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sell Terra-Drills in return for an advance license fee of
$1,600,000. Mitchell thereafter sublicensed its rights to the
Terra-Drill to nine different partnerships, including Mid
Continent. The aggregate sublicense fee of the six partnerships
involved in Webb was $225 million. Pursuant to its sublicense
agreement with Mitchell dated December 31, 1981, Mid Continent
was obligated to pay annual license fees of $8 million in the
first 3 fiscal years commencing October 1, 1982, 1983, and 1984.
The Mid Continent offering memorandum set forth significant
warnings regarding the risk of the investment. It also indicated
that the anticipated tax losses to be incurred by each investor
in the first 3 years would be $40,000 for each $10,000 cash
investment.
The offering memorandum stated that the partnership was
formed to: (1) Exploit the Terra-Drill; (2) conduct exploratory
drilling in the Overthrust Belt in Utah; and (3) develop a
drilling program in Oklahoma and Tennessee. Since a functional
Terra-Drill was never developed, no orders were ever taken by the
limited partnership for the Terra-Drill. No drilling was ever
conducted by the partnership on leases in the Utah Overthrust
Belt. The partnership never developed a drilling program for oil
and gas in Oklahoma and Tennessee.
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