Unit 2009 Employee Oil and Gas Limited Partnership Agreement EX-10.2.31 2 dex10231.htm UNIT 2009 EMPLOYEE OIL AND GAS LIMITED PARTNERSHIP AGREEMENT

Exhibit 10.2.31

CONFIDENTIAL

For Private Placement Purposes Only

UNIT 2009 EMPLOYEE OIL AND GAS LIMITED PARTNERSHIP

7130 South Lewis Avenue, Suite 1000

Tulsa, Oklahoma 74136

(918) 493-7700

A PRIVATE OFFERING

OF

UNITS OF LIMITED PARTNERSHIP INTEREST

 

THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER APPLICABLE STATE SECURITIES ACTS IN RELIANCE ON EXEMPTIONS PROVIDED BY SUCH ACTS. THESE SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION UNDER SUCH ACTS OR AN OPINION OF COUNSEL ACCEPTABLE TO THE GENERAL PARTNER THAT SUCH REGISTRATION IS NOT REQUIRED. FURTHER, THE RESALE OF A UNIT MAY RESULT IN SUBSTANTIAL TAX LIABILITY TO THE INVESTOR. SEE “FEDERAL INCOME TAX CONSIDERATIONS.” ACCORDINGLY, THESE UNITS SHOULD BE CONSIDERED ONLY FOR LONG-TERM INVESTMENT. SEE “PLAN OF DISTRIBUTION — SUITABILITY OF INVESTORS.”

 

THE INFORMATION CONTAINED IN THIS PRIVATE OFFERING MEMORANDUM IS PROVIDED BY THE GENERAL PARTNER SOLELY FOR THE PERSONS RECEIVING IT FROM THE GENERAL PARTNER AND ANY REPRODUCTION OR DISTRIBUTION OF THIS PRIVATE OFFERING MEMORANDUM, IN WHOLE OR IN PART, OR THE DIVULGENCE OF ANY OF ITS CONTENTS IS PROHIBITED AND MAY CONSTITUTE A VIOLATION OF CERTAIN STATE SECURITIES LAWS. THE OFFEREE, BY ACCEPTING DELIVERY OF THIS PRIVATE OFFERING MEMORANDUM, AGREES TO RETURN IT AND ALL ENCLOSED DOCUMENTS TO THE GENERAL PARTNER IF THE OFFEREE DOES NOT UNDERTAKE TO PURCHASE ANY OF THE UNITS OFFERED HEREBY.

 

Private Offering Memorandum Date January 13, 2009


900 Preformation

Units of Limited Partnership Interest

in the

UNIT 2009 EMPLOYEE

OIL AND GAS LIMITED PARTNERSHIP

 

$1,000 Per Unit Plus Possible

Additional Assessments of $100 Per Unit

(Minimum Investment - 2 Units)

Minimum Aggregate Subscriptions Necessary

to Form Partnership - 50 Units

 

A maximum of 900 (minimum of 50) units of limited partnership interest (“Units”) in the UNIT 2009 EMPLOYEE OIL AND GAS LIMITED PARTNERSHIP, a proposed Oklahoma limited partnership (the “Partnership”), are being offered privately only to certain employees of Unit Corporation (“UNIT”) and its subsidiaries and the directors of UNIT at a price of $1,000 per Unit. Subscriptions shall be for not less than 2 Units ($2,000). The Partnership is being formed for the purpose of conducting oil and gas drilling and development operations. Purchasers of the Units will become Limited Partners in the Partnership. Unit Petroleum Company (“UPC” or the “General Partner”) will serve as General Partner of the Partnership. UPC’s address is 7130 South Lewis Avenue, Suite 1000, Tulsa, Oklahoma 74136, and telephone (918) 493-7700.

THE RIGHTS AND OBLIGATIONS OF THE GENERAL PARTNER

AND THE LIMITED PARTNERS ARE GOVERNED BY THE

AGREEMENT OF LIMITED PARTNERSHIP (THE “AGREEMENT”),

A COPY OF WHICH ACCOMPANIES THIS MEMORANDUM AND IS

INCORPORATED HEREIN BY REFERENCE

AN INVESTMENT IN THE UNITS IS SPECULATIVE AND INVOLVES

A HIGH DEGREE OF RISK. SEE “RISK FACTORS.” CERTAIN

SIGNIFICANT RISKS INCLUDE:

 

   

Drilling to establish productive oil and natural gas properties is inherently speculative.

 

   

Participants will rely solely on the management capability and expertise of the General Partner.

 

   

Limited Partners must assume the risks of an illiquid investment.

 

   

Investment in the Units is suitable only for investors having sufficient financial resources and who desire a long-term investment.

 

   

Conflicts of interest exist and additional conflicts of interest may arise between the General Partner and the Limited Partners, and there are no pre-determined procedures for resolving any such conflicts.

 

   

Significant tax considerations to be considered by an investor include:

 

   

possible audit of income tax returns of the Partnership and/or the Limited Partners and adjustment to their reported tax liabilities;

 

   

a Limited Partner will not benefit from his or her share of Partnership deductions in excess of his or her share of Partnership income unless he or she has passive income from other activities; and

 

ii


   

the amount of any cash distribution which a Limited Partner may receive from the Partnership could be insufficient to pay the tax liability incurred by such Limited Partner with respect to income or gain allocated to such Limited Partner by the Partnership.

 

   

There can be no assurance that the Partnership will have adequate funds to provide cash distributions to the Limited Partners. The amount and timing of any such distributions will be within the complete discretion of the General Partner.

 

   

Certain provisions in the Agreement modify what would otherwise be the applicable Oklahoma law as to the fiduciary standards for general partners in limited partnerships. Those standards in the Agreement could be less advantageous to the Limited Partners than the corresponding fiduciary standards otherwise applicable under Oklahoma law. The purchase of Units may be deemed as consent to the fiduciary standards set forth in the Agreement.

 

EXCEPT AS STATED UNDER “ADDITIONAL INFORMATION,” NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PRIVATE OFFERING MEMORANDUM IN CONNECTION WITH THIS OFFERING AND SUCH REPRESENTATIONS, IF ANY, MAY NOT BE RELIED ON. THE INFORMATION CONTAINED IN THIS PRIVATE OFFERING MEMORANDUM IS AS OF THE DATE OF THIS MEMORANDUM UNLESS ANOTHER DATE IS SPECIFIED.

 

PROSPECTIVE INVESTORS ARE NOT TO CONSTRUE THE CONTENTS OF THIS PRIVATE OFFERING MEMORANDUM AS LEGAL, BUSINESS, OR TAX ADVICE. EACH INVESTOR SHOULD CONSULT HIS OR HER OWN ATTORNEY, BUSINESS ADVISOR AND TAX ADVISOR AS TO LEGAL, BUSINESS, TAX AND RELATED MATTERS CONCERNING HIS OR HER INVESTMENT. PROSPECTIVE INVESTORS ARE URGED TO REQUEST ANY ADDITIONAL INFORMATION THEY MAY CONSIDER NECESSARY TO MAKE AN INFORMED INVESTMENT DECISION.

 

THE SECURITIES OFFERED BY THIS MEMORANDUM HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION, THE OKLAHOMA SECURITIES COMMISSION OR BY THE SECURITIES REGULATORY AUTHORITY OF ANY OTHER STATE, NOR HAS ANY COMMISSION OR AUTHORITY PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING OR THE ACCURACY OR ADEQUACY OF THIS PRIVATE OFFERING MEMORANDUM. ANY REPRESENTATION CONTRARY TO THE FOREGOING IS UNLAWFUL.

 

THESE UNITS ARE BEING OFFERED SUBJECT TO PRIOR SALE, TO WITHDRAWAL, CANCELLATION OR MODIFICATION OF THE OFFER WITHOUT NOTICE AND TO THE FURTHER CONDITIONS SET FORTH HEREIN.

 

iii


ADDITIONAL INFORMATION

Each prospective investor, or his or her qualified representative named in writing, has the opportunity (1) to obtain additional information necessary to verify the accuracy of the information supplied herewith or hereafter, and (2) to ask questions and receive answers concerning the terms and conditions of the offering. If you desire to avail yourself of the opportunity, please contact:

Mark E. Schell

Senior Vice President and General Counsel

Unit Petroleum Company

7130 South Lewis Avenue, Suite 1000

Tulsa, Oklahoma 74136

(918) 493-7700

The following documents and instruments are available to qualified offerees on written request:

 

1. Amended and Restated Certificate of Incorporation and By-Laws of UNIT.

 

2. Certificate of Incorporation and By-Laws of Unit Petroleum Company.

 

3. UNIT’s Employees’ Thrift Plan.

 

4. Restated Unit Corporation Amended and Restated Stock Option Plan and related prospectuses covering shares of Common Stock issuable on exercise of outstanding options.

 

5. UNIT’s 2002 Non-Employee Directors’ Stock Option Plan.

 

6. The Credit Agreement and the notes payable of UNIT.

 

7. All periodic reports on Forms 10-K, 10-Q and 8-K and all proxy materials filed by or on behalf of UNIT with the SEC under the Securities Exchange Act of 1934, as amended, during calendar year 2008, the annual report to shareholders and all quarterly reports to shareholders submitted by UNIT to its shareholders during calendar year 2008.

 

8. Unit’s current Registration Statements on Form S-3 and all supplemental prospectuses filed with the SEC under Rule 424.

 

9. The agreements of limited partnership for the prior oil and gas drilling programs and prior employee programs of UPC, UNIT and Unit Drilling and Exploration Company (“UDEC”).

 

10. All periodic reports filed with the SEC and all reports and information provided to limited partners in all limited partnerships of which UPC, UNIT or UDEC now serves or has served in the past as a general partner.

 

11. The agreement of limited partnership for the Unit 1986 Energy Income Limited Partnership.

 

iv


SUMMARY OF CONTENTS

 

    

Page

SUMMARY OF PROGRAM

   1

Terms of the Offering

   1

Risk Factors

   2

Additional Financing

   3

Proposed Activities

   4

Application of Proceeds

   4

Participation in Costs and Revenues

   5

Compensation

   5

Federal Income Tax Considerations; Opinion of Counsel

   5

RISK FACTORS

   6

INVESTMENT RISKS

   6

TAX STATUS AND TAX RISKS

   11

OPERATIONAL RISKS

   12

TERMS OF THE OFFERING

   14

General

   14

Limited Partnership Interests

   14

Subscription Rights

   15

Payment for Units; Delinquent Installment

   15

Right of Presentment

   16

Rollup or Consolidation of Partnership

   17

ADDITIONAL FINANCING

   18

Additional Assessments

   18

Prior Programs

   18

Partnership Borrowings

   18

PLAN OF DISTRIBUTION

   19

Suitability of Investors

   19

RELATIONSHIP OF THE PARTNERSHIP, THE GENERAL PARTNER AND AFFILIATES

   20

PROPOSED ACTIVITIES

   20

General

   20

Partnership Objectives

   22

Areas of Interest

   23

Transfer of Properties

   23

Record Title to Partnership Properties

   23

Marketing of Reserves

   23

Conduct of Operations

   24

APPLICATION OF PROCEEDS

   24

PARTICIPATION IN COSTS AND REVENUES

   25

COMPENSATION

   26

Supervision of Operations

   26

Purchase of Equipment and Provision of Services

   27

Prior Programs

   27

MANAGEMENT

   29

The General Partner

   29

Officers, Directors and Key Employees

   29

Prior Employee Programs

   32

Ownership of Common Stock

   33

Interest of Management in Certain Transactions

   34

CONFLICTS OF INTEREST

   34

Acquisition of Properties and Drilling Operations

   34

Participation in UNIT’s Drilling or Income Programs

   35

Transfer of Properties

   36

Partnership Assets

   36

Transactions with the General Partner or Affiliates

   37

Right of Presentment Price Determination

   37

Receipt of Compensation Regardless of Profitability

   37

Legal Counsel

   37

FIDUCIARY RESPONSIBILITY

   37

General

   37

 

v


Liability and Indemnification

   38

PRIOR ACTIVITIES

   39

Prior Employee Programs

   41

Results of the Prior Oil and Gas Programs

   42

federal income tax considerations

   50

Summary of Conclusions

   51

General Tax Effects of Partnership Structure

   53

Ownership of Partnership Properties

   53

Intangible Drilling and Development Costs Deductions

   54

Depletion Deductions

   54

Production Activities Deduction

   55

Depreciation Deductions

   55

Transaction Fees

   55

Basis and At Risk Limitations

   56

Passive Loss Limitations

   56

Gain or Loss on Sale of Partnership Property

   57

Partnership Distributions

   58

Partnership Allocations

   58

Administrative Matters

   58

Accounting Methods and Periods

   60

State and Local Taxes

   60

COMPETITION, MARKETS AND REGULATION

   60

Marketing of Production

   60

Regulation of Partnership Operations

   61

Natural Gas Price Regulation

   61

Oil Pipeline Regulation

   62

State Regulation of Oil and Gas Production

   62

Legislative and Regulatory Production and Pricing Proposals

   62

Production and Environmental Regulation

   63

SUMMARY OF THE LIMITED PARTNERSHIP AGREEMENT

   64

Partnership Distributions

   64

Deposit and Use of Funds

   64

Power and Authority

   64

Rollup or Consolidation of the Partnership

   65

Limited Liability

   65

Records, Reports and Returns

   66

Transferability of Interests

   66

Amendments

   67

Voting Rights

   68

Exculpation and Indemnification of the General Partner

   68

Termination

   68

Insurance

   69

COUNSEL

   69

GLOSSARY

   69

FINANCIAL STATEMENTS

   73

 

EXHIBIT A    - AGREEMENT OF LIMITED PARTNERSHIP
EXHIBIT B    - LEGAL OPINION

 

vi


SUMMARY OF PROGRAM

This summary is not a complete description of the terms and consequences of an investment in the Partnership and is qualified in its entirety by the more detailed information appearing throughout this Private Offering Memorandum (this “Memorandum”). For definitions of certain terms used in this Memorandum, see “GLOSSARY.”

Terms of the Offering

Limited Partnership Interests. Unit 2009 Employee Oil and Gas Limited Partnership, a proposed Oklahoma limited partnership (the “Partnership”), offers 900 preformation units of limited partnership interest (“Units”) in the Partnership. The offer is made only to certain employees of Unit Corporation (“UNIT”) and its subsidiaries and directors of UNIT (see “TERMS OF THE OFFERING — Subscription Rights”). Unless the context otherwise requires, all references in this Memorandum to UNIT shall include all or any of its subsidiaries. Unit Petroleum Company (“UPC” or the “General Partner”), a wholly owned subsidiary of UNIT, will serve as General Partner of the Partnership.

To invest in the Units, the Limited Partner Subscription Agreement and Suitability Statement (the “Subscription Agreement”) (see Attachment I to Exhibit A to this Memorandum) must be signed and forwarded to the offices of the General Partner at its address listed on the cover of this Memorandum. The Subscription Agreement must be received by the General Partner not later than 5:00 P.M. Central Standard Time on January 30, 2009 (extendable by the General Partner for up to 30 days). Subscription Agreements may be delivered to the office of the General Partner. No payment is required on delivery of the Subscription Agreement. Payment for the Units will be made either (i) in four equal Installments, the first Installment being due on March 15, 2009 and the remaining three Installments being due on June 15, September 15, and December 15, 2009, respectively, or (ii) through equal deductions from 2009 salary commencing immediately after formation of the Partnership.

The purchase price of each Unit is $1,000, and the minimum permissible purchase is two Units ($2,000) for each subscriber. Additional Assessments of up to $100 per Unit may be required (see “ADDITIONAL FINANCING — Additional Assessments”). Maximum purchases by employees (other than directors) will be for an amount equal to one-half of their base salaries for calendar year 2008; provided, however, that the General Partner may, at its discretion, accept subscriptions for greater amounts. Each member of the Board of Directors of UNIT may subscribe for up to 300 Units ($300,000). The Partnership must sell at least 50 Units ($50,000) before the Partnership will be formed. No Units will be offered for sale after the Effective Date (see “GLOSSARY”) except on compliance with the provisions of Article XIII of the Agreement. The General Partner may, at its option, purchase Units as a Limited Partner, including any amount that may be necessary to meet the minimum number of Units required for formation of the Partnership. The Partnership will terminate on December 31, 2039, unless it is terminated earlier under the provisions of the Agreement or by operation of law. See “TERMS OF THE OFFERING — Limited Partnership Interests”; “TERMS OF THE OFFERING — Subscription Rights”; and “SUMMARY OF THE LIMITED PARTNERSHIP AGREEMENT — Termination.”

The offering will be made privately by the officers and directors of UPC or UNIT, except that in states which require participation by a registered broker-dealer in the offer and sale of securities, the Units will be offered through such broker-dealer as may be selected by the General Partner. Any participating broker-dealer may be reimbursed for actual out-of-pocket expenses. Such reimbursements will be borne by the General Partner.

Subscription Rights. Only certain salaried employees of UNIT or any of its subsidiaries whose annual base salaries for 2008 have been set at $36,000 or more and directors of UNIT are eligible to subscribe for Units. Employees may not purchase Units for an amount in excess of one-half of their base salaries for calendar year 2008; provided, however, that the General Partner may, at its discretion, accept a subscription for a greater amount. Directors’ subscriptions may not be for more than 300 Units ($300,000). Only employees and directors who are U.S. citizens are eligible to participate in the offering. In addition, employees and directors must be able to bear the economic risks of an investment in the Partnership and must have sufficient investment experience and expertise to evaluate the risks and merits of such an investment. See “TERMS OF THE OFFERING — Subscription Rights.”

 

1


Right of Presentment. After December 31, 2010, the Limited Partners will have the right to present their Units to the General Partner for purchase. The General Partner will not be obligated to purchase more than 20% of the then outstanding Units in any one calendar year. The purchase price to be paid for the Units will be determined by a specific valuation formula. See “TERMS OF THE OFFERING — Right of Presentment” for a description of the valuation formula and a discussion of the manner in which the right of presentment may be exercised by the Limited Partners.

Risk Factors

An investment in the Partnership has many risks. The “RISK FACTORS” section of this Memorandum contains a detailed discussion of the most important risks, organized into Investment Risks (the risks related to the Partnership’s investment in oil and gas properties and drilling activities, to an investment in the Partnership and to the provisions of the Agreement); Tax Risks (the risks arising from the tax laws as they apply to the Partnership and its investment in oil and gas properties and drilling activities); and Operational Risks (the risks involved in conducting oil and gas operations). The following are certain of the risks which are more fully described under “RISK FACTORS”. Each prospective investor should review the “RISK FACTORS” section carefully before deciding to subscribe for Units.

Investment Risks:

 

   

Oil and gas prices have declined significantly during recent months in a deteriorating national and global economic environment. A slowdown in the national and global economy will also result (to varying degrees) in a reduction in the demand for oil and gas products. Significant reductions in demand for oil and gas would result in lower prices for our products and force us to curtail our production of those products which, in turn, would affect our financial results.

 

   

Future oil and natural gas prices are unpredictable. Partnership’s distributions, if any, to the Limited Partners will be adversely affected by declines in oil and natural gas prices.

 

   

The General Partner is authorized under the Agreement to cause, in its sole discretion, the sale or transfer of the Partnership’s assets to, or the merger or consolidation of the Partnership with, another partnership, corporation or other business entity. Such action could have a material impact on the nature of the investment of all Limited Partners.

 

   

Except for certain transfers to the General Partner and other restricted transfers, the Agreement prohibits a Limited Partner from transferring Units. Thus, except for the limited right of the Limited Partners after December 31, 2010 to present their Units to the General Partner for purchase, Limited Partners will not be able to liquidate their investments.

 

   

The Partnership could be formed with as little as $50,000 in Capital Contributions (excluding the Capital Contributions of the General Partner). As the total amount of Capital Contributions to the Partnership will determine the number and diversification of Partnership Properties, the ability of the Partnership to pursue its investment objectives may be restricted in the event that the Partnership receives only the minimum amount of Capital Contributions.

 

   

The drilling and completion operations to be undertaken by the Partnership for the development of oil and natural gas reserves involve the possibility of a total loss of an investment in the Partnership.

 

   

The General Partner will have the exclusive management and control of all aspects of the business of the Partnership. The Limited Partners will have no opportunity to participate in the management and control of any aspect of the Partnership’s activities. Accordingly, the Limited Partners will be entirely dependent on the management skills and expertise of the General Partner.

 

   

Conflicts of interest exist and additional conflicts of interest may arise between the General Partner and the Limited Partners, and there are no pre-determined procedures for resolving any conflicts. Accordingly the General Partner could cause the Partnership to take actions to the benefit of the General Partner but not to the benefit of the Limited Partners.

 

2


   

Certain provisions in the Agreement modify what would otherwise be the applicable Oklahoma law as to the fiduciary standards for a general partner in a limited partnership. The fiduciary standards in the Agreement could be less advantageous to the Limited Partners and more advantageous to the General Partner than corresponding fiduciary standards otherwise applicable under Oklahoma law. The purchase of Units may be deemed as consent to the fiduciary standards set forth in the Agreement.

 

   

There can be no assurances that the Partnership will have adequate funds to provide cash distributions to the Limited Partners. The amount and timing of any such distributions will be within the complete discretion of the General Partner.

 

   

The amount of any cash distributions which Limited Partners may receive from the Partnership could be insufficient to pay the tax liability incurred by such Limited Partners with respect to income or gain allocated to such Limited Partners by the Partnership.

Tax Risks:

 

   

Tax laws and regulations applicable to partnership investments may change at any time and these changes may be applied retroactively.

 

   

Certain allocations of income, gain, loss and deduction between the Partners may be challenged by the Internal Revenue Service (the “Service”). A successful challenge would likely result in a Limited Partner having to report additional taxable income or being denied a deduction.

 

   

It is anticipated that a Limited Partner will be allocated deductions in excess of his or share of Partnership income for the first year(s) of the Partnership. Unless a Limited Partner has substantial current taxable income from trade or business activities in which the Limited Partner does not materially participate, his or her use of deductions allocated from the Partnership may be limited.

 

   

Federal income tax payable by a Limited Partner by reason of his or her allocated share of Partnership income for any year may exceed the Partnership distributions to that Limited Partner for the year.

Operational Risks:

 

   

The search for oil and gas is highly speculative and the drilling activities conducted by the Partnership may result in wells that may be dry or wells that do not produce sufficient oil and gas to produce a profit or result in a return of the Limited Partners’ investment.

 

   

Certain hazards are encountered in drilling wells some of which could lead to substantial liabilities to third parties or governmental entities. Also, governmental regulations or new laws relating to environmental matters could increase Partnership costs, delay or prevent drilling a well, require the Partnership to cease operations in certain areas or expose the Partnership to significant liabilities for violations of laws and regulations.

Additional Financing

Additional Assessments. After the Aggregate Subscription has been fully expended or committed and the General Partner’s Minimum Capital Contribution has been fully expended, the General Partner may make one or more calls for Additional Assessments if additional funds are required to pay the Limited Partners’ share of Drilling Costs, Special Production and Marketing Costs or Leasehold Acquisition Costs. The maximum amount of total Additional Assessments which may be called for by the General Partner is $100 per Unit. See “ADDITIONAL FINANCING — Additional Assessments.”

 

3


Partnership Borrowings. After the General Partner’s Minimum Capital Contribution has been expended, the General Partner may cause the Partnership to borrow funds required to pay Drilling Costs, Special Production and Marketing Costs or Leasehold Acquisition Costs of Productive properties. The General Partner may also, but is not required to, advance funds to the Partnership to pay those costs. See “ADDITIONAL FINANCING — Partnership Borrowings.”

Proposed Activities

General. The Partnership is being formed for the purposes of conducting oil and gas drilling and development operations and acquiring producing oil and gas properties. The Partnership will, with certain limited exceptions, participate on a proportionate basis with UPC in each producing oil and gas lease acquired and in each oil and gas well participated in by UPC for its own account during the period from January 1, 2009, if the Partnership is formed before that date or from the date of the formation of the Partnership if formed after January 1, 2009, until December 31, 2009, and will, with certain limited exceptions, serve as a co-general partner with UPC in any drilling or income programs which may be formed by the General Partner in 2009. See “PROPOSED ACTIVITIES.”

Partnership Objectives. The Partnership is being formed to provide eligible employees and directors the opportunity to participate in the oil and gas exploration and producing property acquisition activities of UPC during 2009. UNIT hopes that participation in the Partnership will provide the participants with greater proprietary interests in UPC’s operations and the potential for realizing a more direct benefit in the event these operations prove to be profitable. The Partnership has been structured to achieve the objective of providing the Limited Partners with essentially the same economic returns that UPC realizes from the wells drilled or acquired during 2009.

Application of Proceeds

The offering proceeds will be used to pay the Leasehold Acquisition Costs incurred by the Partnership to acquire those producing oil and gas leases in which the Partnership participates and the Leasehold Acquisition Costs, exploration, drilling and development costs incurred by the Partnership under the drilling activities in which the Partnership participates. The General Partner estimates (based on historical operating experience) that those costs will be expended as shown below based on the assumption of a maximum number of subscriptions in the first column and a minimum number of subscriptions in the second column:

 

     $900,000
Program
   $50,000
Program

Leasehold Acquisition Costs of Properties to Be Drilled

   $ 45,000    $ 2,500

Drilling Costs of Exploratory Wells(1)

     45,000      2,500

Drilling Costs of Development Wells(1)

     630,000      35,000

Leasehold Acquisition Costs of Productive Properties

     180,000      10,000

Reimbursement of General Partner’s Overhead Costs(2)

     —        —  
             

Total

   $ 900,000    $ 50,000

(1) See “GLOSSARY.”
(2) The Agreement provides that the General Partner will be reimbursed by the Partnership for that part of its general and administrative overhead expense attributable to the conduct of Partnership business and affairs but that any reimbursement will be made only out of Partnership Revenue. See “COMPENSATION.”

 

4


Participation in Costs and Revenues

Partnership costs, expenses and revenues will be allocated among the Partners in the following percentages:

 

      General
Partner
    Limited
Partners
 

COSTS AND EXPENSES

    

Organizational and offering costs of the Partnership and any drilling or income programs in which the Partnership participates as a co-general partner

   100 %   0 %

All other Partnership costs and expenses

    

Prior to time Limited Partner Capital Contributions are entirely expended

   1 %   99 %

After expenditure of Limited Partner Capital Contributions and until expenditure of General Partner’s Minimum Capital Contribution

   100 %   0 %

After expenditure of General Partner’s Minimum Capital Contribution

   General Partner’s

Percentage(1)

 

 

  Limited Partners’

Percentage(1)

 

 

REVENUES

   General Partner’s

Percentage(1)

 

 

  Limited Partners’

Percentage(1)

 

 

(1) See “GLOSSARY.”

Compensation

The General Partner will not receive any management fees in connection with the operation of the Partnership. The Partnership will reimburse the General Partner for that portion of its general and administrative overhead expense attributable to its conduct of Partnership business and affairs. See “COMPENSATION.”

Federal Income Tax Considerations; Opinion of Counsel

The General Partner has received an opinion from its tax counsel, Conner & Winters, LLP (“Conner & Winters”), concerning all material federal income tax issues applicable to an investment in the Partnership. To be fully understood, the complete discussion of these matters set forth in the full tax opinion in Exhibit B should be read by each prospective investor. Based on current laws, regulations, interpretations, and court decisions, Conner & Winters has rendered its opinion that (i) the material federal income tax benefits in the aggregate from an investment in the Partnership will be realized; (ii) the Partnership will be treated as a partnership for federal income tax purposes and not as a corporation, an association taxable as a corporation or a publicly traded partnership; (iii) to the extent the Partnership’s wells are timely drilled and its drilling costs are timely paid, then subject to the limitations on deductions discussed in such opinion, the Partners will be entitled to their pro rata shares of the Partnership’s intangible drilling and development costs (“IDC”) paid in 2009; (iv) for most Limited Partners, the Partnership’s operations will be considered a passive activity within the meaning of Section 469 of the Internal Revenue Code of 1986, as amended (the “Code”), and losses generated therefrom will be limited by the passive activity provisions of the Code; and (v) to the extent provided in the opinion, the Partners’ distributive shares of Partnership tax items will be determined and allocated substantially in accordance with the terms of the Partnership Agreement.

 

5


Due to the lack of authority regarding, or the essentially factual nature of certain issues, Conner & Winters expresses no opinion on the following: (i) the impact of an investment in the Partnership on an investor’s alternative minimum tax liability; (ii) whether any interest incurred by a Partner with respect to any borrowings incurred to purchase Units will be deductible or subject to limitations on deductibility; and (iii) whether the Partnership will be treated as the tax owner of Partnership Properties acquired by the General Partner as nominee for the Partnership.

The opinion of Conner & Winters was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed by the Service. The opinion of Conner & Winters was written to support the promotion or marketing of Units in the Partnership. Prospective investors should seek advice based on their particular circumstances from an independent tax advisor.

THIS MEMORANDUM CONTAINS AN EXPLANATION OF THE MORE SIGNIFICANT TERMS AND PROVISIONS OF THE AGREEMENT OF LIMITED PARTNERSHIP WHICH IS ATTACHED AS EXHIBIT A. THE SUMMARY OF THE AGREEMENT CONTAINED IN THIS MEMORANDUM IS QUALIFIED IN ITS ENTIRETY BY SUCH REFERENCE AND ACCORDINGLY THE AGREEMENT SHOULD BE CAREFULLY REVIEWED AND CONSIDERED.

RISK FACTORS

Prospective purchasers of Units should carefully study the information contained in this Memorandum and should make their own evaluations of the probability for the discovery of oil and natural gas through exploration.

INVESTMENT RISKS

Financial Risks of Drilling Operations

The Partnership will participate with the General Partner (including, with certain limited exceptions, other drilling programs sponsored by it) and, in many cases, other parties (“joint interest parties”) in connection with drilling operations conducted on properties in which the Partnership has an interest. It is not anticipated that most, if any, of these drilling operations will be conducted under turnkey drilling contracts and, thus, all of the parties participating in the drilling operations on a particular property, including the Partnership, will be fully liable for their proportionate share of all the costs of those operations even if the actual costs are much more than the original cost estimates. Further, if any joint interest party fails to pay its share of the costs, the other joint interest parties may be required to pay the deficiency until, if ever, it can be collected from the defaulting party. As a result of forced pooling or similar proceedings (see “COMPETITION, MARKETS AND REGULATION”), the Partnership may acquire a larger ownership interest in certain Partnership Properties than originally anticipated and, thus, be required to bear a greater share of the costs of operations. Because of the foregoing, the Partnership could become liable for amounts significantly more than the amounts originally anticipated to be spent in connection with its operations and would have only limited means for providing the additional needed funds (see “ADDITIONAL FINANCING”). Also, if a company that operates a Partnership Well does not or cannot pay the costs and expenses of drilling or operating the well, the Partnership’s interest in that well may become subject to liens and claims of creditors who supplied services or materials in connection with such operations even though the Partnership may have previously paid its share of such costs and expenses to the operator. If the operator is unable or unwilling to pay the amount due, the Partnership might have to pay its share of the amounts owing to such creditors in order to preserve its interest in the well which would mean that it would, in effect, be paying for certain of such costs and expenses twice.

Dependence on General Partner

The Limited Partners will acquire interests in the Partnership, not in the General Partner or UNIT. Limited Partners will not participate in either increases or decreases in the General Partner’s or UNIT’s net worth or the value of either’s common stock. Nevertheless, because the General Partner is primarily responsible for the proper conduct of the Partnership’s business and affairs and is obligated to provide certain funds that will be required in connection with the Partnership’s operations, a significant reversal of the General Partners or UNIT’s finances could have an adverse effect on the Partnership and the Limited Partners’ interests in the Partnership.

 

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Under the Agreement, UPC is designated as the General Partner of the Partnership and is given the exclusive authority to manage and operate the Partnership’s business. See “SUMMARY OF THE LIMITED PARTNERSHIP AGREEMENT — Power and Authority”. Accordingly, Limited Partners must rely solely on the General Partner to make all decisions on behalf of the Partnership, since the Limited Partners will have no role in the management of the business of the Partnership.

The Partnership’s success will depend, in part, on the management provided by the General Partner, the ability of the General Partner to select and acquire oil and gas properties on which Partnership Wells capable of producing oil and natural gas in commercial quantities may be drilled, to fund the acquisition of revenue producing properties, and to market oil and natural gas produced from Partnership Wells.

Conflicts of Interest

Certain of UNIT’s subsidiaries have engaged in oil and gas exploration and development and in the acquisition of producing properties for their own account and as the sponsors of drilling and income programs formed with third party investors. It is anticipated that those subsidiaries will continue to engage in those activities. However, with certain exceptions, it is likely that the Partnership will participate as a working interest owner in all producing oil and gas leases acquired and in all oil and gas wells participated in by the General Partner for its own account during the period from January 1, 2009 (if the Partnership is formed before that date) or from the date of the formation of the Partnership, if after January 1, 2009, through December 31, 2009 and, with certain limited exceptions, will be a co-general partner of any drilling or income programs, or both, formed by the General Partner or UNIT in 2009. The General Partner will determine which prospects will be acquired or drilled. With respect to prospects to be drilled, certain of the wells which are drilled for the separate account of the Partnership and the General Partner may be drilled on prospects on which initial drilling operations were conducted by the General Partner before the formation of the Partnership. Further, certain Partnership Wells will be drilled on prospects on which the General Partner and possibly future employee programs may conduct additional drilling operations in years after 2009. Except with respect to its participation as a co-general partner of any drilling or income program sponsored by the General Partner or UNIT, the Partnership will have an interest only in those wells started in 2009 and will have no rights in production from wells started in years other than 2009. Likewise, if additional interests are acquired in wells participated in by the Partnership after 2009, the Partnership will generally not be entitled to share in the acquisition of those additional interests. See “CONFLICTS OF INTEREST — Acquisition of Properties and Drilling Operations.”

The Partnership may enter into contracts for the drilling of some or all of the Partnership Wells with affiliates of the General Partner. Likewise the Partnership may sell or market some or all of its natural gas production to an affiliate of the General Partner. These contracts may not necessarily be negotiated on an arm’s—length basis. The General Partner is subject to a conflict of interest in selecting an affiliate of the General Partner to drill the Partnership Wells and/or market the natural gas therefrom. The compensation under these contracts will be determined at the time each contract is made. The costs to be paid or the sale price to be received under each contract will be competitive with the costs charged or the prices paid by unaffiliated parties in the same general geographic region. The General Partner will make the determination of what are competitive rates or prices. No provision has been made for an independent review of the fairness and reasonableness of such compensation. See “CONFLICTS OF INTERESTS — Transactions with the General Partner or Affiliates.”

Prohibition on Transferability; Lack of Liquidity

Except for certain transfers (i) to the General Partner, (ii) to or for the benefit of the transferor Limited Partner or members of his or her immediate family sharing the same residence, and (iii) by reason of death or operation of law, a Limited Partner may not transfer or assign Units. The General Partner has agreed that it will, if requested at any time after December 31, 2010, buy Units for prices determined either by an independent petroleum engineering firm or the General Partner using the formula described under “TERMS OF THE OFFERING — Right of Presentment.” The General Partner’s obligation to purchase Units is limited and does not assure the liquidity of a Limited Partner’s investment, and the price received may be less than if the Limited Partner continued to hold his or her Units. In addition, similar commitments by the General Partner have been made (and may hereafter be made) to investors in other oil and gas drilling, income and employee programs. There can be no assurance that the General Partner will have the financial resources to honor its repurchase commitments. See “TERMS OF THE OFFERING — Right of Presentment.”

 

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Delay of Cash Distributions

For income tax purposes, a Limited Partner must report his or her distributive (allocated) share of the income, gains, losses and deductions of the Partnership whether or not cash distributions are made. No cash distributions are expected to be made earlier than the first quarter of 2010. In addition, to the extent that the Partnership uses its revenues to repay borrowings or to finance its activities (see “ADDITIONAL FINANCING”), the funds available for cash distributions by the Partnership will be reduced or may be unavailable. It is possible that the amount of tax payable by a Limited Partner on his or her distributive share of the income of the Partnership will exceed his or her cash distributions from the Partnership. See “FEDERAL INCOME TAX CONSIDERATIONS.”

If and when any distributions commence and their subsequent timing or amount cannot be accurately predicted. The decision as to whether or not the Partnership will make a cash distribution at any particular time will be made solely by the General Partner.

Limitations on Voting and Other Rights of Limited Partners

The Agreement, as permitted under the Oklahoma Revised Uniform Limited Partnership Act (the “Act”), eliminates or limits the rights of the Limited Partners to take certain actions, such as:

 

 

withdrawing from the Partnership,

 

 

transferring Units without restrictions, or

 

 

consenting to or voting on certain matters such as:

 

  (i) admitting a new General Partner,

 

  (ii) admitting Substituted Limited Partners, and

 

  (iii) dissolving the Partnership.

Furthermore, the Agreement imposes restrictions on the exercise of voting rights granted to Limited Partners. See “SUMMARY OF THE LIMITED PARTNERSHIP AGREEMENT — Voting Rights.” Without the provisions to the contrary which are contained in the Agreement, the Act provides that certain actions can be taken only with the consent of all Limited Partners. Those provisions of the Agreement which provide for or require the vote of the Limited Partners generally permit the approval of a proposal by the vote of Limited Partners holding a majority of the outstanding Units. See “SUMMARY OF THE LIMITED PARTNERSHIP AGREEMENT — Voting Rights.” Thus, Limited Partners who do not agree with or do not wish to be subject to the proposed action may nevertheless become subject to the action if the required majority approval is obtained. Notwithstanding the rights granted to Limited Partners under the Agreement and the Act, the General Partner retains substantial discretion as to the operation of the Partnership.

Rollup or Consolidation of Partnership

Under the terms of the Agreement, at any time two years or more after the Partnership has completed substantially all of its property acquisition, drilling and development operations, the General Partner is authorized to cause the Partnership to transfer its assets to, or to merge or consolidate with, another partnership or a corporation or other entity for the purpose of combining the oil and gas properties and other assets of the Partnership with those of other partnerships formed for investment or participation by the employees, directors and/or consultants of UNIT or any of its subsidiaries. Such transfer or combination may be effected without the vote, approval or consent of the Limited Partners. In such event, the Limited Partners will receive interests in the transferee or resulting entity which will mean that they will most likely participate in the results of a larger number of properties but will have proportionately smaller allocable interests therein. Any such transaction is required to be effected in a manner which UNIT and the General Partner believe is fair and equitable to the Limited Partners but there can be no assurance that such transaction will in fact be in the best interests of the Limited Partners. Limited Partners have

 

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no dissenters’ or appraisal rights under the terms of the Agreement or the Act. Such a transaction would result in the termination and dissolution of the Partnership. While there can be no assurance that the Partnership will participate in such a transaction, the General Partner currently anticipates that the Partnership will, at the appropriate time, be involved in such a transaction. See “TERMS OF OFFERING,” and “SUMMARY OF THE LIMITED PARTNERSHIP AGREEMENT.”

Partnership Borrowings

The General Partner has the authority to cause the Partnership to borrow funds to pay certain costs of the Partnership. While the use of financing to preserve the Partnership’s equity in oil and gas properties will be intended to increase the Partnership’s profits, such financing could have the effect of increasing the Partnership’s losses if the Partnership is unsuccessful. In addition, the Partnership may have to mortgage its oil and gas properties and other assets in order to obtain additional financing. If the Partnership defaults on such indebtedness, the lender may foreclose and the Partnership could lose its investment in such oil and gas properties and other assets. See “ADDITIONAL FINANCING — Partnership Borrowings.”

Limited Liability

Under the Act a Limited Partner’s liability for the obligations of the Partnership is limited to such Limited Partner’s Capital Contribution and such Limited Partner’s share of Partnership assets. In addition, if a Limited Partner receives a return of any part of his or her Capital Contribution, such Limited Partner is generally liable to the Partnership for a period of one year thereafter (or six years in the event such return is in violation of the Agreement) for the amount of the returned contribution. A Limited Partner will not otherwise be liable for the obligations of the Partnership unless, in addition to the exercise of his or her rights and powers as a Limited Partner, such Limited Partner participates in the control of the business of the Partnership.

The Agreement provides that by a vote of a majority in interest, the Limited Partners may effect certain changes in the Partnership such as termination and dissolution of the Partnership and amendment of the Agreement. The exercise of any of these and certain other rights is conditioned on receipt of an opinion by Conner & Winters for the Limited Partners or an order or judgment of a court of competent jurisdiction to the effect that the exercise of such rights will not result in the loss of the limited liability of the Limited Partners or cause the Partnership to be classified as an association taxable as a corporation (see “SUMMARY OF THE LIMITED PARTNERSHIP AGREEMENT — Amendments” and “SUMMARY OF THE LIMITED PARTNERSHIP AGREEMENT — Termination”). As a result of certain judicial opinions it is not clear that these rights will ever be available to the Limited Partners. Nevertheless, in spite of the receipt of any such opinion or judicial order, it is still possible that the exercise of any such rights by the Limited Partners may result in the loss of the Limited Partners’ limited liability. The Partnership will be governed by the Act. The Act expressly permits limited partners to vote on certain specified partnership matters without being deemed to be participating in the control of the Partnership’s business and, thus, should result in greater certainty and more easily obtainable opinions of Conner & Winters regarding the exercise of most of the Limited Partners’ rights.

If the Partnership is dissolved and its business is not to be continued, the Partnership will be wound up. In connection with the winding up of the Partnership, all of its properties may be sold and the proceeds thereof credited to the accounts of the Partners. Properties not sold will, on termination of the Partnership, be distributed to the Partners. The distribution of Partnership Properties to the Limited Partners would result in their having unlimited liability with respect to such properties. See “SUMMARY OF THE LIMITED PARTNERSHIP AGREEMENT — Limited Liability.”

Partnership Acting as Co-General Partner

It is anticipated that the Partnership will serve as a co-general partner in any drilling or income programs formed by the General Partner or UNIT during 2009. See “PROPOSED ACTIVITIES.” Accordingly, the Partnership generally will be liable for the obligation and recourse liabilities of any such drilling or income program formed. While a Limited Partner’s liability for such claims will be limited to such Limited Partners Capital Contribution and share of Partnership assets, such claims if satisfied from the Partnership’s assets could adversely affect the operations of the Partnership.

 

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Past-Due Installments; Acceleration; Additional Assessments

Installments and Additional Assessments (see “ADDITIONAL FINANCING”) are legally binding obligations and past-due amounts will bear interest at the rate set forth in the Agreement; provided, however, that if the General Partner determines that the total Aggregate Subscription is not required to fund the Partnership’s business and operations, then the General Partner may, at its sole option, elect to release the Limited Partners from their obligation to pay one or more Installments and amend any relevant Partnership documents accordingly. It is anticipated that the total Aggregate Subscription will be required to fund the Partnership’s business and operations. In the event an Installment is not paid when due and the General Partner has not released the Limited Partners from their obligation to pay such Installment, then the General Partner may, at its sole option, purchase all Units of the director or employee who fails to pay such Installment, at a price equal to the amount of the prior Installments paid by such person. The General Partner may also bring legal proceedings to collect any unpaid Installments not waived by it or Additional Assessments. In addition, as indicated under “TERMS OF THE OFFERING — Payment for Units; Delinquent Installment,” if an employee’s employment with or position as a director of the General Partner, UNIT or any affiliate thereof is terminated other than by reason of Normal Retirement (see “GLOSSARY”), death or disability prior to the time the full amount of the subscription price for his or her Units has been paid, all unpaid Installments not waived by the General Partner as described above will become due and payable on such termination.

Partnership Funds

Except for Capital Contributions, Partnership funds are expected to be commingled with funds of the General Partner or UNIT. Thus, Partnership funds could become subject to the claims of creditors of the General Partner or UNIT. The General Partner believes that its assets and net worth are such that the risk of loss to the Partnership by virtue of such fact is minimal but there can be no assurance that the Partnership will not suffer losses of its funds to creditors of the General Partner or UNIT.

Compliance with Federal and State Securities Laws

This offering has not been registered under the Securities Act of 1933, as amended, in reliance on exemptions from the registration provisions of that act. Further, these interests are being sold pursuant to exemptions from registration in the various states in which they are being offered and may be subject to additional restrictions in such jurisdictions on transfer. There is no assurance that the offering presently qualifies or will continue to qualify under such exemptions due to, among other things, the adequacy of disclosure and the manner of distribution of the offering, the existence of similar offerings conducted by the General Partner or UNIT or its affiliates in the past or in the future, a failure or delay in providing notices or other required filings, the conduct of other oil and gas activities by the General Partner or UNIT and its affiliates or the change of any securities laws or regulations.

If and to the extent suits for rescission are brought and successfully concluded for failure to register this offering or other offerings under the Securities Act of 1933, as amended, or state securities acts, or for acts or omissions constituting certain prohibited practices under any of said acts, both the capital and assets of the General Partner and the Partnership could be adversely affected, thus jeopardizing the ability of the Partnership to operate successfully. Further, the time and capital of the General Partner could be expended in defending an action by investors or by state or federal authorities even where the Partnership and the General Partner are ultimately exonerated.

Title to Properties

The Partnership Agreement empowers the General Partner, UNIT or any of their affiliates, to hold title to the Partnership Properties for the benefit of the Partnership. As such it is possible that the Partnership Properties could be subject to the claims of creditors of the General Partner. The General Partner is of the opinion that the likelihood of the occurrence of such claims is remote. However, the Partnership Property could be subject to claims and litigation in the event that the General Partner failed to pay its debts or became subject to the claims of creditors.

 

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Use of Partnership Funds to Exculpate and Indemnify the General Partner

The Agreement contains certain provisions which are intended to limit the liability of the General Partner and its affiliates for certain acts or omissions within the scope of the authority conferred on them by the Agreement. In addition, under the Agreement, the General Partner will be indemnified by the Partnership against losses, judgments, liabilities, expenses and amounts paid in settlement sustained by it in connection with the Partnership so long as the losses, judgments, liabilities, expenses or amounts were not the result of gross negligence or willful misconduct on the part of the General Partner. See “SUMMARY OF THE LIMITED PARTNERSHIP AGREEMENT — Exculpation and Indemnification of the General Partner.”

The Partnership Agreement May Limit the Fiduciary Obligation of the General Partner to the Partnership and the Limited Partners

The Agreement contains certain provisions which modify what would otherwise be the applicable Oklahoma law relating to the fiduciary standards of the General Partner to the Limited Partners. The fiduciary standards in the Agreement could be less advantageous to the Limited Partners and more advantageous to the General Partner than the corresponding fiduciary standards otherwise applicable under Oklahoma law (although there are very few legal precedents clarifying exactly what fiduciary standards would otherwise be applicable under Oklahoma law). The purchase of Units may be deemed as consent to the fiduciary standards set forth in the Agreement. See “FIDUCIARY RESPONSIBILITY.” As a result of these provisions in the Agreement, the Limited Partners may find it more difficult to hold the General Partner responsible for acting in the best interest of the Partnership and the Limited Partners than if the fiduciary standards of the otherwise applicable Oklahoma law governed the situation.

TAX STATUS AND TAX RISKS

It is possible that the tax treatment currently available with respect to oil and gas exploration and production will be modified or eliminated on a retroactive or prospective basis by legislative, judicial, or administrative actions. The limited tax benefits associated with oil and gas exploration do not eliminate the inherent economic risks. See “Federal Income Tax Considerations.”

Partnership Classification

Conner & Winters has rendered its opinion that the Partnership will be classified for federal income tax purposes as a partnership and not as a corporation, an association taxable as a corporation or a “publicly traded partnership.” Such opinion is not binding on the Service or the courts. If the Partnership were classified as a corporation, association taxable as a corporation or publicly traded partnership, any income, gain, loss, deduction, or credit of the Partnership would remain at the entity level, and not flow through to the Partners, the income of the Partnership would be subject to corporate tax rates at the entity level and distributions to the Partners could be considered dividend distributions. See “Federal Income Tax Considerations—General Tax Effects of Partnership Structure.”

Limited Partner Interests

It is anticipated that in the first year(s) of the Partnership Limited Partners will be allocated deductions in excess of their allocations of income. An investment as a Limited Partner may not be advisable for a person who does not anticipate having substantial current taxable income from passive trade or business activities (not counting dividend or interest income). Most Limited Partners will be subject to the “passive activity loss” rules. A Limited Partner subject to the passive activity loss rules will be unable to use passive losses generated by the Partnership until and unless he or she has realized “passive income”.

Tax Liabilities in Excess of Cash Distributions

A Limited Partner must include in his or her own income tax return his or her share of the items of the Partnership’s income, gain, profit, loss, and deductions whether or not cash proceeds are actually distributed to the Partner to pay any tax resulting from the Partnership’s income or gain. For example, income from the Partnership’s sale of oil and gas production will be taxable to Limited Partners as ordinary income subject to depletion and other deductions whether or not the proceeds from such sale are actually distributed (for example, where Partnership income is used to repay Partnership indebtedness).

 

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Items Not Covered by the Tax Opinion

Due to the lack of authority regarding, or the essentially factual nature of certain issues, Conner & Winters has expressed no opinion as to the following: (i) the impact of an investment in the Partnership on an investor’s alternative minimum tax liability; (ii) whether any of the Partnership’s properties will be considered “proven” for purposes of depletion deductions; and (iii) whether the Partnership will be treated as the tax owner of Partnership Properties acquired by the General Partner as nominee for the Partnership.

Tax Opinion Not Binding on Service

Prospective investors should recognize that an opinion of legal counsel merely represents such counsel’s best legal judgment under existing statutes, judicial decisions, and administrative regulations and interpretations. There can be no assurance that deductions claimed by the Partnership in reliance on the opinion of Conner & Winters will not be challenged successfully by the Service.

The opinion of Conner & Winters was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed by the Service. The opinion of Conner & Winters was written to support the promotion or marketing of Units in the Partnership. Prospective investors should seek advice based on their particular circumstances from an independent tax advisor.

OPERATIONAL RISKS

Risks Inherent in Oil and Gas Operations

The Partnership will be participating with the General Partner in acquiring producing oil and gas leases and in the drilling of those oil and gas wells commenced by the General Partner from the later of January 1, 2009 or the time the Partnership is formed through December 31, 2009 and, with certain limited exceptions, serving as a co-general partner of any oil and gas drilling or income programs, or both, formed by the General Partner or UNIT during 2009.

All drilling to establish productive oil and natural gas properties is inherently speculative. The techniques presently available to identify the existence and location of pools of oil and natural gas are indirect, and, therefore, a considerable amount of personal judgment is involved in the selection of any prospect for drilling. The economics of oil and natural gas drilling and production are affected or may be affected in the future by a number of factors which are beyond the control of the General Partner, including (i) the general demand in the economy for energy fuels, (ii) the worldwide supply of oil and natural gas, (iii) the price of, as well as governmental policies with respect to, oil and liquefied natural gas imports, (iv) potential competition from competing alternative fuels, (v) governmental regulation of prices for oil and natural gas production, gathering and transportation, (vi) state regulations affecting allowable rates of production, well spacing and other factors such as, but not limited to, regulation of gathering, (vii) proximity to and capacity available on oil and gas pipelines, and (viii) availability of drilling rigs, casing and other necessary goods and services. See “COMPETITION, MARKETS AND REGULATION.” The revenues, if any, generated from Partnership operations will be highly dependent on the future prices and demand for oil and natural gas. The factors enumerated above affect, and will continue to affect, oil and natural gas prices. Recently, prices for oil and natural gas have fluctuated over a wide range.

Operating and Environmental Hazards

Operating hazards such as fires, explosions, blowouts, unusual formations, formations with abnormal pressures and other unforeseen conditions are sometimes encountered in drilling wells. On occasion, substantial liabilities to third parties or governmental entities may be incurred, the payment of which could reduce the funds available for exploration and development or result in loss of Partnership Properties. The Partnership will attempt to maintain customary insurance coverage, but the Partnership may be subject to liability for pollution and other damages or may lose substantial portions of its properties due to hazards against which it cannot insure or against which it may elect not to insure due to unreasonably high or prohibitive premium costs or for other reasons. The

 

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activities of the Partnership may expose it to drilling limitations and potential liability for pollution or other damages under laws and regulations relating to environmental matters (see “Government Regulation and Environmental Risks” below).

Competition

The oil and gas industry is highly competitive. The Partnership will be involved in intense competition for the acquisition of quality undeveloped leases and producing oil and gas properties. There can be no assurance that a sufficient number of suitable oil and gas properties will be available for acquisition or development by the Partnership. The Partnership will be competing with numerous major and independent companies which possess financial resources and staffs larger than those available to it. The Partnership, therefore, may be unable in certain instances to acquire desirable leases or supplies or may encounter delays in commencing or completing Partnership operations.

Markets for Oil and Natural Gas Production

Historically, oil and gas prices have been extremely volatile, with significant increases and significant price drops being experienced from time to time. Oil and gas prices have declined significantly during recent months in a deteriorating national and global economic environment. The current economic environment and the recent decline in commodity prices are causing the General Partner (and other oil and gas companies) to reduce their overall level of drilling activity and spending. A slowdown in the national and global economy will also result (to varying degrees) in a reduction in the demand for oil and gas products by those industries and consumers that use those products in their business operations. The degree to which that demand is reduced and for how long it may last are unknown at this time. Significant reductions in demand for oil and gas would result in lower prices for our products and force us to curtail our production of those products which, in turn, would affect our financial results. In the future, various factors beyond the control of the Partnership will have a significant effect on oil and gas prices. Such factors include, among other things, uncertainty in the national and global economic markets, the domestic and foreign supply of oil and gas, the price of foreign imports, the levels of demand for oil and gas products, the price and availability of alternative fuels, the availability of pipeline capacity, changes in existing and proposed federal regulation and price controls, and the volatility of spot prices and commodity markets for oil and gas.

Due to the uncertainty in the energy markets, it is possible that prices for oil produced in the future will be higher or lower than those currently available. There can be no assurance that the oil the Partnership produces can be marketed on favorable price and other contractual terms. See “COMPETITION, MARKETS AND REGULATION — Marketing of Production.”

The natural gas market is also unsettled due to a number of factors. In the past, production from natural gas wells in some geographic areas of the United States was curtailed for considerable periods of time due to a lack of market demand. Over the past several years demand for natural gas has increased greatly limiting the number of wells being shut in for lack of demand. It is possible, however, that Partnership Wells may in the future be shut-in or that natural gas will be sold on terms less favorable than might otherwise be obtained should demand for gas lessen in the future. Competition for available markets has been vigorous and there remains great uncertainty about prices that purchasers will pay. Natural gas surpluses could result in the Partnership’s inability to market natural gas profitably, causing Partnership Wells to curtail production and/or receive lower prices for its natural gas, situations which would adversely affect the Partnership’s ability to make cash distributions to its participants. See “COMPETITION, MARKETS AND REGULATION.”

In the event that the Partnership discovers or acquires natural gas reserves, there may be delays in commencing or continuing production due to the need for gathering and pipeline facilities, contract negotiation with the available market, pipeline capacities, seasonal takes by the gas purchaser or a surplus of available gas reserves in a particular area.

Government Regulation and Environmental Risks

The oil and gas business is subject to pervasive government regulation under which, among other things, rates of production from producing properties may be fixed and the prices for gas produced from such producing

 

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properties may be impacted. It is possible that these regulations pertaining to rates of production could become more pervasive and stringent in the future. The activities of the Partnership may expose it to potential liability under laws and regulations relating to environmental matters which could adversely affect the Partnership. Compliance with these laws and regulations may increase Partnership costs, delay or prevent the drilling of wells, delay or prevent the acquisition of otherwise desirable producing oil and gas properties, require the Partnership to cease operations in certain areas, and cause delays in the production of oil and gas. See “COMPETITION, MARKETING AND REGULATION.”

Leasehold Defects

In certain instances, the Partnership may not be able to obtain a title opinion or report with respect to a producing property that is acquired. Consequently, the Partnership’s title to any such property may be uncertain. Furthermore, even if certain technical defects do appear in title opinions or reports with respect to a particular property, the General Partner, in its sole discretion, may determine that it is in the best interest of the Partnership to acquire such property without taking any curative action.

TERMS OF THE OFFERING

General

 

   

900 Maximum Units; 50 Minimum Units

 

   

$1,000 Units; Minimum subscription: $2,000

 

   

Minimum Partnership: $50,000 in subscriptions

 

   

Maximum Partnership: $900,000 in subscriptions

Limited Partnership Interests

The Partnership hereby offers to certain employees (described under “Subscription Rights” below) and directors of UNIT and its subsidiaries an aggregate of 900 Units. The purchase price of each Unit is $1,000, and the minimum permissible purchase by any eligible subscriber is two Units ($2,000). See “Subscription Rights” below for the maximum number of Units that may be acquired by subscribers.

The Partnership will be formed as an Oklahoma limited partnership on the closing of the offering of Units made by this Memorandum. The General Partner will be Unit Petroleum Company (the “General Partner”, or “UPC”), an Oklahoma corporation. Partnership operations will be conducted from the General Partner’s offices, the address of which is 7130 South Lewis Avenue, Suite 1000, Tulsa, Oklahoma 74136, telephone (918) 493-7700.

The offering of Units will be closed on January 30, 2009 unless extended by the General Partner for up to 30 days, and all Units subscribed will be issued on the Effective Date. The offering may be withdrawn by the General Partner at any time prior to such date if it believes it to be in the best interests of the eligible employees and Directors or the General Partner not to proceed with the offering.

If at least 50 Units ($50,000) are not subscribed prior to the termination of the offering, the Partnership will not commence business. The General Partner may, on its own accord, purchase Units and, in such capacity, will enjoy the same rights and obligations as other Limited Partners, except the General Partner will have unlimited liability. The General Partner may, in its discretion, purchase Units sufficient to reach the minimum Aggregate Subscription ($50,000). Because the General Partner or its affiliates might benefit from the successful completion of this offering (see “PARTICIPATION IN COSTS, AND REVENUES” and “COMPENSATION”), investors should not expect that sales of the minimum Aggregate Subscription indicate that such sales have been made to investors that have no financial or other interest in the offering or that have otherwise exercised independent investment discretion. Further, the sale of the minimum Aggregate Subscription is not designed as a protection to investors to indicate that their interest is shared by other unaffiliated investors and no investor should place any reliance on the sale of the minimum Aggregate Subscription as an indication of the merits of this offering. Units acquired by the General Partner will be for investment purposes only without a present intent for resale and there is no limit on the number of Units that may be acquired by it.

 

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Subscription Rights

Units are offered only to persons who are salaried employees of UNIT or its subsidiaries at the date of formation of the Partnership and whose annual base salaries for 2008 (excluding bonuses) has been set at $36,000 or more and to directors of UNIT. Only employees and directors who are U.S. citizens are eligible to participate in the offering. In addition, employees and directors must be able to bear the economic risks of an investment in the Partnership and must have sufficient investment experience and expertise to evaluate the risks and merits of such an investment. See “PLAN OF DISTRIBUTION — Suitability of Investors.”

Eligible employees and directors are restricted as to the number of Units they may purchase in the offering. The maximum number of Units which can be acquired by any employee is that number of whole Units which can be purchased with an amount which does not exceed one-half of the employee’s base salary for 2008; provided, however, that the General Partner may, at its discretion, accept a subscription for a greater amount. Each director of UNIT may subscribe for a maximum of 300 Units (maximum investment of $300,000). At January 12, 2008 there were approximately 675 people eligible to purchase Units.

Eligible employees and directors may acquire Units through a corporation or other entity in which all of the beneficial interests are owned by them or permitted assignees (see “SUMMARY OF THE LIMITED PARTNERSHIP AGREEMENT — Transferability of Interests”); provided that such employees or directors will be jointly and severally liable with such entity for payment of the Capital Subscription.

The number of Units offered is limited and there will not be sufficient Units available if a substantial number of the eligible employees and directors subscribe for the maximum number of Units. In the event the Units are oversubscribed, Units will be allocated among the respective subscribers in the proportion that each subscription amount bears to total subscriptions obtained.

No employee is obligated to purchase Units in order to remain in the employ of UNIT, and the purchase of Units by any employee will not obligate UNIT to continue the employment of such employee. Units may be subscribed for by a trust for the minor children of eligible employees and directors.

Payment for Units; Delinquent Installment

The Capital Subscriptions of the Limited Partners will be payable either (i) in four equal Installments, the first of such Installments being due on March 15, 2009 and the remaining three of such Installments being due on June 15, September 15, and December 15, 2009, respectively, or (ii) by employees so electing in the space provided on the Subscription Agreement, through equal deductions from 2009 salary paid to the employee by the General Partner, UNIT or its subsidiaries commencing immediately after formation of the Partnership. If an employee or director who has subscribed for Units (either directly or through a corporation or other entity) ceases to be employed by or serve as a director of the General Partner, UNIT or any of its subsidiaries for any reason other than death, disability or Normal Retirement prior to the time the full amount of all Installments not waived by the General Partner as described below are due, then the due date for any such unpaid Installments shall be accelerated so that the full amount of his or her unpaid Capital Subscription will be due and payable on the effective date of such termination.

Each Installment will be a legally binding obligation of the Limited Partner and any past due amounts will bear interest at an annual rate equal to two percentage points in excess of the prime rate of interest of Bank of Oklahoma, N.A., Tulsa, Oklahoma; provided, however, that if the General Partner determines that the total Aggregate Subscription is not required to fund the Partnership’s business and operations, then the General Partner may, at its sole option, elect to release the Limited Partners from their obligation to pay one or more Installments (including the obligation to pay in the amount of any Additional Assessments). If the General Partner elects to waive the payment of an Installment, it will notify all Limited Partners promptly in writing of its decision and will, to the extent required, amend the certificate of limited partnership and any other relevant Partnership documents accordingly. It is currently anticipated that the total Aggregate Subscription will be required, however, to fund the Partnership’s business and operations.

 

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In the event a Limited Partner fails to pay any Installment when due and the General Partner has not released the Limited Partners from their obligation to pay such Installment, then the General Partner, at its sole option and discretion, may elect to purchase the Units of such defaulting Limited Partner at a price equal to the total amount of the Capital Contributions actually paid into the Partnership by such defaulting Limited Partner, less the amount of any Partnership distributions that may have been received by him or her. Such option may be exercised by the General Partner by written notice to the Limited Partner at any time after the date that the unpaid Installment was due and will be deemed exercised when the amount of the purchase price is first tendered to the defaulting Limited Partner. The General Partner may, in its discretion, accept payments of delinquent Installments not waived by it but will not be required to do so.

In the event that the General Partner elects to purchase the Units of a defaulting Limited Partner, it must pay into the Partnership the amount of the delinquent Installment (excluding any interest that may have accrued thereon) and pay each additional Installment, if any, payable with respect to such Units as it becomes due. By virtue of such purchase, the General Partner will be allocated all Partnership Revenues, be charged with all Partnership costs and expenses attributable to such Units and will enjoy the same rights and obligations as other Limited Partners, except the General Partner will have unlimited liability.

Right of Presentment

After December 31, 2010, and annually thereafter, Limited Partners will have the right to present their Units to the General Partner for purchase. The General Partner will not be obligated to purchase more than 20% of the then outstanding Units in any one calendar year. The purchase price to be paid for the Units of any Limited Partner presenting them for purchase will be based on the net asset value of the Partnership which shall be equal to:

 

  (1) The value of the proved reserves attributable to the Partnership Properties, determined as set forth below; plus

 

  (2) The estimated salvage value of tangible equipment installed on Partnership Wells less the costs of plugging and abandoning the wells, both discounted at the rate utilized to determine the value of the Partnership’s reserves as set forth below; plus

 

  (3) The lower of cost or fair market value of all Partnership Properties to which proved reserves have not been attributed but which have not been condemned, as determined by an independent petroleum engineering firm or the General Partner, as the case may be; plus

 

  (4) Cash on hand; plus

 

  (5) Prepaid expenses and accounts receivable (less a reasonable reserve for doubtful accounts); plus

 

  (6) The estimated market value of all other Partnership assets not included in (1) through (5) above, determined by the General Partner; MINUS

 

  (7) An amount equal to all debts, obligations and other liabilities of the Partnership.

The price to be paid for each Limited Partner’s interest of the net asset value will be his or her proportionate share of such net asset value less 75% of the amount of any distributions received by him or her which are attributable to the sales of the Partnership production since the date as of which the Partnership’s proved reserves are estimated.

The value of the proved reserves attributable to Partnership Properties will be determined as follows:

 

  (i) First, the future net revenues from the production and sale of the proved reserves will be estimated as of the end of the calendar year in which presentment is made based on an independent engineering firm’s report and its determinations of the prices to be used as well as the escalations, if any, of such prices and cost or, if no report was made, as determined by the General Partner;

 

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  (ii) Next, the future net revenues from the production and sale of proved reserves as determined above will be discounted at an annual rate which is one percentage point higher than the prime rate of interest being charged by the Bank of Oklahoma, N.A., Tulsa, Oklahoma, or any successor bank, as of the date such reserves are estimated; and

 

  (iii) Finally, the total discounted value of the future net revenues from the production and sale of proved reserves will be reduced by an additional 25% to take into account the risks and uncertainties associated with the production and sale of the reserves and other unforeseen uncertainties.

A Limited Partner who elects to have his or her Units purchased by the General Partner should be aware that estimates of future net recoverable reserves of oil and gas and estimates of future net revenues to be received therefrom are based on a great many factors, some of which, particularly future prices of production, are usually variable and uncertain and are always determined by predictions of future events. Accordingly, it is common for the actual production and revenues received to vary from earlier estimates. Estimates made in the first few years of production from a property will be based on relatively little production history and will not be as reliable as later estimates based on longer production history. As a result of all the foregoing, reserve estimates and estimates of future net revenues from production may vary from year to year.

This right of presentment may be exercised by written notice from a Limited Partner to the General Partner. The sale will be effective as of the close of business on the last day of the calendar year in which such notice is given or, at the General Partner’s election, at 7:00 A.M. on the following day. Within 120 days after the end of the calendar year, the General Partner will furnish each Limited Partner who gave such notice during the calendar year a statement showing the cash purchase price which would be paid for the Limited Partner’s interest as of December 31 of the preceding year, which statement will include a summary of estimated reserves and future net revenues and sufficient material to reveal how the purchase price was determined. The Limited Partner must, within 30 days after receipt of such statement, reaffirm his or her election to sell to the General Partner.

As noted above, the General Partner will not be obligated to purchase in any one calendar year more than 20% of the Units in the Partnership then outstanding. Moreover, the General Partner will not be obligated to purchase any Units pursuant to such right if such purchase, when added to the total of all other sales, exchanges, transfers or assignments of Units within the preceding 12 months, would result in the Partnership being considered to have terminated within the meaning of Section 708 of the Code or would cause the Partnership to lose its status as a partnership or be treated as a publicly traded partnership for federal income tax purposes. If more than the number of Units which may be purchased are tendered in any one year, the Limited Partners from whom the Units are to be purchased will be determined by lot. Any Units presented but not purchased with respect to one year will have priority for such purchase the following year.

The General Partner does not intend to establish a cash reserve to fund its obligation to purchase Units, but will use funds provided by its operations or borrowed funds (if available), using its assets (including such Units purchased or to be purchased from Limited Partners) as collateral to fund such obligations. However, there is no assurance that the General Partner will have sufficient financial resources to discharge its obligations.

Rollup or Consolidation of Partnership

The Agreement provides that two years or more after the Partnership has completed substantially all of its property acquisition, drilling and development operations, the General Partner may, without the vote, consent or approval of the Limited Partners, cause all or substantially all of the oil and gas properties and other assets of the Partnership to be sold, assigned or transferred to, or the Partnership merged or consolidated with, another partnership or a corporation, trust or other entity for the purpose of combining the assets of two or more of the oil and gas partnerships formed for investment or participation by employees, directors and/or consultants of UNIT or any of its subsidiaries; provided, however, that the valuation of the oil and gas properties and other assets of all such participating partnerships for purposes of such transfer or combination shall be made on a consistent basis and in a manner which the General Partner and UNIT believe is fair and equitable to the Limited Partners. As a consequence of any such transfer or combination, the Partnership shall be dissolved and terminated and the Limited Partners shall receive partnership interests, stock or other equity interests in the transferee or resulting

 

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entity. Any such action will cause the Limited Partners’ attributable interest in the Partnership Properties to be diluted but it will also provide them with attributable interests in the properties and other assets of the other partnerships participating in the consolidation. It also may reduce somewhat the amount of their attributable shares of the direct and indirect costs of administering the Partnership. See “RISK FACTORS — Investment Risks - Roll-Up or Consolidation of Partnership.”

ADDITIONAL FINANCING

The General Partner will use its best efforts, consistent with Partnership objectives, to acquire Productive properties and complete the Partnership’s drilling and development operations before the Aggregate Subscription has been fully expended or committed. However, funds in addition to the Aggregate Subscription may be required to pay costs and expenses which are chargeable to the Limited Partners. In those instances described below, the General Partner may call for Additional Assessments or may apply Partnership Revenue allocable to the Limited Partners in payment and satisfaction of such costs or the General Partner may, but shall not be required to, fund the deficiency with Partnership borrowings to be repaid with Partnership Revenue.

Additional Assessments

When the Aggregate Subscription has been fully expended or committed, the General Partner may make one or more calls for any portion or all of the maximum Additional Assessments of $100 per Unit. However, no Additional Assessments may be required before the General Partner’s Minimum Capital Contribution has been fully expended. Such assessments may be used to pay the Limited Partners’ share of the Drilling Costs, Special Production and Marketing Costs or Leasehold Acquisition Costs of Productive properties which are chargeable to the Limited Partners. The amount of the Additional Assessment so called shall be due and payable on or before such date as the General Partner may set in such call, which in no event will be earlier than thirty (30) days after the date of mailing of the call. The notice of the call for Additional Assessments will specify the amount of the assessment being required, the intended use of such funds, the date on which the contributions are payable and describe the consequences of nonpayment. Although the Limited Partners who do not respond will participate in production, if any, obtained from operations conducted with the proceeds from the aggregate Additional Assessments paid into the Partnership, the amount of the unpaid Additional Assessment shall bear interest at the annual rate equal to two (2) percentage points in excess of the prime rate of interest of Bank of Oklahoma, N.A., Tulsa, Oklahoma, or successor bank, as announced and in effect from time to time, until paid. The Partnership will have a lien on the defaulting Limited Partner’s interest in the Partnership and the General Partner may retain Partnership Revenue otherwise available for distribution to the defaulting Limited Partner until an amount equal to the unpaid Additional Assessment and interest is received. Furthermore, the General Partner may satisfy such lien by proceeding with legal action to enforce the lien and the defaulting Limited Partner shall pay all expenses of collection, including interest, court costs and a reasonable attorney’s fee. If the General Partner believes that no Additional Assessments will be required to fund the Partnership’s business and operations, it may release the Limited Partners from their obligations to make the Additional Assessments by a notice in writing.

Prior Programs

In the prior employee programs conducted by UNIT or the General Partner in each of the years 1984 through 2008, Additional Assessments could be called for as provided herein. At September 30, 2008, there had been no calls for Additional Assessments in such programs. There can be no assurance, however, that Additional Assessments will not be required to pay Partnership costs. The General Partner released the limited partners in the Unit 2007 Oil and Gas Limited Partnership from the obligation to make any Additional Assessments in excess of $44.00 per Unit.

Partnership Borrowings

At any time after the General Partner’s Minimum Capital Contribution has been fully expended, the General Partner may cause the Partnership to borrow funds for the purpose of paying Drilling Costs, Special Production and Marketing Costs or Leasehold Acquisition Costs of Productive properties, which borrowings may be secured by interests in the Partnership Properties and will be repaid, including interest accruing thereon, out of Partnership

 

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Revenue. The General Partner may, but is not required to, advance funds to the Partnership for the same purposes for which Partnership borrowings are authorized. With respect to any such advances, the General Partner will receive interest in an amount equal to the lesser of the interest which would be charged to the Partnership by unrelated banks on comparable loans for the same purpose or the General Partner’s interest cost with respect to such loan, where it borrows the same. No financing charges will be levied by the General Partner in connection with any such loan. If Partnership borrowings secured by interests in the Partnership Wells and repayable out of Partnership Revenue cannot be arranged on a basis which, in the opinion of the General Partner, is fair and reasonable, and the entire sum required to pay such costs is not available from Partnership Revenue, the General Partner may dispose of some or all of the Partnership Properties on which such operations were to be conducted by sale, farm-out or abandonment.

If the Partnership requires funds to conduct Partnership operations during the period between any of the Installments due from the Limited Partners, then, notwithstanding the foregoing, the General Partner shall advance funds to the Partnership in an amount equal to the funds then required to conduct such operations but in no event more than the total amount of the Aggregate Subscription remaining unpaid. With respect to any such advances, the General Partner shall receive no interest thereon and no financing charges will be levied by the General Partner in connection therewith. The General Partner shall be repaid out of the Installments thereafter paid into the capital of the Partnership when due.

The Partnership may attempt to finance any expenses in excess of the Partners’ Capital Subscriptions by the foregoing means and any other means which the General Partner deems in the best interests of the Partnership, but the Partnership’s inability to meet such costs could result in the deferral of drilling operations or in the inability to participate in future drilling or in non-consent penalties pursuant to which co-owners of particular working interests recover several times the amount which would have been funded by the Partnership in accordance with its ownership interest before the Partnership would participate in revenues.

The use of Partnership Revenue allocable to the Limited Partners to pay Partnership costs and expenses and to repay any Partnership borrowings will mean that such revenue will not be available for distribution to the Limited Partners. Nonetheless, the Limited Partners may incur income tax liability by virtue of that revenue and, thus, may not receive distributions from the Partnership in amounts necessary to pay such income tax. However, the use of such revenue to pay Partnership costs and expenses may generate additional deductions for the Limited Partners.

PLAN OF DISTRIBUTION

Units will be offered privately only to select persons who can demonstrate to the General Partner that they have both the economic means and investment expertise to qualify as suitable investors. The Units will be offered and sold by the officers and directors of UPC or UNIT.

Suitability of Investors

Subscriptions should be made only by appropriate persons who can reasonably benefit from an investment in the Partnership. In this regard, a subscription will generally be accepted only from a person who can represent that such person has (or in the case of a husband and wife, acting as joint tenants, tenants in common or tenants in the entirety, that they have) a net worth, including home, furnishings and automobiles, of at least five times the amount of his or her Capital Subscription, and estimates that such person will have during the current year adjusted gross income in an amount which will enable him or her to bear the economic risks of his or her investment in the Partnership. Such person must also demonstrate that he or she has sufficient investment experience and expertise to evaluate the risks and merits of an investment in the Partnership.

Participation in the Partnership is intended only for those persons willing to assume the risk of a speculative, illiquid, long-term investment. Entitlement to and maintenance of the exemptions from registration provided by Sections 3(b) and/or 4(2) of the Securities Act of 1933, as amended, require the imposition of certain limitations on the persons to whom offers may be made, and from whom subscriptions may be accepted. Therefore, this offering is limited to persons who, by virtue of investment acumen or financial resources, satisfy the General Partner that they meet suitability standards consistent with the maintenance and preservation of the exemptions

 

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provided by Sections 3(b) and/or 4(2) and by the applicable rules and regulations of the Securities and Exchange Commission, as well as those contained herein and in the Subscription Agreement. Persons offering interests shall sufficiently inquire of a prospective investor to be reasonably assured that such investor meets such acceptable standards. Suitability standards may also be imposed by the regulatory authorities of the various states in which interests may be offered.

RELATIONSHIP OF THE PARTNERSHIP,

THE GENERAL PARTNER AND AFFILIATES

The following diagram depicts the primary relationships among the Partnership, the General Partner and certain of its affiliates.

LOGO

PROPOSED ACTIVITIES

General

The Partnership will, with certain limited exceptions, participate in all of UNIT’s or UPC’s oil and gas activities commenced during 2009. The Partnership will acquire 1% of essentially all of UNIT’s interest in such activities. The activities will include (i) participating as a joint working interest owner with UNIT or UPC in any producing leases acquired and in any wells commenced by UNIT or UPC other than as a general partner in a drilling or income program during 2009 and (ii) serving as a co-general partner in any drilling or income programs, or both, formed by the General Partner or UNIT during 2009.

Acquisition of Properties and Drilling Operations. The Partnership will participate, to the extent of 1% of UPC or UNIT’s final interest in each well, as a fractional working interest holder in any producing leases acquired and in any drilling operations conducted by UPC or UNIT for its own account which are acquired or commenced, respectively, from January 1, 2009, or the time of the formation of the Partnership if subsequent to January 1, 2009, until December 31, 2009, except for wells, if any:

 

  (i) drilled outside the 48 contiguous United States;

 

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  (ii) drilled as part of secondary or tertiary recovery operations which were in existence prior to formation of the Partnership;

 

  (iii) drilled by third parties under farm-out or similar arrangements with UNIT or the General Partner or whereby UNIT or the General Partner may be entitled to an overriding royalty, reversionary or other similar interest in the production from such wells but is not obligated to pay any of the Drilling Costs thereof;

 

  (iv) acquired by UNIT or the General Partner through the acquisition by UNIT or the General Partner of, or merger of UNIT or the General Partner with, other companies (this exception may, at the discretion of Unit or the General Partner, be waived.); or

 

  (v) with respect to which the General Partner does not believe that the potential economic return therefrom justifies the costs of participation by the Partnership.

Instances referred to in (v) could occur when UNIT or one of its subsidiaries agrees to participate in the ownership of a prospect for its own account in order to obtain the contract to drill the well thereon. There may be situations where the potential economic return of the well alone would not be sufficient to warrant participation by UNIT but when considered in light of the revenues expected to be realized as a result of the drilling contract, such participation is desirable from UNIT’s standpoint. However, in such a situation, the Partnership would not be entitled to any of the revenues generated by the drilling contract so its participation in the well would not be desirable.

For these purposes, the drilling of a well will be deemed to have commenced on the “spud date,” i.e., the date that the drilling rig is set up and actual drilling operations are commenced. Any clearing or other site preparation operations will not be considered part of the drilling operations for these purposes.

Participation in Drilling or Income Programs. Except for certain limited exceptions it is anticipated that the Partnership will participate with UPC or UNIT as a co-general partner of any drilling or income programs, or both, formed by UPC or UNIT and its affiliates during 2009. The Partnership will be charged with 1% of the total costs and expenses charged to the general partners and allocated 1% of the revenues allocable to the general partners in any such program and UPC or UNIT will be charged with the remaining 99% of the general partners’ share of costs and expenses and allocated the remaining 99% of the general partners’ share of program revenues.

UNIT or its affiliates formed drilling programs for outside investors from 1979 through 1984. In 1987, the Unit 1986 Energy Income Limited Partnership (the “1986 Energy Program”) was formed primarily to acquire interests in producing oil and gas properties. See “PRIOR ACTIVITIES.” All of the programs were formed as limited partnerships and interests in all of the programs other than the Unit 1979 Oil and Gas Program and the 1986 Energy Program were offered in registered public offerings. The 1979 Program and 1986 Energy Program were offered privately to a limited number of sophisticated investors.

No drilling or income programs for third party investors were formed in 2008. Although it does not currently contemplate doing so, UNIT may form such drilling or income programs during 2009. If such a program is formed, there would be only one or two such programs and they probably would be privately offered. The precise revenue and cost sharing format of any such programs has not been determined.

The cost and revenue sharing provisions of virtually all drilling programs offered to third parties generally require the limited partners or investors to bear a somewhat higher percentage of the program’s drilling and development costs than the percentage of program revenues to which they are entitled. Likewise, the general partners will normally receive a higher percentage of revenues than the percentage of drilling and development costs which they are required to pay. The difference in these percentages is often referred to as the general partners’ “promote.” Any drilling program which UNIT or UPC may form in 2009 for outside investors would likely have some amount of “promote” for the general partner(s).

Any income program may use the same or a similar format as that used for the 1986 Partnership. In the 1986 Partnership, virtually all partnership costs and expenses other than property acquisition costs are allocated to the partners in the same percentages that partnership revenue is being shared at the time such expenses are incurred, with property acquisition costs and certain other expenses being charged 85% to the accounts of the limited

 

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partners and 15% to the accounts of the general partners. Partnership revenue in the 1986 Partnership is allocated 85% to the limited partners’ accounts and 15% to the general partners’ accounts until program payout (as defined in the agreement of limited partnership for the 1986 Partnership). After program payout, the percentages of partnership revenue allocable to the respective accounts of the partners depend on the length of the period during which program payout occurs and range from 60% to the limited partners’ accounts and 40% to the general partners’ accounts to 85% to the limited partners’ accounts and 15% to the general partners’ accounts.

As co-general partners of any drilling or income programs that may be formed by UNIT and/or UPC during 2009 and participated in by the Partnership, UNIT and/or UPC and the Partnership will share the costs, expenses and revenues allocable to the general partners on a proportionate basis, 99% for the account of UNIT and/or UPC and 1% for the account of the Partnership. The Partnership will not receive any portion of any management fees payable to the general partners nor any fees or payments for supervisory services which UNIT or UPC may render to such programs as operator of program wells or other fees and payments which UNIT or UPC may be entitled to receive from such programs for services rendered to them or goods, materials, equipment or other property sold to them.

Extent and Nature of Operations. Although the General Partner maintains a general inventory of prospects, it cannot predict with certainty on which of those prospects wells will be started during 2009 nor can it predict what producing properties, if any, will be acquired by it during 2009. Further, since the General Partner anticipates that the Partnership will acquire a small interest (either directly or through any drilling or income programs of which it or UNIT serves as a general partner) in approximately 175 wells (however, the exact number of wells may vary greatly depending on the actual activity undertaken), it would be impractical to describe in any detail all of the properties in which the Partnership can be expected to acquire some interest.

The Partnership’s drilling and development operations are expected to include both Exploratory Wells and comparatively lower-risk Development Wells. Exploratory Wells include both the high-risk “wildcat” wells which are located in areas substantially removed from existing production and “controlled” Exploratory Wells which are located in areas where production has been established and where objective horizons have produced from similar geological features in the vicinity. Based on UNIT’s historical profile of its drilling operations, it is presently anticipated that the portion of the Aggregate Subscription expended for Partnership drilling operations (see “APPLICATION OF PROCEEDS”) will be spent approximately 7% on Exploratory Wells and 93% on Development Wells. However, these percentages may vary significantly.

Certain of the Partnership’s Development Wells may be drilled on prospects on which initial drilling operations were conducted by the General Partner or UNIT prior to the formation of the Partnership. Further, certain of the Partnership Wells will be drilled on prospects on which the General Partner, UNIT or possibly future employee programs may conduct additional drilling operations in years subsequent to 2009. In either instance, the Partnership will have an interest only in those wells begun in 2009 and will have no rights in production from wells commenced in years other than 2009 even though such other wells may be located on prospects or spacing units on which Partnership Wells have been drilled. Furthermore, it is possible that in years subsequent to 2009, UNIT, UPC or possibly future employee programs will acquire additional interests in wells participated in by the Partnership. In such event the Partnership will generally not be entitled to share in the acquisition of such additional interests. With respect to the acquisition of producing properties, UNIT will endeavor to diversify its investments by acquiring properties located in differing geographic locations and by balancing its investments between properties having high rates of production in early years and properties with more consistent production over a longer term. See “CONFLICTS OF INTERESTS — Acquisition of Properties and Drilling Operations.”

Partnership Objectives

The Partnership is being formed to provide eligible employees and directors the opportunity to participate in the oil and gas exploration and producing property acquisition activities of UNIT during 2009. UNIT hopes that participation in the Partnership will provide the participants with greater proprietary interests in its operations and the potential for realizing a more direct benefit in the event these operations prove to be profitable. The Partnership has been structured to achieve the objective of providing the Limited Partners with essentially the same economic returns that UNIT realizes from the wells drilled or acquired during 2009.

 

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Areas of Interest

The Agreement authorizes the Partnership to engage in oil and gas exploration, drilling and development operations and to acquire producing oil and gas properties anywhere in the United States, but the areas presently under consideration are located in the states of Oklahoma, Texas, Louisiana, Kansas, Arkansas, Colorado, Montana, North Dakota, New Mexico, Mississippi and Wyoming. It is possible that the Partnership may drill in inland waterways, riverbeds, bayous or marshes but no drilling in the open seas will be attempted. Plans to conduct drilling and development operations or to acquire producing properties in certain of these states may be abandoned if attractive prospects cannot be obtained on satisfactory terms or if the Partnership is not fully subscribed.

Transfer of Properties

In the case of wells drilled or producing properties acquired by the Partnership and UPC or UNIT for their own accounts and not through another drilling or income program, the Partnership will acquire from UPC or UNIT a portion of the fractional undivided working interest in the properties or portions thereof comprising the spacing unit on which a proposed Partnership Well is to be drilled or on which a producing Partnership Well is located, and UPC or UNIT will retain for its own account all or a portion of the remainder of such working interest. Such working interests will be sold to the Partnership for an amount equal to the Leasehold Acquisition Costs attributable to the interest being acquired. Neither UNIT nor its affiliates will retain any overrides or other burdens on the working interests conveyed to the Partnership, and the respective working interests of UPC or UNIT and the Partnership in a property will bear their proportionate shares of costs and revenues.

The Partnership’s direct interest in a property will only encompass the area included within the spacing unit on which a Partnership Well is to be drilled or on which a producing Partnership Well is located, and, in the case of a Partnership Well to be drilled, it will acquire that interest only when the drilling of the well is ready to commence. If the size of a spacing unit is ever reduced, or any subsequent well in which the Partnership has no interest is drilled thereon, the Partnership will have no interest in any additional wells drilled on properties which were part of the original spacing unit unless such additional wells are commenced during 2009. If additional interests in Partnership Wells are acquired in years subsequent to 2009, the Partnership will generally not be entitled to participate or share in the acquisition of such additional interests. In addition, if the Partnership Well drilled on a spacing unit is dry or abandoned, the Partnership will not have an interest in any subsequent or additional well drilled on the spacing unit unless it is commenced during 2009. The Partnership will never own any significant amounts of undeveloped properties or have an occasion to sell or farm out any undeveloped Partnership Properties.

Transfers of properties to any drilling or income programs of which the Partnership serves as a general partner will be governed by the provisions of the agreement of limited partnership in effect with respect thereto. If any such program is to be offered publicly, those provisions will have to be consistent with the provisions contained in the Guidelines for the Registration of Oil and Gas Programs adopted by the North American Securities Administrators Association, Inc.

Record Title to Partnership Properties

Record title to the Partnership Properties will be held by the General Partner. However, the General Partner will hold the Partnership Properties as a nominee for the Partnership under a form of nominee agreement to be entered into between the General Partner and the Partnership. Under the form of nominee agreement, the General Partner will disclaim any beneficial interest in the Partnership Properties held as nominee for the Partnership.

Marketing of Reserves

The General Partner has the authority to market the oil and gas production of the Partnership. In this connection, it may execute on behalf of the Partnership division orders, contracts for the marketing or sale of oil, gas or other hydrocarbons or other marketing agreements. Sales of the oil and gas production of the Partnership will be to independent third parties or to the General Partner or its affiliates (see “CONFLICTS OF INTEREST”).

 

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Conduct of Operations

The General Partner will have full, exclusive and complete discretion and control over the management, business and affairs of the Partnership and will make all decisions affecting the Partnership Properties. To the extent that Partnership funds are reasonably available, the General Partner will cause the Partnership to (1) test and investigate the Partnership Properties by appropriate geological and geophysical means, (2) conduct drilling and development operations on such Partnership Properties as it deems appropriate in view of such testing and investigation, (3) attempt completion of wells so drilled if in its opinion conditions warrant the attempt and (4) properly equip and complete productive Partnership Wells. The General Partner will also cause the Partnership’s productive wells to be operated in accordance with sound and economical oil and gas recovery practices.

The General Partner will operate certain drilling and productive wells on behalf of the Partnership in accordance with the terms of the Agreement (see “COMPENSATION”). In those cases, execution of separate operating agreements will not be necessary unless third party owners are involved, e.g., fractional undivided interest Partnership Properties and Partnership Properties that are pooled or unitized with other properties owned by third parties. In such cases, and in all cases where Partnership Properties are operated by third parties, the General Partner will, where appropriate, make or cause to be made and enter into operating agreements, pooling agreements, unitization agreements, etc., in the form in general use in the area where the affected property is located. The General Partner is also authorized to execute production sales contracts on behalf of the Partnership.

APPLICATION OF PROCEEDS

The Aggregate Subscription will be used to pay costs and expenses incurred in the operations of the Partnership which are chargeable to the Limited Partners. The organizational costs of the Partnership and the offering costs of the Units will be paid by the General Partner.

If all 900 Units offered hereby are sold, the proceeds to the Partnership would be $900,000. If the minimum 50 Units are sold, the proceeds to the Partnership would be $50,000. The General Partner estimates that the gross proceeds will be expended as follows:

 

     $900,000 Program    $50,000 Program
     Percent     Amount    Percent     Amount

Leasehold Acquisition Costs of Properties to Be Drilled

   5 %   $ 45,000    5 %   $ 2,500

Drilling Costs of Exploratory Wells

   5 %     45,000    5 %     2,500

Drilling Costs of Development Wells

   70 %     630,000    70 %     35,000

Leasehold Acquisition Costs of Productive Properties

   20 %     180,000    20 %     10,000

Total

   100 %   $ 900,000    100 %   $ 50,000

The foregoing allocation between Drilling Costs and Leasehold Acquisition Costs is solely an estimate and the actual percentages may vary materially from this estimate. Funds otherwise available for drilling Exploratory Wells will be reduced to the extent that such funds are used in conducting development operations in which the Partnership participates.

Until Capital Contributions are invested in the Partnership’s operations, they will be temporarily deposited, with or without interest, in one or more bank accounts of the Partnership or invested in short-term United States government securities, money market funds, bank certificates of deposit or commercial paper rated as “A1” or “P1” as the General Partner deems advisable. Partnership funds other than Capital Contributions may be commingled with the funds of the General Partner or UNIT.

 

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PARTICIPATION IN COSTS AND REVENUES

All costs of organizing the Partnership and offering Units therein will be paid by the General Partner. All costs incurred in the offering and syndication of any drilling or income program formed by UPC or UNIT and its affiliates during 2009 in which the Partnership participates as a co-general partner will also be paid by the General Partner. All other Partnership costs and expenses will be charged 99% to the Limited Partners and 1% to the General Partner until such time as the Aggregate Subscription has been fully expended. Thereafter and until the General Partner’s Minimum Capital Contribution has been fully expended, all of such costs and expenses will be charged to the General Partner. After the General Partner’s Minimum Capital Contribution has been fully expended, such costs and expenses will be charged to the respective accounts of the General Partner and the Limited Partners on the basis of their respective Percentages (see “GLOSSARY”).

All Partnership Revenues will be allocated between the General Partner and the Limited Partners on the basis of their respective Percentages.

The General Partner’s Minimum Capital Contribution will be determined as of December 31, 2009 and will be an amount equal to:

 

  (a) all costs and expenses previously charged to the General Partner as of that date, plus

 

  (b) the General Partner’s good faith estimate of the additional amounts that it will have to contribute in order to fund the Leasehold Acquisition Costs and Drilling Costs expected to be incurred by the Partnership after that date.

The respective Percentages of the General Partner and the Limited Partners will then be determined as of December 31, 2009 based on the relative contributions of the Partners previously made and expected to be made in the future during the remainder of the Partnership’s property acquisition and drilling phases. See “GLOSSARY — General Partner’s Minimum Capital Contribution”, “General Partner’s Percentage” and “ Limited Partners’ Percentage.” If the General Partner’s estimate of future Leasehold Acquisition Costs and Drilling Costs proves to be lower than the actual amount of such costs and expenses, the excess amounts will be charged to the Partners on the basis of their respective Percentages and the Limited Partners’ share will be paid out of their share of Partnership Revenues, Additional Assessments required of them or the proceeds of Partnership borrowings. See “ADDITIONAL FINANCING.” If the General Partner’s estimate of such costs and expenses proves to be higher than the actual costs and expenses, the General Partner will continue to bear Partnership costs and expenses that would otherwise have been chargeable to the Limited Partners until the total Partnership costs and expenses charged to it (including, without limitation, offering and organizational costs, Operating Expenses, general and administrative overhead costs and reimbursements and Special Production and Marketing Costs as well as Leasehold Acquisition Costs and Drilling Costs) since the formation of the Partnership equals the General Partner’s Minimum Capital Contribution. In addition to actual contributions of cash or properties, any Partner will be deemed to have contributed amounts of Partnership Revenues allocated to it which are used to pay its share of Partnership costs and expenses.

 

25


The following table presents a summary of the allocation of Partnership costs, expenses and revenues between the General Partner and the Limited Partners:

 

     General Partner     Limited Partners  

COSTS AND EXPENSES

    

•        Organizational and offering costs of the Partnership and any drilling or income programs in which the Partnership participates as a co-general partner

   100 %   0 %

•        All other Partnership Costs and Expenses:

    

•     Prior to time Limited Partner Capital Contributions are Entirely expended

   1 %   99 %

•     After expenditure of Limited Partner Capital Contributions and until expenditure of General Partner’s Minimum Capital Contribution

   100 %   0 %

•     After expenditure of General Partner’s Minimum Capital Contribution

   General Partner’s

Percentage

 

 

  Limited Partners’

Percentage

 

 

REVENUES

   General Partner’s

Percentage

 

 

  Limited Partners’

Percentage

 

 

COMPENSATION

Supervision of Operations

It is anticipated that the General Partner will operate many of the Partnership Properties during the drilling and production of Partnership Wells. For the General Partner’s services performed as operator, the Partnership will compensate the General Partner its pro rata portion of the compensation due to the General Partner under the operating agreements, if any, in effect with respect to such wells or, if none is in effect for such wells, at rates no higher than those normally charged in the same or a comparable geographic area by non-affiliated persons or companies dealing at arm’s length.

That portion of the General Partner’s general and administrative overhead expense that is attributable to its conduct of the actual and necessary business, affairs and operations of the Partnership will be reimbursed by the Partnership out of Partnership Revenue. The General Partner’s general and administrative overhead expenses are determined in accordance with industry practices. The costs and expenses to be allocated include all customary and routine legal, accounting, geological, engineering, travel, office rent, telephone, secretarial, salaries, data processing, word processing and other incidental reasonable expenses necessary to the conduct of the Partnership’s business and generated by the General Partner or allocated to it by UNIT, but will not include filing fees, commissions, professional fees, printing costs and other expenses incurred in forming the Partnership or offering interests therein. The amount of such costs and expenses to be reimbursed with respect to any particular period will be determined by allocating to the Partnership that portion of the General Partner’s total general and administrative overhead expense incurred during such period which is equal to the ratio of the Partnership’s total expenditures compared to the total expenditures by the General Partner for its own account. The portion of such general and administrative overhead expense reimbursement which is charged to the Limited Partners may not

 

26


exceed an amount equal to 3% of the Aggregate Subscription during the first 12 months of the Partnership’s operations, and in each succeeding twelve-month period, the lesser of (a) 2% of the Aggregate Subscription and (b) 10% of the total Partnership Revenue realized in such twelve-month period. Administrative expenses incurred directly by the Partnership, or incurred by the General Partner on behalf of the Partnership and reimbursable to the General Partner, such as legal, accounting, auditing, reporting, engineering, mailing and other such fees, costs and expenses are not considered a part of the general and administrative expense reimbursed to the General Partner and the amounts thereof will not be subject to the limitations described in the preceding sentence.

Purchase of Equipment and Provision of Services

UNIT, through its subsidiary Unit Drilling Company, will probably perform significant drilling services for the Partnership. UNIT also owns Superior Pipeline Company, L.L.C., an Oklahoma limited liability company, which may build or own an interest in certain gathering systems through which a portion of the Partnership’s gas production is transported.

These persons are in the business of supplying such equipment and services to non-affiliated parties in the industry and any such equipment and such services will be acquired or provided at prices or rates no higher than those normally charged in the same or comparable geographic area by non-affiliated persons or companies dealing at arms’ length. Production purchased by any affiliate of UNIT will be for prices which are not less than the highest posted price (in the case of crude oil) or prevailing price (in the case of natural gas) in the same field or area.

UNIT or one of its affiliates may provide other goods or services to the Partnership in which event the compensation received therefore will be subject to the same restrictions and conditions described above and under “CONFLICTS OF INTEREST” below.

Prior Programs

UNIT was formed in 1986 in connection with a major reorganization and recapitalization whereby UNIT acquired all of the assets and liabilities of all of the limited partnerships formed by UNIT’s predecessor, Unit Drilling and Exploration Company (“UDEC”), during the period of 1980 through 1983 in exchange for shares of UNIT’s common stock and UDEC was merged with a wholly owned subsidiary of UNIT whereby UDEC was the surviving corporation and thereby became a wholly owned subsidiary of UNIT. UNIT has conducted one oil and gas program since the date of its formation, the 1986 Energy Program. The 1986 Energy Program was formed on June 12, 1987 with total subscriptions of one million dollars. The Unit 1986 Employee Oil and Gas Limited Partnership is a co-general partner with Unit Petroleum Company of the 1986 Energy Program. Direct compensation charged to or paid by the partnerships and earned by the General Partners for their services in connection with these programs through September 30, 2008, is set forth below.

 

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Program

   Management
Fee(1)
    Compensation for
Supervision and
Operation of
Productive and
Drilling
Wells(2)(3)
   Reimbursement
of General
Administrative
and Overhead
Expense(2)(3)(4)
   Fees
Received as
a Drilling
Contractor(2)

1979(***)

   150,000     2,833,720    2,539,915    1,835,762

1980

   200,000     261,456    1,345,158    1,810,310

1981

   1,250,000 (5)   329,695    1,892,568    4,047,260

1981-II

   450,000     158,406    1,607,706    1,629,201

1982-A

   634,200     521,910    1,688,024    4,110,107

1982-B

   316,650     331,594    1,224,023    4,945,437

1983-A

   50,600     151,289    698,597    695,255

1984

   —       359,959    1,472,044    829,503

1984 Employee(*)

   —       3,924    5,000    13,452

1985 Employee(*)

   —       10,316    —      54,892

1986 Energy Income Fund(**)

   —       424,373    2,469,314    109,383

1986 Employee(*)

   —       23,505    —      59,446

1987 Employee(*)

   —       50,688    —      97,079

1988 Employee(*)

   —       93,854    —      112,861

1989 Employee(*)

   —       54,536    —      165,436

1990 Employee(*)

   —       28,884    —      144,722

1991 Employee(****)

   —       572,357    —      144,993

1992 Employee(****)

   —       159,914    —      14,934

1993 Employee(****)

   —       85,790    —      68,504

1994 Employee(****)

   —       122,392    —      42,135

1995 Employee(****)

   —       72,331    —      35,903

1996 Employee(****)

   —       85,199    —      112,911

1997 Employee(****)

   —       75,475    —      170,174

1998 Employee(****)

   —       57,689    —      161,343

1999 Employee(****)

   —       95,782    —      186,408

Consolidated Program(*)(****)

   —       560,308    —      819

2000 Employee

   —       161,294    —      600,439

2001 Employee

   —       49,196    —      363,663

2002 Employee

   —       50,592    —      275,071

2003 Employee

   —       61,082    —      231,786

2004 Employee

   —       18,048    —      546,424

2005 Employee

   —       37,780    —      752,107

2006 Employee

   —       18,171    —      738,752

2007 Employee

   —       7,161    —      729,991

2008 Employee

   —       1,837    —      484,225

(*)

Effective December 31, 1993, pursuant to an Agreement and Plan of Merger, this employee partnership was merged with and into the Unit Consolidated Employee Oil and Gas Limited Partnership (the “Consolidated Program”), with the latter being the surviving limited partnership. See Prior Activities.

(**)

Formed primarily for purposes of acquiring producing oil and gas properties.

(***)

Effective July 1, 2003 this program was dissolved.

(****)

Effective December 31, 2002, pursuant to an Agreement and Plan of Merger, this employee partnership was merged with and into the Unit Consolidated Employee Oil and Gas Limited Partnership (the “Consolidated Program”), with the latter being the surviving limited partnership. See Prior Activities.

 

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(1) Paid to both UDEC and a prior Key Employee Exploration Fund as general partners. No management fee was payable to UDEC or any of its affiliates by any of the 1984 - 2008 Employee Programs and no management fee is payable by the Partnership to UNIT or any of its affiliates.
(2) Paid only to UDEC.
(3) In the case of compensation for supervision and operation of productive wells and reimbursement of UNIT’s general and administrative overhead expense, the general partners generally were charged with and paid a percentage of such amounts equal to the percentage of partnership revenues being allocated to them.
(4) Although the partnership agreement for each of the 1985 - 2008 Employee Programs provides that the General Partner is entitled to reimbursement for the general administrative and overhead expenses attributable to each of such programs, the General Partner has to date elected not to seek such reimbursement. However, there can be no assurance that the General Partner will continue to forego such reimbursement in the future.
(5) Includes a special allocation of gross revenues totaling $500,000.

MANAGEMENT

The General Partner

UNIT was formed in 1986 in connection with a major reorganization and recapitalization whereby UNIT acquired all of the assets and liabilities of all of the limited partnerships formed by UNIT’s predecessor, UDEC, in exchange for shares of UNIT’s common stock in a transaction whereby UDEC became a wholly owned subsidiary of UNIT. UPC was incorporated in the State of Oklahoma on February 9, 1984 as Sunshine Development Corporation (“SDC”) and was acquired by UDEC in 1985. The name was changed to Unit Petroleum Company in 1988. On October 8, 1985 pursuant to the terms of a Stock Purchase Agreement,” UDEC purchased all of the issued and outstanding stock of SDC whereby SDC became a wholly owned subsidiary of UDEC. On February 1, 1988, pursuant to the terms of an “Amended and Restated Certificate of Incorporation”, SDC was renamed Unit Petroleum Company.

UPC’s as well as UNIT’s, principal office is at 7130 South Lewis Avenue, Suite 1000, Tulsa, Oklahoma 74136 and its telephone number is (918) 493-7700. UNIT through its various subsidiaries is engaged in the onshore contract drilling of oil and gas wells, the exploration for and production of oil and gas and the gathering and transportation of natural gas. Unless the context otherwise requires, references in this Memorandum to UNIT include its predecessor as well as all or any of its subsidiaries.

Officers, Directors and Key Employees

The Partnership will have no directors or officers. The directors of the General Partner are elected annually and serve until their successors are elected and qualified. Directors of UNIT are elected at the Annual Meeting of Shareholders for a staggered term of three years each, or until their successors are duly elected and qualified. The executive officers of the General Partner are elected by and serve at the pleasure of its Board of Directors. The names, ages and respective positions of the directors and executive officers of UNIT are as follows:

 

Name                          

  

Age

  

Position

King P. Kirchner    81    Director
John G. Nikkel    73    Chairman of the Board
Larry D. Pinkston    54    President, Chief Executive Officer and Director
Mark E. Schell    51    Senior Vice President, Secretary and General Counsel
David T. Merrill    47    Treasurer and Chief Financial Officer

 

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Name                                  

  

Age

  

Position

William B. Morgan    64    Director
John H. Williams    90    Director
J. Michael Adcock    59    Director
Gary R. Christopher    59    Director
Robert J. Sullivan, Jr.    63    Director
Steven B. Hildebrand    54    Director

The names, ages and respective positions of the directors and executive officers of UPC are as follows:

 

Name                          

  

Age

  

Position

Larry D. Pinkston    54    President and Director
Mark E. Schell    51    Senior Vice President, Secretary and General Counsel and Director

Mr. Kirchner, a co-founder of UNIT, has been a director since 1963. He served as Unit’s President until November, 1983, as its Chief Executive Officer until June 30, 2001, and served as the Chairman of the Board until July 31, 2003. Mr. Kirchner is a Registered Professional Engineer within the State of Oklahoma, having received degrees in Mechanical Engineering from Oklahoma State University and in Petroleum Engineering, with honors, from the University of Oklahoma. Following graduation, he was employed by Lufkin Manufacturing as a development engineer for hydraulic pumping units. Prior to co-founding Unit, he served in the U.S. Army during the Korean War and after that as vice-president engineering and operations for Woolaroc Oil Company.

Mr. Nikkel joined UNIT as its President, Chief Operating Officer and a director in 1983. He was elected its Chief Executive Officer in July, 2001 and Chairman of the Board in August, 2003. Mr. Nikkel retired as an employee and as the Chief Executive Officer of the company on April 1, 2005. He currently holds the position of Chairman of the Board. From 1976 until January, 1982 when he co-founded Nike Exploration Company, Mr. Nikkel was an officer and director of Cotton Petroleum Corporation, serving as the President of Cotton from 1979 until his departure. Before joining Cotton, Mr. Nikkel was employed by Amoco Production Company for 18 years, last serving as Division Geologist for Amoco’s Denver Division. Mr. Nikkel presently serves as President and a director of Nike Exploration Company, a family owned oil and gas investment company. Mr. Nikkel received a Bachelor of Science degree in Geology and Mathematics from Texas Christian University.

Mr. Pinkston joined UNIT in December, 1981. He had served as Corporate Budget Director and Assistant Controller before being appointed Controller in February, 1985. In December, 1986, he was elected Treasurer and was elected to the position of Vice President and Chief Financial Officer in May, 1989. In August, 2003, he was elected to the position of President. He was elected a director by the Board in January, 2004. In February, 2004, in addition to his position as President, he was elected to the office of Chief Operating Officer. Effective April 1, 2005, Mr. Pinkston was elected to the additional position of Chief Executive Officer. He holds a Bachelor of Science Degree in Accounting from East Central University of Oklahoma and is a Certified Public Accountant.

Mr. Schell joined UNIT in January, 1987, as its Secretary and General Counsel. In December, 2002, he was elected to the additional position of Senior Vice President. From 1979 until joining UNIT, Mr. Schell was Counsel, Vice President and a member of the Board of Directors of C&S Exploration, Inc. He received a Bachelor of Science degree in Political Science from Arizona State University and his Juris Doctorate degree from the University of Tulsa Law School. He is a member of the Oklahoma and American Bar Association as well as being a member of the American Corporate Counsel Association.

 

30


Mr. Merrill joined UNIT in August, 2003 as Vice President, Finance. From May, 1999 through August, 2003, Mr. Merrill served as Senior Vice President, Finance with TV Guide Networks, Inc. From July, 1996 through May, 1999 he was a Senior Manager with Deloitte & Touche LLP. From July, 1994 through July, 1996 he was Director of Financial Reporting and Special Projects for MAPCO, Inc. He began his career as an auditor with Deloitte, Haskins & Sells in 1983. Mr. Merrill received a Bachelor of Business Administration Degree in Accounting from the University of Oklahoma and is a Certified Public Accountant. In February, 2004 he was elected to the position of Treasurer and Chief Financial Officer.

Mr. Morgan was elected a director of UNIT in 1988. Mr. Morgan retired in June 2007 from his position as Executive Vice President and General Counsel of St. John Health System, Inc., Tulsa, Oklahoma, and the President of its principal for-profit subsidiary Utica Services, Inc., which positions he had held since 1995. Prior to joining St. John, he was a Partner in the law firm of Doerner, Saunders, Daniel & Anderson, Tulsa, Oklahoma, and served as Adjunct Professor of Law at the University of Tulsa College of Law, where he taught Securities Regulation. During 1968 and 1969, he served as a United States Army Officer in Vietnam and was awarded several medals including the Bronze Star. Mr. Morgan has an undergraduate degree from Muhlenberg College, Allentown, Pennsylvania and a Juris Doctor from the University of Tulsa College of Law. Mr. Morgan is a member of numerous professional and Bar associations and various federal Bars including the United States Supreme Court. He has been listed in Who’s Who in American Law, Who’s Who in American Education and The Best Lawyers in America. Mr. Morgan is a Fellow of the American College of Healthcare Executives.

Mr. Williams was elected a director of UNIT in December, 1988. Mr. Williams is engaged in personal investments and has been for more than five years. He was Chairman of the Board and Chief Executive Officer of The Williams Companies, Inc. before retiring in 1978 and continues to serve as an honorary director. Mr. Williams is a director of Apco Argentina, Inc. and also an honorary director of Willbros Group, Inc. He formerly served as a director of Petrolera Entre Lomas S.A. In addition, Mr. Williams is a member of the Tulsa Performing Arts Center Trust.

Mr. Adcock was elected a director of UNIT in December, 1997. He is an attorney and currently a Co-trustee of the Don Bodard Trust, which is a private business trust that deals in real estate, oil and natural gas properties and other equity investments. He is Chairman of the Board of Arvest Bank, Shawnee, and a director of Community Health Partners, Inc. and Midwest Consolidated Plastics, LLC. Between 1997 and September, 1998 he was the Chairman of the Board of Ameribank and President and Chief Executive Officer of American National Bank and Trust Company of Shawnee, Oklahoma, and Chairman of AmeriTrust Corporation, Tulsa, Oklahoma. Prior to holding these positions, he was engaged in the private practice of law and served as General Counsel for Ameribank Corporation.

Mr. Gary R. Christopher is engaged in personal investments and consulting. Between August, 1999 and January, 2004, he served as President and Chief Executive Officer of PetroCorp Incorporated (a public oil and gas exploration company), and from March 1996 to August 1999 he served as the Acquisition Coordinator of Kaiser-Francis Oil Company. His other past professional experience includes serving as Vice President of Acquisitions for Indian Wells Oil Company, Senior Vice President and Manager of the Energy Lending Division of First National Bank of Tulsa and from 1991 to 1996 Senior Vice President and Manager of Energy Lending for Bank of Oklahoma. Previous to that, Mr. Christopher worked for Amerada Hess Corporation as a Reservoir Engineer and for Texaco, Inc. as a Production Engineer. Mr. Christopher is a member of the Society of Petroleum Engineers, Society of Petroleum Evaluation Engineers, and the Oklahoma Independent Petroleum Association. Mr. Christopher received a B.S. degree in Petroleum Engineering from the University of Missouri at Rolla. Mr. Christopher is a past Director of the Petroleum Club of Tulsa, Middle Bay Oil Company, Three Tech Energy, PetroCorp Incorporated and a present Director of the Summit Bank of Oklahoma.

Mr. Robert J. Sullivan Jr. is a Principal with Sullivan and Company LLC, a family-owned independent oil and gas exploration and production company founded in 1958. He is also the Founder (1989) and served as Chairman and Chief Executive Officer of Lumen Energy Corporation prior to its sale in 2004. Mr. Sullivan was appointed to Oklahoma Governor Frank Keating’s Cabinet as Secretary of Energy in March, 2002. He received a BBA from the University of Notre Dame, and a MBA from the University of Michigan. Mr. Sullivan is a Board Member of the Oklahoma Independent Petroleum Association, Oklahoma Energy Resources Board, St. John Medical Center, St. Joseph Residence, University of Notre Dame Alumni Association, and former Board Member of Catholic

 

31


Charities and Gatesway Foundation. He also is Trustee for the Monte Cassino Endowment Trust, a Member of the University of Notre Dame, Graduate School Advisory Council and Past Chairman of the following School Boards: Cascia Hall Preparatory School; Monte Cassino School and School of St. Mary.

Mr. Steven B. Hildebrand was elected a director of UNIT in October of 2008. The Board has designated Mr. Hildebrand as an Audit Committee financial expert. Mr. Hildebrand retired in March 2008 from a twenty-one year tenure at Dollar Thrifty Automotive Group, where he spent his last ten years as Executive Vice President and Chief Financial Officer. Before joining Dollar Thrifty, Mr. Hildebrand served in several positions for Franklin Supply Company from 1980 to 1987, including Controller and Vice President of Finance. From 1976 to 1980, Mr. Hildebrand was an Audit Supervisor for the public accounting firm Coopers & Lybrand.

Prior Employee Programs

Since 1984, UNIT has formed limited partnerships for investment by certain of its key employees and directors that participate with UNIT in its exploration and production operations. The name, month of formation and amount of limited partner capital subscriptions of each of these limited partnerships (the “Employee Programs”) are set forth below.

 

Name

   Formed    Limited
Partners’
Capital
Subscriptions

Unit 1984 Employee Oil and Gas Program

   April 1984    $ 348,000

Unit 1985 Employee Oil and Gas Limited Partnership

   January 1985    $ 378,000

Unit 1986 Employee Oil and Gas Limited Partnership

   January 1986    $ 307,000

Unit 1987 Employee Oil and Gas Limited Partnership

   March 1987    $ 209,000

Unit 1988 Employee Oil and Gas Limited Partnership

   April 29, 1988    $ 177,000

Unit 1989 Employee Oil and Gas Limited Partnership

   December 30, 1988    $ 157,000

Unit 1990 Employee Oil and Gas Limited Partnership

   January 19, 1990    $ 253,000

Unit 1991 Employee Oil and Gas Limited Partnership

   January 7, 1991    $ 263,000

Unit 1992 Employee Oil and Gas Limited Partnership

   January 23, 1992    $ 240,000

Unit 1993 Employee Oil and Gas Limited Partnership

   January 21, 1993    $ 245,000

Unit 1994 Employee Oil and Gas Limited Partnership

   January 19, 1994    $ 284,000

Unit 1995 Employee Oil and Gas Limited Partnership

   March 7, 1995    $ 454,000

Unit 1996 Employee Oil and Gas Limited Partnership

   February 5, 1996    $ 437,000

Unit 1997 Employee Oil and Gas Limited Partnership

   February 4, 1997    $ 413,000

Unit 1998 Employee Oil and Gas Limited Partnership

   February 19, 1998    $ 471,000

Unit 1999 Employee Oil and Gas Limited Partnership

   February 22, 1999    $ 188,000

Unit 2000 Employee Oil and Gas Limited Partnership

   February 22, 2000    $ 199,000

Unit 2001 Employee Oil and Gas Limited Partnership

   February 9, 2001    $ 370,000

Unit 2002 Employee Oil and Gas Limited Partnership

   January 30, 2002    $ 457,000

Unit 2003 Employee Oil and Gas Limited Partnership

   January 31, 2003    $ 284,000

Unit 2004 Employee Oil and Gas Limited Partnership

   February 18, 2004    $ 434,000

Unit 2005 Employee Oil and Gas Limited Partnership

   January 26, 2005    $ 496,000

Unit 2006 Employee Oil and Gas Limited Partnership

   February 2, 2006    $ 767,000

Unit 2007 Employee Oil and Gas Limited Partnership

   February 6, 2007    $ 946,000

Unit 2008 Employee Oil and Gas Limited Partnership

   January 31, 2008    $ 841,000

One-half of the capital subscriptions from all limited partners were required to be paid in the 1984 Employee Program, three-fourths of the capital subscriptions from all limited partners were required to be paid in the 1985 Employee Program and the 1986 Employee Program. All of the capital subscriptions from all limited partners,

 

32


including those shown below, were required to be paid in the 1987 through 2008 Employee Programs. The capital subscriptions of the following limited partners to the 2006, 2007 and 2008 Employee Programs were as shown below:

 

     

Position with

                    UNIT                     

     Amount of Capital
Subscription

Subscriber

        2006      2007      2008

King P. Kirchner(1)

   Director      $ 40,000      $ 100,000      $ 100,000

John G. Nikkel

   Chairman of the Board      $ 200,000      $ 250,000      $ 250,000

Larry D. Pinkston

   President & Director      $ 20,000      $ 20,000      $ 20,000

(1) Mr. Kirchner invested in these programs through the King P. Kirchner Revocable Trust as permitted by the limited partnership agreement of those Employee Programs.

Ownership of Common Stock

UNIT’s Common Stock is listed on the New York Stock Exchange as reported on the Composite Tape. On January 7, 2009 there were 47,313,012 shares outstanding.

As of January 7, 2009, the directors and officers of UNIT owned of record or beneficially owned shares of UNIT Common Stock as follows:

 

Name

   Amount of
Beneficial
Ownership(1)
    % of
Outstanding(1)
 

King P. Kirchner

   159,320     *  

John H. Williams

   29,000     *  

John G. Nikkel

   146,989     *  

Larry D. Pinkston

   154,477     *  

Mark E. Schell

   138,568     *  

William B. Morgan

   35,500     *  

J. Michael Adcock

   31,891     *  

Gary R. Christopher

   16,500     *  

Robert J. Sullivan, Jr.

   10,500     *  

David T. Merrill

   41,056     *  

All Officers and Directors as a Group

   763,801 (2)(3)(4)(5)(6)(7)   1.60 %

* Less than 1%
(1) The number of shares includes the shares presently issued and outstanding plus the number of shares which any owner has the right to acquire within 60 days after January 7, 2009. For purposes of calculating the percent of the shares outstanding held by each owner, the total number of shares excludes the shares which all other persons have the right to acquire within 60 days after January 7, 2009 pursuant to the exercise of currently exercisable stock options.
(2) Includes shares of common stock held under UNIT’s 401(k) thrift plan as of January 7, 2009 for the account of: David T. Merrill, 3,889; Larry D. Pinkston, 10,823; and Mark E. Schell, 69,503.
(3) Includes unexercised stock options granted under UNIT’s Non-Employee Directors’ Stock Option Plan to each of the following, all of which are currently exercisable at the discretion of the holder: J. Michael Adcock, 14,000; William B. Morgan, 30,500; John H. Williams, 28,000; John G. Nikkel, 14,000; Gary R. Christopher 10,500; Robert J. Sullivan, Jr. 10,500; and King P. Kirchner 10,500 shares and all Non-Employee Directors as a group, 118,000.

 

33


(4) Includes unexercised stock options granted under UNIT’s Amended and Restated Stock Option Plan to each of the following, all of which are exercisable within 60 days from January 7, 2009 at the discretion of the holder: David T. Merrill, 12,000; Larry D. Pinkston, 33,000; and Mark E. Schell, 29,300.
(5) Of the shares shown, Mr. J. Michael Adcock is deemed to be the beneficial owner of 17,491 shares by virtue of his position as one of three trustees of the Don Bodard 1995 Revocable Trust.
(6) Includes the following shares of stock appreciation rights granted to each of the following which are exercisable within 60 days from January 7, 2009 at the discretion of the holder: David T. Merrill, 9,234; Larry D. Pinkston, 31,654; and Mark E. Schell, 10,157.
(7) Of the shares listed as being beneficially owned, the following individuals disclaim any beneficial interest in shares held by spouses or for the benefit of family members: J. Michael Adcock, 400; and Steven B. Hildebrand, 200.

Interest of Management in Certain Transactions

Reference is made to “COMPENSATION” for a discussion of the compensation for supervision and operation of productive wells and the reimbursement of overhead expenses attributable to the Partnership’s operations to which UNIT is entitled under the terms of the Partnership Agreement.

CONFLICTS OF INTEREST

There will be situations in which the individual interests of the General Partner and the Limited Partners will conflict. Although the General Partner is obligated to deal fairly and in good faith with the Limited Partners and conduct Partnership operations using the standards of a prudent operator in the oil and gas industry, such conflicts may not in every instance be resolved to the maximum advantage of the Limited Partners. Certain circumstances which will or may involve potential conflicts of interest are as follows:

 

   

The General Partner currently manages and in the future will sponsor and manage oil and natural gas drilling programs similar to the Partnership.

 

   

The General Partner will decide which prospects the Partnership will acquire.

 

   

The General Partner will act as operator for Partnership Wells and will, through its affiliates, furnish drilling and/or marketing services with respect to Partnership Wells, the terms of which have not been negotiated by non-affiliated persons.

 

   

The General Partner is a general partner of numerous other partnerships, and owes duties of good faith dealing to such other partnerships.

 

   

The General Partner and its affiliates engage in drilling, operating and producing activities for other partnerships.

Acquisition of Properties and Drilling Operations

With certain limited exceptions it is anticipated that the Partnership will participate in each producing property, if any, acquired by the General Partner and in the drilling of each of the wells, if any, commenced by the General Partner for its own account during the period commencing January 1, 2009, or from the formation of the Partnership if subsequent to January 1, 2009, through December 31, 2009 except for wells:

 

  (i) drilled outside the 48 contiguous United States;

 

  (ii) drilled as part of secondary or tertiary recovery operations which were in existence prior to formation of the Partnership;

 

  (iii) drilled by third parties under farm-out or similar arrangements with UNIT or the General Partner or whereby UNIT or the General Partner may be entitled to an overriding royalty, reversionary or other similar interest in the production from such wells but is not obligated to pay any of the Drilling Costs thereof;

 

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  (iv) acquired by UNIT or the General Partner through the acquisition by UNIT or the General Partner of, or merger of UNIT or the General Partner with, other companies; or

 

  (v) with respect to which the General Partner does not believe that the potential economic return therefrom justifies the costs and participation by the Partnership.

As a result, the Partnership may have an interest in wells located on prospects on which producing wells have been drilled by UNIT or the General Partner in prior years. Likewise, it is possible that the Partnership will participate in the drilling of initial wells on prospects on which some or all of the development or offset wells will be drilled in years subsequent to 2009. In the latter case, the Partnership would have no right to participate in the drilling of such development or offset wells.

Sometimes UNIT will agree to participate in drilling operations on a prospect which it may not believe are fully warranted from an economic standpoint if it believes that such participation is necessary for, or will significantly increase its chances of, obtaining a contract to drill the well with one of its drilling rigs and the revenues from the contract make the economics of the entire arrangement desirable from UNIT’s standpoint. In such an instance, the Partnership would not be entitled to any of the drilling contract revenues so the General Partner will not cause the Partnership to participate in such a well. However, an analysis of the economic potential of any proposed well is a very inexact science and wells which have a very high potential commonly prove to be dry or only marginally profitable and occasionally a well with apparently very little promise may prove to be very profitable. Thus, there can be no assurance that the General Partner will always make the most profitable decision from the Partnership’s standpoint in determining in which of such potential wells the Partnership should or should not participate.

Because the Partnership will acquire an interest only in those properties comprising the spacing unit on which each Partnership Well is located, it will not be entitled to participate in other wells drilled by the General Partner, UNIT or any of its affiliates in the same prospect area unless the drilling of those wells commences during the period from January 1, 2009, or from the formation of the Partnership if subsequent to January 1, 2009, through December 31, 2009. If the size of a spacing unit in which the Partnership has an interest is reduced, the Partnership will have no interest in any additional well drilled on the property comprising the original spacing unit unless it is commenced during the period from January 1, 2009, or from the formation of the Partnership if subsequent to January 1, 2009, through December 31, 2009. Likewise the Partnership would have no interest in any increased density wells drilled on the original spacing unit unless such wells were drilled during 2009. In addition, if additional interests are acquired in wells participated in by the Partnership after 2009, the Partnership will generally not be entitled to participate in the acquisition of such additional interests. Management believes that the apparent conflicts of interest arising from these situations are mitigated by the fact that the Partnership is expected to participate in all of UNIT’s drilling operations (with the exceptions noted above) conducted during the period. Thus, there is little opportunity for the General Partner to selectively choose Partnership drilling locations for the purpose of proving up other properties of UNIT or its affiliates in which the Partnership has no interest. Further, the Partnership will benefit in many instances by its participation in the drilling of wells located on prospects previously proved up by drilling operations conducted by UNIT prior to formation of the Partnership.

Participation in UNIT’s Drilling or Income Programs

If UNIT forms any drilling or income programs in 2009, it is anticipated that the Partnership will serve as a co-general partner with UNIT in any such drilling or income programs, or both. As the other co-general partner of any such drilling or income program, UNIT would have exclusive management and control over the business, operations and affairs of the drilling or income program. Conflicts of interest may arise between the limited partners and the general partners of such drilling or income program and it is possible that UNIT may elect to resolve those conflicts in favor of the limited partners. Further, if any such drilling or income program is offered publicly, the program agreement will be required to contain a number of provisions concerning the conduct of program operations and handling conflicts of interests required by the Guidelines for the Registration of Oil and Gas Programs adopted by the North American Securities Administrators Association, Inc. Such provisions may significantly reduce the flexibility of UNIT in managing such programs or may affect the profitability of the program operations or the transactions between the general partners and the program.

 

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Transfer of Properties

The General Partner or its affiliates are authorized to transfer interests in oil and gas properties to the Partnership, in which case the General Partner or its affiliate will receive an amount equal to the Leasehold Acquisition Costs attributable to the interests being acquired by the Partnership in the spacing unit on which the Partnership Well is located or is to be drilled. The amount of the Leasehold Acquisition Costs attributable to the fractional undivided interest in a property transferred to the Partnership by the General Partner or any affiliate shall not be reduced or offset by the amount of any gain or profit the General Partner or its affiliate might have realized by any prior sale or transfer of a fractional undivided interest in the property to an unaffiliated third party for a price in excess of the portion of the Leasehold Acquisition Costs of the property that is attributable to the transferred interest. The Partnership will not be reimbursed for or refunded any Leasehold Acquisition Costs if the size of a spacing unit on which a Partnership Well is located or drilled is reduced even though the Partnership will have no interest in any subsequent wells drilled on the area encompassed by the original spacing unit unless they are commenced during 2009.

A sale, transfer or conveyance to the Partnership of less than all of the ownership of the General Partner or its affiliates in any interest or property is prohibited unless:

 

  (1) the interest retained by the General Partner or its affiliates is a proportionate working interest;

 

  (2) the obligations of the Partnership with respect to the properties will be substantially the same proportionately as those of the General Partner or its affiliates at the time it acquired the properties; and

 

  (3) the Partnership’s interest in revenues will not be less than the proportionate interest therein of the General Partner or its affiliates when it acquired the properties.

With respect to the General Partner or its affiliates’ remaining interest, it may retain such interest for its own account or it may sell, transfer, farm-out or otherwise convey all or a portion of such remaining interest to non-affiliated industry members, which may occur either before or after the transfer of the interests in the same properties to the Partnership. The General Partner or its affiliates may realize a profit on the interests or may be carried to some extent with respect to its cost obligations in connection with any drilling on such properties and any such profit or interests will be strictly for the account of the General Partner or its affiliates and the Partnership will have no claim with respect thereto. The General Partner or its affiliates may not retain any overrides or other burdens on the property conveyed to the Partnership (other than overriding royalty interests granted to geologists and other persons employed or retained by the General Partner or its affiliates) and may not enter into any farm-out arrangements with respect to its retained interest except to non-affiliated third parties or other programs managed by the General Partner or its affiliates.

Partnership Assets

The General Partner will not take any action with respect to assets or property of the Partnership which does not benefit primarily the Partnership as a whole. The General Partner will not utilize the funds of the Partnership as compensating balances for the benefit of the General Partner or its affiliates. All benefits from marketing arrangements or other relationships affecting property of the Partnership will be fairly and equitably apportioned according to the respective interests of the Partnership and the General Partner.

The Partnership Agreement provides that when the Partnership is terminated, there will be an accounting with respect to its assets, liabilities and accounts. The Partnership’s physical property and its oil and gas properties may be sold for cash. Except in the case of an election by the General Partner to terminate the Partnership before the tenth anniversary of the Effective Date, Partnership Properties may be sold to the General Partner or any of its affiliates for their fair market value as determined in good faith by the General Partner.

 

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Transactions with the General Partner or Affiliates

UNIT provides through its subsidiary Unit Drilling Company contract drilling services in the ordinary course of its business. UNIT also owns Superior Pipeline Company, L.L.C. which is engaged in the business of buying and building gas gathering systems. It is anticipated that the Partnership will obtain services, equipment and supplies from one or all of such persons. In addition, UNIT may supply other goods or services to the Partnership. The terms of any contracts or agreements between the Partnership and UNIT or any affiliate will be no less favorable to the Partnership than those of comparable contracts or agreements entered into, and will be at prices not in excess of (or in the case of purchases of production, less than) those charged in the same geographical area, by non-affiliated persons or companies dealing at arm’s length.

For its services as a drilling contractor, Unit Drilling Company will charge the Partnership on either a daywork (a specified per day rate for each day a drilling rig is on the drill site), a footage (a specified rate per foot drilled) or a turnkey (specified amount for drilling the well) basis. The rate charged by Unit Drilling Company for such services will be the same as those offered to unaffiliated third parties in the same or similar geographic areas.

Right of Presentment Price Determination

Under the terms of the Partnership Agreement, a Limited Partner can, subject to certain conditions, require the General Partner to purchase his or her Units at a price determined by the application of a stated formula to the estimated future net revenues attributable to the Partnership’s estimated proved reserves. See “TERMS OF THE OFFERING — Right of Presentment.” It is anticipated that if an independent engineering firm makes an evaluation of the proved reserves of the Partnership, the result of that evaluation will be used in determining the price to be paid to a Limited Partner exercising his or her right of presentment. However, if no such independent evaluation is made, the right of presentment purchase price will be determined by using the proved reserves and future net revenue estimates of the technical staff of the General Partner.

Receipt of Compensation Regardless of Profitability

The General Partner is entitled to receive its fees and other compensation and reimbursements from the Partnership regardless of whether the Partnership operates at a profit or loss. See “PARTICIPATION IN COSTS AND REVENUES” and “COMPENSATION.” Such fees, compensation and reimbursements will decrease the Limited Partners’ share of any profits generated by operations of the Partnership or increase losses if such operations should prove unprofitable.

Legal Counsel

Conner & Winters, LLP serves as special legal counsel for the General Partner. Such firm has performed legal services for the General Partner and UNIT and is expected to render legal services to the Partnership. Although such firm has indicated its intention to withdraw from representation of the Partnership if conflicts of interest do in fact arise, there can be no assurance that representation of both the General Partner or UNIT and the Partnership by such firm will not be disadvantageous to the Partnership.

FIDUCIARY RESPONSIBILITY

General

Under Oklahoma law, the General Partner will have a fiduciary duty to the Limited Partners and consequently must exercise good faith, fairness and loyalty in the handling of the Partnership’s affairs. The General Partner must provide Limited Partners (or their representatives) with timely and full information concerning matters affecting the business of the Partnership. Each Limited Partner may inspect the Partnership’s books and records on reasonable prior notice. The nature of the fiduciary duties of general partners is an evolving area of law and prospective investors who have questions concerning the duties of the General Partner should consult with their counsel.

Regardless of the fiduciary obligations of the General Partner, the General Partner, UNIT or its affiliates, subject to any restrictions or requirements set forth in the Agreement, may:

 

   

engage independently of the Partnership in all aspects of the oil and gas business, either for their own accounts or for the accounts of others;

 

37


   

sell interests in oil and gas properties held by them to, purchase oil and gas production from, and engage in other transactions with, the Partnership;

 

   

serve as general partner of other oil and gas drilling or income partnerships, including those which may be in competition with the Partnership; and

 

   

engage in other activities that may involve conflicts of interest.

See “CONFLICTS OF INTEREST.” Thus, unlike the strict duty of a fiduciary who must act solely in the best interests of his or her beneficiary, the Agreement permits the General Partner to consider, among other things, the interests of other partnerships sponsored by the General Partner, UNIT or its affiliates in resolving investment and other conflicts of interest. The foregoing provisions permit the General Partner to conduct its own operations and to act as the general partner of more than one similar partnership or investment program and for the Partnership to benefit from its experience resulting therefrom, but relieves the General Partner of the strict fiduciary duty of a general partner acting as such for only one investment program at a time. These provisions are primarily intended to reconcile the applicable duties under Oklahoma law with the fact that the General Partner will manage and administer its own oil and gas operations and a number of other oil and gas investment programs with which possible conflicts of interests may arise and resolve such conflicts in a manner consistent with the expectation of the investors in all such programs, the General Partner’s fiduciary duties and customary business practices and statutes applicable thereto.

Liability and Indemnification

The Agreement provides that the General Partner will perform its duties in an efficient and businesslike manner with due caution and in accordance with established practices of the oil and gas industry. The Agreement further provides that the General Partner and its affiliates will not be liable to the Partnership or the Partners, and will be indemnified by the Partnership, for any expense (including attorney fees), loss or damage incurred by reason of any act or omission performed or omitted in good faith in a manner reasonably believed by the General Partner or its affiliates to be within the scope of authority and in the best interest of the Partnership or the Partners unless the General Partner or its affiliates is guilty of gross negligence or willful misconduct. While not totally certain under Oklahoma law, absent specific provisions in the partnership agreement to the contrary, a general partner of a limited partnership may be liable to its limited partners if it fails to conduct the partnership affairs with the same amount of care which ordinarily prudent persons would use in similar circumstances. Consequently, the Agreement may be viewed as requiring a lesser standard of duty and care than what Oklahoma law might otherwise require of the General Partner.

Any claim against the Partnership for indemnification must be satisfied only out of Partnership assets including insurance proceeds, if any, and none of the Limited Partners will have personal liability therefore.

The Limited Partners may have more limited rights of action than they would have absent the liability and indemnification provisions above. Moreover, indemnification enforced by the General Partner under such provisions will reduce the assets of the Partnership. It should be noted, however, that it is the position of the Securities and Exchange Commission (“Commission”) that any attempt to limit the liability of a general partner or to indemnify a general partner under the federal securities laws is contrary to public policy and, therefore, unenforceable. The General Partner has been advised of the position of the Commission.

Generally, the Limited Partners’ remedy for the General Partner’s breach of a fiduciary duty will be to bring a legal action against the General Partner to recover any damages, generally measured by the benefits earned by the General Partner as a result of the fiduciary breach. Additionally, Limited Partners may also be able to obtain other forms of relief, including injunctive relief. The Act provides that a limited partner may bring an action in the name of a limited partnership (a partnership derivative action) to recover a judgment in its favor if general partners with authority to do so have refused to bring the action or if an effort to cause such general partners to bring the action is not likely to succeed.

 

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PRIOR ACTIVITIES

UNIT has been engaged in oil and gas exploration and development operations since late 1974 and has conducted oil and gas drilling programs using the limited partnership format since 1979. The following table depicts the drilling results achieved as of September 30, 2008 by UNIT during each year since 1975. Because of the unpredictability of oil and gas exploration in general, such results should not be considered indicative of the results that may be achieved by the Partnership.

 

Year Ended

December 31(1)

   Gross Wells(2)    Net Wells(3)
   Total    Oil    Gas    Dry    Total    Oil    Gas    Dry

1975 Exploratory

   2    0    2    0    .01    0    .01    0

Development

   4    0    2    2    .07    0    .03    .04
                                       
   6    0    4    2    .08    0    .04    .04

1976 Exploratory

   1    0    0    1    .01    0    0    .01

Development

   8    0    6    2    .29    0    .28    .01
                                       
   9    0    6    3    .30    0    .28    .02

1977 Exploratory

   9    0    3    6    1.50    0    .45    1.05

Development

   16    0    9    7    2.00    0    .70    1.30
                                       
   25    0    12    13    3.50    0    1.15    2.35

1978 Exploratory

   8    1    1    6    1.17    .34    .15    .68

Development

   26    0    13    13    2.64    0    .76    1.88
                                       
   34    1    14    19    3.81    .34    .91    2.56

1979 Exploratory

   10    0    5    5    1.40    0    .76    .64

Development

   16    1    8    7    1.99    .06    .95    .98
                                       
   26    1    13    12    3.39    .06    1.71    1.62

1980 Exploratory

   1    0    1    0    1.28    0    .23    1.05

Development

   10    0    8    2    3.13    0    .85    2.28
                                       
   11    0    9    2    4.41    0    1.08    3.33

1981 Exploratory

   14    1    4    9    1.12    .02    .16    .94

Development

   66    18    29    19    7.38    2.96    1.77    2.65
                                       

Total

   80    19    33    28    8.50    2.98    1.93    3.59

1982 Exploratory

   40    5    9    26    3.39    .60    .32    2.47

Development

   100    22    51    27    11.70    4.70    2.71    4.29
                                       

Total

   140    27    60    53    15.09    5.30    3.03    6.76

1983 Exploratory

   6    2    0    4    1.31    .72    0    .59

Development

   72    18    26    28    8.01    3.45    1.17    3.39
                                       

Total

   78    20    26    32    9.32    4.17    1.17    3.98

1984 Exploratory

   2    1    1    0    .52    .49    .03    0

Development

   50    15    22    13    6.81    3.42    2.74    .65
                                       

Total

   52    16    23    13    7.33    3.91    2.77    .65

1985 Exploratory

   0    0    0    0    0    0    0    0

Development

   38    11    16    11    8.32    2.89    2.39    3.04
                                       

Total

   38    11    16    11    8.32    2.89    2.39    3.04

1986 Exploratory

   0    0    0    0    0    0    0    0

Development

   21    4    6    11    3.85    .81    1.01    2.03
                                       

Total

   21    4    6    11    3.85    .81    1.01    2.03

1987 Exploratory

   0    0    0    0    0    0    0    0

Development

   46    23    10    13    11.91    7.95    1.76    2.34
                                       

Total

   46    23    10    13    11.91    7.95    1.76    2.34

1988 Exploratory

   0    0    0    0    0    0    0    0

Development

   39    20    10    9    22.56    14.77    4.05    3.74
                                       

Total

   39    20    10    9    22.56    14.77    4.05    3.74

 

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Year Ended

December 31(1)

   Gross Wells(2)    Net Wells(3)
   Total    Oil    Gas    Dry    Total    Oil    Gas    Dry

1989 Exploratory

   3    0    1    2    1.97    0    .47    1.50

Development

   40    12    15    13    18.83    8.81    4.13    5.89
                                       

Total

   43    12    16    15    20.80    8.81    4.60    7.39

1990 Exploratory

   5    0    2    3    1.22    0    .12    1.10

Development

   35    11    14    10    16.53    8.38    3.52    4.63
                                       

Total

   40    11    16    13    17.75    8.38    3.64    5.73

1991 Exploratory

   4    0    0    4    .82    0    0    .82

Development

   28    10    9    9    15.88    8.61    3.91    3.36
                                       

Total

   32    10    9    13    16.70    8.61    3.91    4.18

1992 Exploratory

   0    0    0    0    0    0    0    0

Development

   18    1    11    6    5.81    1.00    3.33    1.48
                                       

Total

   18    1    11    6    5.81    1.00    3.33    1.48

1993 Exploratory

   1    0    0    1    .10    0    0    .10

Development

   16    9    6    1    12.48    8.98    3.32    .18
                                       

Total

   17    9    6    2    12.58    8.98    3.32    .28

1994 Exploratory

   3    0    1    2    1.71    0    .95    .76

Development

   57    5    40    12    25.79    4.75    14.14    6.90
                                       

Total

   60    5    41    14    27.50    4.75    15.09    7.66

1995 Exploratory

   0    0    0    0    0    0    0    0

Development

   45    15    24    6    14.94    4.67    8.04    2.23
                                       

Total

   45    15    24    6    14.94    4.67    8.04    2.23

1996 Exploratory

   0    0    0    0    0    0    0    0

Development

   70    10    51    9    32.09    7.61    20.09    4.39
                                       

Total

   70    10    51    9    32.09    7.61    20.09    4.39

1997 Exploratory

   2    0    0    2    2.00    0    0    2.00

Development

   80    8    58    14    35.94    4.35    23.29    8.30
                                       

Total

   82    8    58    16    37.94    4.35    23.29    10.30

1998 Exploratory

   2    0    1    1    .63    0    .375    .26

Development

   76    3    52    21    30.17    .31    18.750    11.11
                                       

Total

   78    3    53    22    30.80    .31    19.125    11.37

1999 Exploratory

   0    0    0    0    0    0    0    0

Development

   51    1    42    8    21.8    .4    17.4    4.0
                                       

Total

   51    1    42    8    21.8    .4    17.4    4.0

2000 Exploratory

   2    0    2    0    1.72    0    1.72    0

Development

   98    7    73    18    38.37    1.45    28.55    8.37
                                       

Total

   100    7    75    18    40.09    1.45    30.27    8.37

2001 Exploratory

   3    0    0    3    2.03    0    0    2.03

Development

   123    7    94    22    49.94    1.08    34.12    14.74
                                       

Total

   126    7    94    25    51.97    1.08    34.12    16.77

2002 Exploratory

   6    0    2    4    1.34    0    .90    .44

Development

   91    4    63    24    47.15    1.92    29.71    15.52
                                       

Total

   97    4    65    28    48.49    1.92    30.61    15.96

2003 Exploratory

   4    1    3    0    2.40    .20    2.20    0

Development

   145    5    119    21    59.17    2.13    44.31    12.73
                                       

Total

   149    6    122    21    61.57    2.33    46.51    12.73

2004 Exploratory

   14    1    7    6    6.29    .98    2.75    2.56

Development

   156    18    114    24    65.11    7.33    45.28    12.50
                                       

Total

   170    19    121    30    71.40    8.31    48.03    15.06

 

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Year Ended

December 31(1)

   Gross Wells(2)    Net Wells(3)
   Total    Oil    Gas    Dry    Total    Oil    Gas    Dry

2005 Exploratory

   8    1    5    2    3.91    .32    1.59    2.00

Development

   184    17    154    13    68.37    5.68    56.93    5.76
                                       

Total

   192    18    159    15    72.28    6.00    58.52    7.76

2006 Exploratory

   10    0    4    6    4.94    0    2.21    2.73

Development

   234    12    198    24    81.02    2.71    68.19    10.12
                                       

Total

   244    12    202    30    85.96    2.71    70.40    12.85

2007 Exploratory

   15    2    7    6    7.84    0.51    4.61    2.72

Development

   238    17    194    27    86.39    5.57    67.43    13.39
                                       

Total

   253    19    201    33    94.23    6.08    72.04    16.11

Period of January 1, 2008 to September 30, 2008

              

Exploratory

   10    3    4    3    6.13    1.75    3.38    1.00

Development

   201    41    139    21    96.31    22.78    60.69    12.84
                                       

Total

   211    44    143    24    102.44    24.53    64.07    13.84

(1) Except as indicated, the figures used in this table relate to wells drilled and completed during each of the 12 month periods ended July 31 or December 31, as the case may be. Oil wells and gas wells shown include both producing wells and wells capable of production.
(2) “Gross Wells” refers to the total number of wells in which there was participation by UNIT.
(3) “Net Wells” refers to the aggregate leasehold working interest of UNIT in such wells. For example, a 50% leasehold working interest in a well drilled represents 1.0 Gross Well, but a .50 Net Well.

Prior Employee Programs

During the period of 1979 to 1983, persons who were designated key employees of UNIT by its board of directors participated in the Unit Key Employee Exploration Funds (the “Funds”). These Funds were formed as general partnerships for the purpose of participating in 10% of all of the exploration and development operations conducted by UNIT during a specified period. Except for the Fund formed in 1983, each of the prior Funds served as one of the general partners in at least one of the prior drilling programs sponsored by UNIT and was allocated 10% of the expenses and revenues allocable to the general partners as a group. In each of these Funds the costs charged to it in connection with its operations were financed with the proceeds of bank borrowings and out of the Funds’ share of revenues.

The 1983 Fund served as the sole capital limited partner in the Unit 1983-A Oil and Gas Program and as such made no contribution to the capital of that program and shared in 10% of the costs and revenues otherwise allocable to the General Partner after the distributions to the General Partner from the program equaled the amount of its contributions thereto plus UNIT’s interest costs with respect to the unrecovered amount of its contributions.

Because of the differences in structure, format and plan of operations between the prior Funds and the Partnership and because of the uncertainties which are inherent in oil and gas operations generally, the results achieved by the prior Funds should not be considered indicative of the results the Partnership may achieve.

For each year from 1984 through 2008, a separate Employee Program was formed as an Oklahoma limited partnership with UNIT or UPC as its sole general partner (UPC now serves as the sole general partner of each of these Employee Programs) and with eligible employees and directors of UNIT and its subsidiaries who subscribed for units therein as the limited partners. Each Employee Program participated on a proportionate basis (to the extent of 10% of the General Partner’s interest in each case except for the 1986 and 1987 Employee Programs, in which case the percentage participation was 15% and the 1992 - 2001 Employee Programs, in which case the percentage was 5% and the 2002 and 2003 Employee Programs in which case the percentage was 2  1/2% and 2006, 2007 and 2008 Employee Program in which case the percentage was 1%) in all of UNIT’s oil and gas

 

41


exploration and development operations conducted during the calendar year for which the program was formed beginning with its date of formation if it was formed after January 1. Although the terms and provisions of these Employee Programs are virtually identical to those of the Partnership, because of the unpredictability of oil and gas exploration and development in general, the results for the Employee Programs shown below should not be considered indicative of the results that may be achieved by the Partnership.

As noted above, the Funds and the Employee Programs have participated in a specified percentage (ranging from 1% to 15%, depending on the program) of virtually all of UNIT’s or the General Partner’s exploration and development operations conducted since the latter half of 1979. Thus, the drilling results of these partnerships would be proportionate to those drilling results of UNIT for the periods beginning after the fiscal year ended July 31, 1979 shown above.

Results of the Prior Oil and Gas Programs

In each of the General Partner’s prior oil and gas programs other than the Unit 1983-A Oil and Gas Program and the Unit 1984 Oil and Gas Limited Partnership, one of the prior Funds also served as a general partner. The 1983 Fund served as the sole capital limited partner of the Unit 1983-A Oil and Gas Program and the 1984 Employee Program serves as a general partner of the Unit 1984 Oil and Gas Limited Partnership. The Unit 1979 Oil and Gas Program was the first limited partnership drilling program of which UNIT was a sponsor. The revenue sharing terms of the 1979 Program was generally 70% to the limited partners and 30% to the general partners until 150% program payout at which time the revenues were to be shared 55% to the limited partners and 45% to the general partners. The 1979 Program was dissolved effective July 1, 2003. The revenue sharing terms of the Unit 1980 Oil and Gas Program were generally 60% to the limited partners and 40% to the general partners. The revenue sharing terms of the Unit 1981 Oil and Gas Program were generally 70% to the limited partners and 30% to the general partners until program payout and 50% to the limited partners and 50% to the general partners thereafter. The revenue sharing terms of the Unit 1981-II Oil and Gas Program, the Unit 1982-A Oil and Gas Program and the Unit 1982-B Oil and Gas Program (60% to the limited partners and 40% to the general partners) were substantially the same as those of the Unit 1983-A Oil and Gas Program and the Unit 1984 Oil and Gas Limited Partnership (65% to the limited partners and 35% to the general partner) except that the general partners’ cost percentage and the general partners’ revenue share in each of those prior programs could not be less than 25%. The following tables depict the drilling results at September 30, 2008, and the economic results at September 30, 2008 of prior oil and gas programs and the 1984 - 2008 Employee Programs. On September 12, 1986, in connection with a major restructuring and recapitalization, UNIT acquired all of the assets and liabilities of the programs formed during 1980 through 1983 and these programs have now been dissolved. Effective December 31, 1993, pursuant to an Agreement and Plan of Merger, dated as of December 28, 1993, all of the assets and all of the liabilities of the 1984, 1985, 1986, 1987, 1988, 1989 and 1990 Employee Programs were merged with and consolidated into a new Employee Program called the Unit Consolidated Employee Oil and Gas Limited Partnership, an Oklahoma Limited Partnership which was formed November 30, 1993 (the “Consolidated Program”). Effective December 31, 2002, pursuant to an Agreement and Plan of Merger, dated December 27, 2002, all of the assets and all of the liabilities of the 1991, 1992, 1993, 1994, 1995, 1996, 1997, 1998, and 1999 Employee Programs were merged with and consolidated into to the Consolidated Program. The Consolidated Program holds no assets other than those acquired in the mergers with the 1984 through 1999 Employee Programs. All of the Employee Programs formed since 2000 continue in existence. Certain of these programs have not completed all of their drilling and development operations. Moreover, because of the unpredictability of oil and gas exploration and development in general, the results shown below should not be considered indicative of the results that may be achieved by the Partnership.

 

42


DRILLING RESULTS

As of September 30, 2008

 

     Gross Wells    Net Wells

Programs

   Total    Oil    Gas    Dry    Total    Oil    Gas    Dry

1979(1)

 

Exploratory Wells

   6    0    2    4    2.43    0.00    0.65    1.78
  Development Wells    21    16    1    4    17.28    14.14    0.03    3.11
                                         
  Total    27    16    3    8    19.71    14.14    0.68    4.89

1980(2)

 

Exploratory Wells

   15    2    5    8    5.65    0.50    2.14    3.01
  Development Wells    32    5    15    12    12.77    1.17    5.75    5.85
                                         
  Total    47    7    20    20    18.42    1.67    7.89    8.86

1981(2)

 

Exploratory Wells

   11    1    4    6    4.61    0.33    0.88    3.40
  Development Wells    67    14    34    19    21.77    5.03    6.61    10.13
                                         
  Total    78    15    38    25    26.38    5.36    7.49    13.53

1981-II(2)

 

Exploratory Wells

   13    1    5    7    5.21    0.25    1.12    3.84
  Development Wells    45    3    29    13    9.07    0.69    4.78    3.60
                                         
  Total    58    4    34    20    14.28    0.94    5.90    7.44

1982-A(2)

 

Exploratory Wells

   11    3    1    7    3.55    0.78    0.00    2.77
  Development Wells    69    23    22    24    25.22    13.09    3.59    8.54
                                         
  Total    80    26    23    31    28.77    13.87    3.59    11.31

1982-B(2)

 

Exploratory Wells

   4    1    1    2    2.28    0.80    0.08    1.40
  Development Wells    41    16    9    16    18.60    9.47    1.01    8.12
                                         
  Total    45    17    10    18    20.88    10.27    1.09    9.52

1983-A(2)

 

Exploratory Wells

   1    1    0    0    1.00    1.00    0.00    0.00
  Development Wells    26    14    10    2    6.60    4.39    1.27    0.94
                                         
  Total    27    15    10    2    7.60    5.39    1.27    0.94

1984

 

Exploratory Wells

   0    0    0    0    0.00    0.00    0.00    0.00
  Development Wells    21    1    10    10    5.89    .38    3.08    2.43
                                         
  Total    21    1    10    10    5.89    .38    3.08    2.43

(1) Effective July 1, 2003 this program was dissolved.
(2) On September 12, 1986, Unit acquired all of the assets and liabilities of this Program and the Program has been dissolved.

 

43


EMPLOYEE PROGRAMS

As of September 30, 2008

 

     Gross Wells    Net Wells

Programs

   Total    Oil    Gas    Dry    Total    Oil    Gas    Dry

1984(1)

 

Exploratory Wells

   0    0    0    0    0.00    0.00    0.00    0.00

Empl.

 

Development Wells

   25    4    12    9    .14    .02    .06    .06
                                         
  Total    25    4    12    9    .14    .02    .06    .06

1985(1)

 

Exploratory Wells

   0    0    0    0    0.00    0.00    0.00    0.00

Empl.

 

Development Wells

   30    8    10    12    .38    .12    .08    .18
                                         
  Total    30    8    10    12    .38    .12    .08    .18

1986(1)

 

Exploratory Wells

   0    0    0    0    0.00    0.00    0.00    0.00

Empl.

 

Development Wells

   18    6    8    4    .48    .12    .30    .06
                                         
  Total    18    6    8    4    .48    .12    .30    .06

1987(1)

 

Exploratory Wells

   0    0    0    0    0.00    0.00    0.00    0.00

Empl.

 

Development Wells

   21    12    5    4    1.17    .74    .25    .18
                                         
  Total    21    12    5    4    1.17    .74    .25    .18

1988(1)

 

Exploratory Wells

   0    0    0    0    0    0    0    0

Empl.

 

Development Wells

   29    15    9    5    1.55    1.03    .28    .24
                                         
  Total    29    15    9    5    1.55    1.03    .28    .24

1989(1)

 

Exploratory Wells

                       

Empl.

 

Development Wells

   32    7    14    11    1.48    .59    .36    .53
                                         
  Total    32    7    14    11    1.48    .59    .36    .53

1990(1)

 

Exploratory Wells

   5    0    2    3    .122    0    .01    .11

Empl.

 

Development Wells

   34    11    14    9    1.65    .83    .35    .46
                                         
  Total    39    11    16    12    1.78    .83    .36    .57

1991(2)

 

Exploratory Wells

   4    0    0    4    .08    0    0    .08

Empl.

 

Development Wells

   28    10    9    9    1.59    .86    .39    .34
                                         
  Total    32    10    9    13    1.67    .86    .39    .42

1992(2)

 

Exploratory Wells

   0    0    0    0    0    0    0    0

Empl.

 

Development Wells

   18    1    11    6    .29    .05    .17    .07
                                         
  Total    18    1    11    6    .29    .05    .17    .07

1993(2)

 

Exploratory Wells

   0    0    0    0    0    0    0    0

Empl.

 

Development Wells

   16    9    6    1    .63    .45    .17    .01
                                         
  Total    16    9    6    1    .63    .45    .17    .01

1994(2)

 

Exploratory Wells

   3    0    1    2    .09    0    .05    .04

Empl.

 

Development Wells

   57    5    40    12    1.29    .24    .70    .35
                                         
  Total    60    5    41    14    1.38    .24    .75    .39

1995(2)

 

Exploratory Wells

   0    0    0    0    0    0    0    0

Empl.

 

Development Wells

   45    15    24    6    .74    .23    .40    .11
                                         
  Total    45    15    24    6    .74    .23    .40    .11

1996(2)

 

Exploratory Wells

   0    0    0    0    0    0    0    0

Empl.

 

Development Wells

   53    7    38    8    1.24    .27    .76    .21
                                         
  Total    53    7    38    8    1.24    .27    .76    .21

 

44


     Gross Wells    Net Wells

Programs

   Total    Oil    Gas    Dry    Total    Oil    Gas    Dry

1997(2)

 

Exploratory Wells

   2    0    0    2    .10    0    0    .10

Empl.

 

Development Wells

   80    8    58    14    1.80    .22    1.16    .42
                                         
  Total    82    8    58    16    1.90    .22    1.16    .52

1998(2)

 

Exploratory Wells

   2    0    1    1    .03    0    .02    .01

Empl.

 

Development Wells

   76    3    52    21    1.51    .02    .94    .56
                                         
  Total    78    3    53    22    1.54    .02    .96    .57

1999(2)

 

Exploratory Wells

   0    0    0    0    0    0    0    0

Empl.

 

Development Wells

   51    1    42    8    1.09    .02    .87    .20
                                         
  Total    51    1    42    8    1.09    .02    .87    .20

2000

 

Exploratory Wells

   2    0    2    0    .09    0    .09    0

Empl.

 

Development Wells

   98    7    73    18    1.92    .07    1.43    .42
                                         
  Total    100    7    75    18    2.01    .07    1.52    .42

2001

 

Exploratory Wells

   3    0    0    3    .05    0    0    .05

Empl.

 

Development Wells

   123    7    94    22    1.25    .03    .85    .37
                                         
  Total    126    7    94    25    1.30    .03    .85    .42

2002

 

Exploratory Wells

   6    0    2    4    .03    0    .02    .01

Empl.

 

Development Wells

   91    4    63    24    1.18    .05    .74    .39
                                         
  Total    97    4    65    28    1.21    .05    .76    .40

2003

 

Exploratory Wells

   4    1    3    0    .03    .01    .02    0

Empl.

 

Development Wells

   145    5    119    21    .59    .02    .44    .13
                                         
  Total    149    6    122    21    .62    .03    .46    .13

2004

 

Exploratory Wells

   14    1    7    6    .06    .01    .03    .03

Empl.

 

Development Wells

   156    18    114    24    .65    .07    .45    .12
                                         
  Total    170    19    121    30    .71    .08    .48    .15

2005

 

Exploratory Wells

   8    1    5    2    .04    0    .02    .02

Empl.

 

Development Wells

   184    17    154    13    .68    .05    .57    .06
                                         
  Total    192    18    159    15    .72    .05    .59    .08

2006

 

Exploratory Wells

   10    0    4    6    .05    0    .02    .03

Empl.

 

Development Wells

   234    12    198    24    .81    .03    .68    .10
                                         
  Total    244    12    202    30    .86    .03    .70    .13

2007

 

Exploratory Wells

   15    2    7    6    .08    0    .05    .03

Empl.

 

Development Wells

   238    17    194    27    .86    .06    .67    .13
                                         
  Total    253    19    201    33    .94    .06    .72    .16

Period of January 1, 2008 To September 30, 2008

2008

 

Exploratory Wells

   10    3    4    3    .06    .02    .03    .01

Empl.

 

Development Wells

   201    41    139    21    .96    .23    .61    .12
                                         
  Total    211    44    143    24    1.02    .25    .64    .13

(1) Effective December 31, 1993 this Program was merged with and into the Consolidated Program.
(2) Effective December 31, 2002 this Program was merged with and into the Consolidated Program.

 

45


GENERAL PARTNERS’ PAYOUT TABLE(1)

As of September 30, 2008

 

Program

   Total
Expenditures
Including
Operating
Costs(2)
   Total
Revenues
Before
Deducting
Operating
Costs
   Total Revenues
Before Deducting
Operating Costs
for 3 Months Ended
September 30, 2008

1979(***)

   $ 8,781,728    $ 10,846,983    —  

1980

     4,043,599      4,044,424    —  

1981

     8,325,594      6,338,173    —  

1981-II

     6,642,875      3,995,616    —  

1982-A

     9,190,842      6,782,893    —  

1982-B

     4,213,710      3,126,326    —  

1983-A

     2,277,514      1,312,531    —  

1984

     3,331,882      3,018,256    40,474

1984 Employee(*)

     1,542      1,745    —  

1985 Employee(*)

     2,820      1,808    —  

1986 Energy Income Fund(**)

     3,101,603      2,324,868    27,665

1986 Employee(*)

     4,403      6,813    —  

1987 Employee(*)

     624,354      815,358    —  

1988 Employee(*)

     1,196,564      1,588,132    —  

1989 Employee(*)

     1,424,525      1,171,961    —  

1990 Employee(*)

     653,563      525,572    —  

1991 Employee(****)

     2,352,323      3,046,177    —  

1992 Employee(****)

     241,577      400,556    —  

1993 Employee(****)

     496,051      717,460    —  

1994 Employee(****)

     1,435,412      1,841,119    —  

1995 Employee(****)

     476,082      599,485    —  

1996 Employee(****)

     901,692      869,473    —  

1997 Employee(****)

     1,296,424      1,165,747    —  

1998 Employee(****)

     1,180,292      1,083,527    —  

1999 Employee(****)

     953,718      1,314,469    —  

Consolidated Program

     39,497      71,002    2,731

2000 Employee

     2,526,393      3,691,918    119,702

2001 Employee

     1,188,380      1,226,822    23,633

2002 Employee

     1,311,547      1,676,950    59,328

2003 Employee

     2,347,781      3,950,994    107,819

2004 Employee

     759,014      889,260    24,630

2005 Employee

     2,564,468      2,311,564    146,975

2006 Employee

     2,183,866      1,424,617    127,424

2007 Employee

     1,919,088      1,286,634    298,985

2008 Employee

     3,081,813      299,224    206,363

(*)

Effective December 31, 1993, this program was merged with and into the Consolidated Program.

(**)

Formed primarily for purposes of acquiring producing oil and gas properties.

(***)

Effective July 1, 2003 this program was dissolved.

(****)

Effective December 31, 2002 this Program was merged with and into the Consolidated Program.

 

46


LIMITED PARTNERS’ PAYOUT TABLE(1)

As of September 30, 2008

 

Program

   Total
Expenditures
Including
Operating
Costs(2)
   Total
Revenues
Before
Deducting
Operating
Costs
   Total Revenues
Before Deducting
Operating Costs
for 3 Months Ended
September 30, 2008

1979(***)

   $ 14,729,990    $ 18,839,040    —  

1980

     17,688,367      6,949,008    —  

1981

     37,073,946      15,768,826    —  

1981-II

     18,638,600      7,028,946    —  

1982-A

     24,866,078      12,708,949    —  

1982-B

     12,069,566      5,367,312    —  

1983-A

     3,770,856      1,922,177    —  

1984

     3,519,165      3,112,859    40,474

1984 Employee(*)

     120,942      171,540    —  

1985 Employee(*)

     277,901      178,984    —  

1986 Energy Income Fund(**)

     3,182,857      4,607,733    41,498

1986 Employee(*)

     435,858      676,972    —  

1987 Employee(*)

     341,846      469,830    —  

1988 Employee(*)

     333,898      446,044    —  

1989 Employee(*)

     179,593      175,331    —  

1990 Employee(*)

     300,852      188,848    —  

1991 Employee(****)

     620,136      811,871    —  

1992 Employee(****)

     622,697      1,033,805    —  

1993 Employee(****)

     451,551      664,349    —  

1994 Employee(****)

     582,274      754,012    —  

1995 Employee(****)

     762,211      941,188    —  

1996 Employee(****)

     549,125      534,519    —  

1997 Employee(****)

     605,116      524,732    —  

1998 Employee(****)

     613,890      551,342    —  

1999 Employee(****)

     289,622      392,633    —  

Consolidated Program

     3,857,544      7,028,447    270,311

2000 Employee

     347,674      503,438    16,323

2001 Employee

     533,331      551,181    10,618

2002 Employee

     674,766      863,883    30,563

2003 Employee

     479,726      808,958    22,084

2004 Employee

     620,635      727,579    20,153

2005 Employee

     604,294      542,252    34,476

2006 Employee

     962,702      640,058    57,256

2007 Employee

     1,076,580      723,732    168,179

2008 Employee

     818,214      79,541    54,856

(*)

Effective December 31, 1993, this program was merged with and into the Consolidated Program.

(**)

Formed primarily for purposes of acquiring producing oil and gas properties.

(***)

Effective July 1, 2003, this program was dissolved.

(****)

Effective December 31, 2002 this Program was merged with and into the Consolidated Program.

 

47


GENERAL PARTNERS’ NET CASH TABLE (1)

As of September 30, 2008

 

Program

   Total
Expenditures
Less
Operating
Costs(2)
   Total
Revenues
Less
Operating
Costs
    Total
Revenues
Less
Operating
Costs for
3 Months
Ended
Sept. 30,
2008
    Total
Revenues
Distributed
   Total
Revenues
Distributed
for 3 Months
Ended
Sept. 30,
2008

1979(***)

   $ 2,805,917    $ 4,871,172     $ —       $ 3,961,014    $ —  

1980

     2,628,978      2,629,803       —         2,635,751      —  

1981

     6,546,160      4,558,739       —         5,368,272      —  

1981-II

     4,817,145      2,169,886       —         2,609,000      —  

1982-A

     6,297,972      3,890,023       —         3,755,000      —  

1982-B

     2,565,504      1,478,120       —         1,158,000      —  

1983-A

     1,380,331      415,348       —         819,000      —  

1984

     985,862      672,236       (13,612 )     1,175,084      —  

1984 Employee(*)

     874      1,077       —         1,000      —  

1985 Employee(*)

     2,300      1,288       —         1,035      —  

1986 Energy Income Fund(**)

     201,165      (575,570 )     (84,058 )     473,865      —  

1986 Employee(*)

     2,698      5,108         4,486      —  

1987 Employee(*)

     357,368      548,372       —         465,800      —  

1988 Employee(*)

     770,272      1,161,840       —         942,800      —  

1989 Employee(*)

     1,010,133      752,569       —         607,900      —  

1990 Employee(*)

     466,272      338,281       —         266,600      —  

1991 Employee(****)

     1,056,956      1,750,810       —         1,618,020      —  

1992 Employee(****)

     99,250      258,229       —         230,839      —  

1993 Employee(****)

     311,650      533,059       —         472,480      —  

1994 Employee(****)

     856,390      1,262,097       —         1,076,708      —  

1995 Employee(****)

     330,617      454,020       —         350,504      —  

1996 Employee(****)

     681,656      649,437       —         450,383      —  

1997 Employee(****)

     1,057,002      926,325       —         695,477      —  

1998 Employee(****)

     920,862      824,096       —         638,218      —  

1999 Employee(****)

     706,281      1,067,032       —         796,578      —  

Consolidated Program

     13,307      44,812       1,739       41,647      1,500

2000 Employee

     1,639,762      2,805,287       86,903       2,061,669      70,000

2001 Employee

     876,421      914,863       16,179       741,000      20,500

2002 Employee

     935,796      1,301,199       46,695       1,005,000      52,000

2003 Employee

     1,566,523      3,169,736       84,505       2,600,750      120,000

2004 Employee

     589,703      719,949       18,009       532,500      19,000

2005 Employee

     2,099,391      1,846,487       114,814       1,089,000      150,000

2006 Employee

     1,918,755      1,159,506       100,844       503,000      110,000

2007 Employee

     1,756,307      1,123,852       256,000       270,000      240,000

2008 Employee

     3,040,285      257,696       183,807       —        —  

(*)

Effective December 31, 1993, this program was merged with and into the Consolidated Program.

(**)

Formed primarily for purposes of acquiring producing oil and gas properties.

(***)

Effective July 1, 2003, this program was dissolved.

(****)

Effective December 31, 2002 this Program was merged with and into the Consolidated Program.

 

48


LIMITED PARTNERS’ NET CASH TABLE(1)

As of September 30, 2008

 

Program

   Capital
Contributed
    Total
Expenditures
Less
Operating
Costs(2)
   Total
Revenues
Less
Operating
Costs
   Total
Revenues
Less
Operating
Costs for
3 Months
Ended
Sept. 30,
2008
   Total
Revenues
Distributed
   Total
Revenues
Distributed
for 3
Months
Ended
Sept. 30,
2008
 

1979(***)

   $ 3,000,000     $ 6,085,402    $ 10,194,451    $ —      $ 6,198,801    $ —    

1980

     12,000,000 (3)     14,469,265      3,729,906      —        760,000      —    

1981

     29,255,000 (4)     32,700,741      11,395,621      —        5,335,065      —    

1981-II

     15,000,000       16,603,760      4,994,106      —        1,710,001      —    

1982-A

     21,140,000       21,591,442      9,434,313      —        6,342,000      —    

1982-B

     10,555,000       9,935,850      3,233,596      —        2,828,740      —    

1983-A

     2,530,000       2,993,705      1,145,026      —        227,700      —    

1984

     1,875,000       2,036,578      1,630,272      27,859      1,312,331      —   (5)

1984 Employee(*)

     174,000       86,664      137,262      —        125,280      —    

1985 Employee(*)

     283,500       227,670      128,753      —        182,644      —    

1986 Energy Income Fund(**)

     1,000,000       1,024,247      2,449,122      30,054      2,258,800      —   (6)

1986 Employee(*)

     229,750       267,008      508,122      —        460,007      —    

1987 Employee(*)

     209,000       207,060      335,044      —        324,845      —    

1988 Employee(*)

     177,000       214,712      326,858      —        281,630      —    

1989 Employee(*)

     157,000       157,306      153,044      —        147,737      —    

1990 Employee(*)

     253,000       254,483      142,479      —        180,895      —    

1991 Employee(****)

     263,000       275,590      467,325      —        438,947      —    

1992 Employee(****)

     240,000       256,030      667,138      —        626,888      —    

1993 Employee(****)

     245,000       281,201      493,998      —        459,375      —    

1994 Employee(****)

     284,000       345,243      516,980      —        433,668      —    

1995 Employee(****)

     454,000       493,337      672,314      —        572,524      —    

1996 Employee(****)

     437,000       419,615      405,010      —        382,812      —    

1997 Employee(****)

     413,000       495,786      415,402      —        348,159      —    

1998 Employee(****)

     471,000       486,317      423,769      —        398,937      —    

1999 Employee(****)

     141,000       214,376      317,387      —        288,204      —    

Consolidated

     —         1,230,292      4,401,195      169,195      4,167,607      168,248 (7)

2000 Employee

     199,000       223,956      379,721      11,860      347,171      8,955 (8)

2001 Employee

     370,000       393,754      411,604      7,272      372,103      8,880 (9)

2002 Employee

     457,000       482,076      671,193      24,062      606,993      22,393 (10)

2003 Employee

     284,000       320,856      650,088      17,310      583,229      23,004 (11)

2004 Employee

     434,000       482,483      589,426      14,743      515,594      14,756 (12)

2005 Employee

     496,000       496,003      433,961      26,998      415,174      16,368 (13)

2006 Employee

     767,000       847,016      524,372      45,401      367,393      50,622 (14)

2007 Employee

     946,000       987,923      635,074      144,247      378,400      157,036 (15)

2008 Employee

     841,000       808,177      69,503      49,393      —        —   (16)

(*)

Effective December 31, 1993, this program was merged with and into the Consolidated Program.

(**)

Formed primarily for purposes of acquiring producing oil and gas properties.

(***)

Effective July 1, 2003, this program was dissolved.

(****)

Effective December 31, 2002 this Program was merged with and into the Consolidated Program.

 

49


(1) Amounts reflect the accrual method of accounting.
(2) Does not include expenditures of $237,600, $920,453, $2,252,900, $1,480,248, $2,079,268, $985,371 and $241,076 which were obtained from bank borrowings and used to pay the limited partners’ share of sales commissions of $237,600, $722,453, $1,940,400, $1,183,248, $1,656,468, $827,046 and $190,476 and organization costs of $—0—, $198,000, $312,500, $297,000, $422,800, $158,325 and $50,600 for the 1979, 1980, 1981, 1981-II, 1982-A, 1982-B and 1983-A Programs, respectively.
(3) Includes original subscriptions of limited partners totaling $10,000,000 and additional assessments totaling $2,000,000.
(4) Includes original subscriptions of limited partners totaling $25,000,000 and additional assessments totaling $4,255,000.
(5) In November 2008 the 1984 Program made a distribution of $29,295 to that program’s limited partners.
(6) In November 2008 the 1986 Program made a distribution of $34,500 to that program’s limited partners.
(7) In November 2008 the Consolidated Employee Program made a distribution of $207,862 to that program’s limited partners.
(8) In November 2008 the 2000 Employee Program made a distribution of $10,348 to that program’s limited partners.
(9) In November 2008 the 2001 Employee Program made a distribution of $9,620 to that program’s limited partners.
(10) In November 2008 the 2002 Employee Program made a distribution of $25,135 to that program’s limited partners.
(11) In November 2008 the 2003 Employee Program made a distribution of $21,300 to that program’s limited partners.
(12) In November 2008 the 2004 Employee Program made a distribution of $16,926 to that program’s limited partners.
(13) In November 2008 the 2005 Employee Program made a distribution of $13,392 to that program’s limited partners.
(14) In November 2008 the 2006 Employee Program made a distribution of $49,855 to that program’s limited partners.
(15) In November 2008 the 2007 Employee Program made a distribution of $144,738 to that program’s limited partners.
(16) To date the 2008 Employee Program has made no distributions to its limited partners.

FEDERAL INCOME TAX CONSIDERATIONS

The following is a summary of the opinions of Conner & Winters on all material federal income tax consequences to the Partnership and to the Limited Partners. The full tax opinion of Conner & Winters is attached to this Memorandum as Exhibit B. All prospective investors should review Exhibit B in its entirety before investing in the Partnership. There may be aspects of a particular investor’s tax situation which are not addressed in the following discussion or in Exhibit B. Additionally, the