CONFIDENTIAL
For Private Placement Purposes Only
UNIT 2004 EMPLOYEE OIL AND GAS LIMITED PARTNERSHIP
7130 South Lewis, 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 8, 2004
<PAGE>
600 Preformation
Units of Limited
Partnership Interest
in the
UNIT 2004 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 600
(minimum of 50) units of limited partnership interest
("Units") in the UNIT 2004 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, 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.
ii
<PAGE>
. 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;
and
. 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.
. 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.
. 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.
. 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 UPON. 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.
-------------------------------------
iii
<PAGE>
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 UPON 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.
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, Esq.
7130 South Lewis, Suite 1000
Tulsa, Oklahoma 74136
(918) 493-7700
iv
<PAGE>
The following
documents and instruments are available to qualified offerees
upon 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
upon
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 Securities and
Exchange Commission pursuant to the Securities Exchange Act of
1934,
as amended, during calendar year 2003, the annual report to
shareholders and all quarterly reports to shareholders submitted
by
UNIT to its shareholders during calendar year 2003.
8. The Registration Statement
on Form S-3 (File No. 333-104165) and all
supplemental prospectuses filed with the SEC pursuant to Rule
424.
9. The agreements of limited
partnership for the prior oil and gas
drilling programs and prior employee programs of Unit Petroleum
Company, UNIT and Unit Drilling and Exploration Company
("UDEC").
10. All periodic reports filed with
the Securities and Exchange Commission
and all reports and information provided to limited partners in
all
limited partnerships of which Unit Petroleum Company, 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.
v
<PAGE>
SUMMARY OF CONTENTS
Page
SUMMARY OF
PROGRAM.........................................................1
Terms of the
Offering...................................................1
Risk
Factors............................................................2
Additional
Financing....................................................4
Proposed
Activities.....................................................4
Application of
Proceeds.................................................4
Participation in Costs and
Revenues.....................................5
Compensation............................................................6
Federal Income Tax
Considerations; Opinion of Counsel...................6
RISK
FACTORS...............................................................7
INVESTMENT
RISKS......................................................7
TAX STATUS AND
TAX RISKS.............................................13
OPERATIONAL
RISKS....................................................14
TERMS OF THE
OFFERING.....................................................16
General................................................................16
Limited Partnership
Interests..........................................16
Subscription
Rights....................................................17
Payment for Units;
Delinquent Installment..............................18
Right of
Presentment...................................................19
Rollup or Consolidation of
Partnership.................................20
ADDITIONAL
FINANCING.....................................................21
Additional
Assessments.................................................21
Prior
Programs.........................................................21
Partnership
Borrowings.................................................22
PLAN OF
DISTRIBUTION......................................................22
Suitability of
Investors...............................................23
RELATIONSHIP OF THE PARTNERSHIP, THE
GENERAL PARTNER AND AFFILIATES.......24
PROPOSED
ACTIVITIES.......................................................24
General................................................................24
Partnership
Objectives.................................................27
Areas of
Interest......................................................27
Transfer of
Properties.................................................27
Record Title to Partnership
Properties.................................28
Marketing of
Reserves..................................................28
Conduct of
Operations..................................................28
APPLICATION OF
PROCEEDS...................................................29
PARTICIPATION IN COSTS AND
REVENUES.......................................29
COMPENSATION..............................................................31
Supervision of
Operations..............................................31
Purchase of Equipment and
Provision of Services........................32
Prior
Programs.........................................................32
MANAGEMENT................................................................34
The General
Partner....................................................34
Officers, Directors and Key
Employees..................................34
Prior Employee
Programs................................................37
Ownership of Common
Stock..............................................39
Interest of Management in
Certain Transactions.........................41
CONFLICTS OF
INTEREST.....................................................41
Acquisition of Properties
and Drilling Operations......................41
Participation in UNIT's
Drilling or Income Programs....................42
Transfer of
Properties.................................................43
Partnership
Assets.....................................................44
Transactions with the
General Partner or Affiliates....................44
Right of Presentment Price
Determination...............................44
Receipt of Compensation
Regardless of Profitability....................44
Legal
Counsel..........................................................45
vi
<PAGE>
FIDUCIARY
RESPONSIBILITY..................................................45
General................................................................45
Liability and
Indemnification..........................................46
PRIOR
ACTIVITIES..........................................................46
Prior Employee
Programs................................................49
Results of the Prior Oil and
Gas Programs..............................50
FEDERAL INCOME TAX
CONSIDERATIONS.........................................58
Summary of
Conclusions.................................................59
General Tax Effects of
Partnership Structure...........................61
Ownership of Partnership
Properties....................................62
Intangible Drilling and
Development Costs Deductions...................63
Depletion
Deductions...................................................63
Depreciation
Deductions................................................64
Transaction
Fees.......................................................64
Basis and At Risk
Limitations..........................................65
Passive Loss
Limitations...............................................65
Gain or Loss on Sale of
Property or Units..............................66
Partnership
Distributions..............................................66
Partnership
Allocations................................................67
Administrative
Matters.................................................67
Accounting Methods and
Periods.........................................68
State and Local
Taxes..................................................68
Individual Tax Advice Should
Be Sought.................................68
COMPETITION, MARKETS AND
REGULATION.......................................69
Marketing of
Production................................................69
Regulation of Partnership
Operations...................................70
Natural Gas Price
Regulation...........................................70
Oil Price
Regulation...................................................74
State Regulation of Oil and
Gas Production.............................74
Legislative and Regulatory
Production and Pricing Proposals............74
Production and Environmental
Regulation................................75
SUMMARY OF THE LIMITED PARTNERSHIP
AGREEMENT..............................76
Partnership
Distributions..............................................76
Deposit and Use of
Funds...............................................76
Power and
Authority....................................................77
Rollup or Consolidation of the
Partnership.............................77
Limited
Liability......................................................77
Records, Reports and
Returns...........................................78
Transferability of
Interests...........................................79
Amendments.............................................................80
Voting
Rights..........................................................81
Exculpation and
Indemnification of the General Partner.................81
Termination............................................................82
Insurance..............................................................82
COUNSEL...................................................................82
GLOSSARY..................................................................83
FINANCIAL
STATEMENTS......................................................86
EXHIBIT A - AGREEMENT OF
LIMITED PARTNERSHIP
EXHIBIT B - LEGAL
OPINION
vii
<PAGE>
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 2004 Employee Oil and Gas Limited
Partnership, a proposed Oklahoma limited
partnership (the "Partnership"), offers
600 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 hereto) must be executed 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, 2004
(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
upon delivery of the Subscription
Agreement. Payment for the Units will be
made either (i) in four equal
Installments, the first of such
Installments being due on March 15, 2004 and the
remaining three of such Installments being
due on June 15, September 15, and
December 15, 2004, respectively, or (ii)
through equal deductions from 2004
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 2004. Each
member of the Board of Directors of UNIT
may subscribe for up to 250 Units
($250,000). 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 upon
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,
2034, unless it is terminated earlier
pursuant to 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."
Units will be
offered only to those qualified employees of UNIT or any of
its subsidiaries at the date of formation
of the Partnership whose annual base
salaries for 2004 have been set at $36,000
or more and directors of UNIT who
meet certain financial requirements which
will enable them to bear the economic
risks of an investment in the Partnership
and who can demonstrate that they have
sufficient investment experience and
expertise to evaluate the risks and merits
of such an investment. 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
1
<PAGE>
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 salaried employees of UNIT or any of its
subsidiaries whose annual base salaries for
2004 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 2004. Directors'
subscriptions may not be for more than 250
Units ($250,000). 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."
Right of
Presentment. After December 31, 2005, 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:
o Future oil and natural
gas prices are unpredictable. If oil and
natural gas prices go down, the Partnership's distributions, if
any,
to the Limited Partners will be adversely affected.
o 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.
o 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, 2005 to present their Units to the
General
Partner for purchase, Limited Partners will not be able to
liquidate
their investments.
o 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
2
<PAGE>
may be restricted in the event that the
Partnership receives only the minimum amount of Capital
Contributions.
o 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.
o 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 upon the management
skills
and expertise of the General Partner.
o 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.
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.
o 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.
o 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.
o 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:
o Tax laws and
regulations applicable to partnership investments may
change at any time and these changes may be applicable
retroactively.
o Certain allocations of
income, gain, loss and deduction of the
Partnership among 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.
o Investment as a
Limited Partner may be less advisable for a person who
does not have substantial current taxable income from trade or
business activities in which the Limited Partner does not
materially
participate.
o 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 a Limited Partner for the year.
Operational
Risks:
3
<PAGE>
o The search for oil and
gas is highly speculative and the drilling
activities conducted by the Partnership may result in a well that
may
be dry or productive wells that do not produce sufficient oil and
gas
to produce a profit or result in a return of the Limited
Partners'
investment.
o Certain hazards may be
encountered in drilling wells which could lead
to substantial liabilities to third parties or governmental
entities.
In addition, 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 such laws and regulations.
Additional Financing
Additional
Assessments. After the Aggregate Subscription received from the
Limited Partners 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 from the Limited Partners 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."
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. Additionally, the
General Partner may, but is not required
to, advance funds to the Partnership to
pay such costs. See "ADDITIONAL FINANCING
-- Partnership Borrowings."
Proposed Activities
General. The
Partnership is being formed for the purposes of acquiring
producing oil and gas properties and
conducting oil and gas drilling and
development operations. 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
commenced by UPC for its own account
or by UNIT during the period from January
1, 2004, if the Partnership is formed
prior to such date or from the date of the
formation of the Partnership if
subsequent to January 1, 2004, until
December 31, 2004, and will, with certain
limited exceptions, serve as a co-general
partner with UNIT in any drilling or
income programs which may be formed by the
General Partner or UNIT in 2004. 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 UNIT during 2004.
UNIT hopes that participation in the
Partnership will provide the participants
with greater proprietary interests in
UNIT'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
UNIT realizes from the wells drilled or
acquired during 2004.
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
4
<PAGE>
pursuant to drilling activities in which
the Partnership participates. The
General Partner estimates (based on
historical operating experience) that such
costs may 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:
$600,000
$50,000
Program
Program
--------
-------
Leasehold Acquisition Costs
of Properties to Be
Drilled..........
$30,000
$2,500
Drilling Costs of Exploratory
Wells(1).............................
30,000
2,500
Drilling Costs of Development
Wells(1).............................
420,000
35,000
Leasehold Acquisition Costs of
Productive
Properties................
120,000
10,000
Reimbursement of General
Partner's Overhead
Costs(2).........
--
--
========
=======
Total...................................
$600,000
$50,000
---------------
(1) See
"GLOSSARY."
(2) The
Agreement provides that the General Partner shall be reimbursed
by
the Partnership for that portion of its
general and administrative overhead
expense attributable to its conduct of
Partnership business and affairs but such
reimbursement will be made only out of
Partnership Revenue. See "COMPENSATION."
Participation in Costs and Revenues
Partnership
costs, expenses and revenues will be allocated among the
Partners in the following percentages:
5
<PAGE>
General
Limited
COSTS AND EXPENSES
Partner
Partners
-------
--------
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
General Partner's
Limited Partners'
Contribution......... Percentage(1)
Percentage(1)
REVENUES........................
General Partner's
Limited Partners'
Percentage(1)
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, P.C. ("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 upon 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 and not as an association
taxable as a corporation; (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
claim as deductions their pro rata
shares of the Partnership's intangible
drilling and development costs ("IDC")
paid in 2004; (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; (v) to
the extent provided herein, the
Partners'
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distributive shares of Partnership tax
items will be determined and allocated
substantially in accordance with the terms
of the Partnership Agreement; and
(vi) the Partnership will not be required
to register with the Service as a tax
shelter.
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, under
Code Section 183, the losses of the
Partnership will be treated as derived from
"activities not engaged in for
profit," and therefore nondeductible from
other gross income (due to the
inherently factual nature of a Partner's
interest and motive in investing in the
Partnership); (iii) whether any of the
Partnership's properties will be
considered "proven" for purposes of
depletion deductions; (iv) 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 (v) whether the Partnership will be
treated as the tax owner of Partnership
Properties acquired by the General Partner
as nominee for the Partnership.
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, or UNIT)
and, in some 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 all
such 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, may be fully liable for their
proportionate share of all costs of
such operations even if the actual costs
significantly exceed the original cost
estimates. Further, if any joint interest
party defaults in its obligation to
pay its share of the costs, the other joint
interest parties may be required to
fund 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 larger fractional
interests in Partnership Properties than
originally anticipated and, thus, be
required to bear a greater share of the
costs of operations. As a result of the
foregoing, the Partnership could become
liable for amounts significantly in
excess of the amounts originally
anticipated to be expended in connection with
the operations and, in such event, would
have only limited means for providing
needed additional funds (see "ADDITIONAL
FINANCING"). Also, if a well is
operated by a company which does not or
cannot pay the costs and expenses of
drilling or operating a Partnership Well,
the Partnership's interest in such
well may become subject to liens and claims
of creditors who supplied services
or materials in connection with such
operations even though
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<PAGE>
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 Upon General Partner
The Limited
Partners will acquire interests in the Partnership, not in the
General Partner or UNIT. They will not
participate in either increases or
decreases in the General Partner's or
UNIT's net worth or the value of its
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 its
operations, a significant financial
reversal for the General Partner or UNIT
could have an adverse effect on the
Partnership and the Limited Partners'
interests therein.
Under the
Partnership 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, as the
Limited Partners will have no role in the
management of the business of the
Partnership.
The
Partnership's success will depend, in part, upon 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
UNIT and its
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 UNIT and
its subsidiaries will continue to
engage in such 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 commenced by the
General Partner or UNIT for its own account
during the period from January 1,
2004, if the Partnership is formed prior to
such date, or from the date of the
formation of the Partnership, if subsequent
to January 1, 2004, through December
31, 2004 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 2004. 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
UNIT or the General Partner prior to the
formation of the Partnership. Further,
certain of the Partnership Wells will be
drilled on prospects on which the
General Partner and possibly future
employee programs may conduct additional
drilling operations in years subsequent to
2004. 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 begun in 2004 and will
have no rights in production from
wells commenced in years other than 2004.
Likewise, if additional interests are
acquired in wells participated in by the
Partnership after 2004, the Partnership
will generally not be entitled to
participate in the acquisition of such
additional interests. See "CONFLICTS OF
INTEREST -- Acquisition of Properties
and Drilling Operations."
8
<PAGE>
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 of entering into each such
contract, and the costs to be paid
thereunder or the sale price to be received
will be one which is competitive with the
costs charged or the prices paid by
unaffiliated parties in the same geographic
region. The General Partner will
make the determination of what are
competitive rates or prices in the area. 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, however, that it will, if requested
at any time after December 31, 2005,
buy Units for prices determined either by
an independent petroleum engineering
firm or the General Partner pursuant to a
formula described under "TERMS OF THE
OFFERING -- Right of Presentment." This
obligation of the General Partner to
purchase Units when requested 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 have been made and may
hereafter be made to investors in other oil
and gas drilling, income and employee
programs sponsored by the General Partner
or UNIT. 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."
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 2005. 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 the date
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:
o
withdrawing from the Partnership,
o
transferring Units without restrictions, or
9
<PAGE>
o
consenting to or voting upon 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 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."
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<PAGE>
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 upon
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, upon 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
2004. 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.
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
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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
upon 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 upon exemptive
provisions of said 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 exemptive
provisions 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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<PAGE>
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 upon 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
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 and will be unable
to use passive losses generated by the
Partnership until and unless he or she
has realized "passive income".
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<PAGE>
Tax Liabilities in Excess of Cash
Distributions
A 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
activities. For example, income from the
Partnership's sale of gas production will
be taxable to 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).
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.
The
determination of various of the above-referenced issues is
dependent on
facts not currently available. Therefore,
Conner & Winters is unable to render
an opinion at this time with respect to
such issues. Also, the unknown facts
with respect to the various issues referred
to above will vary from Partner to
Partner and will result in different tax
consequences and burdens for individual
Partners.
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 upon
the opinion of Conner & Winters will
not be challenged successfully by the
Service.
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, 2004 or the time
the Partnership is formed through December
31, 2004 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 2004.
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 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, and (vii)
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 upon 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.
14
<PAGE>
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 activities of the Partnership
may expose it to 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
(prior to the early 1980s), world oil prices were established
and maintained largely as a result of the
actions of members of OPEC to limit,
and maintain a base price for, their oil
production. Until recently, however,
members of OPEC were unable to agree to and
maintain price and production
controls, which resulted in significant
downward pressure on oil prices.
Commencing in early 2001, OPEC members were
able to reach agreement on oil
production levels which has contributed to
a rise in oil prices. Although future
levels of production by the members of OPEC
or the degree to which oil prices
will be affected thereby cannot be
predicted, 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 that
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. In recent years, significant court
decisions and regulatory changes have
affected the natural gas markets. As a
result of such court decisions,
regulatory changes and unsettled market
conditions, natural gas regulations may
be modified in the future and may be
subject to further judicial review or
invalidation. The combination of these
factors, among others, makes it
particularly difficult to estimate
accurately future prices of natural gas, and
any assumptions concerning future prices
may prove incorrect. 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
15
<PAGE>
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 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
.
600 Maximum Units; 50 Minimum Units
.
$1,000 Units; Minimum subscription: $2,000
.
Minimum Partnership: $50,000 in subscriptions
.
Maximum Partnership: $600,000 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 600 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 upon 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
16
<PAGE>
conducted from the General Partner's
offices, the address of which is 7130 South
Lewis, Suite 1000, Tulsa, Oklahoma 74136,
telephone (918) 493-7700.
The offering of
Units will be closed on January 30, 2004 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.
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 2004 (excluding bonuses) have
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
2004. Each director of UNIT may subscribe
for a maximum of 250 Units (maximum
investment of $250,000). At January 6, 2004
there were approximately 274 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.
If all eligible
employees and directors subscribed for the maximum number
of Units, the Units would be
oversubscribed. In that event, Units would be
allocated among the respective subscribers
in the proportion that each
subscription amount bears to total
subscriptions obtained.
17
<PAGE>
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 the
spouse or 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, 2004 and the remaining three of
such Installments being due on June
15, September 15, and December 15, 2004,
respectively, or (ii) by employees so
electing in the space provided on the
Subscription Agreement, through equal
deductions from 2004 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. 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.
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.
18
<PAGE>
Right of Presentment
After December
31, 2005, 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;
(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.
19
<PAGE>
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 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
20
<PAGE>
resulting 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.
Prior Programs
In the prior
employee programs conducted by UNIT or the General Partner in
each of the years 1984 through 2003,
Additional Assessments could be called for
as provided herein. At September 30, 2003,
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.
21
<PAGE>
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 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
upon 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.
22
<PAGE>
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 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.
23
<PAGE>
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.
UNIT CORPORATION
----------------
|
------------------------------------------
|
|
| General Partner
|
| ----------------
|
-----------------------------
------------------------
Unit
Petroleum Company
Unit Drilling Company
-----------------------------
------------------------
|
|
-----------------------------
Unit 2004 Employee Oil
& Gas
Limited Partnership
-----------------------------
|
|
| Limited Partners
----------------
-----------------------------
Eligible Employees
and
Directors
-----------------------------
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 2004. 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
2004 and (ii) serving as a co-general
partner in any drilling or income
programs, or both, formed by the General
Partner or UNIT during 2004.
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, 2004, or the time of the
formation of the Partnership if subsequent
to January 1, 2004, until December
31, 2004, except for wells, if any:
(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;
24
<PAGE>
(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 (However,
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
2004. 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
2003. Although it does not currently
contemplate doing so, UNIT may form such
drilling or income programs during 2004. 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
25
<PAGE>
often referred to as the general partners'
"promote." Any drilling program which
UNIT or UPC may form in 2004 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 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 upon 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 2004 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 2004 nor can it predict what
producing properties, if any, will be
acquired by it during 2004. 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 150 - 200 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 2004. In
either instance, the Partnership will
have an interest only in those wells begun
in 2004 and will have no rights in
production from wells commenced in years
other than 2004 even though
26
<PAGE>
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 2004, 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 2004. 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
2004.
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
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 upon
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 2004.
If additional interests in
Partnership Wells are
27
<PAGE>
acquired in years subsequent to 2004 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 2004.
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").
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.
28
<PAGE>
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 600 Units
offered hereby are sold, the proceeds to the Partnership
would be $600,000. 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:
$600,000 Program
$50,000 Program
----------------
---------------
Percent
Amount
Percent
Amount
-------
------
-------
------
Leasehold Acquisition
Costs of
Properties
to Be
Drilled........... 5%
$ 30,000
5%
$ 2,500
Drilling Costs of
Exploratory
Wells....... 5%
30,000
5%
2,500
Drilling Costs of Develop-
ment
Wells..............
70%
420,000
70%
35,000
Leasehold Acquisition
Costs of
Productive
Properties.............. 20%
120,000
20%
10,000
Total..... 100%
$ 600,000
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.
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 2004 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").
29
<PAGE>
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, 2004 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, 2004
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.
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
o 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%
o All other Partnership
Costs and
Expenses:
o Prior to time Limited
Partner Capital Contributions
are Entirely expended........ 1%
99%
30
<PAGE>
o After expenditure of
Limited
Partner Capital Contributions
and until
expenditure of
General Partner's Minimum
Capital Contribution......... 100%
0%
o After expenditure of
General Partner's
Minimum Capital
General Partner's
Limited Partners'
Contribution................. Percentage
Percentage
REVENUES
General Partner's
Limited Partners'
Percentage
Percentage
COMPENSATION
Supervision of Operations
It is
anticipated that the General Partner will operate most, if not
all,
Partnership Properties during the drilling
of Partnership Wells and most, if not
all, productive 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 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.
31
<PAGE>
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 a 40% interest
in 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 as well as a 16.71%
limited partnership interest in Eagle
Energy Partners I, L.P., a Texas limited
partnership, that buys and sells natural
gas. It is possible that this limited
partnership may buy some of the
Partnerships natural gas production.
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, 2003, is set forth below.
32
<PAGE>
Compensation for
Supervision
and Opera-
tion of
Reimbursement
Productive of General
Fees
and
Administrative Received as
Management
Drilling and
Overhead a
Drilling
Program
Fee(1)
Wells(2)(3)
Expense(2)(3)(4)
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..................
- 300,505
964,738
829,503
1984 Employee(*)......
-
3,924
5,000
13,452
1985 Employee(*)......
-
10,316
-
54,892
1986 Energy
Income Fund(**).......
- 343,912
1,224,907
64,945
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(*)(****)......
- 208,885
-
613
2000 Employee.........
-
60,314
-
600,771
2001 Employee.........
-
15,519
-
362,975
2002 Employee.........
-
7,229
-
274,089
2003 Employee.........
-
1,388
-
224,358
---------------
(*) 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.
33
<PAGE>
(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 - 2003 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 -
2003
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, 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 and in the exploration
for and production of oil and 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:
34
<PAGE>
Name
Age
Position
----
---
--------
King P. Kirchner
76
Director
John G. Nikkel
68
Chairman of the Board,
Chief Executive Officer,
Chief Operating Officer
and Director
Larry D. Pinkston
49
President, Treasurer and
Chief Financial Officer
Mark E. Schell
46
Senior Vice President,
Secretary and General Counsel
O. Earle Lamborn
68
Senior Vice President, Drilling
and Director
Philip M. Keeley
62
Senior Vice President,
Exploration and Production
David T. Merrill
42
Vice President, Finance
William B. Morgan
59
Director
Don Cook
78
Director
John S. Zink
75
Director
John H. Williams
85
Director
J. Michael Adcock
54
Director
Mark E. Monroe
49
Director
The names, ages and respective positions of the directors and
executive
officers of UPC are as follows:
Name
Age
Position
----
---
--------
John G. Nikkel
68
Chairman of the Board and
Director
Larry Pinkston
49
President and Treasurer
Philip M. Keeley
62
Executive Vice President and
Director
Mark E. Schell
46
Secretary and General Counsel
35
<PAGE>
Mr. Kirchner, a
co-founder of UNIT, has been a director since 1963. He
served as the Company'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 US Army during the Korean War
and after that as vice-president
engineering and operations for Woolaroc Oil
Company.
Mr. Nikkel
joined UNIT in 1983 as its President and a director. On July 1,
2001 Mr. Nikkel was elected to the
additional office of Chief Executive Officer
and served as President until July 31,
2003. 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. Prior to 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. 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
prior to being appointed Controller in
February 1985. He has been Treasurer since
December 1986 and was elected to the
position of Vice President and Chief
Financial Officer in May 1989. In June
2003, he was elected to the additional
position of President. 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 and the American
Society of Corporate Secretaries.
Mr. Lamborn was
elected Vice President, Drilling in 1973 and to his current
position as Senior Vice President, Drilling
and director in 1979. He has been
actively involved in the oil field for over
50 years, joining UNIT's predecessor
in 1952 prior to its becoming a
publicly-held corporation.
Mr. Keeley joined UNIT
in November 1983 as Senior Vice President,
Exploration and Production. Prior to that
time, Mr. Keeley co-founded (with Mr.
Nikkel) Nike Exploration Company in January
1982 and, until November 2001,
served as Executive Vice President and a
director of that company. From 1977
until 1982, Mr. Keeley was employed by
Cotton Petroleum Corporation, serving
first as Manager of Land and from 1979 as
Vice President and a director. Before
joining Cotton, Mr. Keeley was employed for
four years by Apexco, Inc. as
Manager of Land and prior thereto he was
employed by Texaco, Inc. for nine
years. He received a Bachelor of Arts
degree in Petroleum Land Management from
the University of Oklahoma.
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
37
<PAGE>
of Business Administration Degree in
Accounting from the University of Oklahoma
and is a Certified Public Accountant.
Mr. Morgan was
elected a director of UNIT in February 1988. For over 5
years, Mr. Morgan has been 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.
Before that, he was a Partner in the
law firm of Doerner, Saunders, Daniel &
Anderson, Tulsa, Oklahoma, for over 20
years.
Mr. Cook has
served as a director of UNIT since UNIT's inception. He is a
Certified Public Accountant and was a
partner in the accounting firm of Finley &
Cook, Shawnee, Oklahoma, from 1950 until
1987, when he retired.
Mr. Zink was
elected a director of UNIT in May 1982. For over 5 years, he
has been a principal in several privately
held companies engaged in the
businesses of designing and manufacturing
equipment used in the petroleum
industry, construction, and heating and air
conditioning services and
installation. He holds a Bachelor of
Science degree in Mechanical Engineering
from Oklahoma State University. He is also
a director of Matrix Service Company,
Tulsa, Oklahoma.
Mr. Williams was
elected a director of UNIT in December 1988. Prior to
retiring on December 31, 1978, he was
Chairman of the Board and Chief Executive
Officer of The Williams Companies, Inc.
where he continues to serve as an
honorary director. Mr. Williams also serves
as a director of Apco Argentina,
Inc., and Willbros Group, Inc. In addition,
Mr. Williams also serves as a
director of the Gilcrease Museum and 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 manages a private
trust that deals in real estate, oil
and gas properties and other equity
investments. He is Chairman of the Board of
Arvest Bank, Shawnee and a director of
Community Health Partners, Inc., formerly
Mid America Healthcare, Inc. 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. Monroe was
the Chief Executive Officer and President of Louis Dreyfus
Natural Gas Corp., a publicly-held natural
gas exploration and production
company, until the sale of the company in
2001. Prior to the formation of Louis
Dreyfus Natural Gas in 1990, Mr. Monroe was
the Chief Financial Officer of
Bogert Oil Company, a publicly-held
exploration and production company
headquartered in Oklahoma City, Oklahoma.
From 1976 to 1980, he was an Audit
Manager for the public accounting firm of
Deloitte & Touche in Dallas, Texas.
Mr. Monroe currently serves as a member of
the Board of Directors for
Continental Resources, Inc., a
privately-held exploration and production company
headquartered in Enid, Oklahoma. He has
served as President of the Oklahoma
Independent Petroleum Association, on the
Domestic Petroleum Council, on the
National Petroleum Council and on the
Boards of the Independent Petroleum
Association of America and the Petroleum
Club of Oklahoma City. Mr. Monroe
graduated from the University of Texas at
Austin with a BBA degree in 1975 and
is a Certified Public Accountant.
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
37
<PAGE>
name, month of formation and amount of
limited partner capital subscriptions of
each of these limited partnerships (the
"Employee Programs") are set forth
below.
Limited
Partners'
Capital
Name
Formed
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
38
<PAGE>
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, including those
shown below, were required to be paid
in the 1987 through 2003 Employee Programs.
The capital subscriptions of the
following limited partners to the 2001,
2002 and 2003 Employee Programs were as
shown below:
Position with
Amount of Capital
Subscriber
UNIT
Subscription
------------
2001
2002
2003
----
----
----
King P. Kirchner Director
$25,000 (1) 100,000 (1)
40,000
John G. Nikkel
Chairman, Chief $151,400 (2)
100,000 (2) 80,000
Executive Officer,
Chief Operating
Officer and Director
Earle Lamborn
Senior Vice Presi- 20,000 (3)
0
0
dent and Director
Philip M. Keeley Senior Vice
Presi- $43,600
(2) 40,000 (2)
20,000
dent, Exploration
and Production
---------------
(1) Mr. Kirchner
invested $25,000 indirectly in the 2001 Employee Program,
$100,000 in the 2002 Employee Program and
$40,000 in the 2003 Employee Program,
through the King P. Kirchner Revocable
Trust as permitted by the limited
partnership agreement of those Employee
Programs.
(2) Messrs.
Nikkel and Keeley have invested in the 2001, 2002 and 2003
Employee Programs both directly and through
Nike Exploration Company which until
October of 2001 was owned 71.4% by Mr.
Nikkel and members of his family and
28.6% by Mr. Keeley. Subsequent to October
of 2001, Mr. Nikkel and members of
his family were the sole owners of Nike
Exploration Company. The amounts
invested directly and indirectly through
Nike Exploration Company in the 2001,
2002 and 2003 Employee Programs by Messrs.
Nikkel and Keeley are set forth
below:
Nike
Employee
Mr. Nikkel
Mr. Keeley
Exploration
Program
Directly
Directly
Company
-------
--------
--------
-------
2001
$80,000
$15,000
$100,000
2002
$100,000
$40,000
$100,000
2003
$80,000
$20,000
$60,000
(3) Mr. Lamborn
invested $20,000 indirectly in the 2001 Employee Program
through the Earle Lamborn Revocable Trust
as permitted by the limited
partnership agreement.
Ownership of Common Stock
UNIT's Common
Stock is listed on the New York Stock Exchange as reported on
the Composite Tape. On January 5, 2004
there were 45,590,154 shares outstanding.
As of January 5,
2004, the directors and officers of UNIT owned of record
or beneficially owned shares of UNIT Common
Stock as follows:
39
<PAGE>
Amount of
Beneficial
% of
Name
Ownership (1)
Outstanding (1)
----
---------
-----------
King P. Kirchner..................
446,920
(2)
*
John Williams.....................
11,500
(3)
*
Don Cook..........................
33,818
(3)
*
Philip M. Keeley..................
117,156
(2)(4)
*
Earle Lamborn.....................
222,397
(2)(4)
*
John G. Nikkel....................
426,468
(2)(4)
*
Larry D. Pinkston.................
69,166
(2)(4)
*
Mark E. Schell....................
70,492
(2)(4)
*
John S. Zink......................
9,100 (3)
*
William B. Morgan.................
23,900
(3)
*
J. Michael Adcock.................
455,891
(3)(5)
*
Mark E. Monroe....................
1,000
*
All Officers and Directors
as a
Group.................. 1,887,808 (2)(3)(4)(5)
---------------
*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 5, 2004,
pursuant to the exercise of currently
exercisable stock options. 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
5, 2004 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 5, 2004 for the account of:
Earle Lamborn, 14,603; John G. Nikkel,
32,307; Philip M. Keeley, 12,616; Larry D.
Pinkston, 3,491; and Mark E. Schell,
30,981.
(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; Don Cook, 26,500; William B.
Morgan, 15,500; John H. Williams, 10,500;
John S. Zink, 7,000; and King P. Kirchner
7,000 shares and all Non-Employee
Directors as a group, 80,500.
(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 5,
2004 at the discretion of the holder:
John G. Nikkel 47,500; Philip M. Keeley,
19,000; Larry D. Pinkston, 25,500; and
Mark E. Schell, 25,500.
(5) Of the
shares shown, Mr. J. Michael Adcock is deemed to be the
beneficial owner of 440,891 shares by
virtue of his position as one of three
trustees of the Don Bodard 1995 Revocable
Trust.
40
<PAGE>
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, 2004, or
from the formation of the Partnership if
subsequent to January 1, 2004, through
December 31, 2004 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;
(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
41
<PAGE>
(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 2004. 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, 2004, or from the
formation of the Partnership if subsequent
to January 1, 2004, through December
31, 2004. 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, 2004, or
from the formation of the Partnership
if subsequent to January 1, 2004, through
December 31, 2004. Likewise the
Partnership would have no interest in any
increased density wells drilled on the
original spacing unit unless such wells
were drilled during 2004. In addition,
if additional interests are acquired in
wells participated in by the Partnership
after 2004, 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 2004, 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.
42
<PAGE>
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.
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 2004.
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.
43
<PAGE>
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.
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 a 40%
interest in Superior Pipeline Company,
L.L.C. which is engaged in the business
of buying and building gas gathering
systems and a 16.71% limited partnership
interest in Eagle Energy Partners I, L.P.,
a Texas partnership. Eagle is in the
business of buying and selling natural gas.
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
44
<PAGE>
"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, P.C. 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 upon 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:
o
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;
o
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;
o
serve as general partner of other oil and gas drilling or
income partnerships, including those which may be in
competition with the Partnership; and
o
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
45
<PAGE>
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.
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, 2003
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.
46
<PAGE>
Year Ended
Gross Wells(2)
Net Wells(3)
--------------
------------
July 31(1)
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 .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
--- ---
---
--- ----
--- ---- -----
Year Ended
Gross Wells (2)
Net Wells(3)
---------------
------------
December 31(1)
Total Oil
Gas
Dry Total
Oil Gas Dry
--------------
----- ---
--- --- -----
--- --- ---
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
47
<PAGE>
Year Ended
Gross Wells (2)
Net Wells(3)
---------------
------------
December 31(1)
Total Oil
Gas
Dry Total
Oil Gas Dry
--------------
----- ---
---
--- -----
--- --- ---
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
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
21.80
.4
17.40 4.0
--- ---
---
--- -----
---- ----- ----
Total........ 51
1
42
8
21.80
.4
17.40 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
48
<PAGE>
Year Ended
Gross Wells (2)
Net Wells(3)
---------------
------------
December 31(1)
Total Oil
Gas
Dry Total
Oil Gas Dry
--------------
----- ---
---
--- -----
--- --- ---
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
Period of January 1, 2003
to September 30, 2003
Exploratory....... 2 1 1
0
1.20
.20 1.00 0
Development....... 96 4 77
15 36.84
1.92 25.73 9.19
--- ---
---
--- ----
---- ---- ----
Total.........
98 5
78
15 38.04
2.12 26.73 9.19
---------------
(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.
49
<PAGE>
For each year
from 1984 through 2003, 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%) in all of UNIT's oil and gas
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 2 1/2%
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.
Resul
