, so Limited Partners generally are unable to dispose of
16
<PAGE>
their interests. See "The Partnership - No Trading Market." The approval of the
Proposal would also allow the Managing General Partner to begin the winding up
and dissolution of the Partnership. Following the approval of the Proposal and
the dissolution and sale of the properties, the Limited Partners will recognize
gain or loss or a combination of both under the federal income tax laws.
Thereafter, Limited Partners will have no further tax reporting obligations with
respect to the Partnership. The dissolution of the Partnership will also allow
Limited Partners to take a capital loss deduction for syndication costs incurred
in connection with formation of the Partnership. See "Federal Income Tax
Consequences."
Simultaneous Proposal to Pension Partnership
Simultaneously with this proposal to the Partnership's Limited Partners
to sell all of its Property Interests, a similar proposal is being made to the
limited partners of the companion Pension Partnership which owns a net profits
interest in the same properties in which the Partnership owns the working
interest. If both Partnerships approve the proposal, then the working interest
and non-operating interest will be sold simultaneously.
If the Partnership approves the proposal but its companion Pension
Partnership does not approve the proposal to sell its properties, then the
Partnership will be forced to sell its working interests in its properties
subject to the net profits interest owned by the Pension Partnership which
burdens the Partnership's properties. This may affect the saleability of the
Partnership's properties due to the burden on cash flow caused by the existence
of the Pension Partnership's net profits interest. If this burden prevents an
economic sale to a third party, then the Managing General Partner will again
obtain a third party appraisal of the Partnership's properties and purchase
those Property Interests itself. The Managing General Partner intends to obtain
any such fair market value approval from J.R. Butler & Company.
If the Partnership does not approve the proposal but its companion
Pension Partnership approves the proposal to sell its properties, then the
Managing General Partner will attempt to sell the non-operating interest owned
by the Pension Partnership to a third party. If no economic sale can be made to
a third party, which may occur due to the difficulty in selling a net profits
interest in a property when operating and spending decisions are controlled by
another entity, then the Managing General Partner will get a fair market
appraisal of the value of the Pension Partnership's net profits interest and
will purchase the Pension Partnership's non-operating interests itself for the
highest price for which such interests are appraised.
Therefore, the likelihood of sale of the Partnership's Property
Interests will be significantly affected by the ability of the Partnership and
its companion Pension Partnership to sell their ownership interests in the same
properties at approximately the same time, which in turn is dependent upon
approval of the proposal being made to the Partnership and the similar proposal
being made simultaneously to the companion Pension Partnership. Failure to
approve the proposal by either partnership could significantly adversely affect
the sale of properties by the other partnership to the NP/OR Agreement.
17
<PAGE>
Steps to Implement the Proposal
Following the approval of the Proposal, the Managing General Partner
intends to take the following steps to implement it:
i. Make available to the appropriate persons (that is, the
third party, if any, handling the negotiated sales and/or
the auction house and prospective purchasers) the
following types of data:
o Engineering and Geological Data
- Production curve
- Completion report
- Historical production data
- Engineering well files
- Geological maps (if available)
- Logs (if available)
o Land/Legal Data
- Net Profits Interest schedule for all
properties
- Land files
- Payout data
o Accounting Data
- Lease operating statements by well
- Gas marketing data
- Oil marketing data
- Gas balancing data
ii. Pay or provide for payment of the Partnership's
liabilities and obligations to creditors (See
--"Liquidation") using the Partnership's cash on hand and
proceeds from the sale of Partnership properties;
iii. Conduct a final accounting and distribute any remaining
cash to the partners of the Partnership in accordance
with the Partnership Agreement;
iv. Cause final Partnership tax returns to be prepared and
filed with the Internal Revenue Service and appropriate
state taxing authorities;
v. Distribute to the Limited Partners final Form K-1 tax
information; and
vi. File a Certificate of Cancellation on behalf of the
Partnership with the Secretary of State of the State of
Texas.
18
<PAGE>
Auction. The Managing General Partner (or a third party seller) intends
to engage the O&G Clearinghouse or another similar company to conduct live
auctions for the sales working interests of the Partnership and the
non-operating interests of the Pension Partnership. The O&G Clearinghouse (as
well as other such auction companies) is in the business of conducting auctions
for oil and gas properties. The O&G Clearinghouse establishes a data room, which
they leave open for a period of time (generally three to four weeks), after
which they hold a live auction. The O&G Clearinghouse requires advance
registration for all bidders. Bidders may participate by invitation only, after
having qualified as knowledgeable and sophisticated parties routinely or
actively engaged in the oil and gas business. The O&G Clearinghouse publishes a
brochure regarding the properties. The O&G Clearinghouse is headquartered in
Houston, Texas. In auctions conducted by the O&G Clearinghouse, properties are
generally grouped into small packages with a single field often comprising a
property.
Estimated Selling Costs. The expenses associated with the auction
process (auctioneer's fee plus advertising fee) is expected to be approximately
7% of the sales price received. This does not include internal costs of the
Managing General Partner with respect to the sales, nor fees owed to third
parties for services incident to the sale. For example, if the Managing General
Partner engaged a third party to sell the properties, this would entail an
additional fee (although in such a case the Managing General Partner's internal
costs would be lower). This also does not include the costs of the proxy
solicitation. See "General Information--Solicitation."
Negotiated Sale. Although the Managing General Partner intends to offer
the Partnership's and the Pension Partnership's Property Interests at auction,
it is possible that the Managing General Partner or a third party engaged for
the purpose of selling the Partnership's assets may approach other oil and gas
companies and negotiate a sale of certain Property Interests. The Managing
General Partner (or such third party) may solicit bids on the oil and gas
properties for which the Managing General Partner is the operator. If the
Managing General Partner (or third party) solicits bids, it will provide all
interested parties with information about the properties needed to bid on such
properties. Such information would include raw data and historical information
on all of the operated properties that any of the partnerships managed by the
Managing General Partner intends to sell. See "--Steps to Implement the
Proposal." The data will be organized by property. Neither the Managing General
Partner or any of its affiliates nor any other partnerships managed by the
Managing General Partner will purchase any of the properties in this manner. In
the event of a bid that is lower than a price the Managing General Partner
believes is reasonable, it may sell the property to a third party bidder for
such lower bid price, use another method of sale such as an auction, or have the
Partnership continue to hold such property for a while longer. If the property
has no appreciable value, which is likely to occur only if a Property Interest
has no reserves but requires expenditures to plug and abandon wells, the
Managing General Partner may dispose of such property by conveying it to the
operator or by conveying the property to itself, for no consideration.
Determination as to whether any such conveyance will be made, including
conveyances to the Managing General Partner in such cases,
19
<PAGE>
will be made solely by the Managing General Partner. In no event is the Managing
General Partner obligated to purchase any of the Property Interests.
Other. Any sale of the Partnership Property Interests and the
subsequent liquidating distributions to the Limited Partners, if any, pursuant
to the Proposal will be taxable transactions under federal and state income tax
laws. See "Federal Income Tax Consequences."
Impact on the Managing General Partner
The Managing General Partner will be economically impacted by
liquidation in at least two ways. First, to the extent of its ownership of
Units, liquidation will have the same effect on it as on the Limited Partners.
See "--Estimate of Liquidating Distribution Amount," and "--Estimated Share of
Limited Partners' Net Distributions from Continued Operations." Second, because
of the dissolution and liquidation of the Partnership, together with liquidation
of other partnerships, the Managing General Partner will no longer hold the
majority interest in various wells. Different operators are likely to be
selected and the Managing General Partner will therefore lose revenues that it
currently realizes from its role as operator for those properties. The Managing
General Partner is making its recommendations as set forth below, on the basis
of its fiduciary duty to the Limited Partners, rather than on the basis of the
direct economic impact on the Managing General Partner.
Recommendation of the Managing General Partner
For the foregoing reasons, the Managing General Partner believes that
it is in the best interests of the Limited Partners to dissolve and liquidate
the Partnership in an effort to maximize the value of the Partnership's
remaining assets and the amounts distributed to Limited Partners and to
accelerate the receipt of such liquidating distributions. The Managing General
Partner believes that through the liquidation of the Partnership's remaining
assets in the near term, Limited Partners will benefit from the current higher
levels of oil and gas prices and therefore, may receive a greater liquidating
cash distribution than if the Partnership were to continue to operate as a going
concern, and be subject to possible future negative changes in oil and gas
prices. Additionally, distribution amounts may be affected by the anticipated
continuation of declines in revenues and the continuing relatively fixed general
and administrative and operating expenses that will be incurred by the
Partnership. Continued operations of the Partnership would mean continuation of
the additional costs incurred by the Limited Partners, including the costs
associated with inclusion of information from the Schedule K-1 relating to the
Partnership in their personal income tax returns. Termination of the Partnership
will allow the current receipt of the remaining value of the Partnership and the
preparation of a final tax return, and will make available certain additional
tax deductions.
The Managing General Partner recommends that the Limited Partners vote
FOR the Proposal.
20
<PAGE>
FEDERAL INCOME TAX CONSEQUENCES
General
The following summarizes certain federal income tax consequences to the
Limited Partners arising from the Partnership's proposed sale of its oil and gas
properties and liquidation pursuant to the Proposal. This discussion is not
based upon an opinion of counsel and it is possible that results different than
those described may occur. Statements of legal conclusions regarding tax
consequences are based upon relevant provisions of the Internal Revenue Code of
1986, as amended (the "Code"), and accompanying Treasury Regulations, as in
effect on the date hereof, upon reported judicial decisions and published
positions of the Internal Revenue Service (the "Service"), and upon further
assumptions that the Partnership constitutes a partnership for federal tax
purposes and that the Partnership will be liquidated as described herein. The
laws, regulations, administrative rulings and judicial decisions which form the
basis for conclusions with respect to the tax consequences described herein are
complex and are subject to prospective or retroactive change at any time and any
change may adversely affect Limited Partners.
This summary does not describe all the tax aspects which may affect
Limited Partners because the tax consequences may vary depending upon the
individual circumstances of a Limited Partner. It is generally directed to
individual Limited Partners who are the original purchasers of the Units and
hold interests in the Partnership as "capital assets" (generally, property held
for investment). Each Limited Partner that is a corporation, trust, estate, tax
exempt entity, or other partnership is strongly encouraged to consult its own
tax advisor as to the rules which are specifically applicable to it. Except as
otherwise specifically set forth herein, this summary does not address foreign,
state or local tax consequences, and is inapplicable to nonresident aliens,
foreign corporations, debtors under the jurisdiction of a court in a case under
federal bankruptcy laws or in a receivership, foreclosure or similar proceeding,
or an investment company, financial institution or insurance company.
Taxable Gain or Loss Upon Sale of Properties
Limited Partners will realize and recognize gain or loss, or a
combination of both, upon the Partnership's sale of its properties prior to
liquidation. The amount of gain realized with respect to each oil and gas
property, or related asset, will be an amount equal to the excess of the amount
realized by the Partnership and allocated to the Limited Partner (i.e., cash or
consideration received) over the Limited Partner's adjusted tax basis for such
property. Conversely, the amount of loss realized with respect to each property
or related asset will be an amount equal to the excess of the Limited Partner's
tax basis over the amount realized by the Partnership for such property and
allocated to the Limited Partner. It is projected that taxable gain will be
realized upon the sale of Partnership properties and that such gain will be
allocated among the Limited Partners in accordance with the Partnership
Agreement. The Partnership Agreement includes an allocation provision that
requires allocations pursuant to a liquidation be made among Partners in a
fashion that equalizes capital accounts of the Partners so that the amount in
each Partner's capital account
21
<PAGE>
will reflect such Partner's sharing ratio of income and loss. The extent to
which capital accounts can be equalized, however, is limited by the amount of
gain and loss available to be allocated.
Because the oil and gas properties, and related assets, owned by the
Partnership are properties used in a trade or business, the character of gains
and losses realized by the Partners generally will be governed by Section 1231
of the Code. Deductions for intangible drilling and development costs, depletion
and depreciation expenses with respect to these properties, however, may be
subject to recapture as ordinary income, in an amount which does not exceed gain
recognized. With respect to properties placed in service after 1986, Code
Section 1254 recaptures all intangible drilling and development costs and
depletion (to the extent of basis) as ordinary income. The Partnership did not
incur material amounts of intangible drilling and development costs, and
accordingly the recapture of same is not expected to be material.
Realized gains and losses generally must be recognized and reported in
the year the sale occurs. Accordingly, each Limited Partner will realize and
recognize his allocable share of gains and losses in his tax year within which
the Partnership properties are sold. Each Limited Partner's recognized allocable
share of the net Partnership 1231 gains or losses must be netted with that
Limited Partner's individual section 1231 gains and losses recognized during the
year in order to determine the character of such net gains or net losses under
section 1231. Net gains will be treated as capital gains except to the extent
recharacterized as ordinary income due to recapture and net losses will be
treated as ordinary losses.
Liquidation of the Partnership
After sale of its properties, the Partnership's assets will consist
solely of cash which it will distribute to its partners in complete liquidation.
The Partnership will not realize gain or loss upon such distribution of cash to
its partners in liquidation. If the amount of cash distributed to a Limited
Partner in liquidation is less than such Limited Partner's adjusted tax basis in
his Partnership interest, the Limited Partner will realize and recognize a
capital loss to the extent of the excess. If the amount of cash distributed is
greater than such Limited Partner's adjusted tax basis in his Partnership
interest, the Limited Partner will recognize a capital gain to the extent of the
excess. Because each Limited Partner paid a portion of syndication and formation
costs upon entering the Partnership, neither of which costs were deductible
expenses, it is anticipated that liquidating distributions to Limited Partners
will be less than such Limited Partners' bases in their Partnership interests
and thusly will generate capital losses.
Capital Gain Tax
Net long-term capital gains of individuals, trusts and estates will be
taxed at a maximum rate of 28%, while ordinarily income, including income from
the recapture of intangible drilling and development costs, depreciation and
depletion, will be taxed at a maximum rate depending on that Limited Partner's
taxable income of 36% or 39.6%. With respect to net capital losses, other than
Section 1231 net losses, the amount of net long-term capital loss that can be
utilized to offset
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ordinary income will be limited to the sum of net capital gains from other
sources recognized by the Limited Partner during the tax year, plus $3,000
($1,500, in the case of a married individual filing a separate return). The
excess amount of such net long-term capital loss may be carried forward and
utilized in subsequent years subject to the same limitations.
Passive Loss Limitations
Limited Partners that are individuals, trusts, estates, or personal
service corporations are subject to the passive activity loss limitations rules
that were enacted as part of the Tax Reform Act of 1986.
A Limited Partner's allocable share of Partnership income, gain, loss,
and deduction is treated as derived from a passive activity, except to the
extent of Partnership portfolio income, which includes interest, dividends,
royalty income and gains from the sale of property held for investment purposes.
A Limited Partner's allocable share of any gain realized on sale of Partnership
properties (other than gain from the sale of portfolio investments) will be
characterized as passive activity income that may be offset by passive activity
losses from other passive activity investments. Moreover, because the sale of
properties and liquidation of the Partnership will terminate the Limited
Partner's interest in the passive activity, a Limited Partner's allocable share
of any loss (i) previously realized as a Limited Partner in the Partnership and
suspended because of its passive characterization, (ii) realized on the
liquidating sale of Partnership properties, or (iii) realized by the Limited
Partner upon liquidation of his Partnership interest, will not be characterized
as losses from a passive activity.
THE FOREGOING DISCUSSION IS INTENDED TO BE A SUMMARY OF CERTAIN INCOME
TAX CONSIDERATIONS OF THE SALE OF PROPERTIES AND LIQUIDATION. EACH LIMITED
PARTNER SHOULD CONSULT HIS OWN TAX ADVISOR CONCERNING ITS PARTICULAR TAX
CIRCUMSTANCES AND THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES
TO HIM OF THE SALE OF PROPERTIES AND THE LIQUIDATION OF THE PARTNERSHIP.
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BUSINESS OF THE PARTNERSHIP
The Partnership is a Texas limited partnership formed September 30,
1990. Units in the Partnership are registered under Section 12(g) of the
Securities Exchange Act of 1934. In addition to the following information about
the business of the Partnership, see the attached Annual Report on Form 10-K for
the year ended December 31, 1996, and its quarterly report on Form 10-Q for the
second quarter of 1997, both included herewith.
Reserves
For information about the Partnership's interest in oil and gas
reserves and future net revenue expected from the production of those reserves
as of December 31, 1996, see the attached report, which was audited by H. J.
Gruy & Associates, Inc., independent petroleum consultants. It should be noted
that the reserve estimates in the Annual Report on Form 10-K reflect the entire
Partnership reserves and that the reserve report in the attached letter from H.
J. Gruy & Associates, Inc. reflects only the Limited Partners' share of the
Partnership's estimated oil and gas reserves. This report has not been updated
to include the effect of production since year-end 1996, nor has the annual
review of estimated quantities done each year-end taken place for 1997.
There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting the future rates and timing of production,
future costs and future development plans. Oil and gas reserve engineering must
be recognized as a subjective process of estimating underground accumulations of
oil and gas that cannot be measured in an exact way, and estimates of other
engineers might differ from those in the attached report. The accuracy of any
reserve estimate is a function of the quality of available data and of
engineering and geological interpretation and judgment. Results of drilling,
testing and production subsequent to the date of the estimate may justify
revision of such estimate, and, as a general rule, reserve estimates based upon
volumetric analysis are inherently less reliable than those based on lengthy
production history. Accordingly, reserve estimates are often different from the
quantities of oil and gas that are ultimately recovered.
In estimating the Partnership's interest in oil and natural gas
reserves, the Managing General Partner has used flat pricing based upon
estimates of 1997 average prices, without escalation, except in those instances
where fixed and determinable gas price escalations are covered by contracts,
limited to the price the Partnership reasonably expects to receive. These
pricing assumptions vary from those mandated by the Securities and Exchange
Commission ("SEC") for reserves disclosures under applicable SEC rules, which
require use of prices at year-end, although the discount rate and lack of
escalation are the same. If estimates of reserves and future net revenues had
been prepared using December 31, 1996 prices, as mandated by the SEC, reserves,
future net revenues and the present value thereof would be significantly higher.
The Managing General Partner has determined not to use these higher prices
because current estimates of 1997 average prices more accurately reflect prices
purchasers of properties are willing to pay, rather than higher values which do
not reflect the decrease in prices since year-end 1996. For
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example, the weighted average price of gas received by the Partnership during
the first six months of 1997 was $2.35 per Mcf, as compared to $4.72 per Mcf at
December 31, 1996. The Managing General Partner does not believe that any
favorable or adverse event causing a significant change in the estimated
quantity of proved reserves set forth in the attached report has occurred
between December 31, 1996, and the date of this Proxy Statement.
Future prices received for the sale of the Partnership's products may
be higher or lower than the prices used in the Partnership's estimates of oil
and gas reserves; the operating costs relating to such production may also
increase or decrease from existing levels.
The Managing General Partner
Subject to certain limitations set forth in the Partnership Agreement,
the Managing General Partner has full, exclusive and complete discretion in the
management and control of the business of the Partnership. The Managing General
Partner has general liability for the debts and obligations of the Partnership.
The Managing General Partner is engaged in the business of oil and gas
exploration, development and production, and the Managing General Partner serves
as the general partner of a number of other oil and gas income and pension
partnerships. The Managing General Partner's common stock is traded on the New
York and Pacific Stock Exchanges.
The principal executive offices of the Managing General Partner are
located at 16825 Northchase Drive, Suite 400, Houston, Texas 77060, telephone
number (281) 874-2700.
Transactions Between the Managing General Partner and the Partnership
Under the Partnership Agreement, the Managing General Partner has
received certain compensation for its services and reimbursement for
expenditures made on behalf of the Partnership, which was paid at closing of the
offering of Units, in addition to revenues distributable to the Managing General
Partner with respect to its general partnership interest or limited partnership
interests it has purchased. In addition to those revenues, compensation and
reimbursements, the following summarizes the transactions between the Managing
General Partner and the Partnership pursuant to which the Managing General
Partner has been paid or has had its expenses reimbursed on an ongoing basis:
o The Managing General partner has received management fees of
$142,380, internal acquisition costs reimbursements of
$294,969 and formation costs reimbursements of $113,904 from
the Partnership from inception through June 30, 1997.
o The Managing General Partner receives per-well monthly
operating fees from the Partnership for certain producing
wells in which the Partnership owns Property Interests and for
which it serves as operator in accordance with the joint
operating agreements for
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each of such wells. The fees that are set in the joint
operating agreements are negotiated with the other working
interest owners of the properties.
o The Managing General Partner is entitled to be reimbursed and
has been reimbursed from inception to June 30, 1997, $563,288
for general and administrative costs incurred on behalf of and
allocable to the Partnership, including employee salaries and
office overhead. Amounts are calculated on the basis of
Limited Partner capital contributions to the Partnership
relative to limited partner contributions of all partnerships
for which the Managing General Partner serves as Managing
General Partner.
o The Managing General Partner has been reimbursed $24,165 for
direct expenses, all of which were billed by, and then paid
directly to, third party vendors.
No Trading Market
There is no trading market for the Units, and none is expected to
develop. Under the Partnership Agreement, the Limited Partners have the right to
present their Units to the Managing General Partner for repurchase at a price
determined in accordance with the formula established by Article XVIII of the
Partnership Agreement. Originally, 539 Limited Partners invested in the
Partnership. Through December 31, 1996, the Managing General Partner had
purchased 3,547 Units from Limited Partners pursuant to the right of
presentment. As of August 15, 1997, there were 502 Limited Partners (excluding
the Managing General Partner). The Managing General Partner does not have an
obligation to repurchase Limited Partner interests pursuant to this right of
presentment but merely an option to do so when such interests are presented for
repurchase.
Principal Holders of Limited Partner Units
The Managing General Partner holds 6.26% of the Units of the
Partnership. To the knowledge of the Managing General Partner, there is no
holder of Units that holds more than 5% of the Units.
Approvals
No federal or state regulatory requirements must be satisfied or
approvals obtained in connection with the sale of the Partnership's Property
Interests.
Legal Proceedings
The Managing General Partner is not aware of any material pending legal
proceedings to which the Partnership is a party or of which any of its property
is the subject.
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INCORPORATION OF CERTAIN INFORMATION BY REFERENCE AND
ATTACHMENT OF SUCH INFORMATION HERETO
The Partnership's Annual Report on Form 10-K for the year ended
December 31, 1996, and its quarterly report on Form 10-Q for the second quarter
of 1997, which are attached hereto and incorporated herein by reference.
OTHER BUSINESS
The Managing General Partner does not intend to bring any other
business before the Meeting and has not been informed that any other matters are
to be presented at the Meeting by any other person.
SWIFT ENERGY COMPANY
as Managing General Partner of
Swift Energy Income Partners 1990-C, Ltd.
-----------------------------------------
John R. Alden
Secretary
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