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 Pension Partners 1991-A, 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):
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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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4) Date Filed: ___________________________________________________________
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August 19, 1997
Dear Interest Holders:
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, Interest
Holders holding a majority of the outstanding SDIs 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 Pension Partners 1991-A, Ltd. has been in existence for over
six years, and its net profits interest was purchased in 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
limited impact upon the Partnership's ultimate economic performance. The net
profits received by the Partnership have been reduced by amounts used by its
companion partnership to pay operating and enhancement costs, and the balance of
these excess costs reduce the value of the Partnership's reserves. 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 Interest Holders. Liquidation of
the Partnership's remaining assets at this time is likely to result in a greater
percentage of sales proceeds being paid to Interest Holders, rather than being
used to fund future general and administrative and operating expenses, and will
accelerate the receipt by the Interest Holders of the remaining cash value of
the Partnership.
If Interest Holders holding a majority of the SDIs 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 Pension Partners 1991-A, Ltd.
16825 Northchase Drive, Suite 400
Houston, Texas 77060
(281) 874-2700
NOTICE OF SPECIAL MEETING OF INTEREST HOLDERS
To be held September 30, 1997
Notice is hereby given that a special meeting of Interest Holders who hold
depositary interests in Swift Energy Pension Partners 1991-A, 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) including the
possible purchase in certain circumstances of the Partnership's net
profits interests by the Managing General Partner, 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 Interest Holders has been taken as of the close of business on
August 15, 1997, and only Interest Holders 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............................................................7
Documents Included....................................................7
Vote Required.........................................................7
Proxies; Revocation...................................................7
Dissenters' Rights....................................................7
Payment of Liquidating Distributions..................................8
Solicitation..........................................................8
RISK FACTORS...................................................................8
Uncertainty of Liquidating Distributions..............................8
Undetermined Sales Prices; Volatility of Oil and Gas Prices...........8
Potential Purchase by an Affiliate....................................8
Dependence on Operating Partnership...................................9
THE PROPOSAL..................................................................10
General ............................................................10
Partnership Financial Performance and Condition......................10
Anticipated Impact of Property Sales and Liquidation.................12
Estimates of Liquidating Distribution Amount.........................12
Comparison of Sale Versus Continuing Operations......................15
Reasons for the Proposal.............................................15
The AWP Olmos Field..................................................17
Auction Procedure....................................................17
Fair Market Value Opinion of J.R. Butler & Company...................18
Simultaneous Proposal to Operating Partnership.......................19
Steps to Implement the Proposal......................................20
Impact on the Managing General Partner...............................22
Recommendation of the Managing General Partner.......................22
FEDERAL INCOME TAX CONSEQUENCES...............................................24
General ............................................................24
Tax Treatment of Tax Exempt Plans....................................24
Tax Treatment of Interest Holders Subject to Federal Income
Tax Due to Debt-financing.........................................25
Taxable Gain or Loss Upon Sale of Properties.........................26
Liquidation of the Partnership.......................................26
Capital Gains Tax....................................................26
Passive Loss Limitations.............................................27
BUSINESS OF THE PARTNERSHIP...................................................28
Reserves ............................................................28
The Managing General Partner.........................................29
Transactions Between the Managing General Partner
and the Partnership...............................................29
No Trading Market....................................................30
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Principal Holders of SDIs............................................30
Approvals............................................................30
Legal Proceedings....................................................30
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
AND ATTACHMENT OF SUCH INFORMATION HERETO.....................................30
OTHER BUSINESS................................................................31
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Swift Energy Pension Partners 1991-A, 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 Pension Partners 1991-A, Ltd. a Texas limited
partnership (the "Partnership"), to holders of depositary interests ("SDIs")
representing an initial investment of $1.00 per SDI in the Partnership. This
Proxy Statement and the enclosed proxy are provided for use at a special meeting
of interest holders (the "Interest Holders"), 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),
including the possible purchase of the Partnership's net profits interests by
the Managing General Partner, and (b) dissolve, wind up and terminate the
Partnership (the "Proposal"), in accordance with the terms and provisions of
Article XIX of the Partnership's Limited Partnership Agreement dated June 30,
1991 (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 Interest Holders on or about August 19, 1997.
Under Section 14.09 of the Partnership Agreement, the affirmative vote of
Interest Holders holding at more than 50% of the SDIs then held by Interest
Holders as of the Record Date (as defined) is required for approval of the
Proposal. Each Interest Holder 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 SDI held by such Interest Holder. Under Section
14.09 of the Partnership Agreement, the General Partners may not vote its SDIs
for matters such as the Proposal. VJM Corporation, a California corporation, the
Special General Partner of the Partnership, owns a .75% interest in the
Partnership as a General Partner, but owns no SDIs. The Managing General Partner
currently owns approximately 0.98% of all outstanding SDIs. Therefore, the
affirmative vote of holders of more than 50% of the remaining SDIs 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 Operating Partners 1991-A, Ltd. (the "Operating
Partnership"). The Partnership's assets consist of a net 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 Interest Holders, 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 120 wells. The
total PV10 value of the Partnership's remaining reserves as of December 31, 1996
was $837,878, before reduction for excess costs. The bulk of the Partnership's
remaining reserves are concentrated in five
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fields: the AWP Olmos Field in McMullen County, Texas; the North Foss Field in
Custer County, Oklahoma and the North Buck Draw Field in Campbell County,
Wyoming, which together comprise approximately 79% of the value of the
Partnership's remaining reserves, before reduction for excess remaining costs.
During 1996, approximately 56.3% 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 Interest Holders. A minimum auction price will be set for
sale of certain of the Operating Partnership's working interest and the
Partnership's Property Interest in the same field. In those instances in which
the Managing General Partner has an interest in purchasing the Partnership's
Property Interests if no higher price is paid at auction, the Managing General
Partner will obtain an independent appraisal of the value of the Property
Interest by an independent Consultant, J.R. Butler. A purchase of such property
by the Managing General Partner will take place only if the Property Interest is
first offered to third parties at auction, and then only if no higher price is
received from third parties. Bids over the minimum price from third parties will
be accepted at auction. If no third party purchases these Property Interests at
auction at prices above the minimum bid, only then will the Managing General
Partner purchase those interests for the minimum bid amount set by the third
party appraisals.
The properties to be offered at auction include the Partnership's Property
Interests in the AWP Olmos Field. The Managing General Partner intends to obtain
an independent appraisal of the value of the Partnership's Property Interest in
the AWP Olmos Field by J.R. Butler, the independent Consultant, and to purchase
such Property Interest at auction if no third party offers the minimum bid, in
accordance with the procedure discussed above.
The Managing General Partner is also asking for approval of the sale of
the Partnership's Property Interest in the North Buck Draw Unit in Wyoming to
several recently formed Partnerships also managed by The Managing General
Partner. The price for the proposed sale is the same price at which the operator
of the North Buck Draw Unit offered to buy the Partnership's Property Interests
in an unsolicited bid. This price is more than 3% higher than J.R. Butler &
Company's appraised value of the Property Interests, without giving effect to
the most recent six months' worth of production. See "Sale of Property Interest
in North Buck Draw Unit to Affiliated Partnerships."
The Managing General Partner is asking for approval of the Proposal prior
to offering the Partnership's Property Interests for sale, and thus before the
sales prices for Partnership properties are known, 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
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that the majority of sales will be made by the end of 1997. 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."
THE PROPOSAL INVOLVES CERTAIN RISKS. SEE "RISK FACTORS."
o If the Proposal is approved, the Interest Holders 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 many of the Property Interests,
so there is no guarantee that the Property Interests will be sold at or
above their fair market value.
o If the Proposal is adopted, Property Interests may be sold to the Managing
General Partner after being offered to third parties at auction. Any such
sale must be at the price determined by a single third party appraisal,
which is also the price used as the minimum price at which such Property
Interests will be offered, which may not reflect the fair market value of
the Property Interests.
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 Interest Holders holding more than 50%
of the SDIs held by Interest Holders other than the Managing General Partner,
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.
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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."
INTEREST HOLDERS 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 non-operating 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
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.
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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 together with the appraisal of J. R. Butler and Company dated May 9, 1997
of the fair market value of the Partnership's Property Interests in the AWP
Olmos Field.
Vote Required
According to the terms of the Partnership Agreement, approval of the
Proposal requires the affirmative vote of Interest Holders holding more than 50%
of the SDIs held by Interest Holders. Therefore, an abstention by an Interest
Holder 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, 2,516,649.60 SDIs were
outstanding and were held of record by 298 Interest Holders. Each Interest
Holder is entitled to one vote for each SDI held in his name on the Record Date.
Accordingly, the affirmative vote of holders of more than 1,258,324.80 SDIs is
required to approve the Proposal. The General Partners and their Affiliates are
not entitled to vote SDIs held by them on the Proposal under Section 14.09 of
the Partnership Agreement.
Interest Holders 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 an Interest Holder,
the SDIs it represents will be voted in accordance with the instructions of the
Interest Holder. If no specific instructions are given, the SDIs will be voted
FOR the Proposal. An Interest Holder may revoke his proxy at any time before it
is voted at the Meeting. Any Interest Holder who attends the Meeting and wishes
to vote in person may revoke his proxy at that time. Otherwise, an Interest
Holder 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
Interest Holders are not entitled to any dissenters' or appraisal rights
in connection with the approval of the Proposal. Dissenting Interest Holders 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.
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Payment of Liquidating Distributions
Following the approval of the Proposal at the Meeting, Interest Holders
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 Interest Holders to surrender any certificate
or other documents representing their ownership of SDIs. Payment will be made to
each Interest Holder identified on the Partnership's records as of the Record
Date, or, upon appropriate written instruction from an Interest Holder, 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 85% to the Interest
Holders and 15% to the General Partners with respect to their general
partnership interests pursuant to Section 9.01. As the Managing General Partner
holds approximately 0.98% of the SDIs held by all Interest Holders, 0.98% of the
costs borne by the Interest Holders 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 Interest Holders 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
An Interest Holder 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
any final liquidating distribution, such liabilities could significantly reduce,
or eliminate altogether, any final distribution.
Undetermined Sales Prices; Volatility of Oil and Gas Prices
Interest Holders 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.
Potential Purchase by an Affiliate
Some of the Partnership's Property Interests may be sold to the Managing
General Partner if the minimum price for those properties, set by an independent
appraiser retained by the Managing General Partner, is not exceeded by a bid
from a third party at auction. The Managing General Partner will use this
procedure for Property Interests in the AWP Olmos Field and may determine to use
this procedure for sale
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of certain other properties. The Partnership may also sell a portion of its
Property Interests to several other partnerships managed by the Managing General
Partner for a price based upon an unsolicited third party offer to purchase
those same properties. Property Interests may also be conveyed to the Managing
General Partner for no consideration if it determines that there is no value to
such interests. There is no guarantee that any of the other Property Interests
will be sold at or above their fair market value.
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 Partnership."
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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 a Net Profits and Overriding Royalty Interest Agreement ("NP/OR
Agreement") dated June 30, 1991 with Swift Energy Operating Partners 1991-A,
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
December 31, 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 56.3% 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 by the Managing General Partner to
perform these operations, a portion of which amounts has been subsequently
repaid from production.
Interest Holders made contributions of $2,541,650, in the aggregate to the
Partnership. The Managing General Partner has made capital contributions with
respect to its general partnership interest of $292,290. Additionally, pursuant
to the presentment right set forth in Article XV of the Partnership Agreement,
it purchased 25,000 SDIs from Interest Holders.
10
<PAGE>
From inception through January 31, 1997, the Partnership has made cash
distributions to its Interest Holders totaling $743,300. Through January 31,
1997, the Managing General Partner has received cash distributions from the
Partnership of $116,878 with respect to its general partnership interest, and
distributions of less than $1,000 related to the limited number of SDIs it
purchased from Interest Holders. On a per SDI basis, Interest Holders had
received, as of January 31, 1997, $0.29 per SDI, or approximately 29.24% 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 March 19, 1991 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 $23 per barrel of oil and $1.90 per Mcf of
natural gas. Oil and gas prices were expected to escalate during subsequent
years of the Partnership's operations. In general, in 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
Partnership's Property Interest was acquired during the first quarter of 1991
when current prices were predicted to escalate according to certain parameters
from then current levels. 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 $17.35 per barrel and natural gas prices averaged
approximately $1.70 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.
11
<PAGE>
<TABLE>
<CAPTION>
GAS PER MCF
------------------------
YEAR ACTUAL EXPECTED YEAR MCFE
- - ---- ------ -------- ---- ------
<S> <C> <C> <C> <C>
1991 1.44 1.99 1991 177423
1992 1.65 2.32 1992 246513
1993 1.99 2.83 1993 230410
1994 1.77 3 1994 206465
1995 1.58 3.18 1995 167372
1996 2.35 3.37 1996 154304
</TABLE>
[GRAPHIC OMITTED -- Repreented 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)
In addition to the effect of prices, Partnership performance has been
negatively affected by problems related to a limited number of specific wells in
the Operating Partnership's acquisitions included within the net profits
interests, which disproportionately decreased cash flow because these wells had
been anticipated to have significant early cash flows. For example, in 1992, a
well in the Lewisburg Field, Acadia Parish, Louisiana required certain workover
procedures, due to increased water production. The procedure was unsuccessful
and the well was recompleted higher in the producing zone. Although production
was re-established, the well is producing at a rate lower than prior to the
water encroachment. Additionally, four wells in the Simbrah Field, Jackson
County, Texas experienced rapid depletion of the producing zone in 1992 and
1993. Recompletion attempts into upper zones were unsuccessful and the wells
were plugged and abandoned in 1994. Recompletion and maintenance procedures were
attempted on several other wells in Louisiana, Arkansas and Mississippi with
limited success between 1993 and 1996. Subsequent enhancement activities were
undertaken on the properties in which the Operating Partnership held a working
interest. To the extent funds were available from 1993 to 1995, the
Partnership's companion Operating Partnership drilled seven material development
wells on properties in which the Partnership had Property Interests, of which
six were successful. Five of the seven wells were in McMullen County, Texas in
the AWP Olmos Field and the other two wells were in Custer County, Oklahoma and
Fayette County, Texas, respectively. 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
12
<PAGE>
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 in 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.
Anticipated Impact of Property Sales and Liquidation
As of December 31, 1996, the properties on which the Partnership holds
its net profits interest still carried excess operating costs of approximately
$217,000. Because of the amount of remaining costs, cash distributions have been
limited in recent years. Given the amount of costs incurred in excess of net
revenues on properties in which the Partnership has a non-operating interest
(which has resulted in a significant payable by the Operating Partnership to the
Managing General Partner which has not been repaid by the Operating
Partnership), net profits payments from the Operating Partnership have been
reduced in recent years, which has also reduced the reserve value of the
Partnership's net profits interest. Neither the Operating Partnership's
partnership agreement nor the Partnership's partnership agreement allow
additional assessments to be made against any Interest Holder, nor may any
portion of Partnership capital be remitted to the Operating Partnership to
reduce excess operating costs. Under the NP/OR Agreement, excess operating costs
must be debited from revenues generated by the working interests before any net
profits can be paid to the Partnership or a subsequent owner of the net profits
interest. This requirement substantially diminishes the fair market value of the
net profits interest. The Managing General Partner, however, anticipates that a
sale of the Partnership's Property Interests will generate sufficient cash to
make a liquidating distribution to the Interest Holders.
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 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
13
<PAGE>
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 $2.12 per Mcf as compared to $4.79 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, after taking
into account reduction of the value of those Property Interests due to excess
costs, estimated expenses of the related dissolution and liquidation of the
Partnership, and the estimated amount of net distributions available for
Interest Holders as a result of such sales.
Range of Interest Holders' Share of Estimated Distributions
from Property Sales and Liquidation
<TABLE>
<CAPTION>
Projected Range
--------------------------
Low High
--------- ---------
<S> <C> <C>
Net Sales Proceeds(1) $ 457,300 $ 703,200
Partnership Dissolution Expenses(2) $ (17,000) $ (17,000)
--------- ---------
Net Distributions payable to Interest Holders $ 440,300 $ 686,200
========= =========
Net Distributions per $1.00 SDI $ .17 $ .27
========= =========
</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 Interest Holders' 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 benefit from production of those properties until
depletion, the table below estimates the return to Interest Holders, 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. Moreover, the following estimated future
net revenues do not take into account any growth in excess costs which might be
incurred by the Partnership's companion partnership due to needed future
maintenance or remedial work on the properties in which the Partnership has an
interest.
14
<PAGE>
Estimated Share of Interest Holders'
Net Distributions from Continued Operations
<TABLE>
<CAPTION>
Projected
Cash Flows
------------
<S> <C>
Future Net Revenues from Net Profits Interest (over 20 years)(1) $ 1,273,600
Partnership Direct and Administrative Expenses(2) (77,700)
------------
Net Distributions to Interest Holders (payable over 20 years)(3) $ 1,195,900
============
Net Distributions per $1.00 SDI(4) $ .47
Present Value of Net Distributions per $1.00 SDI(5) $ .28
</TABLE>
(1) Includes cash and net receivables and payables of the Partnership.
Interest Holders' future net revenues are based on the reserve
estimates at December 31, 1996 after reduction for excess costs,
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 Interest Holders' 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 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.
15
<PAGE>
(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 Interest Holders and the General
Partners in accordance with Section 9.01 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 an Interest Holder
could expect to receive from $.17 to $.27 per $1.00 SDI upon immediate sale of
the Partnership Property Interests. In comparison, it is estimated that an
Interest Holder could expect to receive approximately $.28 per $1.00 SDI,
discounted to present value ($.47 per $1.00 SDI 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 Interest Holders for the Partnership to sell its
properties at this time and to dissolve the Partnership and make a final
liquidating cash distribution to its Interest Holders and General 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 Interest Holders' 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 Interest Holders.
16
<PAGE>
Amount of Remaining Assets. As of December 31, 1996, approximately 57%
of the Partnership's ultimate recoverable reserves had been produced, and the
Interest Holders' share of the Partnership's remaining reserves, before any
reduction for costs, is estimated to be less than 826,000 Mcfe. The
Partnership's share of oil and gas reserves are expected to continue to decline
as remaining reserves are produced. Distributions to Interest Holders 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 Interest Holders 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 Interest Holders 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 43% 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 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 Interest Holders. 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 the Partnership property. The approval
of the Proposal will act as the approval of all future assets sales without the
approval by the Interest Holders of the specific terms of such future sales.
Interest Holders' Tax Reporting. Interest Holders will continue to have
a partnership income tax reporting obligation with respect to their SDIs as long
as the Partnership continues to exist. There is no trading market for the SDIs,
so Interest Holders 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
17
<PAGE>
sale of the properties, the Interest Holders will realize gain or loss or a
combination of both under the federal income tax laws. Thereafter, Interest
Holders will have no further tax reporting obligations with respect to the
Partnership. See "Federal Income Tax Consequences."
The AWP Olmos Field
Of the Partnership's interest in remaining reserves (before including
any reduction for costs and excess costs), 33% of the PV 10 value of such
reserves is located in the AWP Olmos Field, located in McMullen County in South
Texas, approximately 87% of which are proven undeveloped reserves that cannot be
produced without additional capital expenditures. Of the Partnership's 1996
revenues attributable to production, 8% was from the AWP Olmos Field. Although
the AWP Olmos Field is the Managing General Partner's largest producing
property, the Partnership's interest in the AWP Olmos Field is immaterial in
relation to the Managing General Partner's interest in the field. The Managing
General Partner operated 240 wells and had an acreage position of approximately
35,000 net acres in the AWP Olmos Field as of December 31, 1996. The General
Partner has been an operator in the field since 1989 and has extensive
experience with the field. Approximately 87% of the Partnership's remaining
reserves (not including any reduction for costs and excess costs) in the AWP
Olmos Field are undeveloped, which makes such reserves less valuable to the
Partnership. On the other hand, in its position as operator of these properties,
the Managing General Partner is in a position to provide information to J.R.
Butler and Company ("Consultant"), an independent petroleum geological firm,
that will allow Consultant to fully evaluate and give value to these behind-pipe
reserves.
Auction Procedure
The properties to be sold at auction include the Partnership's Property
Interest in the AWP Olmos Field. Because of the inherent conflict of interest
between the Managing General Partner's fiduciary duty to the Partnership to
obtain the highest price for the sale of the AWP Property Interest, and the
Managing General Partner's interest as a buyer of such Properties, the Managing
General Partner has developed a procedure to address these conflicts of interest
in bidding on such property. At auction of this Property Interest, a minimum
price will be set for sale of the Operating Partnership's working interest and
the Partnership's Property Interest in the AWP Olmos Field. This minimum price
will be based upon the highest fair market value provided by the Consultant,
J.R. Butler, for the AWP Olmos Field Property Interests. Bids over that price
from third parties will be accepted at auction. If a third party offers to
purchase the AWP Properties at auction for a price equal to or in excess of the
minimum amount the Managing General Partner is willing to pay, they will be sold
to the third party. If no third party purchases either of these Property
Interests at auction, then the Managing General Partner will purchase those
interests for the fair market value price that constituted the minimum bid for
the auction.
If the Managing General Partner determines it is interested in buying
other Property Interests owned by the Partnership if no higher price is bid at
auction, then the same procedure will be used, in each case with the minimum bid
amount to be based upon an independent appraisal of the value of the Property
Interest by J.R. Butler, the independent Consultant, with the property to be
offered at auction to third parties before the Managing General Partner can
purchase these Property Interests for the minimum price, and then only if no
higher price is received from third parties. The Managing General Partner will
not purchase any Property Interests from the Partnership in a negotiated
transaction.
The Consultant selected by the Managing General Partner to provide the
fair market value opinion was chosen through a process whereby several
independent consulting firms were interviewed by the Managing General Partner.
The Managing General Partner determined that having a single independent
appraisal of
18
<PAGE>
certain Property Interests to establish a minimum price at which such properties
could be sold at auction would be adequate protection against conflicts of
interest in any potential sale of such Property Interests to the Managing
General Partner. Therefore, the Managing General Partner deemed such process to
be a better use of Partnership resources than the retention of multiple
appraisers to determine minimum prices to be based upon the highest or average
value determined by the various appraisers.
Fair Market Value Opinion of J.R. Butler & Company
The fair market value opinion ("Opinion") of the Consultant states that
in the opinion of the Consultant, the aggregate market value of the
Partnership's hydrocarbon reserves and future net revenues as of January 1,
1997, from the AWP Properties in each case before reduction for any excess
costs, is approximately $239,700. If the Partnership continues to operate with
no sales of properties, it would not recognize these values because of the need
to reduce any potential payments under the net profits interest by the amount of
excess costs incurred by the Operating Partnership in relation to the properties
in which the Partnership has an interest. The Opinion does not in any manner
address the underlying business decision to sell these Property Interests.
Moreover, the Opinion is necessarily based upon market, economic and other
conditions as they existed on, and could be evaluated as of January 1, 1997.
Consultant prepared the reserves and future performance estimates
utilizing standard petroleum engineering methods. For properties with sufficient
production history, reserves estimates and rate projections were based primarily
on extrapolation of established performance trends and reconciled, whenever
possible, with volumetric and/or material balance calculations. For the
undeveloped locations, reserves were determined by a combination of volumetric
calculations (geologic mapping) and analogy. The Opinion states that
volumetrically determined reserves or those determined by analogy are generally
subject to greater qualifications than reserves estimates supported by
established production decline curves and/or material balance calculations.
Consultant performed the determination and classification of reserves (with
exception of the escalated prices and costs) in accordance with Securities and
Exchange Commission guidelines. The definitions used by Consultant also conform
to those promulgated by the Society of Petroleum Engineers (SPE) and the Society
of Petroleum Evaluation Engineers (SPEE).
Basic evaluation data used by Consultant, including production data,
estimates of drilling, completion and workover costs and operating costs were
obtained principally from the Managing General Partner. Gas and liquid prices
were obtained from averaging the actual prices received by the Managing General
Partner in 1996 through the month of October. The value of the wet gas stream
was reflected by the Btu-adjusted gas price for each well. An additional
adjustment in gas prices included a 5% reduction to reflect lease use. The
estimates of future net revenue prepared by Consultant consisted of those
revenues expected to be realized from the sale of the estimated reserves after
deduction of royalties, ad valorem and production taxes, direct operating costs,
excess costs and required capital expenditures, when applicable. Future net
revenues used by Consultant were determined before the deduction of federal
income tax. Consultant prepared market value estimates by applying qualitative
risk adjustments considered by Consultant to be appropriate for the various
reserves categories and "profit factors" (as applicable) against the spread of
future net revenue values obtained from three pricing scenarios (one
non-escalated and two escalation assumptions) and two present value discount
rates of 10% and 17%.
The reserves and the resulting "value estimates" included in the study
by Consultant are not exact quantities. Future conditions may affect the
recovery of estimated reserves and revenue, and all categories of reserves may
be subject to revision and/or reclassification as more performance and well data
become available. Furthermore, the Opinion states that any oil or gas reserves
estimate or forecast of production and
19
<PAGE>
income is a function of engineering and geological interpretation and judgment
and that such estimates should be used with the understanding that additional
information obtained subsequent to a study may justify revisions which could
increase or decrease the original estimates of reserves and value.
Consultant is an independent consulting firm as provided in the
Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves
Information promulgated by the SPE. Neither consultant nor any of its personnel
have any direct or indirect interest in the Managing General Partner or the
Partnership and Consultant's compensation was not contingent upon the results of
its reserves estimates, cash flow analyses or market value opinion resulting
from its review of the Partnership properties.
In preparing the Opinion, Consultant assumed the accuracy and
completeness of the financial and other information provided to it by the
Managing General Partner or which were publicly available and did not attempt to
independently verify such information. Consultant did not make field inspections
or judgments relative environmental or other legal liabilities.
Sale of Property Interest in North Buck Draw Unit to Affiliated Partnerships
In July 1997, the Managing General Partner received an unsolicited
offer from the operator of the North Buck Draw Unit, in which the Partnership
has a Property Interest, to buy the interest owned by the Partnership and five
other affiliated partnerships in North Buck Draw for $835,000 as of July 1,
1997. This property is a waterflood project in Wyoming that made up 31.5% of the
Partnership's PV-10 Value at January 1, 1997, and 14.5% and 14.9% of the
Partnership's total production for 1996 and the first half of 1997,
respectively.
Previously, the Managing General Partner had obtained an independent appraisal
from J. R. Butler & Company of these partnerships' interest in North Buck Draw
of $809,000 as of January 1, 1997. Four partnerships formed by the Managing
General Partner in late 1995 (the "1995 Partnerships") have certain funds
available to purchase interests in producing properties. As part of the
Proposal, the Partnership is seeking approval of the sale of the Partnership's
Property Interests in the North Buck Draw Unit to these 1995 Partnerships for
the same amount offered by the operator for these Property Interests. The
Managing General Partner believes this is the appropriate price, because it has
been set through an unsolicited offer which came from the property's operator,
who is likely to be the party most familiar with the property, who has recently
purchased other interests in that property owned by another industry member, and
consequently who is in a position to offer the highest price, and a price higher
than the price acquirable from a non-operator at auction. Furthermore, the price
is supported by an independent appraisal of the interests in the North Buck Draw
Unit, showing the offered price to be 3% higher than the appraisal as of a date
six months earlier.
Simultaneous Proposal to Operating Partnership
Simultaneously with this proposal to the Partnership's Interest Holders
to sell all of its Property Interests, a similar proposal is being made to the
interest holders 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 and when excess costs exist, then the
Managing General Partner will get a fair market appraisal of the value of the
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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:
1. 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
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2. 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;
3. Conduct a final accounting and distribute any
remaining cash to the Interest Holders and the
General Partners of the Partnership in accordance
with the Partnership Agreement;
4. Cause final Partnership tax returns to be prepared
and filed with the Internal Revenue Service and
appropriate state taxing authorities;
5. Distribute to the Interest Holders final Form K-1 tax
information; and
6. 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
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
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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 conveyances will be made,
including conveyances to the Managing General Partner in such cases, will be
made solely by the Managing General Partner. Except as described below with
respect to Property Interests in the AWP Olmos Field, in no event is the
Managing General Partner obligated to purchase any of the Property Interests.
See "--AWP Olmos Field."
Other. Any sale of the Partnership Property Interests and the
subsequent liquidating distributions to the Interest Holders, 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 may purchase certain of the Partnership's
Property Interests if the Proposal is approved. In addition, the Managing
General Partner will be economically impacted by liquidation in at least two
ways. First, to the extent of its ownership of SDIs, liquidation will have the
same effect on it as on the Interest Holders. See "--Estimate of Liquidating
Distribution Amount," and "--Estimated Share of Interest Holders' 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 duties to
the Partnership and its 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 Interest Holders to dissolve and liquidate
the Partnership in an effort to maximize the value of the Partnership's
remaining assets and the amounts distributed to Interest Holders 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, Interest Holders 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 Interest Holders, 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.
The Managing General Partner recommends that the Interest Holders vote
FOR the Proposal.
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FEDERAL INCOME TAX CONSEQUENCES
General
The following summarizes certain federal income tax consequences to the
Interest Holders 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 from
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 a private letter ruling dated February 6, 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 Interest
Holders.
This summary does not describe all the tax aspects which may affect
Interest Holders because the tax consequences may vary depending upon the
individual circumstances of an Interest Holder. It is directed to Interest
Holders 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 SDIs and hold
interests in the Partnership as "capital assets" (generally, property held for
investment). Interest Holders were not admitted to the Partnership as limited
partners but are treated as partners of the Partnership for federal income tax
purposes. 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 Interest Holders
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 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 Interest Holders to recognize taxable gain or loss for federal
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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 an Interest Holder borrowed to acquire its Partnership Interest or
had borrowed funds either before or after it acquired its Partnership Interest
(i.e., SDIs), 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 Interest Holders Subject to Federal Income Tax Due to Debt-
financing
All references hereinbelow to Interest Holders refers solely to
Interest Holders 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.
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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 an Interest Holder's income,
gain, loss and deduction from the Partnership is subject to federal taxation.
Taxable Gain or Loss Upon Sale of Properties
An Interest Holder 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 Interest Holder (i.e., cash or
consideration received) over the Interest Holder'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 Interest Holder's
tax basis over the amount realized by the Partnership for such property and
allocated to the Interest Holder. It is projected that taxable loss will be
realized upon the sale of Partnership properties and that such loss will be
allocated among the Interest Holders in accordance with the Partnership
Agreement. The Partnership Agreement includes an allocation provision that
requires allocations pursuant to a liquidation be made among Partners (i.e., the
Interest Holders and the Managing General Partner) 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 Interest Holder will realize and
recognize his allocable share of gains and losses in his tax year within which
the Partnership properties are sold.
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 (including Interest
Holders) 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 an Interest Holder in liquidation is less than such Interest
Holder's adjusted tax basis in his Partnership interest, the Interest Holder
will realize and recognize a capital loss to the extent of the excess. If the
amount of cash distributed is greater than such Interest Holder's adjusted tax
basis in his Partnership interest, the Interest Holder will recognize a capital
gain to the extent of the excess.
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
Interest Holder'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 Interest Holder 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.
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Passive Loss Limitations
Interest Holders 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.
An Interest Holder'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.
An Interest Holder'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 be offset, or be offset by, passive activity gains or losses.
THE FOREGOING DISCUSSION AND IS INTENDED TO BE A SUMMARY OF CERTAIN
INCOME TAX CONSIDERATIONS OF THE SALE OF PROPERTIES AND LIQUIDATION. EACH
INTEREST HOLDER 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 June 30, 1991.
SDIs 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 Interest Holders' share of the
Partnership's estimated oil and gas reserves. Neither of these reports reflect
the Partnership's share of existing and 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 disclosed 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 during the six months
of 1997 was $2.12 per Mcf, as compared to $4.79 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.
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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 SDIs, in addition to revenues distributable to the Managing General
Partner with respect to its general partnership interest or SDIs 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 internal acquisition
costs reimbursements of $195,385 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
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, $231,213
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
Interest Holders' capital contributions to the Partnership
relative to contributions of all interest holders or limited
partners of partnerships for which the Managing General
Partner serves as Managing General Partner.
o The Managing General Partner has been reimbursed $8,536 for
direct expenses, all of which were billed by, and then paid
directly to, third party vendors.
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o The Managing General Partner has received a nonaccountable
incentive amount of $53,408 for services rendered from
inception to June 30, 1997.
No Trading Market
There is no trading market for the SDIs, and none is expected to
develop. Under the Partnership Agreement, the Interest Holders have the right to
present their SDIs to the Managing General Partner for repurchase at a price
determined in accordance with the formula established by Article XV of the
Partnership Agreement. Originally 299 Interest Holders invested in the
Partnership. Through December 31, 1996, the Managing General Partner has
purchased 25,000 SDIs from Interest Holders pursuant to the right of
presentment. As of August 15, 1997, there were 298 Interest Holders (excluding
the Managing General Partner). The Managing General Partner does not have an
obligation to repurchase interests pursuant to this right of presentment but
merely an option to do so when such interests are presented for repurchase.
Principal Holders of SDIs
The Managing General Partner holds 0.98% of the SDIs in the
Partnership. To the knowledge of the Managing General Partner, there is no
holder of SDIs that holds more than 5% of the SDIs.
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.
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.
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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 Pension Partners 1991-A, Ltd.
------------------------------------------
John R. Alden
Secretary
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