SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)
(2))
[X] 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.
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(Name of Registrant as Specified In Its Charter)
Swift Energy Company
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(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:
2) Aggregate number of securities to which transaction applies:
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):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
Fee paid previously with preliminary materials. [X]
[ ] 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:
2) Form, Schedule or Registration Statement No.:
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4) Date Filed:
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October 15, 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.
It is important that you review the enclosed materials before voting on the
proposal. The Managing General Partner recommends that you vote in favor of such
sale and liquidation for a number of reasons. See "The Proposal--Reasons for the
Proposal" and "Recommendation of the Managing General Partner."
SWIFT ENERGY PENSION PARTNERS 1991-A, LTD. has been in existence for over
six years, and its net profits interest was purchased in 1991. No capital is
available for any enhancement activities on the properties in which the
Partnership owns non-operating interests or to produce the proved non-producing
reserves on those properties. For several years limited net profits have been
received by the Partnership due to the need to reduce excess costs incurred to
pay operating and enhancement costs. The balance of these excess costs
significantly reduces the value of the Partnership's reserves. The Partnership's
interest in proved producing reserves at December 31, 1996 was only 528,000 Mcfe
(without regard to excess costs). Thus, even if oil and gas prices were
unusually high, there would be very little impact upon the Partnership's
ultimate economic performance. See "The Proposal--Partnership Financial
Performance and Conditions." To continue operation of the Partnership means that
Partnership direct and administrative expenses (such as costs of audits, tax
returns, 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 remain at low levels which may decrease
the funds ultimately available for Interest Holders. See "The
Proposal--Estimates of Liquidating Distribution Amount." Thus, approval of the
current sale of the Partnership's Property Interests at this time will
accelerate the receipt by the Interest Holders of the remaining cash value of
the Partnership's Property Interests.
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 the first quarter of 1998.
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
/s/ A. Earl Swift
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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 November 25, 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, November 25, 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
purchase in certain circumstances of a portion of the Partnership's property
interests underlying its 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
October 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
/s/ John R. Alden
---------------------------------
John R. Alden
Secretary
October 15, 1997
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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
General
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, November 25, 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 purchase in certain circumstances of a portion of the
Partnership's Property Interests underlying its net profits interest 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 October 21, 1997.
Under Section 14.09 of the Partnership Agreement, the affirmative vote of
Interest Holders holding 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 October 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 Partner 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.
Partnership Property Interests
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 (the "Property Interests") 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.
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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 total PV-10 Value of the Partnership's reserves as of December
31, 1996 was $837,878, 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.
Method of Sale
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 offered
for sale at 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 with third parties. Other than the possible sale of
interests in the AWP Olmos Field to the Managing General Partner (discussed in
"Special Factors" below if no third party exceeds the minimum bid amount at
auction) all sales will be made to unaffiliated third parties at auction or
through negotiated transactions. The procedures to be followed for offering the
AWP Olmos Field Property Interests at auction are discussed under "Special
Factors" herein. 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. If the
Managing General Partner has an interest in purchasing certain of the
Partnership's Property Interests, the Managing General Partner will obtain an
independent appraisal of the value of the Property Interest by an independent
Consultant, J.R. Butler and Company ("J.R. Butler") before such Property
Interest is offered at auction. 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 a price higher than the appraised
value is not 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 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
interests in those same properties owned by the Operating Partnership and
several other partnerships which it manages, solicitation of approval of each
purchase offer from all of the partnerships would be impractical.
It is possible, though unlikely, that less than all of the Partnership's
Property Interests will be sold. See "The Proposal--Steps to Implement the
Proposal--Negotiated Sale." The Managing General Partner anticipates that the
majority of sales will be made by the end of the first quarter of 1998. The sale
of Partnership Property Interests that account for at least 662/3% of the total
value of the Partnership Property Interests will cause the Partnership to
dissolve automatically under the terms of the Partnership Agreement and the
Texas Act. Any Partnership Property Interests that are not sold at auction may
be sold pursuant to negotiated sales to third parties.
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Currently there are no third party 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."
SPECIAL FACTORS
Partnership Property Interests
The chart below presents information on those fields in which the
Partnership has a Property Interest which constitutes 10% or more of the
Partnership's PV-10 Value at December 31, 1996. The information below includes
the location of each field, the number of wells and operator(s), together with
information on the percentage of the Partnership's total PV-10 Value ($837,878
without regard to excess costs) on December 31, 1996 attributable to each of
these fields. Information is also provided regarding the percentage of the
Partnership's production for the 18 months ended June 30, 1997 on a volumetric
basis from each of these fields. On a volumetric basis, the percentages of the
PV-10 Value at December 31, 1996 of these fields attributable to natural gas
ranged between 57.7% and 94.3%, and in excess of 66% of 1996 production from
these fields has been natural gas.
Of the remaining 12 fields in which the Partnership owns a Property
Interest, 4 fields each comprise less than 1% of the Partnership's PV-10 Value
at December 31, 1996 and the PV-10 Value of each of the other 8 fields average
3.0% of the Partnership's PV-10 Value at the same date.
North
AWP Buck North 12
Olmos Draw Foss Other
Field Field Field Fields
McMullen Campbell Custer TX (13);
County and State County, County, County, OK (27);
Texas Wyoming Oklahoma KS (27);
MS (9);
AR (12);
LA (2)
Number of Wells 5 17 8 90
Operator Swift Devon Anson Swift and
3 others
% of 12/31/96 PV-10 Value 34.1% 30.3% 10.9% 24.7%
% of Production for 18 months 8.6% 14.6% 10.1% 66.7%
ended 6/30/97 (Vol.)
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Possible Sale of AWP Olmos Field Property Interest to the Managing General
Partner
If approved by a majority of the Interest Holders holding a majority of the
SDIs, the Proposal described above to sell substantially all of the
Partnership's assets and subsequently to dissolve and terminate the Partnership
will also result in the possible sale to the Managing General Partner, after
first offering such Property Interest to third parties at auction, of the
Partnership's Property Interest in the AWP Olmos Field, representing 34.1% of
its PV-10 Value at December 31, 1996, for $239,700. The possible sale of the
Partnership's AWP Olmos Field Property Interest to the Managing General Partner
is being proposed for Interest Holder approval in an attempt to realize the
highest value for this Property Interest. The reasons for proposing the sale of
the Partnership's Property Interests at this time are described in detail under
"The Proposal--Reasons for the Proposal." In summary, these reasons include: (i)
the reduced levels of cash flow from the Partnership's Property Interests, which
has resulted in only $70,500 in cash distributions to Interest Holders since
January 1, 1996; (ii) the inherent decline in hydrocarbons produced over time in
the absence of any further capital expenditures on the properties in which the
Partnership has a Property Interest; (iii) the continuation of certain fixed oil
field overhead and operating costs ($18,285 in 1996) without regard to the level
of production; and (iv) continued direct costs (audits, reserve reports, tax
returns) and general and administrative costs incurred each year ($49,369 in
1996). Because of the depletion of the Partnership's oil and gas reserves
(825,518 Mcfe at December 31, 1996, 64% of which were proved producing reserves)
and lack of cash flow, the Managing General Partner believes that the
Partnership's asset base and future net revenues no longer justify the
continuation of the Partnership's operations. It is also the Managing General
Partner's belief that improvements over the last several years in the level of
oil and gas prices, particularly those for natural gas, make this an appropriate
time to consider the sale of the Partnership's Property Interests, which also
increases the likelihood of maximizing the value of the Partnership's assets,
although the level of future prices cannot be predicted with any accuracy. By
selling its Property Interests and liquidating the Partnerships, future
overhead, direct and general and administrative costs can be avoided and the
receipt of the value of the Partnership's reserves accelerated so that such
funds are received at one time. Such sale and liquidation is viewed by the
Managing General Partner as preferable to requiring the periodic sale of a
portion of its Property Interests over a long period of time to pay the expenses
of future operations and administration.
AWP Olmos Field
Of the Partnership's interest in remaining reserves (before any reduction
for excess costs), 34.1% of the PV-10 Value of such reserves is located in the
AWP Olmos Field, located in McMullen County in South Texas. Of the Partnership's
1996 revenues attributable to production, 7.4% 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 76% of the Partnership's reserves
attributable to the AWP Olmos Field are proved non-producing reserves that
cannot be produced without additional capital expenditures, which makes such
reserves less valuable to the Partnership.
Fair Market Value Opinion of J.R. Butler and Company Regarding AWP Olmos Field
Property Interest
The Managing General Partner selected J.R. Butler and Company ("J.R.
Butler" or the "Consultant") to appraise the Property Interests in the AWP Field
held by seven different partnerships. J.R. Butler is an established engineering
consulting firm headquartered in Houston, Texas since 1948. J.R. Butler was
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selected from among three established consulting firms interviewed by the
Managing General Partner. The Managing General Partner requested bid proposals
and met with all three firms. The Managing General Partner selected J.R. Butler
based upon the Managing General Partner's appraisal of Butler's capabilities,
experience, responsiveness, fees quoted for the engagement and Butler's
familiarity with the region in which the Property Interests are located. The
Managing General Partner determined that having a single independent appraisal
of 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.
There has been no pre-existing relationship between the Managing General
Partner and J.R. Butler prior to engagement of J.R. Butler in 1997 to appraise
certain interests owned by these partnerships for purposes of determining values
or assessing the sale or possible sale of certain properties. These partnerships
have paid J.R. Butler approximately $30,000 for such appraisal services.
Although the Managing General Partner has no arrangement with J.R. Butler for
future work, it is likely that the Managing General Partner would employ J.R.
Butler for any future appraisals of properties owned by partnerships managed by
the Managing General Partner.
The Managing General Partner did not instruct J.R. Butler as to values or
limit the scope of J.R. Butler's investigation for purposes of preparing the
appraisals. The Managing General Partner provided J.R. Butler with data, logs,
maps, production and tests for Butler's use in determining the fair market value
of the Property Interests. J.R. Butler prepared its own reserves analysis of the
Property Interests and provided the fair market value thereof, and the Managing
General Partner did not provide any values for the Property Interests. The J.R.
Butler appraisal did not opine on the fairness of the transaction to the
Interest Holders, and the Managing General Partner has not acquired a separate
report or opinion regarding the fairness to the Interest Holders of the price at
which the Partnership's Property Interest in the AWP Olmos Field may be sold to
the Managing General Partner. .
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
Property Interest in the AWP Olmos Field, based upon its evaluation of the
Partnership's hydrocarbon reserves and future net revenues as of January 1,
1997, from the AWP Properties, in all cases 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 or could be evaluated as of January 1, 1997.
The 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
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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 Partnership 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 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 to environmental or other legal liabilities.
AWP Olmos Field Sale
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 fair market value provided by the Consultant for the AWP
Olmos Field Property Interests.
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The Managing General Partner will purchase the AWP Property Interest only
if no third party offers to purchase the AWP Property Interest at auction for a
price which exceeds the minimum bid amount. J.R. Butler and Company, an
independent third party appraiser, has already provided an appraisal which
determined that the fair market value of the AWP Property Interest at January 1,
1997 was $239,700 (before any reduction for excess costs). This is also the
amount to be used as the minimum bid amount at auction, and in the event such
interest is not purchased at auction, will also be the price at which the
Managing General Partner would purchase such Property Interest. The basis upon
which this appraisal was prepared is discussed in detail under "Fair Market
Value Opinion of J.R. Butler and Company Regarding AWP Olmos Field Property
Interest" above, and the appraisal itself is included with this Proxy Statement
and incorporated herein by reference. The AWP Olmos Field Property Interest
constitutes 34.1% of the Partnership's PV-10 Value at December 31, 1996, or
approximately $285,716. If any third party bids more than the minimum bid
amount, then it will be sold to such third party. If, however, the minimum bid
amount is not received from a third party, then the Managing General Partner
will purchase the Property Interest for that amount.
The possible purchase of the Partnership's Property Interest in the AWP
Olmos Field has been structured in a manner to ensure that the price received by
the Partnership for its Property Interest in this field is the best price
available, principally through first requiring that the Property Interest be
offered at auction to any third party which desires to purchase it. The
appraised value of such AWP interest by J.R. Butler and Company of $239,700
compares to the PV-10 Value of the same interest as of December 31, 1996
$285,716. The Managing General Partner does not believe that the PV-10 Value
accurately reflects the amount that oil and gas industry members are currently
paying to purchase producing properties on the open market, especially when so
much of the PV-10 Value of the AWP Property Interest is attributable to proved
non-producing reserves (76% of the PV-10 Value of the AWP Property Interest at
December 31, 1996).
During the auction process, the auctioneer does not disclose to prospective
bidders the minimum bid amount which has been set on any Property Interest. When
a bid first exceeds the sales price minimum, the auctioneer announces that the
minimum amount has been exceeded and that the property will be sold. If the
highest bid received does not exceed the minimum amount, the auctioneer
announces that this is the case without disclosing the exact amount of the
minimum bid required.
Fairness of Proposed AWP Sale
The Managing General Partner believes that this proposed method of sale of
the Partnership's AWP Olmos Field interest is fair to Interest Holders for a
variety of reasons, none of which is given greater weight than another:
1. Requiring that the Property Interest be offered at auction to third
parties before any sale is made to the Managing General Partner
provides a mechanism for receiving the highest price a third party is
willing to pay. Only in the event that a higher price is not received
will a sale be made to the Managing General Partner.
2. The minimum price at which the Managing General Partner might buy the
Partnership's AWP Olmos Field interest has been based upon an
independent third party appraisal of its fair market value. The
factors and methods used by J.R. Butler in making this appraisal are
discussed in detail under "Fair Market Value Opinion of J.R. Butler
and Company Regarding AWP Olmos Field Property Interest" above.
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3. Because of its position as the operator of the AWP Olmos Field and
because of the significant number of wells which it operates in that
field, the Managing General Partner believes it is in the position to
offer the highest purchase price for such Property Interest based upon
its familiarity with the costs of operating the field and its
reservoir characteristics.
4. No transaction will take place unless the Proposal is approved by
Interest Holders owning a majority of outstanding SDIs, without the
Managing General Partner voting its 0.98% SDI interest.
Although the Managing General Partner has given consideration to offering
the AWP Property Interests at auction to the third party highest bidder with no
minimum sales price set, this alternative was rejected because there is no
assurance that a price equal to that willing to be paid by the Managing General
Partner would be received from third party bidders. Because of the Managing
General Partner's substantial control and operation of the AWP Olmos Field, the
level of interest and the amount that a third party would be willing to pay to
purchase such interest might be negatively affected by the lack of control of
such third party over such field and its operations. Similarly, attempts to
negotiate transactions with third parties are likely to be negatively affected
by the same lack of control and carry the same risks of receiving an
insufficient price for this Property Interest.
The possible sale of the AWP Olmos Field Property Interests to the Managing
General Partner and the procedures established for such a sale have been
approved by unanimous vote of the Board of Directors of the Managing General
Partner. The funds for any such purchase by the Managing General Partner of the
Partnership's AWP Olmos Field interest will be funded from the Managing General
Partner's working capital.
Neither the Managing General Partner nor a majority of its independent
directors retained an unaffiliated representative to act on behalf of the
Partnership's Interest Holders for the purposes of negotiating the terms upon
which any sale of the AWP Olmos Field interest to the Managing General Partner
would be made or preparing a report concerning the fairness of such transaction.
Managing General Partner Benefits
In addition to sharing the benefits available to Interest Holders through
liquidating their interests and receiving the current value of those interests
as a result of such sales, if the Interest Holders of the Companion Partnership
also vote to sell their properties, then a portion of sales proceeds will be
used to pay the excess costs payable to the Managing General Partner. As of June
30, 1997, the properties on which the Partnership holds its net profits interest
still carried excess operating costs of $157,932. Any sale to the Managing
General Partner of the Partnership's Property Interests in the AWP Olmos Field
would have no effect or inconsequential effect on the Managing General Partner's
net book value and net earnings.
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 third party 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 to third parties.
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<PAGE>
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, certain Property Interests may be sold to the
Managing General Partner if no higher bid is offered by 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, although a final liquidating distribution is
anticipated 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.
INTEREST HOLDERS ARE URGED TO COMPLETE, SIGN AND DATE THE ENCLOSED
PROXY AND TO RETURN IT TO THE MANAGING GENERAL PARTNER NO LATER
THAN NOVEMBER 15, 1997.
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<PAGE>
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 the 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 excess costs, 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 include associated well
machinery and equipment, gathering systems, storage facilities or processing
installations or other equipment and property associated with the production and
field processing of oil or gas. Interests in Producing Properties may include
Working Interests, production payments, Royalty Interests, Overriding Royalty
Interest, Net Profits Interests, and other nonoperating interests. Producing
Properties may include gas gathering lines or pipelines. The geographical limits
of a Producing Property may be enlarged or contracted on the basis of
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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<PAGE>
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 that owner's interest.
VOTING ON THE PROPOSAL
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 Statement, 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 "Business of the Partnership--Transactions Between the
Managing General Partner and the Partnership."
Proxies; Revocation
A sample of the form of proxy is included in this Proxy Statement. The
actual proxy to be used to register your vote on the Proposal is the separate
green sheet of paper included with the Proxy Statement. PLEASE USE THE GREEN
PROXY TO VOTE UPON THE PROPOSAL.
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.
No Appraisal or Dissenters' Rights Provided
In connection with the proposal to sell substantially all of its assets and
liquidate the Partnership, Interest Holders are not entitled to any dissenters'
11
<PAGE>
or appraisal rights such as would be available to shareholders in a corporation
engaging in a merger. 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.
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 of Property Interests by Managing General Partner
The Partnership's Property Interests in the AWP Olmos Field 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 of certain other properties. Property
Interests may also be conveyed to the Managing General Partner for no
consideration if such interests cannot be sold to third parties and it is
determined 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.
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<PAGE>
Dependence on Operating Partnership
If the Partnership approves the proposal to sell its Property Interests but
the Operating Partnership does not approve the sale of its assets, 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. If this lack of control prevents an
economic sale to a third party of the Partnership's Property Interests, the
Managing General Partner will obtain a third party independent appraisal of the
Partnership's Property Interests from J.R. Butler and purchase those properties
itself for the appraisal price. 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."
Prices Used for Calculation of PV-10 Value of Proved Reserves
The PV-10 Value of the Partnership's proved oil and gas reserves upon which
the estimates of the range of liquidating distributions have been based were
calculated using estimated 1997 average prices without any escalation of $2.25
per MMBTU. These estimated prices were based upon pricing scenarios determined
by the Managing General Partner and are not the same as those mandated by the
Securities and Exchange Commission for reserves disclosures under applicable SEC
Rules, which require use of prices at year-end, although the discount rate and
lack of escalation are the same. If estimates of reserves and future net
revenues had been prepared using December 31, 1996 prices, as mandated by the
SEC, reserves, future net revenues and the present value thereof would have been
significantly higher. These higher prices have not been used because of the fall
in prices since year-end 1996 and the Managing General Partner's determination
that reserve estimates using 1997 average prices more accurately reflect values
likely to be received upon sale of the Partnership's Property Interests within
the next six months than estimates based upon year-end 1996 prices. If this
assumption is incorrect or prices increase rapidly at the end of 1997 or the
beginning of 1998, the estimates of the Partnership's PV-10 Value and proceeds
receivable upon liquidation of its Property Interests are likely to be too low.
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 the Partnership's affairs and
make final distributions to its partners. The Partnership's assets consist of a
net profits interest 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
13
<PAGE>
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 third parties in negotiated transactions or to the Managing General
Partner under certain circumstances discussed in detail herein. 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.
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
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<PAGE>
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 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 has been natural gas, the bulk of which was produced during
the years when gas prices were the lowest.
Comparison of Gas Prices Expected in 1991 to Gas Prices Actually Received
Swift Energy Pension Partners 1991-A, Ltd.
PRICE PER MCF OF GAS
YEAR ACTUAL EXPECTED
---- ------ --------
1991 $1.44 $1.99
1992 $1.65 $2.32
1993 $1.99 $2.83
1994 $1.77 $3.00
1995 $1.58 $3.18
1996 $2.35 $3.37
15
<PAGE>
Amounts of Production to Date Produced by Year
Swift Energy Pension Partners 1991-A, Ltd.
YEAR MCFE
---- -----
1991 177,423
1992 246,513
1993 230,410
1994 206,465
1995 167,372
1996 154,304
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 original acquisitions included within the net
profits interests, which disproportionately decreased cash flow because these
wells had been anticipated to have significant early cash flows. In 1992, a well
in the Lewisburg Field, Acadia Parish, Louisiana (the acquisition costs of which
were 8% of Interest Holders' initial capital contributions) 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, the producing zone of four wells in the
Simbrah Field, Jackson County, Texas (the related acquisition costs of which
were 33% of Interest Holders' initial capital contributions) experienced rapid
depletion 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 (the related acquisition costs of which were 12% of the
Interest Holders' initial capital contributions) with limited success between
1993 and 1996. The costs to the Partnership's net profits interest for all of
these workover and recompletion attempts were $253,648, and as of December 31,
1996 associated with these wells was 2.74% of the Partnership's total PV-10
Value. Subsequent enhancement activities were undertaken on certain other
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 drilling costs to the Partnership's net profits interest for
these seven wells was $215,875, and the wells represent 7.2% of the December 31,
1996 PV-10 Value of the Partnership. The benefit of these enhancement
activities, however, was reduced by the need to repay the costs incurred for
these enhancements.
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<PAGE>
Lower prices also had an effect on the Partnership's interest in proved
reserves. Estimates of proved reserves represent quantities of oil and gas
which, upon analysis of engineering and geologic data, appear with reasonable
certainty to be recoverable in the future from known oil and gas reservoirs
under existing economic and operating conditions. When economic or operating
conditions change, proved reserves can be revised either up or down. If prices
had risen as predicted, the volumes of oil and gas reserves that are
economically recoverable might have been higher than the year-end levels
actually reported because higher prices typically extend the life of reserves as
production rates from mature wells remain economical for a longer period of
time. Production enhancement projects that are not economically feasible at low
prices can also be implemented as prices rise. At present, because of the small
remaining amount of reserves, further price increases would not have a
significant impact on the Partnership's performance.
As required 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. These costs relate to the working interests that were subject to the
Partnership's net profits interest. The Managing General Partner of the
Operating Partnership advanced most of these costs because it felt that such
expenditures would increase the value of the properties in which the Partnership
and the Operating Partnership have an interest. Neither the Operating
Partnership's partnership agreement nor the Partnership's partnership agreement
allow additional assessments to be made against any Interest Holder.
Estimates of Liquidating Distribution Amount
As of June 30, 1997, the properties on which the Partnership holds its net
profits interest still carried excess operating costs of approximately $158,000.
Because of the amount of remaining excess costs, cash distributions to Interest
Holders 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), it is likely that future net profits payments
from the Operating Partnership to the Partnership will be delayed for
significant periods of time and will be limited in amount. Neither the Operating
Partnership's partnership agreement nor the Partnership's partnership agreement
allow additional assessments to be made against any Interest Holder. Under the
NP/OR Agreement, these 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.
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 "high" range of estimated distributions from
liquidation is based upon estimated future net revenues discounted to present
value at 10% per annum. The "low" range is 70% of the "high" range estimate. 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
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<PAGE>
reserves disclosures under applicable SEC rules, which require use of prices at
year-end, although the discount rate and lack of escalation are the same. If
estimates of reserves and future net revenues had been prepared using December
31, 1996 prices, as mandated by the SEC, reserves, future net revenues and the
present value thereof would be significantly higher. The Managing General
Partner has determined not to use these higher prices because these estimates of
1997 average prices more accurately reflect prices purchasers of properties
currently 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. 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 net 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 Interest Sales and Liquidation
Projected Range
---------------------
Low High
--------- ---------
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
========= =========
- ----------------
(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 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.
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<PAGE>
Estimated Share of Interest Holders'
Net Distributions from Continued Operations
Projected
Cash Flows
----------
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
- ----------------
(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 "--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 twenty-year life, assuming flat
pricing. (4) Does not reflect effect of intermittent sales of a portion of
the Partnership's 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 other partnerships
which will be offering their interests in the properties in which the
Partnership owns a Property Interest, will own a large enough interest in
the properties to allow the purchaser to designate a new operator of the
properties, which normally increases the amount that a purchaser is willing
to pay.
(3) Changes in the market for gas or oil may affect the pricing assumptions
used by purchasers in evaluating property value and possible purchase
prices.
(4) Different evaluations of the amount of money required to be spent to
enhance or maintain production may have a significant effect upon the
ultimate purchase price.
(5) In certain instances, the Managing General Partner may set minimum bidding
prices for those properties offered at auction, which may not be met.
(6) The Managing General Partner may choose to package certain less attractive
properties together with other properties in order to enhance the
likelihood of their sale. Such packaging could result in a significant
discount by prospective purchasers of the value of the Partnership's more
productive properties contained in such packages.
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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. 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.
Fairness of the Proposal; Comparison of Sale Versus Continuing Operations
The Managing General Partner believes that the Proposal to sell the
Partnership's Property Interests and liquidate is fair to Interest Holders for
several reasons. No such transactions will take place unless the Proposal is
approved by a majority of Interest Holders, without the Managing General Partner
voting its 0.98% of SDIs. The Partnership's Property Interests will be sold to
the highest third-party bidder at auction or to the third party which is willing
to purchase the interests for the highest price in a negotiated sale unless the
Managing General Partner purchases the Partnership's Property Interest in the
AWP Olmos Field in the absence of a third-party bid at auction higher than the
appraised value of that interest. The fairness of making such a sale to the
Managing General Partner is discussed in detail under "Special Factors--Fairness
of Possible Sale of AWP Olmos Field Interest to the Managing General Partner."
Based on the above tables, it is estimated that an Interest Holder could
expect to receive from $0.17 to $0.27 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 $0.28 per $1.00 SDI, discounted to
present value ($0.47 per $1.00 SDI over twenty years on an undiscounted basis)
if the Partnership continued operations.
Although the estimates contained under "The Proposal--Estimates of
Liquidating Distribution Amount" above show that estimated cash distributions to
Interest Holders (based on net present value) from continued operations over
twenty years would be approximately 3.7% higher than estimated cash
distributions from selling the Partnership's properties and liquidating the
Partnership at this time (based on the "high" range of estimates), the Managing
General Partner believes there is a substantial advantage in receiving the
liquidating distribution in one lump sum currently. The estimates of
distributions from continued operations are based upon current prices. It is
highly likely that over such a long period of time, oil and gas prices will vary
often and possibly widely from the prices used to prepare these estimates.
Continued operations over such a long period of time subject Interest Holders to
the risk of receiving lower levels of cash distributions if oil and gas prices
over this twenty-year period are lower on average than those used in preparing
the estimates of cash distributions from continued operations. Continued
operations over twenty years subject Interest Holders' potential distributions
to the risks of price volatility and to possible changes in costs or need for
workover or similar significant remedial work on the properties in which the
Partnership owns Property Interests, for which no capital is available from
either the Partnership or its companion Operating Partnership. The Managing
General Partner also believes that there is an advantage to Interest Holders
taking any funds to be received upon liquidation and redeploying those assets in
other investments, rather than continuing to receive small distributions over
such a long period of time.
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."
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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 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. As discussed above, the Managing General Partner believes that the
ability to receive the estimated liquidating distribution in one lump sum
currently, rather than in smaller amounts over a twenty-year period, is one of
the benefits of the Proposal, without the continuing risk of such potential
distributions being negatively affected but oil and gas price decreases. A vote
in favor of the proposal thus might have the effect of making additional funds
currently available to the Interest Holders.
Small 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 reserves, before any reduction
for excess costs, is estimated to be less than 826,000 Mcfe. The Partnership's
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, direct
costs and/or 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
excess 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 material positive impact on the total
return on investment to the Interest Holders 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
Interest Holders' 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.
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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
"Business of the Partnership--No Trading Market." Following the approval of the
Proposal and the sale of the properties and dissolution of the Partnership, 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."
Simultaneous Proposal to Operating Partnership
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 an independent third party appraisal of the
value of the Partnership's Property Interests and will purchase the
Partnership's non-operating interests itself for the highest price for which the
Property Interests are appraised. The Managing General Partner will obtain any
such fair market value appraisal from J.R. Butler.
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 from J.R. Butler 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:
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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
2. Pay or provide for payment of the Partnership's liabilities and
obligations to creditors, if any, 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 intends to engage the O&G
Clearinghouse or another similar company to conduct live auctions for the sales
of working interests of the Operating Partnership's Property Interest and the
non-operating interests of the Partnership. The O&G Clearinghouse is in the
business of conducting auctions for oil and gas properties. The O&G
Clearinghouse establishes a data room, which it leaves open for a period of time
(generally three to four weeks), after which it holds 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.
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 described under "Special Factors--AWP Olmos
Field Sale" will be used, in each case with the minimum bid amount to be based
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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.
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
"Voting on the Proposal-- Solicitation."
Negotiated Sale. Although the Managing General Partner intends to offer
most of 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 nor its affiliates nor any of the partnerships managed by the Managing
General Partner will purchase any of the Partnership's Property Interests in
this manner. In the event of a bid that is lower than a price the Managing
General Partner believes is reasonable, it may sell the property to a third
party bidder for such lower bid price, use another method of sale such as an
auction, or have the Partnership continue to hold such property for a while
longer. If a property cannot be sold to a third party at auction or on a
negotiated basis, which usually occurs because it has no appreciable value,
often accompanied by the fact that the property 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. The Managing General Partner is not
currently aware of any Property Interests owned by the Partnership which are
likely to be conveyed in this manner. Except as described herein 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 "Special
Factors--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
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Distribution Amount." 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 decreases in oil and gas prices. Additionally,
distribution amounts will 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.
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
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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 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.
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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.
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
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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 20%, 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.
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 and
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 and Associates, Inc. reflects only the Interest Holders' share of the
Partnership's estimated oil and gas reserves without regard to excess costs of
the Partnership. 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 production from properties in which
the Partnership has an interest 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
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, which are less than 1.0%
of the Managing General Partner's net revenues. 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."
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 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.
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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 was billed by, and then paid directly to, third
party vendors.
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 October 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.
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INCORPORATION OF CERTAIN INFORMATION BY REFERENCE AND
ATTACHMENT OF 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. Additionally a
reserve report dated May 20, 1997, prepared as of December 31, 1996, and audited
by H.J. Gruy and Associates, Inc., 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.
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.
/s/ John R. Alden
--------------------------------------
John R. Alden
Secretary
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FORM OF PROXY
SWIFT ENERGY PENSION PARTNERS 1991-A, LTD.
This Proxy is Solicited by the Managing General
Partner for a Special Meeting of Interest Holders to be
held on November 25, 1997
The undersigned hereby constitutes and appoints A. Earl Swift, Bruce H.
Vincent, Terry E. Swift or John R. Alden, as duly authorized officers of Swift
Energy Company, acting in its capacity as Managing General Partner of the
Partnership, or any of them, with full power of substitution and revocation to
each, the true and lawful attorneys and proxies of the undersigned at a Special
Meeting of the Interest Holders (the "Meeting") of SWIFT ENERGY PENSION PARTNERS
1991-A, LTD. (the "Partnership") to be held on November 25, 1997 at 4:00 p.m.
Houston time, at 16825 Northchase Drive, Houston, Texas, and any adjournments
thereof, and to vote as designated, on the matter specified below, the
Depositary Interests standing in the name of the undersigned on the books of the
Partnership (or which the undersigned may be entitled to vote) on the record
date for the Meeting with all powers the undersigned would possess if personally
present at the Meeting:
The adoption of a proposal FOR AGAINST ABSTAIN
("Proposal") for (a) sale of
substantially all of the assets of the [ ] [ ] [ ]
Partnership (consisting of its net
profits interest) including the purchase
in certain circumstances of a portion of
the Partnership's property interests
underlying its net profits interests by
the Managing General Partner and/or
its affiliates, and (b) the dissolution,
winding up and termination of the
Partnership. The undersigned hereby
directs said proxies to vote:
This proxy will be voted in accordance with the specifications made hereon.
If no contrary specification is made, it will be voted FOR the Proposal.
Receipt of the Partnership's Notice of Special Meeting of Interest Holders
and Proxy Statement dated October 15, 1997 is acknowledged.
PLEASE SIGN AND RETURN THE PROXY IN THE ENCLOSED, POSTAGE-PAID,
PRE-ADDRESSED ENVELOPE BY NOVEMBER 15, 1997.
SIGNATURE DATE
- --------------------------- -------------------
SIGNATURE DATE
- --------------------------- -------------------
SIGNATURE DATE
- --------------------------- -------------------
If Depositary Interests are held jointly, all joint tenants must sign.
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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 and Associates, Inc., 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.
TABLE OF CONTENTS
SUMMARY ..................................................................... 1
General .................................................................. 1
Partnership Property Interests............................................. 1
Method of Sale............................................................. 2
SPECIAL FACTORS............................................................... 3
Partnership Property Interests............................................. 3
Possible Sale of AWP Olmos Field Property Interest to the Managing
General Partner............................................................ 4
AWP Olmos Field............................................................ 4
Fair Market Value Opinion of J.R. Butler and Company Regarding
AWP Olmos Field Property Interest.......................................... 4
AWP Olmos Field Sale....................................................... 6
Fairness of Proposed AWP Sale.............................................. 7
Managing General Partner Benefits.......................................... 8
GLOSSARY OF TERMS.............................................................10
VOTING ON THE PROPOSAL........................................................11
Vote Required..............................................................11
Proxies; Revocation........................................................11
No Appraisal or Dissenters' Rights Provided................................11
Solicitation...............................................................12
RISK FACTORS..................................................................12
Uncertainty of Liquidating Distributions...................................12
Undetermined Sales Prices; Volatility of Oil and Gas Prices................12
Potential Purchase of Property Interests by Managing General Partner.......12
Dependence on Operating Partnership........................................13
Prices Used for Calculation of PV-10 Value of Proved Reserves..............13
THE PROPOSAL..................................................................13
General ..................................................................13
Partnership Financial Performance and Condition............................14
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Estimates of Liquidating Distribution Amount...............................17
Fairness of the Proposal; Comparison of Sale Versus Continuing Operations..20
Reasons for the Proposal...................................................21
Simultaneous Proposal to Operating Partnership.............................22
Steps to Implement the Proposal............................................22
Impact on the Managing General Partner.....................................24
Recommendation of the Managing General Partner.............................25
FEDERAL INCOME TAX CONSEQUENCES...............................................25
General ..................................................................25
Tax Treatment of Tax Exempt Plans..........................................26
Tax Treatment of Interest Holders Subject to Federal Income Tax Due
to Debt-financing..........................................................27
Taxable Gain or Loss Upon Sale of Properties...............................27
Liquidation of the Partnership.............................................28
Capital Gains Tax..........................................................28
Passive Loss Limitations...................................................28
BUSINESS OF THE PARTNERSHIP...................................................29
Reserves ..................................................................29
The Managing General Partner...............................................30
Transactions Between the Managing General Partner and the Partnership......30
No Trading Market..........................................................31
Principal Holders of SDIs..................................................31
Approvals..................................................................31
Legal Proceedings..........................................................31
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE AND
ATTACHMENT OF INFORMATION HERETO..............................................32
OTHER BUSINESS................................................................32
FORM OF PROXY
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