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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[x] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [Fee Required]
For the fiscal year ended December 31, 1999
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
For the transition period from to
Commission File Number 000-24181
Southwest Partners III, L.P.
(Exact name of registrant as specified in
its limited partnership agreement)
Delaware 75-2699554
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
407 N. Big Spring, Suite 300, Midland, Texas 79701
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (915) 686-9927
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
limited partnership interests
Indicate by check mark whether registrant (1) has filed reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days: Yes x No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. [x]
The registrant's outstanding securities consist of Units of limited
partnership interests for which there exists no established public market
from which to base a calculation of aggregate market value.
The total number of pages contained in this report is 44. There is no
exhibit index.
Table of Contents
Item Page
Part I
1. Business 3
2. Properties 4
3. Legal Proceedings 5
4. Submission of Matters to a Vote of Security Holders 5
Part II
5. Market for Registrant's Common Equity and Related
Stockholder Matters 6
6. Selected Financial Data 7
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
8. Financial Statements and Supplementary Data 13
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 25
Part III
10. Directors and Executive Officers of the Registrant 26
11. Executive Compensation 27
12. Security Ownership of Certain Beneficial Owners and
Management 27
13. Certain Relationships and Related Transactions 27
Part IV
14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 28
Signatures 29
Part I
Item 1. Business
General
Southwest Partners III, L.P., a Delaware limited partnership (the
"Partnership") was organized March 11, 1997 to invest in oil field service
companies and assets. The Partnership's business strategy was to acquire
interests in oil field service companies and assets with a view to
providing capital appreciation in the value of the Partnership's units of
limited partnership interest (the "Units"). The Partnership concluded its
acquisition of oil field service company assets in December 1997.
Private Placement
From March 15, 1997 to June 30, 1997, the Partnership originally conducted
a "blind pool" offering of the Units in accordance with Regulation D
promulgated under the Securities Act (the "Private Placement"). On July 1,
1997, the Partnership amended the offering, which was concluded on
September 30, 1997, to invest the entire proceeds in the common stock of
Sierra Well Service, Inc. ("Sierra"), an oil field service company
affiliated with the General Partner. A total of 170.92511 Units were sold
to 525 Investors for an aggregate net price of $17,092,510. The
Partnership invested a total of $17,054,500 (including the capital
contribution of the General Partner) in 2,005 shares of the Sierra common
stock.
Sierra in March 2000 filed a restated certificate of incorporation
increasing its authorized common shares to 25,000,000 and completed a 445-
for-1 stock split. All shares have been restated as if the stock split had
occurred at the beginning of 1998. The Partnership at December 31, 1999
owns 44.94% or 892,225 shares of Sierra's outstanding common stock.
The General Partner
The general partner of the Partnership is Southwest Royalties, Inc. (the
"General Partner"). The General Partner was formed in 1983 to acquire and
develop oil and gas properties. The General Partner initially financed the
acquisition of oil and gas reserves and its exploration and development
efforts through public and private limited partnership offerings. The
General Partner has raised approximately $115 million in 31 public and
private limited partnership offerings. The General Partner is a general
partner of these limited partnerships, owns interests in these partnerships
and receives management fees and operating cost reimbursements from such
partnerships. Since its inception, The General Partner, on behalf of itself
and the investment partnerships, has acquired over $320 million of oil and
gas properties, primarily in the Permian Basin of West Texas and New
Mexico.
The principal executive offices of the Partnership are located at 407 N.
Big Spring, Suite 300, Midland, Texas, 79701. The Managing General Partner
of the Partnership, Southwest Royalties, Inc. (the "Managing General
Partner") and its staff of 97 individuals, together with certain
independent consultants used on an "as needed" basis, perform various
services on behalf of the Partnership, including the selection of oil and
gas properties and the marketing of production from such properties. H. H.
Wommack, III, a stockholder, director, President and Treasurer of the
Managing General Partner, is also a general partner. The Partnership has
no employees.
The Partnership
The sole business of the Partnership is holding Sierra stock. The
Partnership has no employees and has no operations, except through Sierra.
The Partnership and the General Partner effectively control Sierra.
Sierra Well Service, Inc.
Sierra provides a broad range of services used for the drilling, completion
and operation of oil and gas wells, including well servicing, liquids
handling and fresh and brine water supply and disposal services. Sierra
provides services in its areas of operation in Texas, New Mexico, Oklahoma
and Louisiana. These services are used by oil and gas companies to
complete newly drilled oil and gas wells, maintain and optimize the
performance of existing wells, recomplete wells to additional producing
zones and plug and abandon wells at the end of their useful lives.
Sierra's well servicing and fluid service equipment fleets includes 92 well
servicing rigs and 130 fluid service trucks.
Formed in 1992 by the General Partner, Sierra has grown primarily through
selective acquisitions. It has completed 14 purchases of well services
companies as well as purchases of additional equipment. Sierra's revenues
have grown from $932,000 in 1992 to approximately $37,331,000 in 1999.
Sierra's strategy emphasizes diversification and expansion through internal
growth and the acquisition of well servicing companies to provide an
integrated group of oil field services.
Sierra uses its well servicing rigs to provide completion, maintenance,
workover and plugging and abandonment services. Sierra's related trucking
services are used to move large equipment to and from the job sites of its
customers. Sierra also provides an integrated mix of liquids handling
services, including vacuum truck services, frac tank rentals, test tank
rentals and Enviro-Vat system rentals. Sierra's fresh and brine water
supply and disposal services include the production and sale of fresh and
brine water which is used in drilling, completion and workover processes,
as well as operation of injection wells that dispose of produced salt water
and incidental non-hazardous oil field wastes. Sierra also provides
certain other well services, including pit lining services and hot oil
services
Environmental
Hazards in the operation of oil field service companies, such as employee
injuries on the job site and accidental petroleum or waste spills, are
sometimes encountered. Such hazards may cause substantial liabilities to
third parties or governmental entities, the payment of which could reduce
ultimately the funds available for distribution. Although it is
anticipated that customary insurance will be obtained, the Partnership may
be subject to liability for pollution and other damages due to hazards,
which cannot be insured against or will not be insured against due to
prohibitive premium costs or for other reasons. Environmental regulatory
matters also could increase the cost of doing business or require the
modification of operations in certain areas. Environmental expenditures
are expensed or capitalized depending on their future economic benefit.
Expenditures that relate to an existing condition caused by past operations
and that have no future economic benefits are expensed. Liabilities for
expenditures of a noncapital nature are recorded when environmental
assessment and/or redemption is probable, and the costs can be reasonably
estimated.
Industry Regulations and Guidelines - Certain industry regulations and
guidelines apply to the registration, qualification and operation of
limited partnerships. The Partnership is subject to these guidelines which
regulate and restrict transactions between the Managing General Partner and
the Partnership. The Partnership complies with these guidelines and the
Managing General Partner does not anticipate that continued compliance
would have a material adverse effect on Partnership operations.
Partnership Employees
The Partnership has no employees; however the Managing General Partner has
a staff of geologists, engineers, accountants, landmen and clerical staff
who engage in Partnership activities and operations and perform additional
services for the Partnership as needed. In addition to the Managing
General Partner's staff, the Partnership engages independent consultants
such as petroleum engineers and geologists as needed. As of December 31,
1999 there were 97 individuals directly employed by the Managing General
Partner in various capacities.
Item 2. Properties
The Partnership does not currently own or lease any property. The
Partnership operates from the offices of its General Partner in Midland,
Texas.
Sierra's corporate office is located in Midland, Texas, which complements
the core of its operations in the Permian Basin of West Texas and eastern
New Mexico ("the Permian Basin"). Within the Permian Basin, Sierra owns 10
field offices and leases five field offices over short-term periods.
Additionally, Sierra leases a field office in South Texas and owns two
field offices in East Texas. Sierra leases a field office in Oklahoma.
Sierra's well servicing equipment fleet includes 92 well servicing rigs,
130 fluid service trucks, 90 Enviro-Vat systems and 314 frac and test
tanks. Additionally, the Company operates nine injection wells and 32
fresh or brine water stations.
Sierra uses its well servicing rigs to provide completion, maintenance,
workover and plugging and abandonment services. Sierra's related trucking
services are used to move large equipment to and from the job sites of its
customers as well as provide an integrated mix of liquids handling
services, including vacuum truck services, frac tank rentals, test tank
rentals and Enviro-Vat system rentals. Sierra's fresh and brine water
supply and disposal services include the production and sale of fresh and
brine water which is used in drilling, completion and workover processes,
as well as operation of injection wells that dispose of produced salt water
and incidental non-hazardous oil field wastes.
Sierra believes it has satisfactory title to all of its properties in
accordance with standards generally accepted within the well servicing
industry.
Item 3. Legal Proceedings
The Partnership is not currently involved in any legal proceeding nor is it
party to any pending or threatened claims that could reasonably be expected
to have a material adverse effect on its financial condition or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during the fourth
quarter of 1999 through the solicitation of proxies or otherwise.
Part II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
Market Information
There is no trading market for the Units, and it is unlikely that a trading
market will exist at any time in the future. The Partnership does not have
any units (i) that are subject to outstanding options or warrants to
purchase, or securities convertible into, common equity of the Partnership,
(ii) that could be sold pursuant to Rule 144 under the Securities Act or
that we have agreed to register under the Securities Act for sale by
security holders, or (iii) that are being, or have been publicly proposed
to be, publicly offered by the Partnership, the offering of which could
have a material effect on the market price of the limited partnership
units. Any transfer of the Units is severely restricted by certain
conditions outlined in the Partnership Agreement and requires the consent
of the General Partner.
There have been no cash distributions to the Limited Partners to date. In
general, the Partnership expects to reinvest all cash flow received from
operations and does not expect to make distributions until liquidation of
the Partnership. The following is a summary of certain allocation
provisions of the Partnership Agreement and is qualified in its entirety by
reference to the Partnership Agreement, which was filed as an Exhibit to
the partnership's Form 10, filed April 1998. Any distributions of cash
flow, income, gain, profit, or loss will be allocated 85% to the Limited
Partners and 15% to the General Partner in accordance with their capital
accounts until the Limited Partners have recovered, through cumulative
distributions 100% of their capital contributions plus a 10% cumulative
(but not compounded) return. Thereafter, distributions will be made 75% to
the Limited Partners and 25% to the General Partner.
The revenues generated and capital appreciation, if any, from the
Partnership's investment in Sierra is highly dependent upon the future
prices and demand for oil and gas in that the level of use of oil field
services and equipment is directly related to the amount of activity in the
oil fields. In addition, investments in oil field service companies, while
presenting significant potential for capital appreciation, may take from
four to seven years from the date of initial investment to reach such a
state of maturity that disposition can be considered. Thus, it is
anticipated that capital gains or losses typically will take two to five
years or longer to realize. In view of these factors, it is unlikely that
any significant distributions of the proceeds from the disposition of
investments will be made until such time. The Partnership's investment in
Sierra will generate little, if any, current income.
The Managing General Partner has the right, but not the obligation, to
purchase limited partnership units should an investor desire to sell. The
value of the unit is determined by adding the sum of (1) current assets
less liabilities and (2) the present value of the future net revenues
attributable to proved reserves and by discounting the future net revenues
at a rate not in excess of the prime rate charged by NationsBank, N.A. of
Midland, Texas plus one percent (1%), which value shall be further reduced
by a risk factor discount of no more than one-third (1/3) to be determined
by the Managing General Partner in its sole and absolute discretion. As of
December 31, 1999 the Managing General Partner purchased no limited partner
units.
Number of Limited Partner Interest Holders
As of December 31, 1999, there were 523 holders of limited partner units in
the Partnership.
Distributions
Pursuant to Section 4.1 of the Partnership's Certificate and Agreement of
Limited Partnership, "Net Cash From Operations and Net Cash From Sales or
Refinancings" shall be distributed, at such times as the General Partner
may determine in its sole discretion. "Net Cash From Operations" is
defined as "the gross cash proceeds from Partnership operations less the
portion thereof used to pay or establish reasonable reserves for all
Partnership expenses, fees, commissions, debt payments, new investments,
capital improvements, replacements, repairs and contingencies, and such
other purposes deemed appropriate, all as determined by the General
Partner." "Net Cash From Sales or Refinancings" is defined as "the net
cash proceeds from all sales and other dispositions (other than in the
ordinary course of business) and all refinancings of Partnership Property,
less any portion thereof used to establish reserves, all as determined by
the General Partner. During 1999, no distributions were made.
Item 6. Selected Financial Data
The following selected financial data for the years ended December 31 1999,
1998 and March 11, 1997 (date of inception) through December 31, 1997
should be read in conjunction with the financial statements included in
Item 8:
March 11, 1997
Years ended December 31,through December 3
1,
------------------------------------------
- --
1999 1998 1997
---- ---- ----
Revenues $ 11,164 11,514 147,356
Equity loss in unconsolidated subsidiary (2,005,000) (5,046,321)
(542,414)
Impairment of equity investment of
unconsolidated subsidiary (Refer
to footnote 2) - (9,460,765) -
Net loss (2,120,433)(14,702,959) (420,813)
Partners' share of net loss:
General partners (318,065) (2,195,181) (68,107)
Limited partners (1,802,368)(12,507,778) (352,706)
Limited partners' net
loss per unit (10,545) (73,177) (2,054)
Total assets $ 392,709 2,386,545 17,081,587
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Southwest Partners III, L.P.
General
Southwest Partners III, L.P. was organized as a Delaware limited
partnership on March 11, 1997. The Partnership was formed for the purpose
of investing in Sierra Well Service, Inc., an oilfield service company
which provides services and products to oil and gas operators for the
workover, maintenance and plugging of existing oil and gas wells in the
southwestern United States.
The Partnership intends to wind up its operations and distribute its assets
or the proceeds therefrom on or before December 31, 2008, at which time the
Partnership's existence will terminate, unless sooner terminated or
extended in accordance with the terms of the Partnership agreement. As of
December 31, 1999, the Partnership owned a 44.94% interest in Sierra, which
is accounted for using the equity method of accounting. The equity method
adjusts the carrying value of the Partnership's investment by its
proportionate share of Sierra's undistributed earnings or losses for each
respective period.
Results of Operations
For the year ended December 31, 1999
Revenues
Revenues consisted of interest income. The surplus cash remaining after
the periodic investments in Sierra generated interest income of $11,164.
Expenses
Direct expenses totaled $126,597 for the year, relating to general and
administrative. General and administrative expenses represent management
fees paid to the Managing General Partner for costs incurred to operate the
partnership.
The Partnerships investment in Sierra upon recording their portion of
Sierra's losses for the six months ended June 30, 1999 was reduced to zero.
Therefore, according to General Accepted Accounting Principles, the equity
method was suspended. The Partnership did not record their ownership
percentage of Sierra's losses beyond June 30, 1999. If Sierra subsequently
begins to report net income, the Partnership will resume applying the
equity method only after its share of net income equals the share of net
losses not recognized during the period the equity method is suspended.
Results of Operations
For the year ended December 31, 1998
Revenues
Revenues consisted of interest income. The surplus cash remaining after
the periodic investments in Sierra generated interest income of $11,514.
Expenses
Direct expenses totaled $207,387 for the year, which consisted of $138,972
relating to general and administrative and $68,415 of amortization.
General and administrative expenses represent management fees paid to the
Managing General Partner for costs incurred to operate the partnership.
Amortization expense for the period relates to the Partnership's
organization cost, which were entirely written off in the current year
based on Statement of Position 98-5 "Reporting on the Cost of Start up
Activities".
Equity loss in unconsolidated subsidiary of $5,046,321 reflects the
Partnership's weighted average proportionate share of the $9,336,000 loss
by Sierra in the amount of $4,284,290 for the year and the amortization of
goodwill in relation to the Partnerships investment in Sierra of $762,031.
Impairment of equity investment of unconsolidated subsidiary of $9,460,765
is the result of the Partnership's equity investment incurring an other
than temporary decline in the fair value of their investment. The
Partnership continually evaluates the current fair value of the investment
in Sierra for impairment. The Partnership determined that the carrying
value of the investment, including excess cost over equity interest, is not
recoverable, and thus recorded a charge to reduce the carrying value of the
investment to its fair value. The Partnership's investment in Sierra is
subject to possible future dilution and/or elimination, in which case the
investment could be written down to zero.
Revenue and Distribution Comparison
Partnership loss for the years ended December 31, 1999, 1998 and the period
from March 11, 1997 (date of inception) through December 31, 1997 was
$2,120,433, $14,702,959 and $420,813, respectively. Excluding the effects
of amortization, net loss would have been $2,120,433 in 1999, $14,634,544
in 1998 and $410,288 in 1997. Since inception of the Partnership, no cash
contributions have been made to the partners.
Liquidity and Capital Resources
Cash flows provided by operating activities were approximately $11,164 in
1999 compared to $11,480 in 1998 and $27,735 in 1997. The source of the
1999 cash flow from operating activities was interest.
There were no cash flows used in investing activities during 1999 as
compared to $63,514 in 1998 and $17,069,927 in 1997.
There were no cash flows provided by (used in) financing activities during
1999 as compared to $(67,507) in 1998 and $17,543,278 in 1997.
As of December 31, 1999, the Partnership had approximately $127,200 in
working capital. The Managing General Partner knows of no other
commitments.
Liquidity - Equity Investment in Subsidiary
Sierra has a highly leveraged capital structure. Sierra on March 23, 2000
filed a Form S-1 "Registration Statement Under the Securities Act of 1933"
with the Securities and Exchange Commission. Sierra plans to use the net
proceeds from this offering to a)repay $25 million in existing Subordinated
Notes; b)finalize $14.5 million as cash consideration to acquire
businesses; c)redeem $5.3 million Series A Cumulative Preferred Stock and
d)cover expenses in connection with the offering and for general corporate
purposes.
Sierra on March 31, 1999 finalized a restructuring of its debt with the
lender. The restructuring of Sierra's debt with its lender provided for a
senior subordinated credit facility and three classes of preferred stock.
According to the redemption and/or conversion features of the three classes
of preferred stock, if Sierra does not meet repayment of scheduled senior
subordinated debt starting at December 31, 1999 with final payment due June
30, 2004, the lender has the right to exercise their conversion features.
The conversion amount as a percentage of post-conversion outstanding common
stock can range from 25% to 100%. Therefore, the Partnership's investment
in Sierra is subject to possible future dilution and/or elimination as a
result of the convertible preferred stock held by Sierra's lender. The
Partnership's ownership percentage in Sierra upon the signing of Sierra's
debt restructuring at March 31, 1999 remained 45.89%. However, should the
lender exercise the conversion feature of the preferred stock, the
Partnership's ownership percentage would decrease by 14.11%.
Liquidity - Managing General Partner
The Managing General Partner has a highly leveraged capital structure with
over $35.1 million principal and $17.5 million interest payments due in
2000 on its debt obligations. Due to the severely depressed commodity
prices experienced during the last quarter of 1997, throughout 1998 and
continuing through the second quarter of 1999 the Managing General Partner
is experiencing difficulty in generating sufficient cash flow to meet its
obligations and sustain its operations. The Managing General Partner is
currently in the process of renegotiating the terms of its various
obligations with its creditors and/or attempting to seek new lenders or
equity investors. Additionally, the Managing General Partner would
consider disposing of certain assets in order to meet its obligations.
There can be no assurance that the Managing General Partner's debt
restructuring efforts will be successful or that the lenders will agree to
a course of action consistent with the Managing General Partners
requirements in restructuring the obligations. Even if such agreement is
reached, it may require approval of additional lenders, which is not
assured. Furthermore, there can be no assurance that the sales of assets
can be successfully accomplished on terms acceptable to the Managing
General Partner. Under current circumstances, the Managing General
Partner's ability to continue as a going concern depends upon its ability
to (1) successfully restructure its obligations or obtain additional
financing as may be required, (2) maintain compliance with all debt
covenants, (3) generate sufficient cash flow to meet its obligations on a
timely basis, and (4) achieve satisfactory levels of future earnings. If
the Managing General Partner is unsuccessful in its efforts, it may be
unable to meet its obligations making it necessary to undertake such other
actions as may be appropriate to preserve asset values.
Information Systems for the Year 2000
The year 2000 issue referred to the risk of disruptions of operations
caused by the failure of computer-controlled systems, including systems
used by third parties, to properly recognize date sensitive information
when the year changed from 1999 to 2000. During the year ended December
31, 1999, the Managing General Partners data processing subsidiary, Midland
Southwest Software, Inc., installed new software as part of an on-going
project to upgrade its financial and management information systems. The
cost of upgrading the software occurred in the normal course of Midland
Southwest Software's business and was not material to the results of
operations or financial condition of the Partnership.
The Partnership has not experienced any significant business disruptions
due to year 2000 issues causing processing errors in its systems, or a
third party's systems, during the period of operations after January 1,
2000 until the filing of the 10-K.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations - continued
Sierra Well Service, Inc.
General
Sierra derives its revenues from well servicing, liquids handling, fresh
and brine water supply and disposal and other related services. Well
servicing rigs are billed at hourly rates that are generally determined by
the type of equipment required, market conditions in the region in which
the well servicing rig operates, ancillary equipment and the necessary
personnel provided on the rig. Sierra charges its customers for liquids
handling and fresh and brine water supply and disposal services on an
hourly or per barrel basis depending on the services offered. Demand for
services depends substantially upon the level of activity in the oil and
gas industry, which in turn depends, in part, on oil and gas prices,
expectations about future prices, the cost of exploring for, producing and
delivering oil and gas, the discovery rate of new oil and gas reserves in
on-shore areas, the level of drilling and workover activity and the ability
of oil and gas companies to raise capital.
Results of Operations
For the year ended December 31, 1999
Revenues
Sierra's revenues decreased to $37.3 million, or 18%, for the year ended
December 31, 1999 as compared to $45.3 million for the same period in 1998.
The decrease was primarily attributable to a severe decline in oil prices,
resulting in reduced oilfield service activity.
Expenses
Operating expenses decreased $5.1 million, or 14%, for the year ended
December 31, 1999 as compared to the same period for 1998. The components
of operating expenses consisted of decreases in cost of revenues of $4.8
million and general and administrative decreases of $300,000. The decrease
reflects Sierra's cost cutting measures taken after the hiring of a new
chief executive officer in early 1999. Interest expense for the year ended
December 31, 1999 decreased to $6.1 million from $7.2 million for the same
period in 1998. The decrease was due to a decrease in long-term debt as a
result of the March 1999 refinancing and a decrease in amortization of debt
issuance costs.
Results of Operations
For the year ended December 31, 1998, as restated
Revenues
Sierra's revenues increased to $45.3 million, or 73%, for the year ended
December 31, 1998 as compared to $26.1 million for the same period in 1997.
The increase was primarily attributable to acquisitions completed in late
1997.
Expenses
The increased activity from the acquisitions also caused operating expenses
to increase $17.3 million, or 75%, for the year ended December 31, 1998 as
compared to the same period for 1997. The components of operating expenses
consisted of increases in cost of revenues of $14.6 million and general and
administrative increases of $2.7 million. In late 1997 Sierra funded a
substantial portion of the acquisitions with borrowings of $52 million from
a financial institution. Consequently, interest expense for the year ended
December 31, 1998 increased to $7.2 million from $1.5 million for the same
period in 1997.
Liquidity and Capital Resources
The primary source of cash is from operations, the receipt of income from
well services provided.
Net Cash Provided by Operating Activities. Cash flows provided by
operating activities for the period consisted primarily of net operating
income net of expenses of $865,000.
Net Cash Used in Investing Activities. Cash flows used in investing
activities totaled $970,000 for the period, and consisted primarily of the
purchase of property and equipment partially offset by proceeds from the
sale of property and equipment.
Net Cash Used in Financing Activities. Cash flows used in financing
activities totaled $1,679 million for the period. The use of these funds
included $1,057 in deferred loan costs.
Liquidity - Equity Investment by Investors
Sierra has a highly leveraged capital structure. Sierra on March 23,2000
filed a Form S-1 "Registration Statement Under the Securities Act of 1933"
with the Securities and Exchange Commission. Sierra plans to use the net
proceeds from this offering to a)repay $25 million in existing Subordinated
Notes; b)finalize $14.5 million as cash consideration to acquire
businesses; c)redeem $5.3 million Series A Cumulative Preferred Stock and
d)cover expenses in connection with the offering and for general corporate
purposes.
Sierra on March 31, 1999 finalized a restructuring of its debt with the
lender. The restructuring of Sierra's debt with its lender provided for a
senior subordinated credit facility and three classes of preferred stock.
According to the redemption and/or conversion features of the three classes
of preferred stock, if Sierra does not meet repayment of scheduled senior
subordinated debt starting at December 31, 1999 with final payment due June
30, 2004, the lender has the right to exercise their conversion features.
The conversion amount as a percentage of post-conversion outstanding common
stock can range from 25% to 100%. Therefore, the Partnership's investment
in Sierra is subject to possible future dilution and/or elimination as a
result of the convertible preferred stock held by Sierra's lender. The
Partnership's ownership percentage in Sierra upon the signing of Sierra's
debt restructuring at March 31, 1999 remained 45.89%. However, should the
lender exercise the conversion feature of the preferred stock, the
Partnership's ownership percentage would decrease by 14.11%.
Information Systems for the Year 2000
Sierra's data processing needs are provided by the same system which the
Managing General Partner uses through their data processing subsidiary
Midland Southwest Software, Inc.
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements
Page
Independent Auditors Report 14
Balance Sheets 15
Statements of Operations 16
Statements of Changes in Partners' Equity 17
Statements of Cash Flows 18
Notes to Financial Statements 20
INDEPENDENT AUDITORS REPORT
The Partners
Southwest Partners III, L.P.
(A Delaware Limited Partnership):
We have audited the accompanying balance sheets of Southwest Partners III,
L.P. (the "Partnership") as of December 31, 1999 and 1998, and the related
statements of operations, changes in partners' equity and cash flows for
each of the years in the three-year period ended December 31, 1999. These
financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Southwest Partners III,
L.P. as of December 31, 1999 and 1998 and the results of its operations and
its cash flows for each of the years in the three-year period ended
December 31, 1999 in conformity with generally accepted accounting
principles.
KPMG LLP
Midland, Texas
April 7, 2000
Southwest Partners III, L.P.
(a Delaware limited partnership)
Balance Sheets
December 31, 1999 and 1998
1999 1998
---- ----
Assets
Current asset:
Cash and cash equivalents $ 392,709 381,545
----------
- ----------
Total current assets 392
,709 381,545
----------
- ----------
Equity investment in subsidiary - 2,005,000
----------
- ----------
$ 392,709
2,386,545
==========
==========
Liabilities and Partners' Equity
Current liabilities:
Payable to General Partner $ 265,535 138,938
----------
- ----------
Total current liabilities 265
,535 138,938
----------
- ----------
Partners' equity:
General Partner (897,750) (579,685)
Limited partners 1,024,924 2,827,292
----------
- ----------
Total partners' equity 127
,174 2,247,607
----------
- ----------
$ 392,709
2,386,545
==========
==========
The accompanying notes are an integral
part of these financial statements.
Southwest Partners III, L.P.
(a Delaware limited partnership)
Statements of Operations
Years Ended December 31, 1999, 1998 and Period from March 11, 1997
(date of inception) through December 31, 1997
1999 1998 1997
---- ---- ----
Revenues
Interest from capital contributions $ - -
104,391
Interest income 11,164 11,514 42,965
---------- ----------
- ---------
11,164 11,514
147,356
---------- ----------
- ---------
Expenses
General and administrative 126,597 138,972 15,230
Amortization - 68,415 10,525
Equity loss in unconsolidated subsidiary 2,005,000 5,046,321
542,414
Impairment of equity investment of
unconsolidated subsidiary - 9,460,765 -
---------- ----------
- ---------
2,131,597 14,714,473
568,169
---------- ----------
- ---------
Net loss $ (2,120,433) (14,702,959) (420,813)
========== ==========
=========
Net loss allocated to:
General Partner $ (318,065) (2,195,181) (68,107)
========== ==========
=========
Limited partners $ (1,802,368) (12,507,778)
(352,706)
========== ==========
=========
Per limited partner unit $ (10,545) (73,177) (2,054)
========== ==========
=========
The accompanying notes are an integral
part of these financial statements.
Southwest Partners III, L.P.
(a Delaware limited partnership)
Statement of Changes in Partners' Equity
Years Ended December 31, 1999, 1998 and Period from March 11, 1997
(date of inception) through December 31, 1997
General Limited Notes
Partner Partners Receivable Total
-------- -------- ---------- -----
Capital contributions $1,692,698 17,167,511(106,330) 18,753,879
Imputed interest on capital
Contributions receivable (9,095) (95,296) - (104,391)
Syndication costs -(1,309,439) -(1,309,439)
Net loss (68,107) (352,706) - (420,813)
------------------- --------
- ----------
Balance - December 31, 1997 1,615,496 15,410,070(106,330) 16,919,236
Capital contributions - 31,330 31,330
Refund of down payment-note
receivable uncollectible (75,000) 75,000 -
Net loss (2,195,181)(12,507,778) -(14,702,959)
------------------- --------
- ----------
Balance - December 31, 1998 (579,685) 2,827,292 - 2,247,607
Net loss (318,065)(1,802,368) -(2,120,433)
- --------- ---------- ------------------
Balance - December 31, 1999 $(897,750) 1,024,924 - 127,174
=================== ========
==========
The accompanying notes are an integral
part of these financial statements.
Southwest Partners III, L.P.
(a Delaware limited partnership)
Statements of Cash Flows
Years Ended December 31, 1999, 1998 and Period from March 11, 1997
(date of inception) through December 31, 1997
1999 1998 1997
---- ---- ----
Cash flows from operating activities:
Cash paid to Managing General Partner
for administrative fees $ - (34) (15,230)
Interest received 11,164 11,514 42,965
----------
- ---------- -----------
Net cash provided by operating
activities 11,164 11,480
27,735
----------
- ---------- -----------
Cash flows from investing activities:
Purchase of Sierra investment - -(17,054,500)
Organization costs - (63,514) (15,427)
----------
- ---------- -----------
Net cash used in investing activities - (63,514)
(17,069,927)
----------
- ---------- -----------
Cash flows from financing activities:
Capital contributed by limited partners - (6,250)
11,217,488
Repayment of notes receivable from limited
partners - 37,580 5,843,693
Capital contributed by General Partner - -
67,022
Repayment of notes receivable from General
Partner - - 1,625,676
Syndication costs - (98,837) (1,210,601)
----------
- ---------- -----------
Net cash provided by (used in)
financing activities -
(67,507) 17,543,278
----------
- ---------- -----------
Net increase (decrease) in cash and cash
equivalents 11,164 (119,541) 501,086
Beginning of period 381,545 501,086 -
----------
- ---------- -----------
End of period $ 392,709 381,545 501,086
==========
========== ===========
(continued)
The accompanying notes are an integral
part of these financial statements.
Southwest Partners III, L.P.
(a Delaware limited partnership)
Statements of Cash Flows, continued
Years Ended December 31, 1999, 1998 and Period from March 11, 1997
(date of inception) through December 31, 1997
1999 1998 1997
---- ---- ----
Reconciliation of net loss to net cash
provided by operating activities:
Net loss $(2,120,433) (14,702,959) (420,813)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Amortization - 68,415 10,525
Undistributed loss of affiliate 2,005,000 5,046,321 542,414
Impairment of equity investment - 9,460,765 -
Interest income added to notes receivable - -
(104,391)
Increase in accounts payable 126,597 138,938 -
----------
- ----------- --------
Net cash provided by operating activities $ 11,164 11,480
27,735
========== =========== ========
Supplemental schedule of noncash investing
and financing activities:
Note receivable from limited partners for
capital contributions $ - - 106,330
==========
=========== ========
The accompanying notes are an integral
part of these financial statements.
Southwest Partners III, L.P.
(a Delaware limited partnership)
Notes to Financial Statements
1. Organization
Southwest Partners III, L.P. (the "Partnership")was organized under
the laws of the state of Delaware on March 11, 1997 for the purpose of
investing in or acquiring oil field service companies assets. The
Partnership intends to wind up its operations and distribute its
assets or the proceeds therefrom on or before December 31, 2008, at
which time the Partnership's existence will terminate, unless sooner
terminated or extended in accordance with the terms of the Partnership
Agreement. Southwest Royalties, Inc., a Delaware corporation formed
in 1983, is the General Partner of the Partnership. Revenues, costs
and expenses are allocated as follows:
Limited General
Partners Partner
------- --------
Interest income on capital contributions (1) (1)
All other revenues 85% 15%
Organization and offering costs 100% -
Syndication costs 100% -
Amortization of organization costs 100% -
Gain or loss on property disposition 85% 15%
Operating and administrative costs 85% 15%
All other costs 85% 15%
After payout, allocations will be seventy-five (75%) to the limited
partners and twenty-five (25%) to the General Partner. Payout is when
the limited partners have received an amount equal to one hundred ten
percent (110%) of their limited partner capital contributions.
(1) Interest earned on promissory notes related to Capital
Contributions is allocated to the specific holders of those notes.
Method of Allocation of Administrative Costs
For the purpose of allocating Administrative Costs, the Managing
General Partner will allocate each employee's time among three
divisions: (1) operating partnerships; (2) corporate activities; and
(3) currently offered or proposed partnerships. The Managing General
Partner determines a percentage of total Administrative Costs per
division based on the total allocated time per division and personnel
costs (salaries) attributable to such time. Within the operating
partnership division, Administrative Costs are further allocated on
the basis of the total capital of each partnership invested in its
operations.
2. Summary of Significant Accounting Policies
Equity investment in subsidiary
Investment in Sierra Well Service, Inc. in which the Partnership had a
44.94% and 45.89% interest at December 31, 1999 and 1998, is accounted
for by the equity method and the carrying amount is adjusted for the
Partnership's proportionate share of Sierra's undistributed earnings
or losses. The Partnership continually evaluates the current fair
value of the investment in Sierra for impairment. The Partnership at
December 31, 1998 determined that the carrying value of the
investment, including excess cost over equity interest, was not
recoverable, and recorded a charge to reduce the carrying value of the
investment to its fair value. An impairment loss of $9,460,765 was
recorded by the Partnership during 1998.
Estimates and Uncertainties
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Southwest Partners III, L.P.
(a Delaware limited partnership)
Notes to Financial Statements
2. Summary of Significant Accounting Policies - continued
Syndication Costs
Syndication costs are accounted for as a reduction of partnership
equity.
Environmental
Hazards in the operation of oil field service companies, such as
employee injuries on the job site and accidental petroleum or waste
spills, are sometimes encountered. Such hazards may cause substantial
liabilities to third parties or governmental entities, the payment of
which could reduce ultimately the funds available for distribution.
Although it is anticipated that customary insurance will be obtained,
the Partnership may be subject to liability for pollution and other
damages due to hazards, which cannot be insured against or will not be
insured against due to prohibitive premium costs or for other reasons.
Environmental regulatory matters also could increase the cost of doing
business or require the modification of operations in certain areas.
Environmental expenditures are expensed or capitalized depending on
their future economic benefit. Expenditures that relate to an
existing condition caused by past operations and that have no future
economic benefits are expensed. Liabilities for expenditures of a
noncapital nature are recorded when environmental assessment and/or
redemption is probable, and the costs can be reasonably estimated.
Income Taxes
No provision for income taxes is reflected in these financial
statements, since the tax effects of the Partnership's income or loss
are passed through to the individual partners.
In accordance with the requirements of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," the
Partnership's tax basis in its assets is $17,091,339 and $15,102,127
more, as of December 31, 1999 and 1998 as that shown on the
accompanying Balance Sheet in accordance with generally accepted
accounting principles.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Partnership considers
all highly liquid debt instruments purchased with a maturity of three
months or less to be cash equivalents. The Partnership maintains its
cash at one financial institution.
Number of Limited Partner Units
There were 170.925 limited partner units outstanding as of December
31, 1999, held by 523 partners.
Concentrations of Credit Risk
All partnership revenues are received by the Managing General Partner
and subsequently remitted to the partnership and all expenses are paid
by the Managing General Partner and subsequently reimbursed by the
partnership.
Fair Value of Financial Instruments
The carrying amount of cash approximates fair value due to the short
maturity of these instruments.
Net Income (loss) per limited partnership unit
The net income (loss) per limited partnership unit is calculated by
using the number of outstanding limited partnership units.
Southwest Partners III, L.P.
(a Delaware limited partnership)
Notes to Financial Statements
3. Liquidity - Managing General Partner
The Managing General Partner has a highly leveraged capital structure
with over $35.1 million principal and $17.5 million interest payments
due in 2000 on its debt obligations. Due to the severely depressed
commodity prices experienced during the last quarter of 1997,
throughout 1998 and continuing through the second quarter of 1999 the
Managing General Partner is experiencing difficulty in generating
sufficient cash flow to meet its obligations and sustain its
operations. The Managing General Partner is currently in the process
of renegotiating the terms of its various obligations with its
creditors and/or attempting to seek new lenders or equity investors.
Additionally, the Managing General Partner would consider disposing of
certain assets in order to meet its obligations.
There can be no assurance that the Managing General Partner's debt
restructuring efforts will be successful or that the lenders will
agree to a course of action consistent with the Managing General
Partners requirements in restructuring the obligations. Even if such
agreement is reached, it may require approval of additional lenders,
which is not assured. Furthermore, there can be no assurance that the
sales of assets can be successfully accomplished on terms acceptable
to the Managing General Partner. Under current circumstances, the
Managing General Partner's ability to continue as a going concern
depends upon its ability to (1) successfully restructure its
obligations or obtain additional financing as may be required, (2)
maintain compliance with all debt covenants, (3) generate sufficient
cash flow to meet its obligations on a timely basis, and (4) achieve
satisfactory levels of future earnings. If the Managing General
Partner is unsuccessful in its efforts, it may be unable to meet its
obligations making it necessary to undertake such other actions as may
be appropriate to preserve asset values.
4. Investments
Common stock ownership in Sierra Well Service, Inc. was as follows:
December 31, 1997 45.89%
January 1, to December 31, 1998 45.89%
January 1, to March 31, 1999 45.89
March 31, to December 31, 1999 44.94%
At December 31, 1999, the investment in Sierra Well Service, Inc.
exceeded the Partnership's share of the underlying net assets by
$7,620,317 and was being amortized on the straight-line method prior
to June 30, 1999, at which time the equity method was suspended. A 10
year amortization period for goodwill was used due to the fact that
the Partnership intends to wind up its operations on or before
December 31, 2008.
Following is a summary of the financial position and results of
operations of Sierra Well Service, Inc. as of and for the years ended
December 31, 1999, 1998 and 1997 (in thousands):
1998
1999 Restated 1997
Current assets $ 8,971 9,882 14,966
Property and equipment, net 31,186 35,634
46,163
Other assets, net 6,704 7,811
25,990
------ ------ ------
Total assets $ 46,861 53,327 87,119
====== ====== ======
Current liabilities $ 7,296 3,599 5,536
Long-term debt 50,371 54,664 52,480
Deferred income taxes 2,224 - 5,743
------ ------ ------
$ 59,891 58,263 63,759
====== ====== ======
Stockholders' equity $ (13,030) (4,936) 23,360
====== ====== ======
Sales $ 37,331 45,319
26,134
====== ====== ======
Net loss $ (13,401) (28,296) (797)
====== ====== ======
Southwest Partners III, L.P.
(a Delaware limited partnership)
Notes to Financial Statements
4. Investments - continued
Sierra has a highly leveraged capital structure. Sierra on March 23,
2000 filed a Form S-1 "Registration Statement Under the Securities Act
of 1933" with the Securities and Exchange Commission. Sierra plans to
use the net proceeds from this offering to a)repay $25 million in
existing Subordinated Notes; b)finalize $14.5 million as cash
consideration to acquire businesses; c)redeem $5.3 million Series A
Cumulative Preferred Stock and d)cover expenses in connection with the
offering and for general corporate purposes.
Sierra in March 2000 filed a restated certificate of incorporation
increasing its authorized common shares to 25,000,000 and completed a
445-for-1 stock split. All shares have been restated as if the stock
split had occurred at the beginning of 1998. The Partnership at
December 31, 1999 owns 44.94% or 892,225 shares of Sierra's
outstanding common stock.
Sierra on March 31, 1999 finalized a restructuring of its debt with
the lender. The restructuring of Sierra's debt with its lender
provided for a senior subordinated credit facility and three classes
of preferred stock. According to the redemption and/or conversion
features of the three classes of preferred stock, if Sierra does not
meet repayment of scheduled senior subordinated debt starting at
December 31, 1999 with final payment due June 30, 2004, the lender has
the right to exercise their conversion features. The conversion amount
as a percentage of post-conversion outstanding common stock can range
from 25% to 100%. Therefore, the Partnership's investment in Sierra
is subject to possible future dilution and/or elimination as a result
of the convertible preferred stock held by Sierra's lender. The
Partnership's ownership percentage in Sierra upon the signing of
Sierra's debt restructuring at March 31, 1999 remained 45.89%.
However, should the lender exercise the conversion feature of the
preferred stock, the Partnership's ownership percentage would decrease
by 14.11%.
5. Commitments and Contingent Liabilities
As a marketing incentive, brokers who sold in excess of one Unit
received three percent (3%) of the Partnership liquidation proceeds
which are distributed to the General Partner in proportion to the
dollar amount of Units sold by each such broker; provided, however
that no broker shall receive such interest unless the Partnership has
returned to the Limited Partners 100% of their Limited Partner Capital
Contribution plus a 10% cumulative (but not compounded) return at the
time of liquidation. As of December 31, 1998, there were 13 such
brokers who sold in excess of one Unit qualifying for the special
distribution.
The Partnership is subject to various federal, state and local
environmental laws and regulations, which establish standards and
requirements for protection of the environment. The Partnership
cannot predict the future impact of such standards and requirements,
which are subject to change and can have retroactive effectiveness.
The Partnership continues to monitor the status of these laws and
regulations.
As of December 31, 1999, the Partnership has not been fined, cited or
notified of any environmental violations and management is not aware
of any unasserted violations, which would have a material adverse
effect upon capital expenditures, earnings or the competitive position
in the oil field service industry.
Southwest Partners III, L.P.
(a Delaware limited partnership)
Notes to Financial Statements
6. Related Party Transactions
Southwest Royalties, Inc., the General Partner, was paid an
administrative fee of $120,000, $120,000 and $15,000 during 1999, 1998
and 1997 for indirect general and administrative overhead expenses.
In addition, a director and officer of the Managing General Partner is
a partner in a law firm, with such firm providing legal services to
the Partnership. There were approximately $2,500 and $3,400 in legal
services provided for the years ended December 31, 1999 and 1998.
Accounts payable due to the General Partner at December 31, 1999 and
1998 totaled $265,535 and $138,938 for administrative fees.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None
Part III
Item 10. Directors and Executive Officers of the Registrant
Management of the Partnership is provided by Southwest Royalties, Inc., as
Managing General Partner. The names, ages, offices, positions and length
of service of the directors and executive officers of Southwest Royalties,
Inc. are set forth below. Each director and executive officer serves for a
term of one year.
Name Age Position
- -------------------- --- -----------------------------------
- --
H. H. Wommack, III 44
Chairman of the Board, President,
Chief Executive Officer, Treasurer
and Director
H. Allen Corey 43 Secretary and Director
Bill E. Coggin 45
Vice President and Chief Financial
Officer
J. Steven Person 41 Vice President, Marketing
Paul L. Morris 58 Director
H. H. Wommack, III, is Chairman of the Board, President, Chief Executive
Officer, Treasurer, principal stockholder and a director of the Managing
General Partner, and has served as its President since the Company's
organization in August, 1983. Prior to the formation of the Company, Mr.
Wommack was a self-employed independent oil producer engaged in the
purchase and sale of royalty and working interests in oil and gas leases,
and the drilling of exploratory and developmental oil and gas wells. Mr.
Wommack holds a J.D. degree from the University of Texas from which he
graduated in 1980, and a B.A. from the University of North Carolina in
1977.
H. Allen Corey, a founder of the Managing General Partner, has served as
the Managing General Partner's secretary and a director since its
inception. Mr. Corey is President of Trolley Barn Brewery, Inc., a brew
pub restaurant chain based in the Southeast. Prior to his involvement with
Trolley Barn, Mr. Corey was a partner at the law firm of Miller & Martin in
Chattanooga, Tennessee. He is currently of counsel to the law firm of
Baker, Donelson, Bearman & Caldwell, with the offices in Chattanooga,
Tennessee. Mr. Corey received a J.D. degree from the Vanderbilt University
Law School and B.A. degree from the University of North Carolina at Chapel
Hill.
Bill E. Coggin, Vice President and Chief Financial Officer, has been with
the Managing General Partner since 1985. Mr. Coggin was Controller for Rod
Ric Corporation of Midland, Texas, an oil and gas drilling company, during
the latter part of 1984. He was Controller for C.F. Lawrence & Associates,
Inc., an independent oil and gas operator also of Midland, Texas during the
early part of 1984. Mr. Coggin taught public school for four years prior
to his business experience. Mr. Coggin received a B.S. in Education and a
B.B.A. in Accounting from Angelo State University.
J. Steven Person, Vice President, Marketing, assumed his responsibilities
with the Managing General Partner as National Marketing Director in 1989.
Prior to joining the Managing General Partner, Mr. Person served as Vice
President of Marketing for CRI, Inc., and was associated with Capital
Financial Group and Dean Witter (1983). He received a B.B.A. from Baylor
University in 1982 and an M.D.A. from Houston Baptist University in 1987.
Paul L. Morris has served as a Director of Southwest Royalties Holdings,
Inc. since August 1998 and Southwest Royalties, Inc. since September 1998.
Mr. Morris is President and CEO of Wagner & Brown, Ltd., one of the largest
independently owned oil and gas companies in the United States. Prior to
his position with Wagner & Brown, Mr. Morris served as President of Banner
Energy and in various managerial positions with Columbia Gas System, Inc.
Key Employees
Jon P. Tate, Vice President, Land and Assistant Secretary, assumed his
responsibilities with the Managing General Partner in 1989. Prior to
joining the Managing General Partner, Mr. Tate was employed by C.F.
Lawrence & Associates, Inc., an independent oil and gas company, as Land
Manager from 1981 through 1989. Mr. Tate is a member of the Permian Basin
Landman's Association and received his B.B.S. degree from Hardin-Simmons
University.
R. Douglas Keathley, Vice President, Operations, assumed his
responsibilities with the Managing General Partner as a Production Engineer
in October, 1992. Prior to joining the Managing General Partner, Mr.
Keathley was employed for four (4) years by ARCO Oil & Gas Company as
senior drilling engineer working in all phases of well production (1988-
1992), eight (8) years by Reading & Bates Petroleum Company as senior
petroleum engineer responsible for drilling (1980-1988) and two (2) years
by Tenneco Oil Company as drilling engineer responsible for all phases of
drilling (1978-1980). Mr. Keathley received his B.S. in Petroleum
Engineering in 1977 from the University of Oklahoma.
Item 11. Executive Compensation
The Partnership does not have any directors or executive officers. The
executive officers of the Managing General Partner do not receive any cash
compensation, bonuses, deferred compensation or compensation pursuant to
any type of plan, from the Partnership. The Managing General Partner
billed $120,000 during 1999 and 1998 and $15,000 during 1997, as an annual
administrative fee.
Item 12. Security Ownership of Certain Beneficial Owners and Management
There are no limited partners who own of record, or are known by the
Managing General Partner to beneficially own, more than five percent of the
Partnership's limited partnership interests.
The Managing General Partner owns a nine percent interest in the
Partnership as a general partner.
No officer or director of the Managing General Partner owns Units in the
Partnership. H. H. Wommack, III, as the individual general partner of the
Partnership, owns a one percent interest as a general partner. There are
no arrangements known to the Managing General Partner which may at a
subsequent date result in a change of control of the Partnership.
Item 13. Certain Relationships and Related Transactions
The General Partner contributed $1,692,698, which entitled it to receive
100% of the Partnership's general partner interest. The general partner
interest entitles the General Partner to 15% interest in the Partnership.
See "Item 5."
In 1999, the Managing General Partner received $120,000 as an
administrative fee. This amount is part of the general and administrative
expenses incurred by the Partnership.
The Partnership originally invested all of the proceeds of the Private
Placement in 2,005 shares 45.9% of Sierra common stock. The General
Partner at December 31, 1999 directly owns 28.24% of Sierra's common stock.
Sierra in March 2000 filed a restated certificate of incorporation
increasing its authorized common shares to 25,000,000 and completed a 445-
for-1 stock split. All shares have been restated as if the stock split had
occurred at the beginning of 1998. The Partnership at December 31, 1999
now owns 44.94% or 892,225 shares of Sierra's outstanding common stock.
H. Allen Corey, who is an officer and director of the General Partner, is
of counsel with Baker, Donelson, Bearman & Caldwell, a law firm, which
provides legal services to the General Partner and the Partnership. The
Partnership paid approximately $2,500 in legal services for 1999.
In the opinion of management, the terms of the above transactions are
similar to ones with unaffiliated third parties.
Part IV
Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K
(a)(1) Financial Statements:
Southwest Partners III, L.P. Financial Statements
Included in Part II Item 8 of this report -
Independent Auditors Report
Balance Sheets
Statements of Operations
Statement of Changes in Partners' Equity
Statements of Cash Flows
Notes to Financial Statements
Index to Financial Statements of Unconsolidated
Subsidiary
Independent Auditors' Report 30
Balance Sheets
31
Statements of Operations 32
Statements of Stockholders' Equity 33
Statements of Cash Flows 34
Notes to Financial Statements 35
(2) Schedules required by Article 12 of Regulation S-
X are either omitted because they are not applicable or
because the required information is shown in the
financial statements or the notes thereto.
(3) Exhibits:
4 (a)
Certificate of Limited Partnership of Southwest
Partners III, L.P., dated March 11, 1997.
(Incorporated by reference from Partnership's
Form 10-K for the fiscal year ended December 31,
1998).
(b) Agreement of Limited Partnership of
Southwest Partners III, L.P., dated March 11,
1997. (Incorporated by reference from
Partnership's Form 10-K for the fiscal year ended
December 31, 1998).
27 Financial Data Schedule
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during the
quarter ended December 31, 1999.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Partnership has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Southwest Partners III, L.P.
a Delaware limited partnership
By:
Southwest Royalties, Inc.,
Managing General Partner
By: /s/ H. H. Wommack, III
-----------------------------
H. H. Wommack, III, President
Date: April 14, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Partnership and in the capacities and on the dates indicated.
By: /s/ H. H. Wommack, III
-----------------------------------
H. H. Wommack, III, Chairman of the
Board, President, Chief Executive
Officer, Treasurer and Director
Date: April 14, 2000
By: /s/ H. Allen Corey
-----------------------------
H. Allen Corey, Secretary and
Director
Date: April 14, 2000
When the transaction referred to in the third paragraph of Note 1 of the
Notes to Financial Statements has been consummated, we will be in a
position to render the following report.
KPMG LLP
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Sierra Well Service, Inc.:
We have audited the accompanying balance sheets of Sierra Well Service,
Inc. of December 31, 1999 and 1998, and the related statements of
operations, stockholders' equity and cash flows for each of the years in
the three-year period ended December 31, 1999. These financial statements
are the responsibility of the Company's management.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Sierra Well
Service, Inc. as of December 31, 1999 and 1998, and the results of its
operations and its cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with generally accepted
accounting principles.
KPMG LLP
Midland, Texas
March 11, 2000, except as to the
third paragraph of Note 1
which is as of , 2000.
SIERRA WELL SERVICE, INC.
BALANCE SHEETS
As of December 31, 1998 and 1999
ASSETS
(in thousands, except share data)
1998
1999
Current assets
Cash and cash equivalents $2,84 $
6 1,062
Trade accounts receivable, net of allowance of
$1,238 and 6,534
$271, respectively 7,477
Accounts receivable-related party 89
73
Inventories 158
144
Other current assets 255
215
Total current assets 9,882
8,971
Property and equipment, net 35,63
4 31,18
6
Other assets
Deferred loan costs, net of amortization of
$1,318 and 317
$2,198, respectively 494
Goodwill, net of amortization of $16,660 and
$17,024, 4,998
respectively 4,633
Other 2,496
1,577
Total other assets 7,811
6,704
Total assets $53,3 $
27 46,86
1
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt $403 $
1,164
Accounts payable 1,772
4,281
Accounts payable-related party 40
49
Accrued expenses 1,384
1,698
Deferred income tax -
104
Total current liabilities 3,599
7,296
Long-term debt 54,66
4 50,37
1
Deferred income tax -
2,224
Commitments & contingencies -
-
Stockholders' equity
Series A Redeemable 10% Preferred Stock,
$10,000 par, -
1,000 shares authorized, 530.45 shares 5,305
issued
Series B Convertible Preferred Stock, $1 par,
1,000 shares -
authorized, 1,000 issued 1
Series C Convertible Preferred Stock, $1,000
par, 1 share -
authorized, one issued 1
Common stock - $.01 par; $1 stated value;
25,000,000
shares authorized; 1,944,966 and 1,985,488
shares 19
issued and outstanding at December 31, 1998 20
and 1999,
respectively
Additional paid-in capital 24,83
0 24,82
9
Accumulated deficit (29,7
85) (43,1
86)
Total stockholders' deficit (4,93
6) (13,0
30)
Total liabilities and stockholders' deficit $53,3 $
27 46,86
1
The accompanying notes are an integral part of these financial
statements.
SIERRA WELL SERVICE, INC.
STATEMENTS OF OPERATIONS
For the years ended December 31, 1997, 1998 and 1999
(in thousands, except per share and share data)
1997
1998 1999
Revenues
Well Servicing $20,920$ $
26,687 24,453
Fluid Services 5,214
18,632 12,878
26,134
45,319 37,331
Expenses
Well Servicing 16,534
21,640 20,164
Fluid Services 3,469
13,009 9,613
General and administration, including
management fees
and computer services from related 2,785
parties of $136, 5,471 5,229
$241, and $234, respectively
Depreciation and amortization 2,931
8,624 6,747
Impairment of long lived assets (Note -
4) 22,671 -
25,719
71,415 41,753
Operating income (loss) 415
(26,09 (4,422
6) )
Other income (expense)
Interest income 85
263 100
Interest expense (1,508)
(7,166 (6,065
) )
Loss on sale of assets (30)
(93) (301)
Other, net 11
(974) 45
(1,442)
(7,970 (6,221
) )
Loss before income taxes (1,027)
(34,06 (10,64
6) 3)
Deferred income tax (expense) benefit 230
5,770 (2,328
)
Net loss $(797) $ $
(28,29 (12,97
6) 1)
Preferred stock dividend -
- 430
Net loss to common stockholders' interest $(797) $ $
(28,29 (13,40
6) 1)
Loss per share $ $(14 $
(0.65) .55) (6.78)
Weighted average number of shares 1,224,195
outstanding 1,945, 1,975,
095 358
The accompanying notes are an integral part of these financial
statements.
SIERRA WELL SERVICE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1997, 1998 and 1999
Series A Series B Series C
RedeemableConvertible Convertible Additional
PreferredPreferred Preferred Common Paid-In Accum
Stock ulated
Stoc Stock Stock
k
Shar Deficit
es Amou Share Amou Shar Amou Shares Amou Capita
nt s nt es nt nt l
(in
thou
sand
s,
exce
pt
shar
e
data
)
Balance - - - - 867,7 8 $ $(692)
January 1, - - - 50 5,145
1997
Stock - - - 8,900 - - -
compensatio - - -
n
granted
Common - - - 1,068 11 19,209 -
stock - - - ,316
issued
Issuance
of - - - - - 476 -
common - - -
stock
Warrants
Net loss - - - - (797)
- - - - -
Balance -
December - - - 1,944 19 24,830 (1,489)
31, 1997 - - - ,966
Net loss - - - - (28,2
- - - - - 96)
Balance - - - - 1,944 19 24,830 (29,7
December - - - ,966 85)
31, 1998
Stock - - - 40,522 1 (1) -
compensatio - - -
n
granted
Preferred 500 5,00 1 - - - -
stock 0 1,000 1 1
issued
Preferred
stock 30 305 - - - - (305)
- - -
dividend -
stock
Preferred
stock - - - - - - (125)
- - -
dividend -
cash
Net loss - - - - (12,9
- - - - - 71)
Balance - 530 5,305 1,0 1 20 $ $(43,
December 00 1 1 1,985, 24,829 186)
31, 1999 488
The accompanying notes are an integral part of these financial statements.
SIERRA WELL SERVICE, INC.
STATEMENTS OF CASH FLOWS
For the years ended December 31, 1997, 1998 and 1999
(In thousands)
1997
1998 1999
Cash flows from operating activities
Net loss $(797 $ $
) (28,2 (12,9
96) 71)
Depreciation 2,459
6,322 5,494
Amortization 472
2,302 1,253
Impairment of long lived assets -
22,67 -
1
Bad debt expense 475
442 125
Noncash interest expense 281
1,435 2,494
Write-off of deferred loan costs -
655 -
Loss on sale of assets 30
93 301
Deferred income tax expense (benefit) (230)
(5,77 2,328
0)
Changes in operating assets and
liabilities, net of
acquisitions - (6,48
Accounts receivable 9) 1,011 (1,05
1)
Inventories 15
92 14
Income tax receivable 15
- -
Other current assets 33
(152) 46
Accounts payable 2,586
(1,33 2,518
3)
Accrued expenses 1,095
(468) 314
Net cash provided by (used in) operating (55)
activities (996) 865
Cash flows from investing activities
Purchase of property and equipment (6,58
5) (2,43 (2,28
5) 7)
Proceeds from sale of property and 86
equipment 309 1,210
Collections of notes receivable -
- 3
Proceeds from sale of other long-term -
assets 85 205
Payments for other long-term assets (247)
(92) (101)
Payments for businesses, net of cash (56,0
acquired 76) (1,80 -
0)
Net cash used in investing (62,8
activities 22) (3,93 (970)
3)
Cash flows from financing activities
Borrowings under long-term debt 58,79
1 2,100 -
Payments of long-term debt (7,12
1) (595) (497)
Dividends paid -
- (125)
Deferred loan costs (2,03
7) (267) (1,05
7)
Proceeds from issuance of common stock 19,22
0 - -
Net cash provided by financing 68,85
activities 3 1,238 (1,67
9)
Net increase (decrease) in cash and cash 5,976
equivalents (3,69 (1,78
1) 4)
Cash and cash equivalents - beginning of 561
year 6,537 2,846
Cash and cash equivalents - end of year $6,53 $ $
7 2,846 1,062
Supplemental disclosures of cash flow
information - $1,22 $ $
Interest paid 7 5,732 5,106
Income taxes received -
- -
Supplemental schedule of noncash investing
and financing
activities - $476 $ $
Common stock warrants issued as debt - -
discount
Capital leases issued for equipment 462
252 353
Notes receivable-non cash -
- 83
The accompanying notes are an integral part of these financial statements.
SIERRA WELL SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Organization & Business - Sierra Well Service, Inc. (the "Company"), a
Delaware corporation, was formed in 1992 as a subsidiary of Southwest
Royalties, Inc. ("SWR"). In June 1997, Southwest Royalties Holding, Inc.
("SRH") was formed to serve as a holding company for SWR, the Company and
other subsidiaries of SWR. At that time, SWR's investment in the Company
was transferred by dividend to SRH and the Company became a subsidiary of
SRH. Due to sales of the Company's common stock to Southwest Partners II,
L.P. and Southwest Partners III, L.P. (limited partnerships for which SWR
serves as general partner) in 1996 and 1997, SRH's ownership interest in
the Company was reduced to a point where the Company's financial position
and results of operations were no longer consolidated with SRH, effective
July 1, 1997.
The Company provides a range of well site services to oil and gas drilling
and producing companies through the Company's fleet of well servicing rigs
and fluid handling assets. The Company's operations are concentrated in the
major United States oil and gas producing regions of Texas, New Mexico,
Oklahoma and Louisiana.
Common Stock Split
On , 2000, the Company filed a restated certificate of
incorporation increasing its authorized common shares to 25,000,000 and
completed a 445-for-1 stock split. All share and per share amounts have
been restated as if the stock split had occurred at the beginning of the
earliest period presented.
Estimates and Uncertainties - The preparation of these financial statements
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
Cash and Cash Equivalents - The Company considers all highly liquid
instruments purchased with a maturity of three months or less to be cash
equivalents. The Company maintains its excess cash in various financial
institutions, where deposits may exceed federally insured amounts at times.
Inventories - Inventories mainly consist of pipe, are held for use in the
operations of the Company and are stated at the lower of cost or market,
with cost being determined on the first-in, first-out (FIFO) method.
Property and Equipment - Property and equipment are stated at cost.
Expenditures for repairs and maintenance are charged to expense as incurred
and additions and improvements that significantly extend the lives of the
assets are capitalized. Upon sale or other retirement of depreciable
property, the cost and accumulated depreciation are removed from the
related accounts and any gain or loss is reflected in operations. All
assets are depreciated on the straight-line method and the estimated useful
lives of the assets are as follows:
Buildings and improvements 20-30
years
Well servicing rigs and equipment 5-15
years
Fluid service equipment 5-10
years
Brine/fresh water stations 15
years
Enviro-Vat units and fluid service 10
years
Disposal facilities 10
years
Vehicles 3-5
years
The Company reviews property and equipment and certain identifiable
intangibles for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. An
impairment loss is indicated if the sum of the expected undiscounted future
cash flows is less than the carrying amount, including any related
goodwill, of such assets. Expected future cash flows and carrying values
are aggregated at their lowest identifiable level, which is on a rig-by-rig
basis for the Company's well service rigs and by region for the Company's
truck fleets and water stations. The Company would recognize an impairment
loss for the difference between the asset's, or group of assets, carrying
value and estimated fair value, if the carrying value exceeded the expected
future cash flows.
Deferred Debt Costs - The Company capitalizes certain costs in connection
with obtaining its borrowings, such as lender's fees and related attorney's
fees. These costs are being amortized to interest expense on the straight-
line method over the terms of the related debt.
Goodwill - The Company classifies as goodwill the cost in excess of fair
value of the net tangible assets acquired in purchase transactions.
Goodwill is being amortized on a straight-line basis over fifteen years.
Management continually evaluates whether events or circumstances have
occurred that indicate the remaining useful life of goodwill may warrant
revision or the remaining balance of goodwill may not be recoverable.
Income Taxes - Deferred income taxes are recognized for the tax
consequences of temporary differences between financial statement carrying
amounts and the tax basis of existing assets and liabilities. The
measurement of current and deferred tax assets and liabilities is based on
enacted tax law. The effect on deferred tax assets and liabilities of a
change in tax rate is recognized in income in the period of change. A
valuation allowance for deferred tax assets is recognized when it is "more
likely than not" that the benefit of deferred tax assets will not be
realized.
Concentrations of Credit Risk - Financial instruments, which potentially
subject the Company to concentration risk, consist primarily of temporary
cash investments and trade receivables. The Company restricts investment of
temporary cash investments to financial institutions with high credit
standing. The Company's customer base consists primarily of multi-national
and independent oil and natural gas producers. The Company performs ongoing
credit evaluations of its customers but generally does not require
collateral on its trade receivables. Credit risk is considered by
management to be limited due to the large number of customers comprising
the Company's customer base. The Company maintains reserves for potential
credit losses, and such losses have been within management's expectations.
Loss Per Share - The Company accounts for loss per share based upon
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
(SFAS 128). Under SFAS 128, basic earnings or loss per common share are
determined by dividing net earnings or loss applicable to common stock by
the weighted average number of common shares actually outstanding during
the year. Diluted earnings per common share is based on the increased
number of shares that would be outstanding assuming conversion of dilutive
outstanding convertible securities using the "as if converted" method. The
share effect related to outstanding common stock warrants is omitted for
1998 and 1997 because they are antidilutive to the periods presented. Such
warrants are no longer outstanding.
Recent Accounting Pronouncements - In June 1998, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
No. 133 "Accounting for Derivative Instruments and Hedging Activities"
("FAS 133") which establishes standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and
for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. It establishes
conditions under which a derivative may be designated as a hedge, and
establishes standards for reporting changes in the fair value of a
derivative. FAS 133, as amended by FAS 137, is required to be implemented
for all fiscal quarters of all fiscal years beginning after June 15, 2000.
Early adoption is permitted. The Company has not completed the evaluation
of the potential effects of implementing FAS 133.
2. Acquisitions
In 1997 and 1998, Sierra acquired either substantially all of the assets or
all of the outstanding capital stock of each of the following businesses,
which were accounted for using the purchase method of accounting:
Closing Purchase
Date Price
(in
thousands)
East Texas Vac. Service, L.C June $3,080
1997
S&N Well Servicing, Ltd July 5,400
1997
Lonnies Well Service Co August 714
1997
Harrison Rig Service, inc August 475
1997
DKB Enterprises, Inc October 5,600
1997
Diamond Rental, Inc October 3,500
1997
Larry O'Connor, Inc October 3,600
1997
Aries Well Service, Inc October 1,500
1997
Trans-Texas Operating, Inc October 5,500
1997
Smith Brothers Casing Pullers, Inc October 1,300
1997
Mansell Brine Sales, Inc November 7,000
1997
Bobby Herricks Trucking, Inc December 11,750
1997
Ackerly Service Company, Inc. and Enviro- December 5,000
Vat, Inc 1997
Accurate Petroleum Services, Inc April 2,100
1998
The Company sold 2,401 shares of common stock totaling $19,219,500 to
Southwest Partners II, Southwest Partners III and Southwest Royalties, Inc.
and borrowed $49,408,000 from Joint Energy Development Investments Limited
Partnership II in order to fund the acquisitions and purchase additional
well servicing equipment. The remainder of the proceeds was used for
working capital. The operations of each of the aforementioned acquisitions
are included in the Company's statement of operations as of each respective
closing date.
In 1998, the Company expensed previously deferred costs from foregone
acquisitions and costs associated with an equity offering not consummated,
totaling approximately $990,000.
3. Property and Equipment
Property and equipment consists of the following as of December 31 (in
thousands):
1998
1999
Land $831 $
236
Buildings and improvements 1,97
3 1,67
3
Well service units and equipment 21,5
23 22,5
07
Water hauling equipment 7,04
9 7,05
2
Brine/fresh water stations 8,42
9 8,62
0
Enviro-Vat units and frac/test tanks 3,21
1 3,21
1
Disposal facilities 5,34
8 5,34
8
Vehicles 4,42
9 4,38
9
Other 631
672
53,4
24 53,7
08
Less accumulated depreciation 17,7
90 22,5
22
Property and equipment, net $35, $
634 31,1
86
4. Impairment
At December 31, 1998, the Company recorded an impairment loss on its well
service rigs and equipment, water stations and related goodwill of
approximately $378,000, $7,372,000 and $14,922,000, respectively, for a
total impairment of approximately $22,672,000. In determining if an
impairment loss was indicated, management projected future cash flows
through the estimated life of each asset, for each of the Company's well
service rigs and by region for the Company's trucks and water stations,
based on estimated utilization rates, hours, revenues and expenses,
generally increasing utilization rates based on managements expectations,
but using constant hourly rates charged to customers. Where an impairment
was indicated, the carrying value of the asset plus the related goodwill
was reduced to the estimated fair market value, based upon a recent
appraisal.
5. Long-Term Debt
Long-term debt consists of the following as of December 31 (in thousands):
1998
1999
Credit Facility $54, $
331 -
New Credit Facility
Senior Notes -
24,4
08
Subordinated Notes -
26,5
35
Capital leases and equipment notes 736
592
55,0
67 51,5
35
Less current portion, determined based on the
terms of the 403
New Credit Facility (see discussion below) 1,16
4
$54, $
664 50,3
71
On September 30, 1997, the Company signed a loan agreement (the "Credit
Facility") that provided up to $60,000,000 for acquisitions and refinancing
existing debt. The agreement required monthly interest payments with the
outstanding principal balance and accrued interest due on March 31, 1999.
The loan consisted of two tranches (Tranche A and Tranche B) totaling
$30,000,000 each. As of December 31, 1998, Tranche A had an outstanding
balance of $30,000,000 and Tranche B had an outstanding balance of
$24,410,000. The initial interest rates for Tranche A and B were prime plus
1% and 3%, respectively. Interest on Tranche B, if not retired in whole by
October 1998, increased by 1% at the end of each subsequent two-month
period. The Credit Facility contained various restrictive covenants which
included restrictions on the incurrence of additional indebtedness and
limitations on the amount of capital lease obligations. Certain covenants
also placed restrictions on dividends, stock redemptions, investments and
sales of assets.
As part of the agreement, the Company issued common stock warrants to the
lender which were exercisable in whole or in part any time prior to October
2002. As of December 31, 1998, the lender was entitled to 457 warrants at
exercise prices ranging from $8,500 to $11,500 per share. These warrants
had estimated fair value of $476,400 at time of issuance and a carrying
value of $79,400 as of December 31, 1998. The fair value of the warrants
were calculated using the Black-Scholes option model assuming no expected
volatility and a risk free interest rate of 5%. On March 31, 1999 the
outstanding warrants associated with the Credit Facility were cancelled.
In October 1997, the Company repaid approximately $6,000,000 of short-term
debt, including accrued interest, with proceeds from the Credit Facility.
On March 31, 1999, the Company entered into three security purchase
agreements (collectively, the "New Credit Facility") that provides up to
$54,410,000, the proceeds of which were used to retire the Credit Facility.
The Company has accounted for this restructuring under FAS 15, "Accounting
by Debtors and Creditors for Troubled Debt Restructuring". The Company
issued preferred stock with an estimated fair value of $5 million to the
lender on March 31, 1999, as partial settlement of the outstanding balance
of the Credit Facility. In accordance with FAS 15, no gain or loss was
recognized on the restructuring.
The New Credit Facility is comprised of a senior credit facility (the
"Senior Notes"), a senior subordinated credit facility (the "Subordinated
Notes") and three classes of preferred stock, as follows:
The Senior Notes have a principal balance of $24,408,000 with quarterly
interest payable at a rate per annum of 250 basis points above the six
month London Interbank Offered Rate beginning March 31, 1999. All
outstanding principal and accrued and unpaid interest is due and payable in
full on June 30, 2004. The principal is payable quarterly beginning
September 30, 2000, based on a seven year amortization of principal
beginning June 30, 2000 and a final balloon payment due on June 30, 2004
for the unpaid balance.
The Subordinated Notes have a principal balance of $25,000,000 with
quarterly interest payable at a rate of 10% per annum beginning March 31,
1999. The Company may defer interest payments due prior to September 30,
2001, at a rate of 12% per annum. All accrued and unpaid interest is due on
September 30, 2001. The Company chose to defer the interest payments due
September 30 and December 31, 1999. All principal and accrued and unpaid
interest is due and payable in full on June 30, 2004.
The Senior and Subordinated Notes contain covenants which restrict
dividends, investments, and the sale of assets. At December 31, 1999, the
Company was not in compliance with certain debt covenants of the Senior and
Subordinated Notes. The Company has obtained an amendment to the New Credit
Facility to cure those events of non-compliance. Additionally, the
covenants require the Company to maintain a fixed charge coverage ratio (as
defined) of at least 1.00:1 for each quarter beginning June 30, 2000.
As of December 31, 1999, the aggregate maturities of debt, including
capital leases, for each of the five years subsequent to December 31, 1999,
are as follows (in thousands):
Year Ending
December 31,
2000 $1,16
5
2001 6,070
2002 3,608
2003 3,488
2004 37,20
4
$51,5
35
500 shares of Series A Cumulative Preferred Stock ("Series A"), $10,000 per
share liquidation preference ($5,000,000) with a dividend payable quarterly
at 10% per annum. The Company may choose to pay dividends in-kind at a rate
of 12% per annum. The Company paid dividends in-kind on the September 30
and December 31, 1999 payment dates.
The Company may redeem all of the shares of Series A at any time, at a
redemption price of $10,000 per share, together with accrued and unpaid
dividends to the date of redemption; provided, however, that in accordance
with the Company's Senior Subordinated Credit Facility, the Company is not
entitled to redeem shares of Series A unless and until all outstanding
principal and accrued and unpaid interest under the Subordinated Note has
been paid in full.
Series A ranks senior to all other classes and series of the stock in all
respects, including as to redemption and payment of dividends and
distributions (including upon liquidation or winding up). Series A may be
redeemed by the Issuer at any time after the Subordinated Notes have been
paid in full for an amount equal to par plus all accrued and unpaid
dividends. Upon redemption, all conversion, voting, and other rights of
Series A shall terminate.
1,000 shares of Series B Convertible Preferred Stock ("Series B"), $1 per
share liquidation value ($1000), with dividends payable only if dividends
are paid on the Company's common stock. The number of shares of the common
stock into which Series B is convertible varies based upon the timing of
the repayment of Series A, but represents, at a minimum, 25% of the
Company's outstanding common stock. Series B may be converted, at the
holders option, into the number of shares of the Company's common stock
necessary to equal the following percentages of total, post-conversion
common shares calculated on a fully diluted basis:
Conversion
Timing of repayment Amount as
of Series A Issue a percentage
on or before of post-
conversion
outstanding
Common
Stock
December 31, 1999 25%
June 30, 2000 30%
After June 30, 2000 35%
Series B ranks senior to all other classes and series of the Company's
stock except Series A, in all respects, including as to redemption and
payment of dividends and distributions (including upon liquidation or
winding up).
One share of Series C Convertible Preferred Stock ("Series C"), $1,000 per
share liquidation preference, with dividends payable only if dividends are
paid on the Company's common stock. The number of shares of the Company's
common stock into which Series C is convertible varies based upon the
timing of the redemption of Series A. Series C may be converted, at the
option of the holder, into the number of shares of common stock necessary
to equal the following percentages of total, post-conversion common shares
calculated on a fully diluted basis:
Conversion A
Timing of repayment mount as
of Series A Issue a percentage
on or before of post-
conversion o
utstanding
Common
Stock
June 30, 2000 0%
June 30, 2001 10%
June 30, 2002 20%
June 30, 2003 30%
June 30, 2004 40%
After June 30, 2004 65%
Series C ranks senior to all other classes and series of the Company's
stock except for Series A and Series B, in all respects, including as to
redemption and payment of dividends and distributions (including upon
liquidation or winding up).
6. Income Taxes
The provision (benefit) for income taxes consists of the following as of
December 31 (in thousands):
1997
1998 1999
Current $ - $ $
- -
Deferred 1,20
4 (2,9 5,39
24) 2
Benefit of net operating loss carryforward (1,4
34) (3,3 (2,5
55) 55)
Change in valuation allowance -
509 (509
)
$(23 $ $
0) (5,7 2,32
70) 8
A reconciliation between the amount determined by applying the federal
statutory rate with the provision (benefit) for income taxes is as follows
as of December 31 (in thousands):
19 1998 1999
97
Statutory federal income tax $(3 $(11, $(3,
50) 582) 619)
Amortization of non-deductible goodwill and 74 5,195 227
property
Meals and entertainment 46 95 75
Change in valuation allowance - 509 (509
)
Reduction in net operating loss carryforwards - - 6,10
1
Other - 13 53
$(2 $(5,7 $2,3
30) 70) 28
As a result of issuing preferred stock and convertible preferred stock to
its primary lender on March 31, 1999, the Company's net operating loss
carryforwards accumulated prior to that date were effectively reduced to
zero under Section 382 of the Internal Revenue Code. Deferred tax assets
related to operating loss carryforwards existing at December 31, 1999 arose
from losses occurring subsequent to March 31, 1999.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are as follows as of
December 31 (in thousands):
1998
1999
Deferred tax assets:
Operating loss carryforwards $5,0 $
82 2,55
5
Receivables 148
-
Other 1
202
Valuation allowance (509
) -
Total deferred tax assets 4,72
2 2,75
7
Deferred tax liabilities:
Property and equipment (4,5
05) (4,7
94)
Real estate investments (23)
-
Goodwill (157
) (145
)
Other intangibles (37)
(42)
Receivables -
(104
)
Total deferred tax liabilities (4,7
22) (5,0
85)
Net deferred tax liability $ - $
(2,3
28)
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax assets will not be realized. The valuation
allowance relates primarily to the uncertainty of the realizability of the
Company's carryforwards. The amount of the valuation allowance could be
reduced if estimates of future taxable income during the carryforward
period are increased.
As of December 31, 1999, the Company had net operating loss carryforwards
for U.S. federal income tax purposes of approximately $7,514,107, which are
available to offset future regular taxable income, if any. The net
operating loss carryforwards expire in various periods through 2020. As
described above, this amount relates only to tax losses since March 31,
1999.
7. Commitments and Contingencies
Environmental
The Company is subject to various federal, state and local environmental
laws and regulations which establish standards and requirements for
protection of the environment. The Company cannot predict the future impact
of such standards and requirements which are subject to change and can have
retroactive effectiveness. The Company continues to monitor the status of
these laws and regulations. Management does not believe that the
disposition of any of these items will result in a material adverse impact
to the financial position, liquidity, capital resources or future results
of operations of the Company.
Currently, the Company has not been fined, cited or notified of any
environmental violations which would have a material adverse effect upon
the financial position, liquidity or capital resources of the Company.
However, management does recognize that by the very nature of its business,
material costs could be incurred in the near term to bring the Company into
total compliance. The amount of such future expenditures is not
determinable due to several factors including the unknown magnitude of
possible contamination, the unknown timing and extent of the corrective
actions which may be required, the determination of the Company's liability
in proportion to other responsible parties and the extent to which such
expenditures are recoverable from insurance or indemnification.
Litigation
From time to time, the Company is a party to litigation or other legal
proceedings that the Company considers to be a part of the ordinary course
of business. The Company is not currently involved in any legal proceedings
that could reasonably be expected to have a material adverse effect on the
Company's financial condition or results of operations.
Leases
The Company leases certain equipment under non-cancelable operating leases
which expire at various dates through December 2001. The term of the
operating leases generally run from 36 to 60 months with varying payment
dates throughout each month.
As of December 31, 1999, the future minimum lease payments under non-
cancelable operating leases are as follows (in thousands):
Year Ending
December 31, Lease P
ayments
2000 $291
2001 176
2002 142
2003 142
2004 118
Total $869
Rent expense approximated $962,000 for 1997, $979,000 for 1998, and
$942,000 for 1999. The Company rents various equipment for short-term
periods in order to assist day-to-day operations.
8. Stock Compensation
The Company granted an officer 40,520 shares with nominal value, at March
31, 1999. The Company granted two employees 10 shares of common stock each,
effective January 1, 1997. Compensation expense related to the 1997
issuances was determined at the date of the grant based on the estimated
fair value of the Company as determined by an independent investment
advisor.
9. Related Party Transactions
The Company provided services and products for workover, maintenance and
plugging of existing oil and gas wells to a related party for $508,000,
$906,000 and $1,010,000 in 1997, 1998 and 1999 respectively. The Company
has receivables from this related party, of $89,000 and $73,000 as of
December 31, 1998 and 1999, respectively.
The Company paid a related party management fees for accounting,
bookkeeping, tax preparation, banking and computer services in 1999. All
services, except for computer services, were terminated by the Company as
of December 31, 1999. Since January 1996, this related party has performed
computer services for the Company for $7,500 per month.
The Company leases three well service rigs from a related party under an
operating lease entered into in October 1999. The lease requires monthly
payments of approximately $11,000 and expires in October 2004. Rent expense
related to this lease approximated $24,000 for 1999.
A director of the Company is a partner in a law firm that provides legal
services to the Company. During 1998 and 1999, the Company paid
approximately $112,000 and $64,000, respectively in fees for legal services
performed.
10. Profit Sharing Plan
The Company has a contributory retirement plan that covers substantially
all employees. Employees may contribute up to 15% of their base salary with
the maximum amount determined by law. Employee contributions are fully
vested at all times and discretionary employer contributions are fully
vested upon the first to occur of retirement and five years of service.
Employer contributions to the 401(k) plan approximated $13,000 for 1997,
$18,000 for 1998 and $56,000 for 1999.
11. Major Customers
No customers accounted for over 10% sales in 1997, 1998 or 1999. The
Company performs ongoing evaluations of its customers' financial condition
and generally requires no collateral to secure outstanding receivables.
12. Business Segment Information
Information about the Company's operations by business segment for the
years ended December 31, 1997, 1998 and 1999, is as follows:
1997 1998
1999
Revenues:
Well servicing $20,9 $26,6 $
20 87 24,45
3
Fluid services 5,214 18,63
2 12,87
8
$26,1 $45,3 $
34 19 37,33
1
Income (loss) before income taxes:
Well servicing $4,38 $5,74 $
8 1 4,553
Fluid services 1,744 5,943
3,382
Interest expense (1,50 (7,16
8) 6) (6,06
5)
General corporate (5,65 (38,5
1) 84) (12,5
13)
$(1,0 $(34, $
27) 066) (10,6
43)
Identifiable assets:
Well servicing $28,6 $25,5 $
13 31 23,85
5
Fluid services 46,28 20,88
7 8 18,89
3
General corporate 12,21 6,908
9 4,113
$87,1 $53,3 $
19 27 46,86
1
Capital expenditures:
Well servicing $5,88 $1,74 $
3 7 1,715
Fluid services 338 536
469
General corporate 364 152
103
$6,58 $2,43 $
5 5 2,287
Depreciation:
Well servicing $1,94 $3,84 $
1 9 3,829
Fluid services 907 4,593
2,721
General corporate 83 182
197
$2,93 $8,62 $
1 4 6,747
The Company's well servicing business line offers a broad range of services
including well maintenance, workover of existing wells, new well
completions and plug and abandonment services. The Company's fluid services
business line complements the well service operations by providing liquids
handling, water supply and disposal services.
13. Subsequent Events
The Company entered into definitive agreements to acquire five businesses
and the stock purchase of a sixth corporation with four inactive rigs
during the last quarter of 1999 and the first quarter of 2000. Funding of
each of these acquisitions is contingent upon the consummation of the
Company's initial public offering. The following described acquisitions
were not completed as of December 31, 1999 and are not included in the
Company's results of operations for the twelve months ended December 31,
1999. Other than Trinity Services, which is an asset purchase rather than a
stock purchase, the cash portion of each acquisition will be adjusted to
reflect the net financial assets of the acquired company as of the
acquisition date. Net financial assets is defined as net working capital
minus long-term debt, including leases.
TAT (Turn Around Trucking), Inc.
The Company has entered into a definitive agreement for the acquisition of
TAT (Turn Around Trucking), Inc. ("TAT") for cash and a note with an total
estimated value of approximately $6.5 million. The note will be converted
within 45 days after the completion of the offering into shares of the
Company's common stock valued at the initial public offering price; the
note accrues interest at a floating rate equal to the prime rate. TAT
operates 32 fluid service trucks, 2 support trucks, 38 fluid service tanks,
2 salt water disposal wells and related equipment in south Texas.
Sundown Operating Company, Inc.
The Company has entered into a definitive agreement for the acquisition of
Sundown Operating Company, Inc. ("Sundown") for cash and a note with an
estimated value of approximately $5.2 million. The note will be
convertible, at the holder's option, into shares of the Company's common
stock valued at the initial public offering price; the note matures on the
one year anniversary of the closing of the proposed initial public offering
and accrues interest at a floating rate equal to the prime rate. Sundown
operates 26 well servicing rigs and related equipment in the northern
Permian Basin.
Eunice Well Service Company
The Company has entered into a definitive agreement for the acquisition of
Eunice Well Service Company ("Eunice") for cash and a note with an
estimated value of approximately $2.1 million. The note will be
convertible, at the holder's option, into shares of the Company's common
stock valued at the initial public offering price; the note matures on the
one year anniversary of the closing of this offering and accrues interest
at a floating rate equal to the prime rate. Eunice operates 10 well
servicing rigs and related equipment in the western Permian Basin.
Gold Star Service Company, Inc.
The Company has entered into a definitive agreement for the acquisition of
Gold Star Service Company, Inc. ("Gold Star") for cash and a note with an
estimated value of approximately $1.80 million. The note will be converted
into shares of our common stock valued at the initial public offering price
within 45 days after the completion of the proposed initial public
offering; the note accrues interest at a floating rate equal to the prime
rate. Gold Star operates 19 fluid service trucks, 4 support trucks, 1 salt
water disposal well, 2 fresh and brine water stations and related equipment
in the western Permian Basin.
Trinity Services
The Company has entered into a definitive agreement for the acquisition of
Trinity Services ("Trinity") for cash, a note and warrants with an
estimated value of approximately $1.94 million. The warrants will be
exercisable, at the holder's option, into shares of the Company's common
stock valued at the initial public offering price. The holder has the
option to offset any indebtedness under the note against the exercise price
of the warrant. The note matures 15 months after the closing of this
offering and accrues interest at a floating rate equal to the prime rate.
The warrant expires on the later of (1) 18 months after the closing of the
proposed offering or (2) one year after the note is repaid in full. Trinity
operates 10 well servicing rigs and related equipment in south Texas.
Harrison Well Service, Inc.
The Company has entered into a definitive agreement for the acquisition of
Harrison Well Service, Inc. ("Harrison") for cash and a note with an
estimated value of approximately $1.225 million. The note will be converted
into shares of the Company's common stock at the initial public offering
price within 45 days after the completion of the proposed offering; the
note accrues interest at a floating rate equal to the prime rate. Harrison
operates 4 well servicing rigs and related equipment in the northern
Permian Basin.