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 Managed Pension Assets Partnership 1990-D, 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): $15.46 -
$21.11. 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 Managed Pension Assets Partnership 1990-D, Ltd. has been in
existence for over six years, and most of the properties underlying its net
profits interest were purchased by 1991. All economically feasible enhancement
opportunities have already been implemented by the Partnership's companion
partnership on the properties in which the Partnership owns non-operating
interests. Consequently, the Partnership's interest in 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 properties in which the Partnership owns an
interest, 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 Managed Pension Assets Partnership 1990-D, 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 Managed Pension Assets Partnership 1990-D, 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 (consisting of its net profits interest), 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............................................................6
Documents Included....................................................6
Vote Required.........................................................6
Proxies; Revocation...................................................6
Dissenters' Rights....................................................6
Solicitation..........................................................7
RISK FACTORS...................................................................7
Uncertainty of Liquidating Distributions..............................7
Undetermined Sales Prices; Volatility of Oil and Gas Prices...........7
Dependence on Operating Partnership...................................7
THE PROPOSAL...................................................................9
General .............................................................9
Partnership Financial Performance and Condition.......................9
Estimates of Liquidating Distribution Amount.........................11
Comparison of Sale Versus Continuing Operations......................13
Reasons for the Proposal.............................................14
Simultaneous Proposal to Operating Partnership.......................15
Steps to Implement the Proposal......................................16
Impact on the Managing General Partner...............................18
Recommendation of the Managing General Partner.......................18
FEDERAL INCOME TAX CONSEQUENCES...............................................19
General ............................................................19
Tax Treatment of Tax Exempt Plans....................................19
Tax Treatment of Limited Partners Subject to Federal Income
Tax Due to Debt-financing or Who are Not Tax Exempt Plans.........20
Taxable Gain or Loss Upon Sale of Properties.........................21
Liquidation of the Partnership.......................................21
Capital Gains Tax....................................................21
Passive Loss Limitations.............................................22
BUSINESS OF THE PARTNERSHIP...................................................23
Reserves ............................................................23
The Managing General Partner.........................................24
Transactions Between the Managing General Partner
and the Partnership...............................................24
No Trading Market....................................................25
Principal Holders of Limited Partner Units...........................25
Approvals............................................................25
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Legal Proceedings....................................................25
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
AND ATTACHMENT OF SUCH INFORMATION HERETO.....................................25
OTHER BUSINESS................................................................26
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Swift Energy Managed Pension Assets Partnership 1990-D, 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 Managed Pension Assets Partnership 1990-D, 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 (consisting of its net profits interest), 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 December 31, 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 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 4.14% of all outstanding Units. Therefore,
the affirmative vote of holders of 51% of the remaining Units is required to
approve the proposed sale.
The working interest in the producing oil and gas properties in which the
Partnership owns the Property Interests is owned by an affiliated companion
partnership, Swift Energy Income Partners 1990-D, Ltd. (the "Operating
Partnership"). The Partnership's assets consist of a net
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profits interest that covers multiple working interests, and which may be
divided into multiple net profits interests if the Operating Partnership
separately sells one or more of its working interests burdened by the net
profits interest (the "Property Interests"). Upon approval 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 Operating
Partnership's working interests 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 $560,688. The most significant
property owned by the Partnership is the Velrex Field in Schleicher County,
Texas, which accounts for approximately 35% of the value of the Partnership's
remaining reserves. During 1996, approximately 78% 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 working interest owned by the Operating 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. 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 working
interests in those same properties owned by the Operating 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 662/3% 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.
Any Partnership Property Interests that are not sold at auction may be sold
pursuant to negotiated sales to third parties.
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."
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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 Operating Partnership's interest in the same properties. The
failure of the Operating 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 net profits 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 Operating Partnership, the Managing General
Partner will no longer serve as operator for a number of the wells in which the
Partnership has a net profits 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
Partnership receives 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 an Operating Partnership
pursuant to which the Partnership acquired a Net Profits Interest, or in certain
instances various Overriding Royalty Interests, from the Operating Partnership
in a group of Producing Properties. The Working Interest in such group of
properties is held by the Operating 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
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or contracted on the basis of 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.
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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, 28,089.79 Units were outstanding and
were held of record by 277 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 14,325.79 Units is required to approve the Proposal. The
Managing General Partner holds 1,214 Units, but, in accordance with Article XX.H
of the Partnership Agreement, the Managing General Partner may not vote its
Units. The Managing 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.
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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(iv). As the Managing General
Partner holds approximately 4.14% of the Units held by all Limited Partners,
4.14% 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 $20,000.
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.
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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 Operating Partnership
If the Partnership approves the proposal to sell its properties but the
Operating 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 net profits interest as a single property (or undivided
interests therein). The purchaser or purchasers would have no control as working
interest owners, as the working interest will still be retained by the Operating
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 Operating
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
Operating 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 Operating
Partnerships."
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THE PROPOSAL
General
The Managing General Partner has proposed that the Partnership's net
profits interest 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 a net profits
interest (the "Property Interests") in producing oil and gas properties in which
the working interest is owned by an affiliated partnership also managed by the
Managing General Partner and formed at approximately the same time as the
Partnership was organized. The Partnership's non-operating net profits interest
exists by virtue of a Net Profits and Overriding Royalty Interest Agreement
("NP/OR Agreement") dated December 31, 1990 Swift Energy Income Partners 1990-
D, Ltd. (the "Operating Partnership"). The NP/OR Agreement gives the Partnership
a net profits interest in a group of producing properties in which the Operating
Partnership owns the working interests, and entitles the Partnership to receive
a portion of the net profits from operation of the group of producing properties
owned by the Operating Partnership which are subject to the NP/OR Agreement. The
net profits percentage to which the 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 non-operating Property Interests in producing oil and
gas properties within the continental United States in which Operating
Partnerships managed by the Managing General Partner own the working interests.
By the end of 1991 the Partnership had expended all of its original capital
contributions for the purchase of a Property Interest in oil and gas producing
properties. During 1996 approximately 78% of the Partnership's revenue was
attributable to natural gas production. The Operating Partnership has, from time
to time, performed workovers and recompletions of wells in which the Partnership
has Property Interests, using funds advanced
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by the Managing General Partner to perform these operations, a portion of which
amounts has been subsequently repaid from production.
The Limited Partners have made contributions of $2,930,379 in the
aggregate to the Partnership. The Managing General Partner has made capital
contributions with respect to its general partnership interest of $23,340.
Additionally, pursuant to the presentment right set forth in Article XVIII of
the Partnership Agreement, it purchased 1,214 Units from Limited Partners.
From inception through January 31, 1997, the Partnership has made cash
distributions to its Limited Partners totaling $1,391,400. Through January 31,
1997, the Managing General Partner has received cash distributions from the
Partnership of $129,299 with respect to its general partnership interest, and
distributions of $5,202 related to its limited partnership interests. On a per
Unit basis, Limited Partners had received, as of January 31, 1997, $47.48 per
$100 Unit, or approximately 47.48% 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 October 18, 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 $22.88 per barrel of oil and $2.15 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
$2.15 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 $16.37 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.
<TABLE>
<CAPTION>
GAS PER MCF
------------------------
YEAR ACTUAL EXPECTED YEAR MCFE
- - ---- ------ -------- ---- ------
<S> <C> <C> <C> <C>
1991 1.61 2.38 1991 458982
1992 1.82 2.84 1992 342701
1993 1.97 3.39 1993 259909
1994 1.92 3.59 1994 225786
1995 1.46 3.81 1995 177070
1996 2.05 4.04 1996 150063
</TABLE>
[GRAPHIC OMITTED -- Represented by table above.] (Comparison of Gas Prices
Expected in 1991 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 Operating 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 Operating Partnership held a
working interest.
11
<PAGE>
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 net
profits paid by the Operating Partnership to the Partnership have been reduced
by amounts used by the Operating Partnership to pay operating and enhancement
costs to the third party operator. These costs relate to the working interests
that were subject to the Partnership's net profits interest. The Managing
General Partner of the Operating Partnership advanced most of these costs
because it felt that such expenditures would increase the value of the
properties in which the Partnership and the Operating Partnership have an
interest. Neither the Operating Partnership's partnership agreement nor the
Partnership's partnership agreement 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 net
profits interest or possibly multiple net profits interests may vary. In the
latter case, 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 to present value at 10%
per annum. The 1997 price estimate grew out of the pricing scenarios determined
by the
12
<PAGE>
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
$2.36 per Mcf as compared to $4.68 per Mcf at December 31, 1996. For the lower
end of such projected sales proceeds, the estimated sales proceeds have been
further reduced 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) $ 471,000 $ 636,500
Partnership Dissolution Expenses(2) (18,000) (18,000)
--------- ---------
Net Distributions payable to Limited Partners $ 453,000 $ 618,500
========= =========
Net Distributions per $100 Unit $ 15.46 $ 21.11
========= =========
</TABLE>
(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.
13
<PAGE>
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 from Net Profits Interest (over 20 years)(1) $ 1,022,500
Partnership Direct and Administrative Expenses(2) (64,700)
-----------
Net Distributions to Limited Partners (payable over 20 years)(3) $ 957,800
===========
Net Distributions per $100 Unit(4) $ 32.69
Present Value of Net Distributions per $100 Unit(5) $ 22.02
</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.
(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
14
<PAGE>
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
Operating Partnerships which will be offering its working
interest in the properties in which the Partnership owns a
Property Interest, 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.
Comparison of Sale Versus Continuing Operations
Based on the above tables, it is estimated that a Limited Partner could
expect to receive from $15.46 to $21.11 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 $22.02 per $100 Unit, discounted
to present value ($32.69 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.
15
<PAGE>
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 continue 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 648,000 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 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 expense 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.
16
<PAGE>
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 Operating Partnership on the properties in which the
Partnership has a non-operating 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 his 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 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 realize 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."
17
<PAGE>
Simultaneous Proposal to Operating 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 Operating Partnership which owns the working
interest in the same properties in which the Partnership owns a non-operating
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 Operating
Partnership does not, then the Managing General Partner will attempt to sell the
Non-Operating Interest owned by the 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 Partnership's Property
Interests and will purchase the Partnership's non-operating interests itself for
the highest price for which the Property Interests are appraised. The Managing
General Partner intends to obtain any such fair market value appraisal from J.R.
Butler & Company.
If the Partnership does not approve the proposal but its companion
Operating Partnership approves the proposal to sell its properties, then the
Operating Partnership will be forced to sell its working interests in its
properties subject to the net profits interest owned by the Partnership which
burdens the Operating Partnership's properties. Again this may affect the
saleability of the Operating Partnership's properties due to the burden on cash
flow caused by the existence of the 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 Operating Partnership's
properties and purchase those Property Interests itself.
Therefore the likelihood of sale of the Partnership's Property
Interests will be significantly affected by the ability of the Partnership and
its companion Operating 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 Operating 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.
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:
18
<PAGE>
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.
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 Operating Partnership and the
non-operating interests of the 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
19
<PAGE>
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 Operating 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 of the 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 such conveyances will be made, including conveyances
to the Managing General Partner in such cases, 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
20
<PAGE>
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.
21
<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 different results 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 private letter rulings dated October 6, 1987 and
August 22, 1991, 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
Limited Partners that are qualified plans and trusts under Code Section 401(a)
and individual retirement accounts ("IRAs") under Code Section 408 (collectively
"Tax Exempt Plans") and that 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 not a tax-exempt Plan 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.
Tax Treatment of Tax Exempt Plans
Sale of Property Interest and Liquidation of Partnership
The Managing General Partner is proposing to sell the Partnership's
Property Interest as well as any other royalties and overriding royalties the
Partnership may own. After the sale of the properties, the Partnership's assets
will consist solely of cash, which will be distributed to the partners in
complete liquidation of the partnership.
Tax Exempt Plans are subject to tax on their unrelated business taxable
income ("UBTI"). UBTI is income derived by an organization from the conduct of a
trade or business that is substantially unrelated to its performance of the
function that constitutes the basis of its tax exemption (aside from the need of
such organization for funds). Royalty interests, dividends, interest and gain
from the
22
<PAGE>
disposition of capital assets are generally excluded from classification as
UBTI. Notwithstanding these exclusions, royalties, interest, dividends, and
gains will create UBTI if they are received from debt-financed property, as
discussed below.
The Internal Revenue Service has previously ruled that the
Partnership's Property Interest, as structured under the NP/OR, is a royalty, as
are any overriding royalties the Partnership may own. To the extent that the
Property Interest is not debt-financed property, neither the sale of the
Property Interest by the Partnership nor the liquidation of the Partnership is
expected to cause Limited Partners that are Tax Exempt Plans to recognize
taxable gain or loss for federal income tax purposes, even though there may be
gain or loss upon the sale of the Property Interest for federal income tax
purposes.
Debt-Financed Property
Debt-financed property is property held to produce income that is
subject to acquisition indebtedness. The income is taxable in the same
proportion which the debt bears to the total cost of acquiring the property.
Generally, acquisition indebtedness is the unpaid amount of (i) indebtedness
incurred by a Tax Exempt Plan to acquire an interest in a partnership, (ii)
indebtedness incurred in acquiring or improving property, or (iii) indebtedness
incurred either before or after the acquisition or improvement of property or
the acquisition of a partnership interest if such indebtedness would not have
been incurred but for such acquisition or improvement, and if incurred
subsequent to such acquisition or improvement, the incurrence of such
indebtedness was reasonably foreseeable at the time of such acquisition or
improvement. Generally, property acquired subject to a mortgage or similar lien
is considered debt-financed property even if the organization acquiring the
property does not assume or agree to pay the debt. Notwithstanding the
foregoing, acquisition indebtedness excludes certain indebtedness incurred by
Tax Exempt Plans other than IRAs to acquire or improve real property. Although
this exception may apply, its usefulness may be limited due to its technical
requirements and the fact that the debt excluded from classification as
acquisition indebtedness appears to be debt incurred by a partnership and not
debt incurred by a partner directly or indirectly in acquiring a partnership
interest.
If a Limited Partner that is a Tax Exempt Plan borrowed to acquire its
Partnership Interest or had borrowed funds either before or after it acquired
its Partnership Interest, its pro rata share of Partnership gain on the sale of
the Property Interest may be UBTI. The Managing General Partner has represented
that (i) the Partnership did not borrowed money to acquire its Property
Interest, and (ii) that the Property Interest of the Partnership is not subject
to any debt, mortgages or similar liens that will cause the Partnership's
Property Interest to be debt-financed property under Code Section 514. If a Tax
Exempt Plan has not caused its Partnership Interest to be debt-financed
property, and based upon the representations of the Managing General, the
Property Interest is not expected to be considered debt-financed property.
Tax Treatment of Limited Partners Subject to Federal Income Tax Due to
Debt-financing or Who are Not Tax Exempt Plans
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All references hereinbelow to Limited Partners refers solely to Limited
Partners that either are not Tax Exempt Plans or are Tax Exempt Plans whose
Partnership Interest is debt-financed. To the extent that a Tax Exempt Plan's
Partnership Interest is only partially debt-financed, the percentage of gain or
loss from the sale of the Property Interest and liquidation of the Partnership
that will be subject to taxation as UBTI is the percentage of the Tax Exempt
Plan's share of Partnership income, gain, loss and deduction adjusted by the
following calculation. Section 514(a)(1) includes, with respect to each
debt-financed property, as gross income from an unrelated trade or business an
amount which is the same percentage of the total gross income derived during the
taxable year from or on account of the property as (i) the average acquisition
indebtedness for the taxable year with respect to the property is of (ii) the
average amount of the adjusted basis of the property during the period it is
held by the organization during the taxable year (the "debt/basis percentage").
A similar calculation is used to determine the allowable deductions.
For each debt-financed property, the amount of the deductions directly
attributable to the property are multiplied by the debt/basis percentage, which
yields the allowable deductions. If the average acquisition indebtedness is
equal to the average adjusted basis, the debt/basis percentage is zero and all
the income and deductions are included within UBTI. The debt/basis percentage is
calculated on an annual basis.
Tax Exempt Plans with debt-financed Partnership Interests should
consult their tax advisors to determine the portion of gain or loss that may be
recognized for federal income tax purposes. The following discussion of the tax
consequences of the sale of the Partnership Property Interest and the
liquidation of the Partnership assumes that all of a Limited Partner's income,
gain, loss and deduction from the Partnership is subject to federal taxation.
Taxable Gain or Loss Upon Sale of Properties
A Limited Partner 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 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 loss will be
realized upon the sale of Partnership properties and that such loss 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 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.
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.
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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 thus will generate capital losses.
Capital Gains 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 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 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. Corporations are taxed on net long-term capital gains at their
ordinary Section 11 rates and are allowed to carry net capital losses back three
years and forward five years.
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 or loss realized on sale of the
Partnership's net profits interest is expected to be characterized as portfolio
and may not offset, or be offset by, passive activity gains or losses.
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 ITS OWN TAX ADVISOR CONCERNING ITS PARTICULAR TAX
CIRCUMSTANCES AND THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES
TO IT 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 December 31,
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. Neither of these reports reflect
the Partnership's share of future costs of operations which must be debited from
the Partnership's interest in reserves in order to determine the Partnership's
net interest in reserves by virtue of its net profits interest. 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
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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 during the first six months of 1997 was $2.36 per
Mcf, as compared to $4.68 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
$73,259, internal acquisition costs reimbursements of $143,297
and formation costs reimbursements of $58,608 from the
Partnership from inception through June 30, 1997.
o The Managing General Partner receives per-well monthly
operating fees from the Operating Partnership for certain
producing wells in which the Partnership owns Property
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Interests and for which it serves as operator in accordance
with the joint operating agreements for 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, $277,025
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 $11,504 for
direct expenses, all of which was 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, 279 Limited Partners invested in the
Partnership. Through December 31, 1996, the Managing General Partner had
purchased 1,214 Units from Limited Partners pursuant to the right of
presentment. As of August 15, 1997, there were 277 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 4.14% 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 Managed Pension Assets
Partnership 1990-D, Ltd.
-----------------------------------
John R. Alden
Secretary
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