13
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
Southwest Partners III, L.P.
(Exact Name of Registrant as Specified in its Charter)
Delaware 75-2699554
(State or Other Jurisdiction of
(I.R.S. Employer
Incorporation or Organization)
Identification No.)
407 North Big Spring, Suite 300
Midland, Texas 79701
(Address of Principal Executive Offices)
(Zip Code)
(915) 686-9927
(Registrant's Telephone Number,
Including Area Code)
Securities to be Registered Pursuant to Section 12(b) of the
Act: NONE.
Securities to be Registered Pursuant to Section 12(g) of the
Act:
Units of Limited Partnership Interests
(Title of Class)
<PAGE>
Item 1. Business.
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.
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. Southwest initially financed the acquisition
of oil and gas reserves and its exploration and development
efforts through public and private limited partnership
offerings. Southwest has raised approximately $115 million
in 31 public and private limited partnership offerings.
Southwest 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 inception, Southwest, 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.
In October 1997, the General Partner concluded a $200
million private placement debt offering under Rule 144A of
the Securities Act of 1933, as amended (the "Securities
Act"). The General Partner utilized a portion of the
proceeds of that offering to acquire various working
interests in 431 producing oil and gas wells located in
seven oil and gas fields in the Permian Basin of West Texas
and southeastern New Mexico, for $72.3 million. In the
first quarter of 1998, the General Partner conducted a
registered offer to exchange the Rule 144A notes which were
issued and sold in October 1997 for notes which have been
registered under the Securities Act. As a result of this
exchange offer, the General Partner has become a reporting
company under the Securities Exchange Act of 1934, as
amended (the "Exchange Act").
Private Placement
From March 15, 1997 to September 30, 1997, the Partnership
conducted a "blind pool" offering of the Units in accordance
with Regulation D promulgated under the Securities Act (the
"Private Placement"). A total of 171.67511 Units were sold
to 525 Investors for an aggregate net price of $16,926,982.
At the close of the Private Placement, the General Partner
invested all of the proceeds of the offering in the common
stock of Sierra Well Service, Inc. ("Sierra"), an oil field
service company affiliated with the General Partner. The
Partnership has invested a total of $17,054,500 (including
the capital contribution of the General Partner) in 2,007
shares of the Sierra common stock and currently owns 45.9%
of Sierra's outstanding common stock.
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.
<PAGE>
Sierra Well Service, Inc.
Sierra is a leading provider of 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 these services primarily in its core areas of
operation in the Permian Basin of West Texas and eastern New
Mexico and East Texas. 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 equipment fleet includes 84 well servicing
rigs, 134 transport and vacuum trucks, 235 frac tanks, 90
Enviro-Vat systems and 44 test tanks. Additionally, Sierra
operates nine injection wells and 32 fresh or brine water
stations
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 $26,134,000 million in
1997. 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 is a participant in the
consolidation of the well servicing industry and believes
that the highly fragmented well servicing market will
continue to provide attractive acquisition opportunities.
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
Currently, Sierra has 10,000 shares of common stock
authorized and 4,371 shares issued and outstanding. The
ownership of Sierra's common stock is as follows:
Southwest Royalties Holdings, Inc.1,260 shares 28.8%
Southwest Partners II, L.P.* 1,076 shares 24.6%
Southwest Partners III, L.P.** 2,005 shares 45.9%
Joey Fields 20 shares .5%
Dub Harrison 10 shares .2%
*Southwest Partners II, L.P., is a Delaware limited
partnership of which Southwest Royalties, Inc. serves as
General Partner.
**Sierra has outstanding 416 anti-dilutive warrants at
December 31, 1997, which if redeemed would reduce the
Partnership's ownership percentage to 41.9%.
The management group of Sierra includes:
Joey D. Fields, age 40, has been the President of Sierra
since 1993. From 1988 to 1992, Mr. Fields was operations
manager for Smith Brothers Casing Pullers and Smith Brothers
Pipe, Inc. of Midland, Texas. Mr. Fields has also served as
purchasing agent for Permian West Pipe, Inc. in Odessa,
Texas.
<PAGE>
Dub W. Harrison, age 39, has served as Executive Vice
President of Sierra since 1995 and manages its East Texas
operations. From 1987 to 1995, Mr. Harrison was an area
manager for Pool Energy Services Co., with responsibilities
including all aspects of workover rig services and liquids
handling services. Mr. Harrison also served as equipment
superintendent and a safety representative for Pool Energy
Services Co.
Charles W. Swift, age 48, has served as Vice President,
Operations for Sierra since July 1997 and manages operations
for the Permian Basin. From 1986 to 1997, Mr. Swift was a
partner of S & N Well Servicing Ltd. of Midland, Texas,
which was acquired by Sierra in July 1997. Prior to founding
S & N, Mr. Swift served in various capacities in the well
servicing industry for over 15 years.
The remaining officers and the directors of Sierra are H.H.
Wommack, III, Chairman of the Board and director and Bill E.
Coggin, Vice President, Secretary, and director.
Biographical information on Messrs, Wommack and Coggin is
included under "Item 5 -- Directors and Executive Officers."
Item 2. Financial Information.
Selected Financial Data
Year Ended December 31,
1997
Income Statement Data:
Revenue:
Interest $ 147,356
Expenses:
General and administrative 15,230
Depreciation, depletion and
amortization 10,525
Equity in loss of unconsolidated
subsidiary 542,414
Total expense 568,169
Net loss $
(420,813)
Year Ended
December 31,
1997
Balance Sheet Data:
Cash and cash equivalents $
501,086
Equity investment in subsidiary $
16,512,086
Total Assets $17,081,587
Long-term debt, including current
portion $ -
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
General
Southwest Partners III, L.P., a Delaware limited partnership
(the "Partnership"), was formed on March 11, 1997 to invest
in Sierra Well Service, Inc. ("Sierra"), 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. As of December 31, 1997, the Partnership owned a
45.9% 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 period from March 11, 1997 (date of inception)
through December 31, 1997
Revenues
Revenues consisted of interest from capital contributions
and interest income. The partners originally signed notes
for their respective capital contributions, which were
called in September 1997. The interest income generated
from these notes totaled $104,391 for the period. The
surplus of cash prior to the periodic investments in Sierra
generated interest income of $42,965.
Expenses
Direct expenses totaled $25,755 for the period, which
consisted of $15,230 relating to general and administrative
and $10,525 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 costs.
Equity in loss of unconsolidated subsidiary of $542,414
reflects the Partnership's weighted average proportionate
share of the $796,695 loss by Sierra for the period. During
1997, Sierra used the proceeds from the Partnership and
additional debt to purchase 13 businesses for a combined
purchase price of $54,419,000. These acquisitions coupled
with property and equipment additions for the year increased
Sierra's total assets from $6,585,000 at December 31, 1996
to $87,119,000 at December 31, 1997. Since the majority of
Sierra's acquisitions were made in the last quarter of 1997,
their statement of operations did not represent an entire
year of operations relating to the aforementioned
acquisitions. See "Item 15. - Financial Statements and
Exhibits - Notes to Financial Statements."
Liquidity and Capital Resources
The proceeds from the sale of partnership units in March
1997 funded the Partnership's investment in Sierra. The
Partnership does not expect to sell any additional
partnership units or to invest any additional amount in
Sierra subsequent to December 31, 1997.
Net Cash Provided by Operating Activities. Cash flows
provided by operating activities for the period consisted of
interest income from a financial institution of $42,965
offset by administrative fees paid to the managing general
partner of $15,230.
Net Cash Used in Investing Activities. Cash flows used in
investing activities totaled $17,069,927 for the period,
which mainly consisted of the Partnership's $17,054,500
investment in Sierra.
Net Cash Provided by Financing Activities. Cash flows from
investing activities totaled $17,543,278 for the period.
The source of these funds included capital contributed by
partners of $18,753,879 offset by $1,210,601 in syndication
costs.
<PAGE>
Item 3. Properties.
The Partnership does not currently own or lease any
property. The Partnership operates from the offices of its
General Partner in Midland, Texas.
Item 4. Security Ownership of Certain Beneficial Owners
and Management.
Exclusive management and control of the Partnership is
vested in the General Partner. The Partnership has no
employees and is managed and controlled by the Board of
Directors and executive officers of the General Partner.
The General Partner owns 100% of the Partnership's general
partnership interest.
There are no limited partners who own of record, or are know
by the General Partner to beneficially own, more than five
percent of the Units. Neither the General Partner nor any
officer or director of the General Partner owns Units in the
Partnership.
Item 5. Directors and Executive Officers.
The Partnership has no employees, directors or executive
officers. The Partnership is managed by the General
Partner, whose directors and executive officers are as
follows:
Name Age
Position
H. H. Wommack, III Chairman, President, Chief
42 Executive Officer and Director
H. Allen Corey Secretary and Director
41
Bill E. Coggin Vice President and Chief
43 Financial Officer
J. Steven Person Vice President, Marketing
39
Set forth below is a description of the backgrounds of the
directors and executive officers of the General Partner.
H. H. Wommack, III has served as Chairman of the Board,
President, Chief Executive Officer and a director of the
General Partner since its founding in 1983. Prior to the
formation of the General Partner, Mr. Wommack was a self-
employed independent oil and gas producer engaged in the
purchase and sale of royalty and working interests in oil
and gas leases and the drilling of wells. Mr. Wommack
received a J.D. degree from the University of Texas and a
B.A. degree from the University of North Carolina, Chapel
Hill.
H. Allen Corey has served as Secretary and a director of the
General Partner since its founding in 1983. Since January
1997, Mr. Corey has been president of Trolley Barn Brewery,
Inc., a brew pub restaurant chain based in the southeastern
United States and of counsel to the law firm of Baker,
Donelson, Bearman & Caldwell, P.C. From 1986 to 1997, Mr.
Corey was a partner at the law firm of Miller & Martin in
Chattanooga, Tennessee. Mr. Corey received a J.D. degree
from the Vanderbilt University Law School and a B.A. degree
from the University of North Carolina at Chapel Hill.
Bill E. Coggin has served as Vice President and Chief
Financial Officer of the General Partner since 1985.
Previously, Mr. Coggin was controller for an oil and gas
drilling company and an independent oil and gas operator.
Mr. Coggin received a B.S. in Education and B.A.A. in
Accounting from Angelo State University.
J. Steven Person has served as Vice President, Marketing for
the General Partner since 1989. Prior to joining the
General Partner, Mr. Person was a senior wholesaler with
Capital Reality, Inc. and was involved in the syndication of
mortgage-based securities. Mr. Person received a B.B.A.
degree form Baylor University and an M.B.A. from Houston
Baptist University.
<PAGE>
Other key employees of the General Partner include:
Jon P. Tate, age 40, has served as Vice President, Land and
Assistant Secretary of the General Partner since 1989. From
1981 to 1989, Mr. Tate was employed by C.F. Lawrence &
Associates, Inc., an independent oil and gas company, as
land manager. Mr. Tate is a member of the Permian Basin
Landman's Association and received a B.B.S. degree from
Hardin-Simmons University.
R. Douglas Keathley, age 42, has served as Vice President,
Operations of the General Partner since 1992. Before joining
The General Partner, Mr. Keathley worked as a senior
drilling engineer for ARCO Oil and Gas Company and in
similar capacities for Reading & Bates Petroleum Co. and
Tenneco Oil Co.
Richard B. Morton, age 36, joined the General Partner in
1997 and has served as Chief Operating Officer since early
1998. Before joining the General Partner, Mr. Morton worked
for Merit Energy Company in various capacities, including
District Manager, from 1990 to 1997 and served as a
reservoir engineer and production supervisor for ARCO Oil
and Gas Company from 1983 to 1990. Mr. Morton received an
B.S. degree in Petroleum Engineering from Texas A&M
University.
Phillip F. Hock, Jr., age 54, joined the General Partner in
1993 and has served as Vice President Exploration since
early 1998. Before joining the General Partner, Mr. Hock
worked for RAMCO Oil and Gas from 1989 to 1993 as
Exploitation Manager and as a geologist for Magic Circle
Energy Company and Reading & Bates Petroleum Company.
Item 6. Executive Compensation.
The Partnership has no executive officers and pays no
executive compensation. The information provided herein
reflects compensation paid to the executive officers of the
General Partner.
The following table sets forth certain information for
fiscal years 1996 and 1997 with respect to the compensation
paid to Mr. Wommack, the Chairman and President, and the
three other most highly compensated executive officers of
The General Partner. No other executive officers of The
General Partner received annual compensation (including
salary and bonuses earned) that exceeded $100,000 for the
years ended December 31, 1996 and 1997. Mr. Wommack
determines the compensation of The General Partner's
executive officers.
<PAGE>
All Other
Name and Principal Position Year Salary Bonus Compensati
($) ($)(2) on($)(1)
H. H. Wommack, III, 1997 623,884 113,600 116,869
President and Treasurer (3)
1996 586,320 100,677 148,031
Bill E. Coggin, Vice 1997 183,753 101,659 7,764
President and Chief
Financial Officer
1996 153,000 61,169 7,471
J. Steven Person, Vice 1997 112,078 73,153 7,464
President, Marketing
1996 96,062 13,821 7,064
R. Douglas Keathley, Vice 1997 101,567 17,556 6,771
President, Operations
1996 - - -
Richard E. Masterson, Vice 1997 112,707 - 11,306
President, Exploration and
Acquisitions
1996 92,000 8,293 15,494
Profit
Insurance Sharing/
Name Year Premiums ($) 401(k)
Contribu
tion ($)
H. H. Wommack, III 1997 5,864 1,900
1996 5,571 1,900
Bill E. Coggin 1997 5,864 1,900
1996 5,571 1,900
J. Steven Person 1997 5,864 1,600
1996 5,571 1,493
R. Douglas Keathley 1997 5,864 907
1996 - -
Richard E. Masterson 1997 5,864 669
1996 4,362 690
(1) Reflects (i) The General Partner's contributions to the
Southwest Royalties, Inc. Employee Profit Sharing and
401(k) Plan and premium payments made by The General
Partner for health, disability and life insurance
policies for the referenced individuals and (ii) net
cash received from carried interests in Oil and Gas
Properties.
(2) Amount includes club dues and automobiles furnished by
The General Partner.
<PAGE>
(3) Mr. Wommack has acted as a general partner of the
income funds and certain of the drilling funds
sponsored by Southwest since 1983, holding a 1%
interest in these partnerships.
The non-employee director of The General Partner received $
20,000 in 1997 and 1996 for his services.
Item 7. 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 9."
The Partnership pays the General Partner an annual
Management Fee of $200,000. The Management Fee is payable
monthly; however, the Management fee did not begin to accrue
until December, 1997 when 50% of the Limited Partners'
capital contributions were invested by the Partnership.
The Partnership reimbursed the General Partner for any
expenses incurred organizing the Partnership and in offering
the Units in the Partnership. In addition, the General
Partner is reimbursed on a monthly basis for all direct
general and administrative costs incurred by it in operating
the Partnership.
The Partnership has invested all of the proceeds of the
Private Placement in 2,007 shares (45.9%) of Sierra common
stock. The General Partner directly own 26% of Sierra's
common stock. The General Partner effectively controls
sierra.
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.
Item 8. Legal Proceedings.
The Partnership is not currently involved in any legal
proceeding nor is it party to any pending or threatened
claims that could reasonable be expected to have a material
adverse effect of its financial condition or results of
operations.
Item 9. Market Price of and Dividends on the Registrant's
Common Equity and Related Stockholder Matters.
There is no trading market for the Units, and it is unlikely
that a trading market will exist at any time in the future.
Any transfer of the Units is severely restricted by certain
conditions outlined in the Partnership Agreement and
requires the consent of the General Partner. See "Item 11 -
- - - Description of Registrant's Securities to be Registered --
Transferability of Limited Partnership Interests."
As of December 31, 1997, the General Partner holds the only
general partner interest and 525 Limited Partners hold an
aggregate of 171.67511 Units of limited partnership
interest.
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 is filed as an Exhibit to this Form 10.
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.
<PAGE>
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.
Item 10. Recent Sales of Unregistered Securities.
From March 15, 1997 to September 30,1997, the Partnership
conducted the Private Placement of the Units in accordance
with Regulation D promulgated under the Securities Act. A
total of 171.67511 Units were sold to 525 Investors for an
aggregate net price of $16,926,982. The Private Placement
was made in reliance upon, among others, the exemption from
registration pursuant to Section 4(2) of the Securities Act
and Regulation D of the Rules and Regulations of the
Securities and Exchange Commission for an offer and sale of
securities which does not involve a public offering. The
sales qualify as an exempt offering under Rule 506 of
Regulation D because all of the Investors are "accredited
investors" as defined by Regulation D.
Item 11. Description of Registrant's Securities to be
Registered.
The Partnership was formed as a limited partnership under
the Delaware Uniform Revised Limited Partnership Act. The
rights and obligations of the partners are governed by the
Agreement of Limited Partnership of Southwest Partners III,
L.P. dated March 15, 1997 (the "Partnership Agreement). The
following is a brief summary of certain provisions of the
Partnership Agreement. This summary does not purport to be
complete and is qualified in its entirety by express
reference to the Partnership Agreement, which is filed as an
Exhibit to this Form 10.
Management
The General Partner has full, exclusive and complete control
of, responsibility for and discretion over the management of
the business of the Partnership. The Limited Partners have
no authority to transact business for, or participate in the
management activities and decisions of the Partnership.
However, the Limited Partners do have limited voting and
management rights.
The General Partner is not required to devote full time to
Partnership business and is specifically permitted to engage
in any other business, including, but not limited to, acting
as a general partner for other partnerships formed for
purposes similar to the purpose of the Partnership.
Limited Partner Voting and Management Rights
Limited Partners have limited voting and other management
rights. Under most circumstances, Limited Partners are only
be permitted to vote on certain amendments to the
Partnership Agreement, to vote on transfer of the general
partner interest to a non-affiliate of the General Partner,
to have access to Partnership books and records and to call
Partner meetings.
<PAGE>
Fiduciary Duty of General Partner
The General Partner is under a fiduciary duty to conduct the
affairs of the Partnership in the best interest of the
Partnership and of the Limited Partners. However, the
General Partner shall not be liable to the Partnership or to
any Limited Partner for acts or omissions made in good faith
unless such act or omission constitutes willful misconduct,
fraud or gross negligence.
Liability of General Partner
The General Partner is liable for all debts and obligations
of the Partnership (other than nonrecourse obligations) to
the extent the Partnership lacks sufficient assets to
satisfy its debts and obligations. The General Partner is
not liable to the Partnership or to any Limited Partner for
acts or omissions made in good faith unless such act or
omission constitutes willful misconduct, fraud, bad faith or
gross negligence or a breach or violation of the Partnership
Agreement or Delaware limited partnership law.
Transfer of the General Partner Interest
The General Partner may transfer its general partner
interest to an affiliate of the General Partner at any time.
If a transfer of the general partner interest is made by
involuntary operation of law or to any person who is not an
affiliate of the General Partner, the transferee is only
admitted as the general partner if the admission is approved
by a majority in interest of the Limited Partners.
Liability of Limited Partners
Limited Partners are not liable for any debts or bound by
any obligations of the Partnership, except that they may be
liable to the Partnership for any capital contributions
returned to them to the extent that the Partnership does not
have sufficient assets to pay its creditors, as provided by
law. The Limited Partners are not required to lend any
funds to the Partnership or to make any additional capital
contributions to the Partnership.
Indemnification
In general, the General Partner will be indemnified by the
Partnership against any cost or expense incurred by it in
connection with any action, suit or proceeding as a result
of being a General Partner; provided, however, that the
General Partner will not be indemnified for any liability
for bad faith, willful misconduct or gross negligence.
Term
The term of the Partnership is approximately ten years. The
term can also be extended or shortened in accordance with
the terms for amending the Partnership Agreement, or the
Partnership can end through termination and liquidation
under certain circumstances.
Amendments and Power of Attorney
Except as otherwise provided in the Partnership Agreement or
by law, the Partnership Agreement may be amended by the
written consent of the General Partner and a majority in
interest of the Limited Partners. Each Limited Partner has
appointed the General Partner has his attorney-in-fact. The
General Partner may utilize such power of attorney to
execute certain documents pertaining to the Partnership,
including amendments to the Partnership Agreement, on behalf
of the Limited Partners.
<PAGE>
Transferability of Limited Partnership Interests
The interests of the Limited Partners are not transferable
without the prior written consent of the General Partner.
Compliance with tax and securities laws will be significant
factors considered by the General Partner in determining
whether to consent to a proposed transfer. In addition, the
General Partner has a right of first refusal on all proposed
sales.
The Units have not been registered under the Securities Act.
The Limited Partners have no rights to require registration
of the Units under the Securities Act or other applicable
securities laws and registration is neither contemplated nor
likely. There is no public market for the Units and none is
expected to develop. The Units may not be sold, transferred
or otherwise disposed of except in a transaction that is
either registered or exempt from registration under the
Securities Act and all applicable state securities laws. A
legend has been placed on the Partnership Agreement and
certificates representing the Units referring to the
restrictions on transferability and sale of the Units.
Partnership Allocations to the General Partner
Provisions governing the allocation of income, gains and
losses among Partners are complex and should be reviewed in
their entirety in the Partnership Agreement. In general,
however, subject to special allocations to cover specific
situations:
(a) net income is allocated 85% among all Limited
Partners in proportion to their capital contributions
and 15% to the General Partner until the Limited
Partners have recovered, through cumulative
distributions 100% of their capital contributions plus a
10% cumulative (but not compounded) return and
thereafter 75% among all Limited Partners and 25% to the
General Partner, and
(b) net loss is allocated in a manner consistent with
prior allocations of income and gain (i.e., 85% to the
Limited Partners and 15% to the General Partner unless
allocations are required to offset profits that were
previously allocated 75% to the Limited Partners and 25%
to the General Partner).
Item 12. Indemnification of Directors and Officers.
The Partnership Agreement provides that, in general, the
Partnership, its receiver or trustee shall indemnify, hold
harmless, and pay all judgements and claims against the
General Partner for any liability or damage incurred by
reason of any act performed or omitted to be performed by
the General Partner in connection with the Partnership's
business, including attorneys' fees incurred in connection
with the defense of any action based on any such act or
omission, including all such liabilities under federal and
state securities laws to the extent permitted by law. In an
action by a Limited Partner against the General Partner, the
Partnership shall indemnify, hold harmless, and pay all
expenses of the General Partner, including attorney fees,
incurred in defense of such action, if the General Partner
is successful in defending the action. The Partnership
shall indemnify, hold harmless, and pay all expenses, costs,
or liabilities of the General Partner which for the benefit
of the Partnership makes any deposit, acquires any option,
or makes any other similar payment or assumes any obligation
in connection with any property proposed to be acquired by
the Partnership and which suffers any financial loss as the
result of such action. However, the General Partner shall
not be indemnified from any liabilities, obligations,
losses, damages, penalties, actions, judgments, suits,
proceedings, costs, expenses or disbursements resulting from
the General Partner's willful misconduct, fraud, gross
negligence or other breach of fiduciary duty to the
Partnership or any Partner.
<PAGE>
The General Partner is incorporated under the laws of the
State of Delaware. Section 145 of the General Corporation
Law of the State of Delaware ("Section 145") provides that a
Delaware corporation may indemnify any person who is, or is
threatened to be made, a party to any threatened, pending or
completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an
action by or in right of such corporation), by reason of the
fact that such person was an officer, director, employee or
agent of such corporation, or is or was serving at the
request of such corporation as a director, officer, employee
or agent of another corporation or enterprise. The
indemnity may include expenses (including attorneys' fees),
judgments, fines and amount paid in settlement actually and
reasonably incurred by such person in connection with such
action, suit or proceeding, provided such person acted in
good faith and in a manner he reasonably believed to be in
or not opposed to the corporation's best interests and, with
respect to any criminal action or proceeding, had no
reasonable cause to believe that his conduct was illegal. A
Delaware corporation may also indemnify any person who is,
or is threatened to be made, a party to any threatened,
pending or completed action or suit by or in the right of
the corporation by reason of the fact that such person was a
director, officer, employee or agent of such corporation, or
is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation
or enterprise. The indemnity may include expenses
(including attorneys' fees) actually and reasonably incurred
by such person in connection with the defense or settlement
of such action or suit, provided such person acted in good
faith and in a manner he reasonably believed to be in or not
opposed to the corporation's best interests except that no
indemnification is permitted without judicial approval if
the officer or director is adjudged to be liable to the
corporation. In addition, where an officer or director is
successful on the merits or otherwise in the defense of any
action referred to above, the corporation must indemnify him
against the expenses which such officer or director has
actually and reasonably incurred. The General Partner's
Bylaws provide for the indemnification of its directors and
officers to the fullest extent permitted or allowed by the
law of Delaware, whether or not specifically required,
permitted or allowed by Section 145.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or
persons controlling the Partnership or the General Partner
pursuant to the provisions described above, the Partnership
has been informed that, in the opinion of the Securities and
Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is therefore
unenforceable.
Item 13. Financial Statements and Supplementary Data.
Index to Southwest Partners III, L.P. Financial Statements
Independent Auditors' Report F-0
Balance Sheet F-1
Statement of Operations F-2
Statement of Changes in Partners' Equity F-3
Statement of Cash Flow F-4
Notes to Financial Statements F-6
Index to Financial Statements of Unconsolidated Subsidiary
Independent Auditors' Report F-11
Report of Independent Accountants F-12
Balance Sheets F-13
Statements of Operations F-14
Statements of Equity F-15
Statements of Cash Flow F-16
Notes to Financial Statements F-17
Item 14. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure.
Not Applicable.
Item 15. Financial Statements and Exhibits.
(a) Financial Statements and Financial Statement
Schedules
See "Index to Financial Statements" at Item 13
(b) Exhibits
Exhibit Number Description of Exhibit
3 Agreement of Limited Partnership of
Southwest Partners III, L.P.
3.1 Certificate of Limited Partnership
27 Financial Data Schedule
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Exchange
Act of 1934, the registrant has duly caused this
registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: April 30, 1998 SOUTHWEST PARTNERS III,
L.P.
By: SOUTHWEST ROYALTIES, INC.
Its: General Partner
By: /s/ H.H. Wommack, III
H.H. Wommack, III
Its: Chairman,
President, and Chief Executive Officer
<PAGE>
Independent Auditors' Report
The Board of Directors
Southwest Partners III, L.P.:
We have audited the accompanying balance sheet of Southwest
Partners III, L.P. as of December 31. 1997, and the related
statements of operations, changes in partners' equity and
cash flows for the period March 11, 1997 (inception) through
December 31, 1997. 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 audit
We conducted our audit 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 audit provides
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,
1997, and the results of it operations and its cash flows
for the period March 11, 1997 (inception) through December
31, 1997, in conformity with generally accepted accounting
principles.
April 16, 1998 KPMG Peat Marwick L
L P
F-0
<PAGE>
Southwest Partners III, L.P.
(a Delaware limited partnership)
Balance Sheet
December 31, 1997
1997
------
Assets
Current asset:
Cash and cash equivalents $ 501,086
--------------
Total current assets 501,086
--------------
Equity investment in subsidiary 16,512,086
Organization costs, net of
$10,525 amortization 68,415
--------------
$ 17,081,587
========
Liabilities and Partners' Equity
Current liabilities:
Payable to General Partner and subsidiary $ 162,351
-------------
Total current liabilities 162,351
-------------
Partners' equity:
General Partner 1,615,496
Limited partners 15,410,070
Less notes receivable from
limited partners 106,330
--------------
Total partners' equity 16,919,236
--------------
$ 17,081,587
========
The accompanying notes are an integral
part of these financial statements.
F-1
<PAGE>
Southwest Partners III, L.P.
(a Delaware limited partnership)
Statements of Operations
Year ended December 31, 1997
1997
-----
Revenues
Interest from capital contributions $ 104,391
Interest income 42,965
------------
147,356
------------
Expenses
General and administrative 15,230
Amortization 10,525
Equity in loss of unconsolidated subsidiary 542,414
------------
568,169
------------
Net loss (420,813)
=======
Net loss allocated to:
General Partner $ (68,107)
=======
Limited partners $(352,706)
=======
Per limited partner unit $ (2,054)
=======
The accompanying notes are an integral
part of these financial statements.
F-2
<PAGE>
Southwest Partners III, L.P.
(a Delaware limited partnership)
Statement of Changes in Partners' Equity
Year ended December 31, 1997
General Limited Notes
Partner PartnersReceivableTotal
------------------------------------------
Capital contributions $ 1,692,69817,167,511(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 $ 1,615,49615,410,070(106,330) 16,919,236
=============== ======= ========
The accompanying notes are an integral
part of these financial statements.
F-3
<PAGE>
Southwest Partners III, L.P.
(a Delaware limited partnership)
Statements of Cash Flows
Year ended December 31, 1997
1997
-----
Cash flows from operating activities:
Cash paid to Managing General Partner for administrative
fees $(15,230)
Interest received 42,965
---------------
Net cash provided by operating activities 27,735
---------------
Cash flows from investing activities:
Purchase of Sierra investment (17,054,500)
Organization costs (15,427)
---------------
Net cash used in investing activities (17,069,927)
---------------
Cash flows from financing activities:
Capital contributed by limited partners 11,217,488
Repayment of notes receivable from limited partners 5,843,693
Capital contributed by General Partner 67,022
Repayment of notes receivable from General
Partner 1,625,676
Syndication costs (1,210,601)
---------------
Net cash provided by financing activities 17,543,278
---------------
Net increase in cash and cash equivalents 501,086
Beginning of period -
---------------
End of period $ 501,086
=========
(continued)
The accompanying notes are an integral
part of these financial statements.
F-4
<PAGE>
Southwest Partners III, L.P.
(a Delaware limited partnership)
Statements of Cash Flows, continued
Year ended December 31, 1997
1997
----
Reconciliation of net loss to net cash
provided by operating activities:
Net loss $(420,813)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Amortization 10,525
Undistributed loss of affiliate 542,414
Interest income added to notes receivable (104,391)
------------
Net cash provided by operating activities $ 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.
F-5
<PAGE>
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
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.
F-6
<PAGE>
2. Summary of Significant Accounting Policies - continued
Organization Costs
Organization costs are stated at cost and are amortized
over sixty months using the straight-line method.
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.
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 $542,414 more, as of December 31, 1997 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 171.675 limited partner units outstanding as
of December 31, 1997, held by 525 partners.
Equity investment in subsidiary
Investment in Sierra Well Service, Inc. in which the
Partnership has a 45.89% interest at December 31, 1997,
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.
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.
F-7
<PAGE>
2. Summary of Significant Accounting Policies - continued
Recent Accounting Pronouncements
In June 1997, the FASB issued "Reporting Comprehensive
Income," SFAS No. 130, which establishes standards for
reporting and display of comprehensive income and its
components in a full set of general-purpose financial
statements. Specifically, this statement requires that
an enterprise (i) classify items of other comprehensive
income by their nature in a financial statement and
(ii) display the accumulated balance of other
comprehensive income separately from retained earnings
and additional paid-in capital in the equity section of
a statement of financial position. This statement is
effective for fiscal years beginning after December 15,
1997. The Partnership anticipates adoption of SFAS No.
130 in its year ended December 31, 1998 financial
statements.
Comprehensive income consists of the change in equity
of a business enterprise during a period from
transactions and other events and circumstances from
nonowner sources. Specifically, this includes net
income and other comprehensive income, which is made up
of certain changes in assets and liabilities that are
not reported in a statement of operations but are
included in the balances within a separate component of
equity in a statement of financial position. Such
changes include, but are not limited to, unrealized
gains for marketable securities and futures contracts,
foreign currency translation adjustments and minimum
pension liability adjustments.
Net Income (loss) per limited partnership unit
The net income (loss) per limited partnership unit is
calculated by using the weighted average number of
limited partnership units outstanding during the year.
3. Investments
Common stock ownership in Sierra Well Service, Inc. was
as follows:
July 1 to July 31, 1997 18.30%
August 1 to August 31, 1997 26.24%
September 1 to November 30, 1997 33.55%
December 1 to December 31, 1997 45.89%
At December 31, 1997, the investment in Sierra Well
Service, Inc. exceeded the Partnership's share of the
underlying net assets by $7,620,317 and is being
amortized on the straight-line method over 10 years.
F-8
<PAGE>
3. Investments - continued
Following is a summary of the financial position and
results of operations of Sierra Well Service, Inc. as
of and for the year ended December 31, 1997:
1997
------
Current assets $14,966,755
Property and equipment, net 46,162,631
Other assets, net 25,990,119
--------------
Total assets $87,119,505
========
Current liabilities $ 5,535,783
Long-term debt 52,480,500
Deferred income taxes 5,743,000
--------------
$63,759,283
========
Stockholders' equity $ 23,360,221
========
Sales $ 26,133,541
========
Net loss $ (796,695)
========
4. Notes Receivable
In connection with the sale of limited partnership
units, the Partnership accepted a minimum of twenty-
five percent (25%) cash down payment and executed
promissory notes for the balance of the subscription
secured by the Units purchased. The Notes provide for
(a) payment of the remaining subscription price upon
demand with 30 days written notice or (b) if not sooner
paid (i) payment of 25% of the subscription price on
March 31, 1998, and (ii) payment of the remaining
balance (50% of the subscription price) on October 31,
1998. The Notes, due to the lack of a stated rate of
interest, are being carried at an imputed interest rate
of nine and one half percent (9 1/2%). During 1997,
$95,296 of interest was recognized.
A letter, dated September 6, 1997, was sent to all
limited partners requesting payment in full of all
outstanding notes receivable.
The General Partner has entered into an agreement with
the Partnership to pay its committed contribution as
Limited Partner Capital Contributions are invested by
the Partnership, in amounts proportionate to such
invested amounts. The agreement, due to the lack of a
stated rate of interest, is being carried at an imputed
interest rate of nine and one half percent (9 1/2%).
During 1997 $9,095 of the interest was recognized as
interest income.
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, 1997, there were 13
such brokers who sold in excess of one Unit qualifying
for the special distribution.
F-9
<PAGE>
5. Commitments and Contingent Liabilities - continued
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, 1997, 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.
6. Related Party Transactions
Southwest Royalties, Inc., the General Partner, was
paid an administrative fee of $15,000 during 1997 for
indirect general and administrative overhead expenses.
Accounts payable to the General Partner at December 31,
1997 totaled $162,351, which is for reimbursement of
syndication and organization costs.
The Partnership paid Southwest Royalties Securities,
Inc., a subsidiary of Southwest Royalties, Inc.,
$927,945 as of December 31, 1997, for commissions on
Limited Partner capital contributions.
F-10
<PAGE>
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. as of December 31, 1996 and 1997, and the
related statements of operations, stockholders' equity and
cash flows for the years then ended. These financial
statements are the responsibility of the Company's
management. Our responsibilty 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 included 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 Sierra Well Service, Inc. as of December 31,
1996 and 1997, and the results of its operations and its
cash flows for the years then ended, in conformity with
generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Midland, Texas
February 25, 1997
F-11
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
Sierra Well Service, Inc.
Midland, Texas
We have audited the accompanying statements of operations,
stockholders' equity and cash flows of Sierra Well Service,
Inc. for the year ended December 31, 1995. These financial
statements are the responsibility of the company's
management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit 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 included 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
presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the results of
operations and cash flows of Sierra Well Service, Inc. for
the year ended December 31, 1995, in conformity with
generally accepted accounting principles.
Joseph Decosimo and Company LLP
Chattanooga, Tennessee
March 21, 1996
F-12
<PAGE>
Sierra Well Service, Inc.
Balance Sheets
As of December 31, 1996 and 1997
(in thousands, except per share data)
Assets 1996 1997
Current Assets
Cash and cash equivalents $ 561 $ 6,537
Trade accounts receivable, net of allowance of
$140 and $868, respectively 1,152 8,075
Federal income tax receivable 15 -
Inventories 88 251
Deferred income taxes 61 -
Other current assets 42 103
-------- --------
Total current assets 1,919 14,966
-------- --------
Property and equipment, net 4,651 46,163
-------- --------
Other assets
Deferred loan costs, net of amortization of $216 -
1,821
Goodwill, net of amortization of $294 -
21,363
Other 15 2,806
-------- --------
Total other assets 15 25,990
-------- --------
Total assets $ 6,585 $ 87,119
===== =====
Liabilities and stockholders' equity
Current liabilities
Current portion of long-term debt $ 277$
512
Accounts payable 559 3,145
Accrued expenses 294 1,852
Deferred income taxes - 27
-------- --------
Total current liabilities 1,130 5,536
-------- --------
Long-term debt 980 52,480
-------- --------
Deferred income taxes 14 5,743
-------- --------
Stockholders' equity
Common stock - no par; $1 stated value; 10,000 shares
authorized; 1,950 and 4,371 issued, respectively
2 4
Additional paid-in capital 5,151 24,845
Accumulated deficit (692) (1,489)
-------- --------
Total stockholders' equity 4,461 23,360
-------- --------
Total liabilities and stockholders' equity $ 6,585 $
87,119
===== =====
The accompanying notes are an integral part of these f
inancial statements
F-13
<PAGE>
Sierra Well Service, Inc.
Statements of Operations
For the years ended December 31, 1995, 1996 and 1997
(in thousands, except per share data)
1995 1996 1997
Revenues $4,437 $8,273 $26,134
Expenses
Cost of revenues 3,538 6,557 19,307
General and administration 628 1,359 3,481
Depreciation and amortization 448 863
2,931
-------- ---------- -------
- - -
4,614 8,779 25,719
-------- ---------- -------
- - -
Operating income (loss) (177) (506) 415
-------- ---------- -------
- - -
Other income (expense)
Interest income - 11 85
Interest expense (70) (82) (1,508)
Loss on sale of assets (1) (31) (30)
Other, net - - 11
-------- ---------- -------
- - -
(71) (102) (1,442)
-------- ---------- -------
- - -
Loss before income taxes (248) (608) (1,027)
Income tax benefit 80 160 230
-------- ---------- -------
- - -
Net loss $ (168) $(448) $(797)
===== ====== =====
Loss per share $ (166.37) $(280.80) $(298.71)
===== ====== =====
Weighted average number of shares 1,010 1,596
2,751
===== ====== =====
The accompanying notes are an integral part of these financi
al statements.
F-14
<PAGE>
Sierra Well Service, Inc.
Statements of Stockholders' Equity
For the years ended December 31, 1995, 1996 and 1997
(in thousands, except per share data)
Common Stock Additional Accumulated
Shares AmountPaid-In CapitalDeficit
Balance - January 1, 19951,000 $ 1 $ 370 $
(76)
Issuance of stock as compensation10 - 5
- - -
Related party payable contributed as
capital - - 2,202 -
Net loss - - - (168)
----------------- -------
- - - --------
Balance - December 31, 1995 1,010 1 2,577
(244)
Common stock issued 940 1 2,524 -
Issuance of stock as compensation
(Note 7) - - 50 -
Net loss - - - (448)
----------------- -------- -------
- - -
Balance December 31, 1996 1,950 2 5,151
(692)
Stock compensation granted (Note7) 20 -
- - - -
Common stock issued 2,401 2 19,218 -
Issuance of common stock warrants
(Note 4) - - 476 -
Net loss - - - (797)
----------------- -------- -------
- - -
Balance - December 31, 1997 4,371 $ 4 $ 24,845
$ (1,489)
==== ====== ===== =====
The accompanying notes are an integral part of these financi
al statements.
F-15
<PAGE>
Sierra Well Service, Inc.
Statements of Cash Flows
For the years ended December 31, 1995, 1996, and 1997
1995 1996 1997
Cash flows from operating activities
Net loss $(168) $(448) $(797)
Depreciation 448 859 2,459
Amortization - 4 472
Bad debt expense - 140 475
Noncash interest expense - - 281
Loss on sale of assets 1 31 30
Provision for deferred income taxes (80) (125)
(230)
Stock compensation 5 50 -
Changes in operating assets and liabilities, net of
acquisitions -
Accounts receivable (286) (521) (6,489)
Inventories (12) (59) 15
Income tax receivable 14 (15) 15
Other current assets (5) (26) 33
Accounts payable (190) 300 2,586
Accrued expenses 377 20 1,095
-------- --------
- - ---------
Net cash provided (used) by operating activities 104
210 (55)
-------- --------
- - ----------
Cash flows from investing activities
Purchase of property and equipment (1,328) (3,165)
(6,585)
Proceeds from sale of property and equipment 13
94 86
Payments for other long-term assets (118) -
(247)
Payments for businesses, net of cash acquired -
- - - (56,076)
-------- --------
- - ----------
Net cash provided by investing activities (1,433)
(3,071) (62,822)
-------- --------
- - ----------
Cash flows from financing activities
Borrowings under long-term debt - 1,054 58,791
Payments of long-term debt (7) (195) (7,121)
Payments for deferred loan costs - - (2,037)
Proceeds from issuance of common stock - 2,525
19,220
Advances from related party 1,298 - -
-------- --------
- - ----------
Net cash provided by financing activities 1,291
3,384 68,853
-------- --------
- - ----------
Net increase (decrease) in cash and cash equivalents
(38) 523 5,976
Cash and cash equivalents - beginning of year 76
38 561
-------- --------
- - ----------
Cash and cash equivalents - end of year $ 38 $
561 $ 6,537
===== =====
======
Supplemental disclosures of cash flow information -
Interest paid $ 70 $ 82 $1,227
Income taxes received 14 20
- - -
Supplemental schedule of noncash investing and
financing activities -
Common stock warrants issued as debt discount$ -
$ - $476
Capital leases issued for equipment 55
351 462
Stock issued to employee as compensation 5
50 -
Related party payable contributed as capital 2,202
- - - -
The accompanying notes are an integral part of these finan
cial statements
F-16
<PAGE>
Sierra Well Service, Inc.
Notes to Financial Statements
1. Summary of Significant Accounting Policies
Business - Sierra Well Service, Inc. ("the Company"), a
Delaware corporation, was formed in 1992 and operates
within the oilfield service industry. The Company
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.
Cash and Cash Equivalents - The Company considers all
highly liquid debt instruments purchased with a maturity
of three months or less to be cash equivalents. The
Company maintains its excess cash in various financial
institutions, which deposits may exceed federally insured
amounts at times.
Inventories - Inventories mainly consist of pipe 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 service units and equipment 5-15 years
Water hauling equipment 5-10 years
Brine/fresh water stations 15 years
Enviro-Vat units and frac/test tanks 10 years
Disposal facilities 10 years
Vehicles 3-5 years
The Company reviews property and equipment and certain
indentifiable 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 future cash
flows, on a depreciable unit basis, is less that the
carrying amount of such assets. In this circumstance, the
Company would recognize an impairment loss for the
difference. To date, there has not been an impact on the
Company's financial position, results of operations or
liquidity.
F-17
<PAGE>
Sierra Well Service, Inc.
Notes to Financial Statements
1. Summary of Significant Accounting Policies - continued
Deferred Debt Costs - The Company capitalizes certain
costs in connection with obtaining its borrowings. These
costs are being amortized to interest expense on the
straight-line method over the terms of the related debt.
Goodwill - Goodwill represents the excess of the cost of
the business acquired over the fair value of net
identifiable assets at the date of the acquisition and is
amortized using the straight-line method, generally over
fifteen years.
Income Taxes - Deferred income taxes are recognized for
the tax consequences for 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 law. Management includes the consideration of
future events to assess the likelihood that tax benefits
will be realized in the future.
The Company and its parent, Southwest Royalties Holdings,
Inc. ("SRH"), filed a consolidated federal income tax
return since inception through 1995. Income tax expense
in the Company's statements of operations was allocated on
the basis of its proportionate share of the consolidated
taxable income or loss. Subsequent to 1995, the Company
sold additional common stock and was not able to be
consolidated in the federal return; thus, it has filed its
federal income tax return independent of SRH.
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.
Concentrations of Credit Risk - Financial instruments that
potentially expose the Company to concentrations of credit
risk consist primarily of unsecured accounts receivable.
Reclassifications - Certain reclassifications have been
made to the prior year financial statements to conform
with the current period presentation.
Fair Value of Financial Instruments - The carrying amount
of cash, accounts receivable, accounts payable and accrued
liabilities approximates fair value due to the short
maturity of these instruments. The carrying amount of
long-term debt approximates fair value since the current
borrowing rate available to the Company does not differ
from the existing rate on the Company's long-term debt
balance.
Loss Per Share - In February 1997, the Financial
Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 128 ("SFAS 128"),
"Earnings per Share." This statement establishes
standards for computing and presenting earnings per share
("EPS") which makes them comparable to international
standards. In accordance with SFAS 128, the Company
adopted the statement in its year ended December 31, 1997
financial statements. Under SFAS 128, primary EPS is
replaced by basic earnings per share, which excludes
dilution and is computed based on the weighted average
number of common shares. Diluted EPS, which is computed
similarly to fully-diluted EPS, reflects potential
dilution that could occur if securities of other
contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of
common stock that then shared
F-18
<PAGE>
Sierra Well Service, Inc.
Notes to Financial Statements
1. Summary of Significant Accounting Policies - continued
Loss Per Share - continued
in the earnings of the entity. For the years ended
December 31, 1995, 1996 and 1997, the computation of
diluted net loss per share was antidilutive due to the
Company's net loss; therefore, the amounts reported for
basic and diluted net loss per share were identical.
Recent Accounting Pronouncements - In June 1997, the FASB
issued "Reporting Comprehensive Income," SFAS No. 130,
which establishes standards for reporting and display of
comprehensive income and its components in a full set of
general-purpose financial statements. Specifically, this
statement requires that an enterprise (i) classify items
of other comprehensive income by their nature in a
financial statement and (ii) display the accumulated
balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the
equity section of a statement of financial position. This
statement is effective for fiscal years beginning after
December 15, 1997. The Company anticipates adoption of
SFAS No. 130 in its year ending December 31, 1998
financial statements.
Comprehensive income consists of the change in equity of a
business enterprise during a period from transactions and
other events and circumstances from nonowner sources.
Specifically, this includes net income and other
comprehensive income, which is made up of certain changes
in assets and liabilities that are not reported in a
statement of operations but are included in the balances
within a separate component of equity in a statement of
financial position. Such changes include, but are not
limited to, unrealized gains for marketable securities and
futures contracts, foreign currency translation
adjustments and minimum pension liability adjustments.
F-19
<PAGE>
Sierra Well Service, Inc.
Notes to Financial Statements
2. Acquisitions
In 1997, 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:
Purchase Price
Closing Date (in thousands)
East Texas Vac. Service, L.C.June 1997 $3,080
S&N Well Servicing, Ltd. July 1997 5,400
Lonnies Well Service Co. August 1997 714
Harrison Rig Service, Inc.August 1997 475
DKB Enterprises, Inc. October 1997 5,600
Diamond Rental, Inc. October 1997 3,500
Larry O'Connor, Inc. October 1997 3,600
Aries Well Service October 1997 1,500
Trans-Texas Operating, Inc.October 1997 5,500
Smith Brothers Casing Pullers, Inc. October 1997
1,300
Mansell Brine Sales, Inc.November 1997 7,000
Bobby Herricks Trucking, Inc.December 199711,750
Ackerly Service Company, Inc. and
Enviro-Vat, Inc. December 1997 5,000
The Company sold 2,401 shares of common stock totaling
$19,219,500 and borrowed $52,310,000 from a financial
institution in order to fund the acquisitions and purchase
additional well servicing equipment. The remainder 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.
The following unaudited proforma results of operations
have been prepared as though the aforementioned
acquisitions, which were funded by equity and debt, had
been completed prior to January 1, 1996. The unaudited
proforma results of operations consist of the following as
December 31 (in thousands, except share data):
1996 1997
Revenues $ 41,363 $
57,473
======= ======
Net loss $ (2,689) $
(429)
======= ======
Loss per share $ (615.19) $
(98.15)
======= ======
F-20
<PAGE>
Sierra Well Service, Inc.
Notes to Financial Statements
3. Property and Equipment
Property and equipment consists of the following as of
December 31 (in thousands):
1996 1997
Land $ - $ 996
Buildings and improvements 3 2,007
Well service units and equipment 5,053 19,079
Water hauling equipment - 6,966
Brine/fresh water stations - 8,460
Enviro-Vat units and frac/test tanks - 2,997
Disposal facilities - 5,325
Vehicles 1,153 3,973
Other 150 474
------- ---------
6,359 50,257
Less accumulated depreciation 1,708 4,094
------- ---------
$ 4,651 $ 46,163
==== =====
F-21
<PAGE>
Sierra Well Service, Inc.
Notes to Financial Statements
4. Long-Term Debt
Long-term debt consists of the following as of December 31
(in thousand):
1996 1997
Credit facility provided by financial institution-interest
payable monthly; principal due March 1999; collateralized
by all real and personal property (Tranche A - $30,000 and
Tranche B - $22,310, net of debt discount of $397) $-
$ 51,913
Capital leases - collateralized by equipment, various
monthly payments totaling $29 including interest 338
527
Equipment notes - interest from 7.9%-12.2%, various
monthly payments totaling $24 including interest;
collateralized
by related equipment 144 552
Prime plus 1% notes payable - refinanced in October 1997
775 -
------- --------
1,257 52,992
Less current portion 277 512
------- --------
$ 980 $52,480
==== =====
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 requires monthly interest payments with the
outstanding principal balance and accrued interest due in
March 1999. The Loan consists of two tranches (Tranche A
and Tranche B) totaling $30,000,000 each. The initial
interest rates for Tranche A and B are prime plus 1% and
3%, respectively. Interest on Tranche B, if not retired
in whole by October 1998, shall increase by 1% at the end
of each subsequent two month period. As part of the noted
agreement, the Company issued common stock warrants to the
lender which are exercisable in whole or in part any time
prior to October 2002. As of December 31, 1997, the
lender was entitled to 416 warrants at exercise prices
ranging from $8,500 to $11,500 per share. These warrants
had an estimated fair value of $476,400 at time of
issuance and $397,000 as of December 31, 1997. The fair
value of the warrants was calculated using the Black-
Scholes option pricing mode which included the conditions
of expected volatility, risk-free interest rate, except
life and dividend yield.
In October 1997, the Company repaid approximately
$6,000,000 of short-term debt, including accrued interest,
with proceeds from the Credit Facility. The Credit
Facility contains various restrictive covenants which
include restrictions on the incurrence on additional
indebtedness and limitations on the amount of capital
lease obligations. Certain covenants also place
restrictions on dividends, stock redemptions, investments
and sales of assets. As of December 31, 1997, the Company
was not in violation of any such covenants.
F-22
<PAGE>
Sierra Well Service, Inc.
Notes to Financial Statements
4. Long-term Debt - continued
Aggregate maturities of long-term debt, including capital
leases, for the five years subsequent to December 31,
1997, are as follows (in thousands):
Year ending
1998 $ 512
1999 52,281
2000 153
2001 33
2002 13
Rent expense approximated $190,000 for 1995, $369,000 for
1996 and $962,000 for 1997. The Company rents various
equipment for short-term periods in order to assist day to
day operations.
5. Income Taxes
The provision for income taxes consists of the following
as of December 31 (in thousands):
1995 1996 1997
Current provision $ - $ (35) $ -
Deferred provision 31 54 1,204
Benefit of net operating loss carryforward (111)
(179) (1,434)
------- ------- ---------
$ (80) $ (160) $ (230)
==== ==== =====
A reconciliation between the amount determined by applying
the federal statutory rate with the provision for income
taxes is as of December 31 (in thousands):
1995 1996 1997
Statutory federal income tax$ (84) $ (207) $ (350)
Amortization of non-deductible goodwill - -
74
Meals and entertainment - 17 46
Other 4 30 -
----- ------- -------
$ (80) $ (160) $ (230)
=== ==== ====
F-23
<PAGE>
Sierra Well Service, Inc.
Notes to Financial Statements
5.Income Taxes - continued
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):
1996 1997
Deferred tax assets
Operating loss carryforwards $ 290 $ 1,724
Receivables 45 -
Accounts payable and accrued expenses 15 -
Other 1 -
----- -------
351 1,724
----- -------
Deferred tax liabilities
Property and equipment (304) (6,650)
Real estate investments - (54)
Goodwill - (630)
Other intangibles - (147)
Other - (13)
------- ---------
(304) (7,494)
------- ---------
$ 47 $(5,770)
==== =====
The Company has net operating loss carryforwards of
$5,070,000 expiring in various periods through 2012.
Realization of the loss carryforwards is dependent on
generating sufficient taxable income prior to expiration.
Although realization is not assured, management believes
it is more likely than not that the deferred tax asset
will be realized. The amount of the deferred tax asset
could be reduced if estimates of future taxable income
during the carryforward period are reduced.
6. Commitments and Contingencies
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.
Currently, the Company has not been fined, cited or
notified of any environmental violations which would have
a material adverse effect upon capital expenditures,
earnings or the competitive position in the oil and gas
industry. However, management does recognize that by the
very nature of its business, material cost 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.
F-24
<PAGE>
Sierra Well Service, Inc.
Notes to Financial Statements
7. Stock Compensation
The Company granted two employees 10 shares of common
stock effective January 1, 1997 for 1996 compensation.
Compensation expense was determined at the date of the
grant based on the estimated fair value of the Company as
determined by an independent investment advisor.
8. Related Party Transactions
Transactions and outstanding balances with Southwest
Royalties Holdings, Inc., an affiliate of the Company, are
as follows as of December 31 (in thousands):
1995 1996 1997
Accounts receivable $ 122 $ 44 $ 156
Accounts payable 14 46 461
Revenue 593 472 508
Interest expense 66 - -
Management fees and computer services - 90
136
9. Profit Sharing Plan
The Company has a contributory retirement plan sponsored
by an affiliate that covers substantially all employees.
Employees may contribute up to 15% of their base salary
with the maximum amount determined by enacted law.
Employee contributions are fully vested at all times and
discretionary employer contributions are fully vested upon
retirement or five years of service. Employer
contributions to the 401(k) plan approximated $4,000
for1995, $8,000 for 1996 and $13,000 for 1997.
10.Major Customers
Sales from one unrelated customer totaled $1,133,688 or
26% for the year ended December 31, 1995.
Receivables from two customer were 21% of total
receivables as of December 31, 1996. The Company performs
ongoing evaluations of its customers' financial condition
and generally requires no collateral to secure outstanding
receivables.
F-25
<PAGE>
AGREEMENT OF LIMITED PARTNERSHIP
OF
SOUTHWEST PARTNERS III, L.P.
<PAGE>
TABLE OF CONTENTS
Page
Section 1 THE PARTNERSHIP 1
1.1 Organization 1
1.2 Partnership Name 1
1.3 Purpose 1
1.4 Principal Place of Business 1
1.5 Term 1
1.6 Filings 1
1.7 Independent Activities 2
1.8 Definitions--General 2
Section 2 PARTNERS: CAPITAL CONTRIBUTIONS 8
2.1 General Partner 8
2.2 Limited Partners 8
2.3 Capital Contributions 8
2.4 Default on Capital Contributions 9
Section 3 ALLOCATIONS 9
3.1 Profits 9
3.2 Losses 10
3.3 Special Allocations 10
Minimum Gain Chargeback 10
Partner Minimum Gain Chargeback 10
Qualified Income Offset 10
Gross Income Allocation 11
Nonrecourse Deductions 11
Partner Nonrecourse Deductions 11
Section 754 Adjustment 11
Imputed Interest 11
Organization and Offering Expenses 11
Basis Increases 12
Basis Reductions 12
Other Fees 12
3.4 Curative Allocations 12
3.5 Other Allocations Rules 13
3.6 Tax Allocations: Code Section 704(c) 15
Section 4 DISTRIBUTIONS 15
4.1 Net Cash From Operations and Net Cash From
Sales or Refinancings 15
4.2 Division Among Unit Holders and General
Partner 15
4.3 Amounts Withheld 15
4.4 Interest on Excess Capital Contribution 15
<PAGE>
Section 5 MANAGEMENT 16
5.1 Authority of the General Partner 16
5.2 Duties and Obligations of General Partner 17
5.3 Indemnification of General Partner 18
5.4 Compensation and Expenses of General Partner 18
5.5 Operating Restrictions 19
Section 6 ROLE OF LIMITED PARTNERS 19
6.1 Rights or Powers 19
6.2 Voting Rights 19
6.3 Indemnification of Limited Partners 19
Section 7 BOOKS AND RECORDS 19
7.1 Books and Records 19
7.2 Annual Reports 20
7.3 Tax Information 20
Section 8 AMENDMENTS; MEETINGS 20
8.1 Amendments 20
8.2 Meetings of the Partners 21
Section 9 TRANSFERS OF UNITS 21
9.1 Restrictions on Transfers 21
9.2 Permitted Transfers 21
9.3 Prohibited Transfers 23
9.4 Rights of Unadmitted Assignees 23
9.5 Admission of Assignees as Partners 23
9.6 Representations; Legend 23
9.7 Distributions and Allocations in Respect to
Transferred Units 24
Section 10 GENERAL PARTNERS 25
10.1 Additional General Partners 25
10.2 Covenant Not to Withdraw, Transfer, or
Dissolve 25
10.3 Permitted Transfers 25
10.4 Prohibited Transfers 25
10.5 Termination of Status as General Partner 26
<PAGE>
Section 11 DISSOLUTION AND WINDING UP 26
11.1 Liquidating Events 26
11.2 Winding Up 27
11.3 Compliance With Timing Requirements of
Regulations 27
11.4 Deemed Distribution and Recontribution 28
11.5 Rights of Unit Holders 28
11.6 Notice of Dissolution 28
Section 12 POWER OF ATTORNEY 28
12.1 General Partner as Attorney-In-Fact 28
12.2 Nature as Special Power 28
Section 13 MISCELLANEOUS 29
13.1 Notices 29
13.2 Binding Effect 29
13.3 Construction 29
13.4 Time 29
13.5 Headings 29
13.6 Severability 29
13.7 Incorporation by Reference 29
13.8 Further Action 29
13.9 Variation of Pronouns 30
13.10 Governing Law 30
13.11 Waiver of Action for Partition 30
13.12 Counterpart Execution 30
13.13 Sole and Absolute Discretion 30
<PAGE>
AGREEMENT OF LIMITED PARTNERSHIP
OF
SOUTHWEST PARTNERS III, L.P.
This AGREEMENT OF LIMITED PARTNERSHIP is entered into and
shall be effective as of the 11 th day of March, 1997, by and
between SOUTHWEST PARTNERS III, L.P., as the General Partner,
Bill E. Coggin, as the Original Limited Partner, and the Persons
whose names are set forth on Exhibit A attached hereto, as
Limited Partners, pursuant to the provisions of the Delaware
Revised Uniform Limited Partnership Act, on the following terms
and conditions:
Section 1
THE PARTNERSHIP
1.1 Organization. The Partnership was organized on
March 11, 1997. The Partners hereby agree to conduct the
operations of the Partnership as a limited partnership pursuant
to the provisions of the Act and upon the terms and conditions
set forth in this Agreement.
1.2 Partnership Name. The name of the Partnership
shall be Southwest Partners III, L.P., a Delaware limited
partnership, and all business of the Partnership shall be
conducted in such name. The General Partner may change the name
of the Partnership at any time in its sole discretion. The
Partnership shall hold all of its Property in the name of the
Partnership or in the name of a nominee of the Partnership and
not in the name of any Partner.
1.3 Purpose. The business of the Partnership shall be
any business which may lawfully be conducted by a limited
partnership organized pursuant to the Act. The purposes of the
Partnership, among others, shall be to acquire or invest in oil
and gas business entities, to acquire direct interests in oil and
gas properties, to own, manage, distribute, or sell all or a
portion of such assets or other interests, and to engage in any
activity that is necessary, incident or advisable therewith, in
accordance with the restrictions and provisions herein.
1.4 Principal Place of Business. The principal place
of business of the Partnership shall be at 407 N. Big Spring,
Suite 300, Midland, Texas 79701. The General Partner may change
the principal place of business of the Partnership in its sole
discretion.
1.5 Term. The term of the Partnership commenced on
the date the Partnership was organized, as set forth in Section
1.1 hereof, and shall continue until the winding up and
liquidation of the Partnership, and its business is completed
following a Liquidating Event, as provided in Section 11 hereof.
1.6 Filings.
(a) A Certificate of Limited Partnership (the
"Certificate") has been filed in the office of the Secretary of
State of Delaware in accordance with the provisions of the Act.
The General Partner shall take any and all other actions
reasonably necessary to perfect and maintain the status of the
Partnership as a limited partnership under the laws of Delaware.
The General Partner shall cause amendments to the Certificate to
be filed whenever required by the Act.
<PAGE>
(b) The General Partner shall execute and cause
to be filed original or amended Certificates and shall take any
and all other actions as may be reasonably necessary to perfect
and maintain the status of the Partnership as a limited partner
ship or similar type of entity under the laws of any other states
or jurisdictions in which the nature of the business of the
Partnership requires it to qualify to do business.
(c) Upon the dissolution of the Partnership, the
General Partner (or, in the event there is no remaining General
Partner, any Person elected pursuant to Section 11.2 hereof)
shall promptly execute and cause to be filed certificates of
dissolution in accordance with the Act and the laws of any other
states or jurisdictions in which the Partnership has filed
certificates.
1.7 Independent Activities. The General Partner and
each Limited Partner may, notwithstanding this Agreement, engage
in whatever activities they choose, whether the same are
competitive with the Partnership or otherwise, without having or
incurring any obligation to offer any interest in such activities
to the Partnership or any Partner. Neither this Agreement nor
any activity undertaken pursuant hereto shall prevent the General
Partner from engaging in such activities, or require the General
Partner to permit the Partnership or any Partner to participate
in any such activities, and as a material part of the
consideration for the execution of this Agreement by the General
Partner and the admission of each Limited Partner, each Limited
Partner hereby waives, relinquishes and renounces any such right
or claim of participation.
1.8 Definitions--General. Capitalized words and
phrases used in this Agreement have the following meanings:
(a) "Act" means the Delaware Revised Uniform
Limited Partnership Act, as amended from time to time (or any
corresponding provisions of succeeding law).
(b) "Adjusted Capital Account Deficit" means,
with respect to any Unit Holder, the deficit balance, if any, in
such Unit Holder's Capital Account as of the end of the relevant
fiscal year, after giving effect to the following adjustments:
(i) Credit to such Capital Account any
amounts which such Unit Holder is obligated to restore
(pursuant to the terms of such Unit Holder's Promissory Note
or otherwise) or is deemed to be obligated to restore
pursuant to the penultimate sentences of Regulations
Sections 1.704-2(g)(1) and 1.704-2(i)(5); and
(ii) Debit to such Capital Account the items
described in Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-
1(b)(2)(ii)(d)(5) and 1.704-1(b)(2)(ii)(d)(6) of the
Regulations.
The foregoing definition of Adjusted Capital Account Deficit is
intended to comply with the provisions of Section 1.704-
1(b)(2)(ii)(d) of the Regulations and shall be interpreted
consistently therewith.
(c) "Adjusted Capital Contribution" means, as of
any day, a Unit Holder's Capital Contribution adjusted as
follows:
(i) Increased by the amount of any
Partnership liabilities which, in connection with
distributions pursuant to Sections 4.1 and 11.2(c) hereof,
are assumed by such Unit Holder or are secured by any
Partnership Property distributed to such Unit Holder, and
<PAGE>
(ii) Reduced by the amount of cash and the
Gross Asset Value of any Partnership Property distributed to
such Unit Holder pursuant to Sections 4.1 and 11.2(c) hereof
and the amount of any liabilities of such Unit Holder
assumed by the Partnership or which are secured by any
property contributed by such Unit Holder to the Partnership.
In the event any Person transfers all or any portion of his Units
in accordance with the terms of this Agreement, his transferee
shall succeed to the Adjusted Capital Contribution of the
transferor to the extent it relates to the transferred Units.
(d) "Affiliate" means, with respect to any
Person, (i) any Person directly or indirectly controlling,
controlled by or under common control with such Person, (ii) any
Person owning or controlling 10% or more of the outstanding
voting interests of such Person, (iii) any officer, director, or
general partner of such Person, or (iv) any Person who is an
officer, director, general partner, trustee, or holder of 10% or
more of the voting interests of any Person described in clauses
(i) through (iii) of this sentence.
(e) "Agreement" or "Partnership Agreement" means
this Agreement of Limited Partnership, as amended from time to
time. Words such as "herein," "hereinafter," "hereof," "hereto,"
and "hereunder" refer to this Agreement as a whole, unless the
context otherwise requires.
(f) "Capital Account" means, with respect to any
Partner or Unit Holder, the Capital Account maintained for such
Person in accordance with the following provisions:
(i) To each Person's Capital Account
there shall be credited such Person's Capital Contributions,
such Person's distributive share of Profits and any items in
the nature of income or gain which are specially allocated
pursuant to Section 3.3, Section 3.4 or Section 3.5 hereof,
and the amount of any Partnership liabilities assumed by
such Person or which are secured by any Partnership Property
distributed to such Person.
(ii) To each Person's Capital Account
there shall be debited the amount of cash and the Gross
Asset Value of any Partnership Property distributed to such
Person pursuant to any provision of this Agreement, such
Person's distributive share of Losses and any items in the
nature of expenses or losses that are specially allocated
pursuant to Section 3.3, Section 3.4 or Section 3.5 hereof,
and the amount of any liabilities of such Person assumed by
the Partnership or which are secured by any property
contributed by such Person to the Partnership.
(iii) In the event any interest in the
Partnership is transferred in accordance with the terms of
this Agreement, the transferee shall succeed to the Capital
Account of the transferor to the extent it relates to the
transferred interest.
(iv) In determining the amount of any
liability for purposes of Sections 1.8(c)(i), 1.8(c)(ii),
1.8(f)(i), and 1.8(f)(ii) hereof, there shall be taken into
account Code Section 752(c) and any other applicable
provisions of the Code and Regulations.
<PAGE>
The foregoing provisions and the other provisions of this
Agreement relating to the maintenance of Capital Accounts
are intended to comply with Regulations Section 1.704-1(b),
and shall be interpreted and applied in a manner consistent
with such Regulations. In the event the General Partner
shall determine that it is prudent to modify the manner in
which the Capital Accounts, or any debits or credits thereto
(including, without limitation, debits or credits relating
to liabilities that are secured by contributed or
distributed property or that are assumed by the Partnership
or the General Partner or Unit Holders), are computed in
order to comply with such Regulations, the General Partner
may make such modification, provided that it is not likely
to have a material effect on the amounts distributable to
any Partner or Unit Holder pursuant to Section 11 hereof
upon the dissolution of the Partnership. The General
Partner also shall (i) make any adjustments that are
necessary or appropriate to maintain equality between the
Capital Accounts of the Partners and Unit Holders and the
amount of Partnership capital reflected on the Partnership's
balance sheet, as computed for book purposes, in accordance
with Regulations Section 1.704-1(b)(2)(iv)(q), and (ii) make
any appropriate modifications in the event unanticipated
events might otherwise cause this Agreement not to comply
with Regulations Section 1.704-1(b).
(g) "Capital Contribution" means, with respect to
any Partner or Unit Holder, the amount of money and the initial
Gross Asset Value of any property (other than money) contributed
to the Partnership with respect to the interest in the
Partnership or Units held by such Partner or Unit Holder. The
principal amount of a promissory note which is not readily traded
on an established securities market and which is contributed to
the Partnership by the maker of the note shall not be included in
the Capital Account of any Person until the Partnership makes a
taxable disposition of the note or until (and to the extent)
principal payments are made on the note, all in accordance with
Regulations Section 1.704-1(b)(2)(iv)(d)(2).
(h) "Code" means the Internal Revenue Code of
1986, as amended from time to time (or any corresponding
provisions of succeeding law).
(i) "Depreciation" means, for each fiscal year or
other period, an amount equal to the depreciation, amortization,
or other cost recovery deduction allowable with respect to an
asset for such year or other period, except that if the Gross
Asset Value of an asset differs from its adjusted basis for
federal income tax purposes at the beginning of such year or
other period, Depreciation shall be an amount which bears the
same ratio to such beginning Gross Asset Value as the federal
income tax depreciation, amortization, or other cost recovery
deduction for such year or other period bears to such beginning
adjusted tax basis; provided, however, that if the federal income
tax depreciation, amortization, or other cost recovery deduction
for such year is zero, Depreciation shall be determined with
reference to such beginning Gross Asset Value using any
reasonable method selected by the General Partner.
(j) "Excess Capital Contribution" means the
excess cash contributed to the Partnership by any Person
acquiring Units over the amount of cash required to be
contributed to the Partnership in Section 2.3(c) at a given point
in time. Any such excess cash contributions shall immediately
cease to be Excess Capital Contributions when such excess amounts
would otherwise be required to be contributed to the Partnership
in accordance with Sections 2.3(c)(ii) or 2.3(c)(iii).
(k) "General Partner" means any Person who (i) is
referred to as such in the first paragraph of this Agreement or
has become a General Partner pursuant to the terms of this
Agreement, and (ii) has not ceased to be a General Partner
pursuant to the terms of this Agreement. "General Partners"
means all such Persons.
(l) "Gross Asset Value" means, with respect to
any asset, the asset's adjusted basis for federal income tax
purposes, except as follows:
<PAGE>
(i) The initial Gross Asset Value of
any asset contributed by a Partner to the Partnership shall
be the gross fair market value of such asset, as determined
by the contributing Partner and the Partnership;
(ii) The Gross Asset Values of all
Partnership assets shall be adjusted to equal their
respective gross fair market values, as determined by the
General Partner, as of the following times: (a) the
acquisition of an additional interest in the Partnership
(other than pursuant to Section 2.3(c) hereof) by any new or
existing Partner in exchange for more than a de minimis
Capital Contribution; (b) the distribution by the
Partnership to a Partner or Unit Holder of more than a de
minimis amount of Partnership Property as consideration for
an interest in the Partnership; and (c) the liquidation of
the Partnership within the meaning of Regulations Section
1.704-1(b)(2)(ii)(g); provided, however, that the
adjustments pursuant to clauses (a) and (b) above shall be
made only if the General Partner reasonably determines that
such adjustments are necessary or appropriate to reflect the
relative economic interests of the Partners and Unit Holders
in the Partnership;
(iii) The Gross Asset Value of any
Partnership asset distributed to any Partner or Unit Holder
shall be the gross fair market value of such asset on the
date of distribution; and
(iv) The Gross Asset Values of
Partnership assets shall be increased (or decreased) to
reflect any adjustments to the adjusted basis of such assets
pursuant to Code Section 734(b) or Code Section 743(b), but
only to the extent that such adjustments are taken into
account in determining Capital Accounts pursuant to
Regulations Section 1.704-1(b)(2)(iv)(m) and Section 3.3(g)
hereof; provided, however, that Gross Asset Values shall not
be adjusted pursuant to this Section 1.8(l)(iv) to the
extent the General Partner determines that an adjustment
pursuant to Section 1.8(l)(ii) hereof is necessary or
appropriate in connection with a transaction that would
otherwise result in an adjustment pursuant to this Section
1.8(l)(iv).
If the Gross Asset Value of an asset has been determined or
adjusted pursuant to Section 1.8(l)(i), Section 1.8(l)(ii), or
Section 1.8(l)(iv) hereof, such Gross Asset Value shall
thereafter be adjusted by the Depreciation taken into account
with respect to such asset for purposes of computing Profits and
Losses.
(m) "Lease" shall mean a full or partial interest
in (i) oil or gas leases; (ii) oil and gas mineral rights; (iii)
licenses; (iv) concessions; (v) contracts; (vi) fee rights; or
(vii) other rights authorizing the owner thereof to explore for,
and produce and reduce to possession of, oil or gas. When used
in this Agreement, such "Leases" may be either producing or non-
producing.
(n) "Limited Partner" means any Person (i) whose
name is set forth in the first paragraph of this Agreement as the
Original Limited Partner or who has been admitted as an
additional or Substituted Limited Partner pursuant to the terms
of this Agreement and (ii) who is the owner of Units. "Limited
Partners" means all such Persons. All references in this
Agreement to a majority in interest or a specified percentage of
the Limited Partners shall mean Limited Partners holding more
than 50% or such specified percentage, respectively, of the Units
then held by Limited Partners.
(o) "Memorandum" means that certain confidential
Private Placement Memorandum dated March 15, 1997, relating to
the Partnership.
<PAGE>
(p) "Net Cash From Operations" means 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 Operations"
shall not be reduced by depreciation, amortization, cost recovery
deductions, or similar allowances, but shall be increased by any
reductions of reserves previously established where and to the
extent the General Partner no longer regards such reserves as
reasonably necessary in the efficient conduct of the Partnership
business.
(q) "Net Cash From Sales or Refinancings" means
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. "Net Cash From Sales or Refinancings" shall include all
principal and interest payments with respect to any note or other
obligation received by the Partnership in connection with sales
and other dispositions (other than in the ordinary course of
business) of Partnership Property.
(r) "Nonrecourse Deductions" has the meaning set
forth in Section 1.704-2(c) of the Regulations. The amount of
Nonrecourse Deductions for a Partnership fiscal year equals the
excess, if any, of the net increase, if any, in the amount of
Partnership Minimum Gain during that fiscal year over the
aggregate amount of any distributions during that fiscal year of
proceeds of a Nonrecourse Liability that are allocable to an
increase in Partnership Minimum Gain, determined according to the
provisions of Section 1.704-2(c) of the Regulations.
(s) "Nonrecourse Liability" has the meaning set
forth in Section 1.704-2(b)(3) of the Regulations.
(t) "Organization and Offering Expenses" means
all costs of organizing the Partnership and selling the offering
of Partnership Units, including, but not limited to, Syndication
Expenses, total underwriting and brokerage discounts and
commissions (including fees of the underwriters' attorneys),
wholesaling fees, due diligence reimbursements paid to the
soliciting dealers, expenses for printing, engraving, mailing,
salaries of employees while engaging in sales activities, charges
of transfer agents, registrars, trustees, escrow holders,
depositaries, engineers and other experts, expenses of
qualification of the sale of securities under federal and state
law, including taxes, accountants and attorneys' fees, and fees
and other front-end fees.
(u) "Original Limited Partner" means any Person
who is referred to as such in the first paragraph of this
Agreement.
(v) "Partner Minimum Gain" means an amount, with
respect to each Partner Nonrecourse Debt, equal to the
Partnership Minimum Gain that would result if such Partner
Nonrecourse Debt were treated as a Nonrecourse Liability,
determined in accordance with Section 1.704-2(i) of the
Regulations.
(w) "Partner Nonrecourse Debt" has the meaning
set forth in Section 1.704-2(b)(4) of the Regulations.
(x) "Partner Nonrecourse Deductions" has the
meaning set forth in Section 1.704-2(i)(2) of the Regulations.
The amount of Partner Nonrecourse Deductions with respect to a
Partner Nonrecourse Debt for a Partnership fiscal year equals the
excess, if any, of the net increase, if any, in the amount of
Partner Minimum Gain attributable to such Partner Nonrecourse
Debt during that fiscal year over the aggregate amount of any
distributions during that fiscal year to the Partner or Unit
Holder that bears the economic risk of loss for such Partner
Nonrecourse Debt to the extent such distributions are from the
proceeds of such Partner Nonrecourse Debt and are allocable to an
increase in Partner Minimum Gain attributable to such Partner
Nonrecourse Debt, determined in accordance with Section 1.704-
2(i)(2) of the Regulations.
<PAGE>
(y) "Partners" means all General Partners and all
Limited Partners. "Partner" means any one of the Partners. All
references in this Agreement to a majority in interest or a
specified percentage of the Partners shall mean Partners (both
General and Limited) holding more than 50% in interest of the
Partnership or such specified percentage interest in the
Partnership, respectively, then held by Partners. Solely for
purposes of making the foregoing determination, the General
Partner's interest in the Partnership shall be no less than 15%
of the total interests in the Partnership.
(z) "Partnership" means the partnership organized
pursuant to this Agreement and the partnership continuing the
business of this Partnership in the event of dissolution as
herein provided.
(aa) "Partnership Minimum Gain" has the meaning
set forth in Regulations Sections 1.704-2(d).
(ab) "Partnership Property" means all real and
personal property acquired by the Partnership and any
improvements thereto, and shall include both tangible and
intangible property.
(ac) "Person" means any individual, partnership,
corporation, trust, or other entity.
(ad) "Pledge Agreement" means the pledge agreement
entered into by the Partnership and each Person who acquires
Units in order to induce the Partnership to accept the Person's
Promissory Note. A copy of the form of the Pledge Agreement is
attached to the Memorandum as Exhibit 5.
(ae) "Priority Return" means a sum equivalent
to 10% per annum, cumulative but not compounded (prorated for any
partial year) of the aggregate Adjusted Capital Contribution of
all the Unit Holders, from time to time during the period to
which the Priority Return relates, commencing on the first day
any Limited Partner is admitted to the Partnership pursuant to
Section 2.3(c) hereof.
(af) "Profits" and "Losses" means, for each fiscal
year or other period, an amount equal to the Partnership's
taxable income or loss for such year or period, determined in
accordance with Code Section 703(a) (for this purpose, all items
of income, gain, loss, or deduction required to be stated
separately pursuant to Code Section 703(a)(1) shall be included
in taxable income or loss), with the following adjustments:
(i) Any income of the Partnership that
is exempt from federal income tax and not otherwise taken
into account in computing Profits or Losses pursuant to this
Section 1.8(af) shall be added to such taxable income or
loss;
(ii) Any expenditures of the Partnership
described in Code Section 705(a)(2)(B) or treated as Code
Section 705(a)(2)(B) expenditures pursuant to Regulations
Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into
account in computing Profits or Losses pursuant to this
Section 1.8(af), shall be subtracted from such taxable
income or loss;
(iii) In the event the Gross Asset Value
of any Partnership asset is adjusted pursuant to Section
1.8(l)(ii) or Section 1.8(l)(iii) hereof, the amount of such
adjustment shall be taken into account as gain or loss from
the disposition of such asset for purposes of computing
Profits or Losses;
(iv) Gain or loss resulting from any
disposition of Partnership Property with respect to which
gain or loss is recognized for federal income tax purposes
shall be computed by reference to the Gross Asset Value of
the property disposed of, notwithstanding that the adjusted
tax basis of such property differs from its Gross Asset
Value;
<PAGE>
(v) In lieu of the depreciation,
amortization, and other cost recovery deductions taken into
account in computing such taxable income or loss, there
shall be taken into account Depreciation for such fiscal
year or other period, computed in accordance with Section
1.8(i) hereof; and
(vi) Notwithstanding any other
provisions of this Section 1.8(af), any items which are
specially allocated pursuant to Section 3.3 or Section 3.4
hereof shall not be taken into account in computing Profits
or Losses.
(ag) "Promissory Note" means the promissory note
payable to the Partnership issued by each Person who acquires
Units pursuant to Section 2.3(c) hereof.
(ah) "Property" means all property, real and
personal, which will be acquired and operated by the Partnership
as set forth in the Memorandum.
(ai) "Regulations" means the Income Tax
Regulations, including Temporary Regulations, promulgated under
the Code, as such regulations may be amended from time to time
(including corresponding provisions of succeeding regulations).
(aj) "Substituted Limited Partner" means any
Person admitted to the Partnership as a Limited Partner pursuant
to Section 9 hereof.
(ak) "Syndication Expenses" means all
expenditures classified as syndication expenses pursuant to
Section 1.709-2(b) of the Regulations. Syndication Expenses
shall be taken into account under this Agreement at the time they
would be taken into account under the Partnership's method of
accounting if they were deductible expenses.
(al) "Transfer" means any voluntary or involuntary
transfer, sale, pledge, hypothecation, or other disposition or
voluntary or involuntary agreement to transfer, sell, pledge,
hypothecate, or otherwise dispose of.
(am) "Unit" means an interest in the Partnership
representing Capital Contributions of $100,000 to the
Partnership.
(an) "Unit Holders" means all Persons who hold
Units, regardless of whether they are Partners. "Unit Holder"
means any one of the Unit Holders.
Section 2
PARTNERS: CAPITAL CONTRIBUTIONS
2.1 General Partner. The name and address of the
General Partner is as follows:
Southwest Royalties, Inc.
407 N. Big Spring, Suite 300
Midland, Texas 79701
<PAGE>
2.2 Limited Partners.
(a) The Original Limited Partner is Bill E.
Coggin, Vice President and Chief Financial Officer of the General
Partner, who serves as Original Limited Partner until such time
as additional Limited Partners are admitted to the Partnership,
at which point, the Original Limited Partner shall be deemed to
have withdrawn from the Partnership and his Capital Contribution
shall be returned to him. The General Partner and the Limited
Partners hereby consent to such withdrawal and waive and release
the Original Limited Partner from any right, claim, or action
they or any of them may have against him for such withdrawal.
(b) The name, address, and number of Units of
each Limited Partner (other than the Original Limited Partner)
shall be set forth in Exhibit A attached hereto, which Exhibit A
may be amended by the General Partner from time to time.
2.3 Capital Contributions.
(a) The General Partner has made or shall make
Capital Contributions with respect to its interest in the
Partnership in an amount equal to 10% of the total Limited
Partner Capital Contributions under this Section 2.3. The
Capital Contribution of the General Partner may be paid into the
Partnership as Limited Partner Capital Contributions are invested
by the Partnership, in amounts proportionate to such invested
amounts.
The General Partner shall not be required to make any other
Capital Contributions to the Partnership.
(b) The Original Limited Partner has made a
Capital Contribution of $10 with respect to his fractional Unit
described in Section 2.2(a) hereof. The Original Limited Partner
shall not be required to make any other Capital Contributions to
the Partnership.
(c) Each Person who acquires any of the Units
offered pursuant to the Memorandum shall be admitted as a Limited
Partner upon the acceptance of his subscription by the General
Partner. Each such Person shall make Capital Contributions with
respect to each Unit he acquires as follows:
(i) $25,000 concurrently with such Person's
admission to the Partnership; and
(ii) The remainder upon demand of the General
Partner within 30 days after receipt of written notice or
(1) $25,000 on March 31, 1998; and
(2) $50,000 on October 31, 1998.
Each such Person's obligation to make such Capital Contributions
(other than the Capital Contribution set forth in Section
2.3(c)(i) above) shall be evidenced by a Promissory Note in the
form attached hereto as Exhibit B, which shall be delivered to
the Partnership concurrently with such Person's admission to the
Partnership.
(d) Except as otherwise provided in this
Agreement, no Partner shall demand or receive a return of his
Capital Contributions or withdraw from the Partnership.
(e) No Partner shall receive any interest, salary
or drawing with respect to his Capital Contributions or his
Capital Account or for services rendered on behalf of the
Partnership or otherwise in his capacity as a Partner, except as
otherwise provided in this Agreement.
<PAGE>
(f) No Limited Partner shall be liable for the
debts, liabilities, contracts or any other obligations of the
Partnership. Except as otherwise provided by applicable state
law, a Limited Partner shall be liable only to make his Capital
Contributions and shall not be required to lend any funds to the
Partnership or, after his Capital Contributions have been paid,
to make any additional capital contributions to the Partnership.
The General Partner shall have no personal liability for the
repayment of any Capital Contributions of any Limited Partner.
2.4 Default on Capital Contributions. If any Unit
Holder shall fail to make any payment of any required Capital
Contribution to the Partnership with respect to any Unit when due
as provided in his Note, the General Partner may at any time
following such failure declare such Unit Holder in default and
provide such Unit Holder with written notice thereof. Upon
continuation of such default for more than 30 days after written
notice of such default is given by the General Partner to the
defaulting Unit Holder, at the election of the General Partner on
behalf of the Partnership, (i) all amounts due under the
defaulting Unit Holder's Note shall immediately become due and
payable, (ii) the defaulting Unit Holder shall forfeit all Units
subscribed for (including partial Units) and the Partnership may
exercise all such other rights and remedies it may have as
provided in the Pledge Agreement executed by the Unit Holder.
The forfeited Units, if any, and any Capital Account balance and
interest in Profits and Losses attributable thereto (including
any partial Units) shall automatically be transferred to all non-
defaulting Partners in proportion to such non-defaulting
Partners' positive Capital Account balances at the beginning of
the fiscal year in which such default occurs. Upon such
transfer, the defaulting Unit Holders' obligation to make further
capital contributions shall automatically be canceled.
Section 3
ALLOCATIONS
3.1 Profits. After giving effect to the special
allocations set forth in Sections 3.3, 3.4 and 3.5(b) hereof,
Profits for any fiscal year shall be allocated in the following
order and priority:
(a) First, 85% to the Unit Holders and 15% to the
General Partner until the cumulative Profits allocated pursuant
to this Section 3.1(a) are equal to the cumulative Losses
allocated pursuant to Section 3.2(a) hereof for all prior
periods;
(b) Second, 85% to the Unit Holders and 15% to
the General Partner until the cumulative Profits allocated to the
Unit Holders pursuant to this Section 3.1(b) hereof are equal to
the cumulative Priority Return from the inception of the
Partnership to the end of such fiscal year; and
(c) The balance, if any, 75% to the Unit Holders
and 25% to the General Partner.
3.2 Losses. After giving effect to the special
allocations set forth in Sections 3.3 and 3.4 hereof, Losses for
any fiscal year shall be allocated in the following order and
priority:
(a) Except as provided in Sections 3.2(b) and
3.2(c) hereof, Losses shall be allocated 85% to the Unit Holders
and 15% to the General Partner.
(b) Except as provided in Section 3.2(c) hereof,
to the extent Profits have been allocated pursuant to Section
3.1(b) or Section 3.1(c) hereof for any prior year, Losses shall
be allocated first to offset any Profits allocated pursuant to
Section 3.1(c) hereof, and then to offset any Profits allocated
pursuant to Section 3.1(b) hereof, (in each case, pro rata among
the Unit Holders and/or the General Partner in proportion to
their shares of the Profits being offset). To the extent any
allocations of Profits are offset pursuant to this Section
3.2(b), such allocations shall be disregarded for purposes of
computing subsequent allocations pursuant to this Section 3.
<PAGE>
(c) The Losses allocated pursuant to Sections
3.2(a) and 3.2(b) hereof shall not exceed the maximum amount of
Losses that can be so allocated without causing any Unit Holder
who is not a General Partner to have an Adjusted Capital Account
Deficit at the end of any fiscal year. In the event some but not
all of the Unit Holders who are not General Partners would have
Adjusted Capital Account Deficits as a consequence of an
allocation of Losses pursuant to Section 3.2(a) and Section
3.2(b) the limitation set forth in this Section 3.2(a) and
Section 3.2(b) shall be applied on a Unit Holder by Unit Holder
basis so as to allocate the maximum permissible Loss to each Unit
Holder who is not a General Partner under Section 1.704-
1(b)(2)(ii)(d) of the Regulations. All Losses in excess of the
limitation set forth in this Section 3.2(c) shall be allocated to
the General Partner.
3.3 Special Allocations. The following special
allocations shall be made in the following order:
(a) Minimum Gain Chargeback. Notwithstanding any
other provision of this Section 3, if there is a net decrease in
Partnership Minimum Gain during any Partnership fiscal year, the
General Partner and each Unit Holder shall be specially allocated
items of Partnership income and gain for such year (and, if
necessary, subsequent years) in an amount equal to the portion of
such Person's share of the net decrease in Partnership Minimum
Gain, determined in accordance with Regulations Section 1.704-
2(g)(i). Allocations pursuant to the previous sentence shall be
made in proportion to the respective amounts required to be
allocated to the General Partner and each Unit Holder pursuant
thereto. The items to be so allocated shall be determined in
accordance with Section 1.704-2(f) of the Regulations. This
Section 3.3(a) is intended to comply with the minimum gain
chargeback requirement in such Section of the Regulations and
shall be interpreted consistently therewith.
(b) Partner Minimum Gain Chargeback.
Notwithstanding any other provision of this Section 3 except
Section 3.3(a), if there is a net decrease in Partner Minimum
Gain attributable to a Partner Nonrecourse Debt during any
Partnership fiscal year, each Person who has a share of the
Partner Minimum Gain attributable to such Partner Nonrecourse
Debt, determined in accordance with Section 1.704-2(i)(5), shall
be specially allocated items of Partnership income and gain for
such year (and, if necessary, subsequent years) in an amount
equal to the portion of such Person's share of the net decrease
in Partner Minimum Gain attributable to such Partner Nonrecourse
Debt, determined in accordance with Regulations Section 1.704-
2(i)(5). Allocations pursuant to the previous sentence shall be
made in proportion to the respective amounts required to be
allocated to the General Partner and each Unit Holder pursuant
thereto. The items to be so allocated shall be determined in
accordance with Section 1.704-2(i)(4) of the Regulations. This
Section 3.3(b) is intended to comply with the minimum gain
chargeback requirement in such Section of the Regulations and
shall be interpreted consistently therewith.
(c) Qualified Income Offset. In the event any
Unit Holder who is not a General Partner unexpectedly receives
any adjustments, allocations, or distributions described in
Regulations Section 1.704-1(b)(2)(ii)(d)(4), 1.704-
1(b)(2)(ii)(d)(5), or 1.704-1(b)(2)(ii)(d)(6), items of
Partnership income and gain shall be specially allocated to each
such Unit Holder in an amount and manner sufficient to eliminate,
to the extent required by the Regulations, the Adjusted Capital
Account Deficit of such Unit Holder as quickly as possible,
provided that an allocation pursuant to this Section 3.3(c) shall
be made if and only to the extent that such Unit Holder would
have an Adjusted Capital Account Deficit after all other
allocations provided for in this Section 3 have been tentatively
made as if this Section 3.3(c) were not in the Agreement.
<PAGE>
(d) Gross Income Allocation. In the event any
Unit Holder who is not a General Partner has a deficit Capital
Account at the end of any Partnership fiscal year that is in
excess of the sum of (i) the amount such Unit Holder is obligated
to restore (pursuant to the terms of such Unit Holder's
Promissory Note or otherwise), and (ii) the amount such Unit
Holder is deemed to be obligated to restore pursuant to the
penultimate sentences of Regulations Sections 1.704-2(g) and
1.704-2(i)(5), each such Unit Holder shall be specially allocated
items of Partnership income and gain in the amount of such excess
as quickly as possible, provided that an allocation pursuant to
this Section 3.2(d) shall be made if and only to the extent that
such Unit Holder would have a deficit Capital Account in excess
of such sum after all other allocations provided for in this
Section 3 have been tentatively made as if Section 3.2(c) hereof
and this Section 3.2(d) were not in the Agreement.
(e) Nonrecourse Deductions. Nonrecourse
Deductions for any fiscal year or other period shall be specially
allocated 15% to the General Partner and 85% to the Unit Holders
in proportion to their Units.
(f) Partner Nonrecourse Deductions. Any Partner
Nonrecourse Deductions for any fiscal year or other period shall
be specially allocated to the Partner or Unit Holder who bears
the economic risk of loss with respect to the Partner Nonrecourse
Debt to which such Partner Nonrecourse Deductions are
attributable in accordance with Regulations Section 1.704-2(i).
(g) Section 754 Adjustment. To the extent an
adjustment to the adjusted tax basis of any Partnership asset
pursuant to Code Section 734(b) or Code Section 743(b) is
required, pursuant to Regulations Section 1.704-1(b)(2)(iv)(m),
to be taken into account in determining Capital Accounts, the
amount of such adjustment to the Capital Accounts shall be
treated as an item of gain (if the adjustment increases the basis
of the asset) or loss (if the adjustment decreases such basis)
and such gain or loss shall be specially allocated to the
Partners and Unit Holders in a manner consistent with the manner
in which their Capital Accounts are required to be adjusted
pursuant to such Section of the Regulations.
(h) Imputed Interest. To the extent the
Partnership has taxable interest income with respect to any
Promissory Note pursuant to Section 483 or Sections 1271 through
1288 of the Code:
(i) such interest income shall be specially
allocated to the Unit Holder to whom such Promissory Note
relates; and
(ii) the amount of such interest income shall
be excluded from the Capital Contributions credited to such
Unit Holder's Capital Account in connection with payments of
principal with respect to such Promissory Note.
(i) Organization and Offering Expenses.
Organization and Offering Expenses, which include Syndication
Expenses, shall be allocated to the Unit Holders in proportion to
the Units held by each Unit Holder; provided, however, that all
such Organization and Offering Expenses (exclusive of broker
commissions and due diligence reimbursements) in excess of 1.5%
of the Aggregate Capital Contributions (which includes amounts
that Unit Holders are obligated to contribute pursuant to the
Promissory Notes) shall be allocated to the General Partner.
<PAGE>
(j) Basis Increases. In the event the adjusted
tax basis of any Code Section 38 property that has been placed in
service by the Partnership is increased pursuant to Code Section
48(q), such increase shall be specially allocated among the
General Partner and the Unit Holders (as an item in the nature of
income or gain) in the same proportions as the investment tax
credit that is recaptured with respect to such property is shared
among the General Partner and Unit Holders.
(k) Basis Reductions. Any reduction in the
adjusted tax basis (or cost) of Partnership Code Section 38
property pursuant to Code Section 48(q) shall be specially
allocated among the General Partner and the Unit Holders (as an
item in the nature of expenses or losses) in the same proportions
as the basis (or cost) of such property is allocated pursuant to
Regulations Section 1.46-3(f)(2)(i).
(l) Other Fees. Any fees or other compensation
for services rendered received by the General Partner from
companies or businesses in which the Partnership may invest or
otherwise as contemplated in Section 5.5(c), shall be for all
purposes the fees or other compensation of the General Partner
and the Partnership shall have no interest therein. To the
extent the Partnership has imputed or other taxable income with
respect to such fees or other compensation paid to the General
Partner, such fees or other compensation shall be specially
allocated to the General Partner.
(m) Notwithstanding the allocations contained in
Sections 3.1 and 3.2, any interest income earned on Excess
Capital Contributions will be specially allocated to the Unit
Holder who made such Excess Capital Contribution in proportion to
its share of total Excess Capital Contributions.
3.4 Curative Allocations.
(a) The "Regulatory Allocations" consist of the
"Basic Regulatory Allocations," as defined in Section 3.4(b)
hereof, the "Nonrecourse Regulatory Allocations," as defined in
Section 3.4(c) hereof, and the "Partner Nonrecourse Regulatory
Allocations," as defined in Section 3.4(d) hereof.
(b) The "Basic Regulatory Allocations" consist of
(i) allocations pursuant to the last sentence of Section 3.2(c)
hereof, and (ii) allocations pursuant to Sections 3.3(c), 3.3(d),
and 3.3(g) hereof. Notwithstanding any other provision of this
Agreement, other than the Regulatory Allocations, the Basic
Regulatory Allocations shall be taken into account in allocating
items of income, gain, loss and deduction among the General
Partner and Unit Holders so that, to the extent possible, the net
amount of such allocations of other items and the Basic
Regulatory Allocations to the General Partner and each Unit
Holder shall be equal to the net amount that would have been
allocated to each such General Partner and Unit Holder if the
Basic Regulatory Allocations had not occurred. For purposes of
applying the foregoing sentence, allocations pursuant to this
Section 3.4(b) shall only be made with respect to allocations
pursuant to Section 3.3(g) hereof to the extent the General
Partner reasonably determines that such allocations will
otherwise be inconsistent with the economic agreement among the
parties to this Agreement.
<PAGE>
(c) The "Nonrecourse Regulatory Allocations"
consist of all allocations pursuant to Sections 3.3(a) and 3.3(e)
hereof. Notwithstanding any other provision of this Agreement,
other than the Regulatory Allocations, the Nonrecourse Regulatory
Allocations shall be taken into account in allocating items of
income, gain, loss, and deduction among the General Partner and
Unit Holders so that, to the extent possible, the net amount of
such allocations of other items and the Nonrecourse Regulatory
Allocations to the General Partner and each Unit Holder shall be
equal to the net amount that would have been allocated to each
such General Partner and Unit Holder if the Nonrecourse
Regulatory Allocations had not occurred. For purposes of
applying the foregoing sentence (i) no allocations pursuant to
this Section 3.4(c) shall be made prior to the Partnership fiscal
year during which there is a net decrease in Partnership Minimum
Gain, and then only to the extent necessary to avoid any
potential economic distortions caused by such net decrease in
Partnership Minimum Gain, and (ii) allocations pursuant to this
Section 3.4(c) shall be deferred with respect to allocations
pursuant to Section 3.3(e) hereof to the extent the General
Partner reasonably determines that such allocations are likely to
be offset by subsequent allocations pursuant to Section 3.2(a)
hereof.
(d) The "Partner Nonrecourse Regulatory
Allocations" consist of all allocations pursuant to Sections
3.3(b) and 3.3(f) hereof. Notwithstanding any other provision of
this Agreement, other than the Regulatory Allocations, the
Partner Nonrecourse Regulatory Allocations shall be taken into
account in allocating items of income, gain, loss, and deduction
among the General Partner and Unit Holders so that, to the extent
possible, the net amount of such allocations of other items and
the Partner Nonrecourse Regulatory Allocations to the General
Partner and each Unit Holder shall be equal to the net amount
that would have been allocated to each such General Partner and
Unit Holder if the Partner Nonrecourse Regulatory Allocations had
not occurred. For purposes of applying the foregoing sentence
(i) no allocations pursuant to this Section 3.4(d) shall be made
with respect to allocations pursuant to Section 3.3(f) relating
to a particular Partner Nonrecourse Debt prior to the Partnership
fiscal year during which there is a net decrease in Partner
Minimum Gain attributable to such Partner Nonrecourse Debt, and
then only to the extent necessary to avoid any potential economic
distortions caused by such net decrease in Partner Minimum Gain,
and (ii) allocations pursuant to this Section 3.4(d) shall be
deferred with respect to allocations pursuant to Section 3.3(f)
hereof relating to a particular Partner Nonrecourse Debt to the
extent the General Partner reasonably determines that such
allocations are likely to be offset by subsequent allocations
pursuant to Section 3.3(b) hereof.
(e) The General Partner shall have reasonable
discretion, with respect to each Partnership fiscal year, to (i)
apply the provisions of Sections 3.4(b), 3.4(c), and 3.4(d)
hereof in whatever order is likely to minimize the economic
distortions that might otherwise result from the Regulatory
Allocations, and (ii) divide all allocations pursuant to Sections
3.4(b), 3.4(c), and 3.4(d) hereof among the General Partner and
Interest Holders in a manner that is likely to minimize such
economic distortions.
(f) Any income, gain, loss, or deduction realized
as a direct or indirect result of the issuance of a partnership
interest by the Partnership to a Partner (the "Issuance Items")
shall be allocated among the Partners so that, to the extent
possible, the net amount of such Issuance Items, together with
all other allocations under this agreement to each Partner, shall
be equal to the net amount that would have been allocated to each
such Partner if the Issuance Items had not been realized.
3.5 Other Allocations Rules.
(a) The basis (or cost) of any Partnership Code
Section 38 property shall be allocated among the General Partner
and the Unit Holders in accordance with Regulations Section 1.46-
3(f)(2)(i). All tax credits (other than the investment tax
credit) shall be allocated among the Partners and Unit Holders in
accordance with applicable law.
<PAGE>
(b) In the event Partnership Code Section 38
property is disposed of during any taxable year, Profits for such
taxable year (and, to the extent such Profits are insufficient,
Profits for subsequent taxable years) in an amount equal to the
excess, if any, of (i) the reduction in the adjusted tax basis
(or cost) of such property pursuant to Code Section 50(c), over
(ii) any increase in the adjusted tax basis of such property
pursuant to Code Section 50(c) caused by the disposition of such
property, shall be excluded from the Profits allocated pursuant
to Section 3.1 hereof and shall instead be allocated among the
General Partner and the Unit Holders in proportion to their
respective shares of such excess, determined pursuant to Sections
3.3(j) and 3.3(k) hereof. In the event more than one item of
such property is disposed of by the Partnership, the foregoing
sentence shall apply to such items in the order in which they are
disposed of by the Partnership, so that Profits equal to the
entire amount of such excess with respect to the first such
property disposed of shall be allocated prior to any allocations
with respect to the second such property disposed of, and so
forth.
(c) Generally, all Profits and Losses allocated
to the Unit Holders shall be allocated among them in proportion
to the Units held by each. In the event more than one Person is
a General Partner, Profits or Losses allocated to the General
Partners shall be divided among them as they may agree. In the
event additional Limited Partners are admitted to the Partnership
pursuant to Section 2 hereof on different dates, the Profits (or
Losses) allocated to the Unit Holders for each such fiscal year
during which Limited Partners are so admitted shall be allocated
among the Unit Holders in proportion to the number of Units each
holds from time to time during such fiscal year in accordance
with Code Section 706, using any convention permitted by law and
selected by the General Partner.
(d) For purposes of determining the Profits,
Losses, or any other items allocable to any period, Profits,
Losses, and any such other items shall be determined on a daily,
monthly, or other basis, as determined by the General Partner
using any permissible method under Code Section 706 and the
Regulations thereunder.
(e) Profits or Losses allocable to the period
commencing with the admission of any Limited Partners and all
subsequent periods shall be allocated pursuant to Sections 3.1
and 3.2 hereof.
(f) Except as otherwise provided in this
Agreement, all items of Partnership income, gain, loss,
deduction, and any other allocations not otherwise provided for
shall be divided among the General Partner and the Unit Holders
in the same proportions as they share Profits or Losses, as the
case may be, for the year.
(g) The General Partner and Unit Holders are
aware of the income tax consequences of the allocations made by
this Section 3 and hereby agree to be bound by the provisions of
this Section 3 in reporting their shares of Partnership income
and loss for income tax purposes.
(h) Solely for purposes of determining a General
Partner's or Unit Holder's proportionate share of the "excess
nonrecourse liabilities" of the Partnership within the meaning of
Regulations Section 1.752-3(a)(3), the General Partner's and Unit
Holders' interests in Partnership profits are as follows: General
Partner, 15% and Unit Holders, 85% (in proportion to their
Units).
(i) To the extent permitted by Sections 1.704-
2(h) and 1.704-2(i)(6) of the Regulations, the General Partner
shall endeavor to treat distributions of Net Cash From Operations
or Net Cash From Sales or Refinancing as having been made from
the proceeds of a Nonrecourse Liability or a Partner Nonrecourse
Debt only to the extent that such distributions would cause or
increase an Adjusted Capital Account Deficit for any Unit Holder.
<PAGE>
(j) Cost and percentage depletion deductions and
the gain or loss on the sale or other disposition of property the
production from which is subject to depletion (herein sometimes
called "depletable property") shall be computed separately by the
General Partner and the Unit Holders rather than the Partnership.
For purposes of making such computations, the Partnership's
adjusted basis in each depletable property shall be allocated
under Section 613A(c)(7)(D) of the Code, 85% to the Unit Holders
and 15% to the General Partner. The amount of gain or loss
recognized on the sale or other disposition of each such property
shall be determined by subtracting the Partnership's simulated
adjusted basis in such property from any gain recognized upon
such disposition. The portion of the amount realized on the
disposition of such property that represents the recovery of the
Partnership's simulated depletion in the property shall be
allocated 85% to the Unit Holders and 15% to the General Partner.
Thereafter, any remaining gain shall be allocated in the same
percentage as the Partners share in Profits pursuant to Section
3.1 of this Agreement. Any loss recognized on sale or other
disposition of each such property shall be allocated in
accordance with the terms of Section 3.2 of this Agreement.
(k) Notwithstanding any other provision of this
Agreement, if any allocation is required by the Code or the
Regulations to be allocated in a manner contrary to the terms of
this Agreement, the allocations under this Agreement will be
automatically reformed to comply with such requirements and the
Capital Accounts of the Partners will be adjusted accordingly.
3.6 Tax Allocations: Code Section 704(c). In
accordance with Code Section 704(c) and the Regulations
thereunder, income, gain, loss, and deduction with respect to any
property contributed to the capital of the Partnership shall,
solely for tax purposes, be allocated among the General Partner
and the Unit Holders so as to take account of any variation
between the adjusted basis of such property to the Partnership
for federal income tax purposes and its initial Gross Asset Value
(computed in accordance with Section 1.8(l)(i) hereof). In the
event the Gross Asset Value of any Partnership asset is adjusted
pursuant to Section 1.8(l)(ii) hereof, subsequent allocations of
income, gain, loss, and deduction with respect to such asset
shall take account of any variation between the adjusted basis of
such asset for federal income tax purposes and its Gross Asset
Value in the same manner as under Code Section 704(c) and the
Regulations thereunder. Any elections or other decisions
relating to such allocations shall be made by the General Partner
in any manner that reasonably reflects the purpose and intention
of this Agreement. Allocations pursuant to this Section 3.6 are
solely for purposes of federal, state, and local taxes and shall
not affect, or in any way be taken into account in computing, any
Person's Capital Account or share of Profits, Losses, other
items, or distributions pursuant to any provision of this
Agreement.
Section 4
DISTRIBUTIONS
4.1 Net Cash From Operations and Net Cash From Sales
or Refinancings. Except as otherwise provided in Section 11
hereof, 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, in the following
order and priority:
(a) First, 85% to the Unit Holders and 15% to the
General Partner until the Unit Holders' Adjusted Capital
Contributions are reduced to zero;
<PAGE>
(b) Second, 85% to the Unit Holders and 15% to
the General Partner, until distributions to the Unit Holders
pursuant to this Section 4.1(b) are equal to the excess of (i)
the cumulative Priority Return from the inception of the
Partnership to the end of the calendar quarter preceding the
quarter during which the distribution is made, over (ii) the sum
of all prior distributions to the Unit Holders under Section
4.1(c) and this Section 4.1(b); and
(c) The balance, if any, 75% to the Unit Holders
and 25% to the General Partner.
4.2 Division Among Unit Holders and General Partner.
All distributions to the Unit Holders pursuant to this Section 4
shall be divided among them in proportion to the Units held by
each. In the event there is more than one General Partner, all
amounts distributed to the General Partner pursuant to this
Section 4 shall be divided among them as they may agree.
4.3 Amounts Withheld. All amounts withheld pursuant
to the Code or any provision of any state or local tax law with
respect to any payment or distribution to the Partnership or the
Unit Holders shall be treated as amounts distributed to the Unit
Holders pursuant to this Section 4 for all purposes under this
Agreement. The General Partner may allocate any such amounts
among the Unit Holders in any manner that is in accordance with
applicable law.
4.4 Interest on Excess Capital Contribution.
Notwithstanding the provisions of Section 4.1, interest income
earned on Excess Capital Contributions and received by the
Partnership during the fiscal year shall be distributed to the
Unit Holder who made such Excess Capital Contribution in
proportion to its share of total Excess Capital Contributions.
Section 5
MANAGEMENT
5.1 Authority of the General Partner. Except to the
extent otherwise provided herein, the General Partner shall have
the sole and exclusive right to manage the business of the
Partnership and shall have all of the rights and powers which may
be possessed by general partners under the Act including, but not
limited to, the right and power to:
(a) acquire by purchase, lease, or otherwise any
real or personal property from related or unrelated parties which
may be necessary, convenient, or incidental to the accomplishment
of the purposes of the Partnership;
(b) contract with other entities, including
Affiliates of the General Partner, to conduct the equipping,
production, and operation of the Partnership's properties, and to
acquire equipment necessary therefor, if such affiliates are
engaged, independent of the Partnership, as an ordinary and
ongoing business, in providing such services, equipment, and
supplies to a substantial extent to other persons in the
industry, in addition to their partnerships in which the General
Partner has an interest, and the services, supplies, or equipment
are provided by the General Partner or its Affiliates to the
Partnership at prices competitive with those charged by others in
the area which would be available to the Partnership, or if such
is not the case, to provide such services, supplies or equipment
at the lesser of cost or the competitive market rate;
<PAGE>
(c) operate, maintain, finance, improve,
construct, own, grant options with respect to, sell, convey,
assign, mortgage, and lease any real estate and any personal
property necessary, convenient, or incidental to the
accomplishment of the purposes of the Partnership;
(d) execute any and all agreements, contracts,
documents, certifications, and instruments necessary or
convenient in connection with the management, maintenance, and
operation of Partnership Property, or in connection with managing
the affairs of the Partnership, including executing amendments to
the Agreement and the Certificate in accordance with the terms of
the Agreement, pursuant to any power of attorney granted by the
Limited Partners to the General Partner;
(e) borrow money and issue evidences of
indebtedness necessary, convenient, or incidental to the
accomplishment of the purposes of the Partnership, and secure the
same by mortgage, pledge, or other lien on any Partnership
Property; provided, however, that the total amount of
indebtedness of the Partnership at any given point in time shall
not exceed 400% of the aggregate Capital Contributions to the
Partnership;
(f) execute, in furtherance of any or all of the
purposes of the Partnership, any deed, lease, mortgage, deed of
trust, mortgage note, promissory note, bill of sale, contract, or
other instrument purporting to convey or encumber any or all of
the Partnership Property;
(g) prepay in whole or in part, refinance,
recast, increase, modify, or extend any liabilities affecting the
Partnership Property and in connection therewith execute any
extensions of renewals of encumbrances on any or all of the
Partnership Property;
(h) care for and distribute funds to the Unit
Holders by way of cash, income, return of capital, or otherwise,
all in accordance with the provisions of this Agreement, and
perform all matters in furtherance of the objectives of the
Partnership or this Agreement;
(i) contract on behalf of the Partnership for the
employment and services of employees and/or independent contrac
tors, such as lawyers and accountants and delegate to such
Persons the duty to manage or supervise any of the assets or
operations of the Partnership;
(j) engage in any kind of activity and perform
and carry out contracts of any kind (including contracts of
insurance covering risks to Partnership Property and General
Partner liability) necessary or incidental to, or in connection
with, the accomplishment of the purposes of the Partnership, as
may be lawfully carried on or performed by a partnership under
the laws of each state in which the Partnership is then formed or
qualified;
(k) make any and all elections for federal,
state, and local tax purposes including, without limitation, any
election, if permitted by applicable law: (i) to adjust the basis
of Partnership Property pursuant to Code Sections 754, 734(b),
and 743(b), or comparable provisions of state or local law, in
connection with transfers of interests in the Partnership and
Partnership distributions; (ii) to expense intangible drilling
costs to the extent permitted by applicable law, (iii) to extend
the statute of limitations for assessment of tax deficiencies
against Partners and Unit Holders with respect to adjustments to
the Partnership's federal, state, or local tax returns; and (iv)
to represent the Partnership, Partners, and Unit Holders before
taxing authorities or courts of competent jurisdiction in tax
matters affecting the Partnership, Partners, and Unit Holders in
their capacity as Partners and Unit Holders, and to execute any
agreements or other documents relating to or affecting such tax
matters, including agreements or other documents that bind the
Partners and Unit Holders with respect to such tax matters or
otherwise affect the rights of the Partnership, Partners, and
Unit Holders. The General Partner is specifically authorized to
act as the "Tax Matters Partner" under the Code and in any
similar capacity under state or local law;
<PAGE>
(l) take, or refrain from taking, all actions,
not expressly proscribed or limited by this Agreement, as may be
necessary or appropriate to accomplish the purposes of the
Partnership; and
(m) institute, prosecute, defend, settle,
compromise, and dismiss lawsuits or other judicial or
administrative proceedings brought on or in behalf of, or
against, the Partnership or the Partners in connection with
activities arising out of, connected with, or incidental to this
Agreement, and to engage counsel or others in connection
therewith.
In the event more than one Person is a General Partner, the
rights and powers of the General Partner hereunder shall be
exercised by them in such manner as they may agree. In the
absence of an agreement among the General Partners, no General
Partner shall exercise any of such rights and powers without the
unanimous consent of all General Partners.
Any Partner who acts beyond the scope of the authority granted by
this Agreement shall, in addition to any other remedy available
to the Partnership or the other Partners, be liable in damages to
the Partnership and each other Partner for any loss or damages
that they may incur or suffer as a consequence of such act.
5.2 Duties and Obligations of General Partner.
(a) The General Partner shall take all actions
which may be necessary or appropriate (i) for the continuation of
the Partnership's valid existence as a limited partnership under
the laws of the State of Delaware (and of each other jurisdiction
in which such existence is necessary to enable the Partnership to
conduct the business in which it is engaged) and (ii) for the
accomplishment of the Partnership's purposes, including, but not
limited to, the acquisition, development, maintenance,
preservation, and operation of Partnership Property in accordance
with the provisions of this Agreement and applicable laws and
regulations.
(b) The General Partner shall devote to the
Partnership such time as may be necessary for the proper
performance of all duties hereunder; provided, however, that the
General Partner shall not be required to devote full time to the
performance of such duties and may at any time and from time to
time engage in and possess any interest in any other business
ventures of any type or description, independently or with
others, including, without limitation, ventures engaged in the
ownership, development, operation and management of oil and gas
properties, and the practice of any trade or profession, and
neither the Partnership nor any Partner shall by virtue of this
Agreement have any right, title or interest in or to such
independent ventures.
(c) The General Partner shall be under a
fiduciary duty to conduct the affairs of the Partnership in the
best interests of the Partnership and of the Limited Partners,
including the safekeeping and use of all of the Partnership
Property and the use thereof for the exclusive benefit of the
Partnership. The General Partner shall not be liable to the
Partnership or to any Limited Partner for acts or omissions made
in good faith unless such act or omission constitutes willful
misconduct, fraud or gross negligence.
(d) The General Partner shall use its reasonable
efforts to take such actions which may be necessary or
appropriate to prevent the Partnership from being treated as a
publicly traded partnership within the meaning of Code Section
7704.
5.3 Indemnification of General Partner.
<PAGE>
(a) The Partnership, its receiver or its trustee
shall indemnify, save harmless, and pay all judgments and claims
against any General Partner relating to any liability or damage
incurred by reason of any act performed or omitted to be
performed by such General Partner in connection with the business
of the Partnership, including attorneys' fees incurred by such
General Partner in connection with the defense of any action
based on any such act or omission, which attorneys' fees may be
paid as incurred, including all such liabilities under federal
and state securities laws (including the Securities Act of 1933,
as amended) as permitted by law.
(b) In the event of any action by a Unit Holder
against any General Partner, including a Partnership derivative
suit, the Partnership shall indemnify, save harmless, and pay all
expenses of such General Partner, including attorneys' fees,
incurred in the defense of such action, if such General Partner
is successful in such action.
(c) The Partnership shall indemnify, save
harmless, and pay all expenses, costs, or liabilities of any
General Partner who for the benefit of the Partnership makes any
deposit, acquires any option, or makes any other similar payment
or assumes any obligation in connection with any property
proposed to be acquired by the Partnership and who suffers any
financial loss as the result of such action.
(d) Notwithstanding the provisions of Sections
5.3(a), 5.3(b), and 5.3(c) above, the General Partner shall not
be indemnified from any liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, proceedings,
costs, expenses or disbursements resulting from the General
Partner's willful misconduct, fraud, gross negligence or other
breach of fiduciary duty to the Partnership or any Partner.
5.4 Compensation and Expenses of General Partner.
(a) The General Partner may charge the
Partnership for any direct expenses reasonably incurred in
connection with the Partnership business (including, but not
limited to, operating and administrative expenses of the
Partnership, which may include legal, accounting, consulting and
all customary expenses incurred by the General Partner in the
administration of the Partnership). The Partnership shall
reimburse the General Partner for any Organization and Offering
Expenses incurred by the General Partner up to an amount equal to
1.5% of the total Capital Contributions to the Partnership (i.e.,
including cash contributed by the General Partner and all Unit
Holders plus the face amount of any Promissory Notes executed by
the Unit Holders).
(b) The Partnership shall pay to the General
Partner an annual fee for managing the affairs of the Partnership
equal to 2% of total Capital Contributions (i.e., including cash
contributed by the General Partner and the Unit Holders and the
face amount of any Promissory Notes executed by the Unit
Holders); provided, however, that the fee described in this
Section 5.4(b) shall not begin to accrue until such time as the
Partnership has invested at least 50% of total Capital
Contributions. The fee described in this Section 5.4(b) shall be
payable on a monthly basis. Notwithstanding the foregoing, the
General Partner shall be entitled to the distributions and
allocations provided for elsewhere in this Agreement.
(c) The parties hereto acknowledge and agree that
the General Partner may receive certain fees and compensation
from companies and businesses the Partnership is contemplating
investing in, and other companies, businesses and entities,
including without limitation, transaction fees received in
connection with investment banking services, and other fees,
commissions and compensation, and the Partnership and the Unit
Holders shall have no interest in nor any liability or
responsibility for any of such fees or compensation.
<PAGE>
5.5 Operating Restrictions.
(a) No loans or guarantees of loans shall be made
by the Partnership to any General Partner or any Affiliate of a
General Partner.
(b) No rebates, kickbacks, or reciprocal
arrangements may be received or entered into by any General
Partner, nor may any General Partner participate in any business
arrangement which would circumvent this Agreement.
(c) The funds of the Partnership may, in the
discretion of the General Partner, be deposited in a common trust
account with other affiliated limited partnerships. Payments for
expenses may be made from such trust account, and such payments
may include the Partnership's allocable share of such expenses.
Notwithstanding the foregoing, the funds of the Partnership shall
not be commingled with the funds of any other Person.
(d) The signature of the General Partner shall be
necessary to convey title to any real property owned by the
Partnership or to execute any promissory notes, trust deeds,
mortgages, or other instruments of hypothecation, and all of the
Partners agree that a copy of this Agreement may be shown to the
appropriate parties in order to confirm the same. All of the
Partners do hereby appoint the General Partner as their attorney-
in-fact for the execution of any or all of the documents
described herein.
Section 6
ROLE OF LIMITED PARTNERS
6.1 Rights or Powers. Except as otherwise set forth
in Section 6.2 hereof, no Limited Partner shall have any right or
power to take part in the management or control of the
Partnership or its business and affairs or to act for or bind the
Partnership in any way.
6.2 Voting Rights. The Limited Partners shall have
the right to vote on the matters explicitly set forth in this
Agreement.
6.3 Indemnification of Limited Partners. The
Partnership shall indemnify, to the extent of Partnership assets,
the Limited Partners against any claims of liability asserted
against the Limited Partners solely because they are a Limited
Partner of the Partnership.
Section 7
BOOKS AND RECORDS
7.1 Books and Records. The Partnership shall keep
adequate books and records at its principal place of business,
setting forth a true and accurate account of all business
transactions arising out of and in connection with the conduct of
the Partnership. The Partnership shall maintain its books and
records using the accounting method selected by the General
Partner. Any Partner or his designated representative shall have
the right, at any reasonable time, to have access to and inspect
and copy the contents of such books or records. Quarterly
financial information shall be provided to each Partner within 60
days of the end of each fiscal quarter of the Partnership.
<PAGE>
7.2 Annual Reports. Within 120 days after the end of
each Partnership fiscal year, each Partner shall be furnished
with an annual report containing a balance sheet as of the end of
such fiscal year and statements of income, Partners' equity, and
changes in financial position and a cash flow statement for the
year then ended. Information concerning companies in which the
Partnership has invested or with which it has entered into a
joint venture or other business relationship will be distributed
on the basis of availability.
7.3 Tax Information. Necessary tax information shall
be delivered to each Partner after the end of each fiscal year of
the Partnership. Every effort shall be made to furnish such
information within 75 days after the end of each fiscal year.
Section 8
AMENDMENTS; MEETINGS
8.1 Amendments.
(a) Amendments to this Agreement may be proposed
by any General Partner or by any Limited Partners holding in the
aggregate 20% or more of the Units. Following such proposal, the
General Partner shall submit to the Limited Partners a verbatim
statement of any proposed amendment, providing that counsel for
the Partnership shall have approved of the same in writing as to
form, and the General Partner shall include in any such
submission a recommendation as to the proposed amendment. The
General Partner shall seek the written vote of the Partners on
the proposed amendment or shall call a meeting to vote thereon
and to transact any other business that it may deem appropriate.
For purposes of obtaining a written vote, the General Partner may
require a response within a reasonable specified time, but not
less than 15 days, and failure to respond in such time period
shall constitute a vote which is consistent with the General
Partner's recommendation with respect to the proposal. A
proposed amendment shall be adopted and be effective as an
amendment hereto if it receives the affirmative vote of the
General Partner and a majority in interest of the Partners.
(b) Notwithstanding Section 8.1(a) hereof,
(i) this Agreement shall not be amended
without the consent of each Person adversely affected if
such amendment would (A) convert a Limited Partner's
interest in the Partnership into a General Partner's
interest, (B) modify the limited liability of a Limited
Partner, or (C) alter the interest of a Partner in Profits,
Losses, other items, or any Partnership distributions; and
(ii) this Agreement may be amended by
the General Partner, without the consent of any of the
Limited Partners: (A) to add to the representations, duties,
or obligations of the General Partner or surrender any right
or power granted to the General Partner herein, for the
benefit of the Limited Partners; (B) to cure any ambiguity,
to correct or supplement any provision hereof which may be
inconsistent with any other provisions hereof, or to make
any other provision with respect to matters or questions
arising under this Agreement not inconsistent with the
intent of this Agreement; and (C) to change any provision of
this Agreement required to be so changed by the staff of the
Securities and Exchange Commission or other federal agency
or by a state "Blue Sky" commissioner or similar official,
which change is deemed by such commissioner, agency, or
official to be for the benefit or protection of the Limited
Partners; provided that no amendment shall be adopted
pursuant to this Section 8.1(b)(ii) unless the adoption
thereof (D) is for the benefit of or not adverse to the
interests of the Limited Partners, and (E) does not violate
Section 8.1(b)(i) hereof.
<PAGE>
8.2 Meetings of the Partners.
(a) Meetings of the Partners may be called by any
General Partner and shall be called upon the written request of
any group of Limited Partners holding 20% or more of the Units.
The call shall state the nature of the business to be transacted.
Notice of any such meeting shall be given to all Partners not
less than seven days nor more than 30 days prior to the date of
such meeting. Partners may vote in person or by proxy at such
meeting. Whenever the vote or consent of Partners is permitted
or required under the Agreement, such vote or consent may be
given at a meeting of Partners or may be given in accordance with
the procedure prescribed in Section 8.1 hereof. Except as
otherwise expressly provided in the Agreement or under state law,
the vote of a majority in interest of the Partners shall control.
(b) For the purpose of determining the Partners
entitled to vote on, or to vote at, any meeting of the Partners
or any adjournment thereof, the General Partner or the Partners
requesting such meeting may fix, in advance, a date as the record
date for any such determination. Such date shall not be more
than 30 days nor less than 10 days before any such meeting.
(c) Each Limited Partner may authorize any Person
or Persons to act for him by proxy on all matters in which a
Limited Partner is entitled to participate, including waiving
notice of any meeting, or voting or participating at a meeting.
Every proxy must be signed by the Limited Partner or his attorney-
in-fact. No proxy shall be valid after the expiration of 11
months from the date thereof unless otherwise provided in the
proxy. Every proxy shall be revocable at the pleasure of the
Limited Partner executing it.
(d) Each meeting of Partners shall be conducted
by the General Partner or such other Person as the General
Partner may appoint pursuant to such rules for the conduct of the
meeting as the General Partner or such other Person deems
appropriate.
Section 9
TRANSFERS OF UNITS
9.1 Restrictions on Transfers. Except as otherwise
permitted by this Agreement, no Unit Holder shall Transfer all or
any portion of his Units.
9.2 Permitted Transfers. A Unit Holder may Transfer
all or any portion of his Units (other than Units subject to
Section 10 hereof that are held by a General Partner in his
capacity as a General Partner) subject to the following
conditions precedent (any Transfer of such Units satisfying such
conditions precedent is referred to herein as a "Permitted
Transfer"):
(a)(i) No Unit Holder (for purposes of this
Section, the "Selling Holder") shall sell, assign, transfer,
pledge, encumber, grant a security interest in, or otherwise
dispose of all or any part of his interest in the
Partnership to any person, trust, association, company,
firm, partnership, corporation or other entity without first
giving written notice of such intended transfer to the
General Partner of the number of Units he proposes to
dispose of (for purposes of this Section 9.2, the "Offered
Units") and the nature and terms of the proposed
disposition. Such notice shall be given in the manner
provided in Section 13.1 hereof. The notice shall be deemed
to constitute an offer to sell the Offered Units to the
General Partner on the terms set forth in the notice. The
General Partner shall have 15 days from the date the offer
is deemed to have been given by the Selling Holder to
indicate in writing to the Selling Holder its decision as to
whether it will purchase all or any of the Offered Units.
<PAGE>
(ii) In the event that the Selling Holder's offer
made pursuant to this Section is accepted by the General
Partner, the closing of the purchase of the Offered Units,
or any portion thereof by the General Partner shall occur
within ten days after the notice of acceptance of such offer
is given by the General Partner in accordance with
Subsection 9.2(a)(i) hereof. The General Partner shall make
payment of the purchase price of the Offered Units in the
manner specified in the notice of sale.
(iii) If the General Partner does not purchase
all of the Offered Units pursuant to this Section, the
Selling Holder shall be free to dispose of the Offered
Units, or any portion thereof not purchased by the General
Partner; provided, however, that:
(1) the transfer by the Selling Holder
pursuant hereto shall be made in strict accordance with
the terms of the proposed sale described in the offer
made to the General Partner, and such transfer shall be
consummated within ten days from the expiration of the
time in which the General Partner could have accepted
the Selling Holder's offer to purchase pursuant to
Subsection 9.2(a)(i) hereof. After the expiration of
such ten-day period, all of the Selling Holder's Units
shall again be subject to the provisions of this
Agreement as though the offer under Subsection
9.2(a)(i) hereof had not been made. Any Unit which is
transferred pursuant to Subsection 9.2(a)(i) shall
remain subject to the provisions of this Agreement as
fully as if the original Selling Holder remained the
holder of such Unit;
(2) no such assignment shall be made which,
in the opinion of counsel to the Partnership, would
result in the Partnership being considered to have been
terminated for purposes of Section 708 of the Code or
would result in material adverse federal income tax
consequences to the Partnership or its Partners;
(3) the Partnership shall not be required to
recognize any such assignment until the instrument
conveying such interest has been delivered to the
General Partner for recordation on the books of the
Partnership; and
(4) unless an assignee becomes a substituted
Unit Holder in accordance with the provisions set froth
herein, he shall not be entitled to any of the rights
granted to a Unit Holder hereunder, other than the
right to receive all or part of the share of the
profits, losses, income, gain, cash distributions or
returns of capital to which his assignor would
otherwise be entitled.
(b) The transferor shall furnish to the
Partnership an opinion of counsel, which counsel and opinion
shall be satisfactory to the Partnership, that the Transfer will
not cause the Partnership to terminate for federal income tax
purposes and that such Transfer will not cause the application of
the rules of Code Sections 168(g)(1)(B) and 168(h) (generally
referred to as the "tax-exempt entity leasing rules") or similar
rules to apply to the Partnership, Partnership Property, or the
Unit Holders.
(c) The transferor and transferee shall furnish
the Partnership with the transferee's taxpayer identification
number and sufficient information to determine the transferee's
initial tax basis in the Units transferred.
(d) Either (1) such Units shall be registered
under the Securities Act of 1933, as amended, and any applicable
state securities laws, or (2) the transferor shall provide an
opinion of counsel, which opinion and counsel shall be
satisfactory to the Partnership, to the effect that such Transfer
is exempt from all applicable registration requirements and that
such Transfer will not violate any applicable laws regulating the
Transfer of securities.
<PAGE>
(e) The transferror shall have obtained the
General Partner's written consent to such Transfer.
9.3 Prohibited Transfers. Any purported Transfer of
Units that is not a Permitted Transfer shall be null and void and
of no effect whatever; provided that, if the Partnership is
required to recognize a Transfer that is not a Permitted Transfer
(or if the Partnership, in its sole discretion, elects to
recognize a Transfer that is not a Permitted Transfer), the
interest Transferred shall be strictly limited to the trans
feror's rights to allocations and distributions as provided by
this Agreement with respect to the transferred Units, which
allocations and distributions may be applied (without limiting
any other legal or equitable rights of the Partnership) to
satisfy the debts, obligations, or liabilities for damages that
the transferor or transferee of such Units may have to the
Partnership.
In the case of a Transfer or attempted Transfer of
Units that is not a Permitted Transfer, the parties engaging or
attempting to engage in such Transfer shall be liable to
indemnify and hold harmless the Partnership and the other
Partners from all cost, liability, and damage that any of such
indemnified Persons may incur (including, without limitation,
incremental tax liability and lawyers fees and expenses) as a
result of such Transfer or attempted Transfer and efforts to
enforce the indemnity granted hereby.
9.4 Rights of Unadmitted Assignees. A Person who
acquires one or more Units but who is not admitted as a
Substituted Limited Partner pursuant to Section 9.5 hereof shall
be entitled only to allocations and distributions with respect to
such Units in accordance with this Agreement, but shall have no
right to any information or accounting of the affairs of the
Partnership, shall not be entitled to inspect the books or
records of the Partnership, and shall not have any of the rights
of a General Partner or a Limited Partner under the Act or the
Agreement.
9.5 Admission of Assignees as Partners. Subject to
the other provisions of this Section 9, a transferee of Units may
be admitted to the Partnership as a Substituted Limited Partner
only upon satisfaction of the conditions set forth below in this
Section 9.5:
(a) The General Partner consents to such
admission;
(b) The Units with respect to which the
transferee is being admitted were acquired by means of a
Permitted Transfer;
(c) The transferee becomes a party to this
Agreement as a Limited Partner and executes such documents and
instruments as the General Partner may reasonably request
(including, without limitation, amendments to the Certificate) as
may be necessary or appropriate to confirm such transferee as a
Limited Partner in the Partnership and such transferee's
agreement to be bound by the terms and conditions hereof;
(d) The transferee pays or reimburses the
Partnership for all reasonable legal, filing, and publication
costs that the Partnership incurs in connection with the
admission of the transferee as a Limited Partner with respect to
the transferred Units; and
(e) If the transferee is not an individual of
legal majority, the transferee provides the Partnership with
evidence satisfactory to counsel for the Partnership of the
authority of the transferee to become a Partner and to be bound
by the terms and conditions of this Agreement.
<PAGE>
9.6 Representations; Legend.
(a) Each Unit Holder hereby covenants and agrees
with the Partnership for the benefit of the Partnership and all
Unit Holders, that (i) he is not currently making a market in
Units and (ii) he will not Transfer or attempt to Transfer any
Unit on an established securities market or a secondary market
(or the substantial equivalent thereof) within the meaning of
Code Section 7704(b) (and any regulations, proposed regulations,
revenue rulings, or other official pronouncements of the Internal
Revenue Service or Treasury Department that may be promulgated or
published thereunder). Each Unit Holder further agrees that he
will not Transfer any Unit to any Person unless such Person
agrees to be bound by this Section 9.6(a) and to Transfer such
Units only to Persons who agree to be similarly bound.
(b) Each Unit Holder hereby agrees that the
following legend may be placed upon any counterpart of this
Agreement, the Certificate, or any other document or instrument
evidencing ownership of Units:
The Partnership Units represented by this document have not been
registered under any securities laws and the transferability
of the Partnership Units therefore is restricted. The
Partnership Units may not be sold, assigned, or transferred,
nor will any assignee, vendee, transferee, or endorsee
thereof be recognized as having an interest in such Partner
ship Units by the issuer for any purpose, unless (i) a
registration statement under the Securities Act of 1933, as
amended, with respect to such Partnership Units shall then
be in effect and such transfer has been qualified under
applicable state securities laws, or (ii) the availability
of an exemption from registration and qualification shall be
established to the satisfaction of counsel for the Partner
ship.
The Units represented by this document are subject to further
restriction as to their sale, transferability, or assignment
as set forth in the Agreement of Limited Partnership and
agreed to by each Limited Partner. Said restriction
provides, among other things, that no vendee, transferee, or
assignee shall become a Substituted Limited Partner unless
consented to by every General Partner.
9.7 Distributions and Allocations in Respect to
Transferred Units. If any Unit is sold, assigned, or transferred
during any accounting period in compliance with the provisions of
this Section 9, Profits, Losses, each item thereof, and all other
items attributable to such Unit for such period shall be divided
and allocated between the transferor and the transferee by taking
into account their varying interests during the period in
accordance with Code Section 706(d), using any conventions
permitted by law and selected by the General Partner. All
distributions on or before the date of such transfer shall be
made to the transferor, and all distributions thereafter shall be
made to the transferee. Solely for purposes of making such
allocations and distributions, the Partnership shall recognize
such transfer not later than the end of the calendar month during
which it is given notice of such transfer, provided that if the
Partnership does not receive a notice stating the date such Unit
was transferred and such other information as the General Partner
may reasonably require within 30 days after the end of the
accounting period during which the Transfer occurs, then all of
such items shall be allocated, and all distributions shall be
made, to the Person who, according to the books and records of
the Partnership, on the last day of the accounting period during
which the transfer occurs, was the owner of the Unit. Neither
the Partnership nor any General Partner shall incur any liability
for making allocations and distributions in accordance with the
provisions of this Section 9.7, whether or not any General
Partner or the Partnership has knowledge of any Transfer of
ownership of any Unit.
<PAGE>
Section 10
GENERAL PARTNERS
10.1 Additional General Partners. Except as provided
in this Section 10 and Section 11.1 hereof, no Person shall be
admitted to the Partnership as a General Partner without the
unanimous consent of the Partners.
10.2 Covenant Not to Withdraw, Transfer, or Dissolve.
Except as otherwise permitted by this Agreement, the General
Partner hereby covenants and agrees not to (a) withdraw or
attempt to withdraw from the Partnership, (b) exercise any power
under the Act to dissolve the Partnership, or (c) Transfer all or
any portion of his interest in the Partnership as the General
Partner. Further, the General Partner hereby covenants and
agrees to continue to carry out the duties of General Partner
hereunder until the Partnership is dissolved and liquidated
pursuant to Section 11 hereof.
10.3 Permitted Transfers.
(a) The General Partner may Transfer all or any
part of its interest in the Partnership as General Partner (i) at
any time to any Person who is the General Partner's Affiliate,
(ii) at any time involuntarily by operation of law, or (iii) to
any Person who is approved by the General Partner and a majority
in interest of the Limited Partners; provided that no such
Transfer shall be permitted unless and until (a) all of the
conditions set forth in Section 9.2 hereof are satisfied as if
the Partnership interest being Transferred was a Unit, and (b)
the transferor and transferee provide the Partnership with an
opinion of counsel to the effect that such Transfer will not
cause the Partnership to become taxable as a corporation for
federal income tax purposes.
(b) A transferee of a Partnership interest from
the General Partner hereunder shall be admitted as General
Partner with respect to such interest if, but only if (i) the
transferee is an Affiliate of the transferring General Partner or
(ii) the admission of such transferee as General Partner is
approved by a majority in interest of the Limited Partners.
(c) A transferee who acquires a Partnership
interest from the General Partner hereunder by means of a
Transfer that is permitted under this Section 10.3, but who is
not admitted as a General Partner, shall have no authority to act
for or bind the Partnership, to inspect the Partnership's books,
or otherwise to be treated as a General Partner, but such trans
feree shall be treated as a Unit Holder who acquired an interest
in the Partnership in a Permitted Transfer under Section 9
hereof.
10.4 Prohibited Transfers. Any purported Transfer of
any Partnership interest held by the General Partner that is not
permitted by Section 10.3 above shall be null and void and of no
effect whatever; provided that, if the Partnership is required to
recognize a Transfer that is not so permitted (or if the Partner
ship, in its sole discretion, elects to recognize a Transfer that
is not so permitted), the interest transferred shall be strictly
limited to the transferor's rights to allocations and
distributions as provided by this Agreement with respect to the
transferred interest, which allocations and distributions may be
applied (without limiting any other legal or equitable rights of
the Partnership) to satisfy the debts, obligations, or
liabilities for damages that the transferor or transferee of such
interest may have to the Partnership.
In the case of a Transfer or attempted Transfer of
a Partnership interest that is not permitted by Section 10.3
above, the parties engaging or attempting to engage in such
Transfer shall be liable to indemnify and hold harmless the
Partnership and the other Partners from all cost, liability, and
damage that any of such indemnified Persons may incur (including,
without limitation, incremental tax liability and lawyers fees
and expenses) as a result of such Transfer or attempted Transfer
and efforts to enforce the indemnity granted hereby.
<PAGE>
10.5 Termination of Status as General Partner.
(a) If a General Partner ceases to be a Partner
for any reason hereunder, such Person shall continue to be liable
as a Partner for all debts and obligations of the Partnership
existing at the time such Person ceases to be a General Partner,
regardless of whether, at such time, such debts or liabilities
were known or unknown, actual or contingent. A Person shall not
be liable as a General Partner for Partnership debts and
obligations arising after such Person ceases to be a General
Partner. The Partnership shall indemnify and save harmless any
General Partner for any Partnership debts and obligations arising
after such Person ceases to be a General Partner (including any
fees of whatever nature incurred in connection with the defense
of any action based upon such debts or obligations). Any debts,
obligations, or liabilities in damages to the Partnership of any
Person who ceases to be a General Partner shall be collectible by
any legal means and the Partnership is authorized, in addition to
any other remedies at law or in equity, to apply any amounts
otherwise distributable or payable by the Partnership to such
Person to satisfy such debts, obligations, or liabilities.
(b) It is the intention of the Partners that the
Partnership not dissolve as a result of the cessation of the
General Partner's status as a General Partner; provided, however,
that if a dissolution nevertheless occurs under the Act, the
Partnership's property and business shall continue to be held and
conducted in a new limited partnership under this Agreement with
any remaining General Partners as general partners, the Limited
Partners as limited partners, and any unadmitted assignees of
Units as Unit Holders. Notwithstanding any provision of the Act
to the contrary, each Partner and Unit Holder (including any
successor to the Partnership interest of the General Partner)
hereby (1) waives any rights that such Person may have as a
result of any such unintended dissolution to demand or receive an
accounting of the Partnership or any distribution in satisfaction
of such Person's interest in the Partnership or any security for
the return or distribution thereof, and (2) agrees to indemnify
and hold the Partnership and each other Partner and Unit Holder
wholly and completely harmless from all cost or damage
(including, without limitation, legal fees and expenses of
enforcing this indemnity) that any such indemnified Person may
incur as a result of any action inconsistent with part (1) of
this sentence.
(c) Notwithstanding any provision to the contrary
herein, if a Person ceases to be a General Partner, the remaining
General Partner or Partners (as the case may be) shall refile the
Certificate as if the Partnership had dissolved as a result of
such cessation and a new limited partnership were formed pursuant
to this Agreement to hold the assets and continue the business of
the Partnership.
(d) If at the time a Person ceases to be a
General Partner such Person is also a Limited Partner or a Unit
Holder, such cessation shall not affect such Person's rights and
obligations with respect to such Units.
Section 11
DISSOLUTION AND WINDING UP
11.1 Liquidating Events. The Partnership shall
dissolve and commence winding up and liquidating upon the first
to occur of any of the following ("Liquidating Events"):
(a) On December 31, 2008;
(b) Upon the vote by the General Partner and a
majority in interest of the Limited Partners to dissolve, wind
up, and liquidate the Partnership;
<PAGE>
(c) Upon the happening of any other event that
makes it unlawful, impossible, or impractical to carry on the
business of the Partnership; or
(d) Upon any event which causes there to be no
General Partner.
The Partners hereby agree that, notwithstanding any provision of
the Act or the Delaware Uniform Partnership Act, the Partnership
shall not dissolve prior to the occurrence of a Liquidating
Event. Furthermore, if an event specified in Section 11.1(d)
hereof occurs, the Limited Partners, within 90 days of the date
such event occurs, may unanimously vote to elect a successor
General Partner and continue the Partnership business, in which
case the Partnership shall not dissolve. If it is determined, by
a court of competent jurisdiction, that the Partnership has
dissolved (i) prior to the occurrence of a Liquidating Event, or
(ii) upon the occurrence of an event specified in Section 11.1(d)
hereof following which the Limited Partners elect a successor
General Partner pursuant to the previous sentence, the Partners
hereby agree to continue the business of the Partnership without
a winding up or liquidation.
11.2 Winding Up. Upon the occurrence of a Liquidating
Event, the Partnership shall continue solely for the purposes of
winding up its affairs in an orderly manner, liquidating its
assets, and satisfying the claims of its creditors and Partners.
No Partner shall take any action that is inconsistent with, or
not necessary to or appropriate for, the winding up of the
Partnership's business and affairs. The General Partner (or, in
the event there is no remaining General Partner, any Person
elected by a majority in interest of the Limited Partners) shall
be responsible for overseeing the winding up and dissolution of
the Partnership and shall take full account of the Partnership's
liabilities and Partnership Property and the Partnership Property
shall be liquidated as promptly as is consistent with obtaining
the fair value thereof, and the proceeds therefrom, to the extent
sufficient therefor, shall be applied and distributed in the
following order:
(a) First, to the payment and discharge of all of
the Partnership's debts and liabilities to creditors, including
creditors who are also Limited Partners, other than the General
Partner;
(b) Second, to the payment and discharge of all
the Partnership's debts and liabilities to the General Partner;
and
(c) The balance, if any, to the General Partner
and Unit Holders in accordance with their Capital Accounts, after
giving effect to all contributions, distributions, and
allocations for all periods.
The General Partner shall not receive any additional compensation
for any services performed pursuant to this Section 11.
11.3 Compliance With Timing Requirements of
Regulations. In the event the Partnership is "liquidated" within
the meaning of Regulations Section 1.704-1(b)(2)(ii)(g), (a)
distributions shall be made pursuant to this Section 11 to the
General Partner and Unit Holders who have positive Capital
Accounts in compliance with Regulations Section 1.704-
1(b)(2)(ii)(b)(2), and (b) if any General Partner's Capital
Account has a deficit balance (after giving effect to all
contributions, distributions, and allocations for all taxable
years, including the year during which such liquidation occurs),
such General Partner shall contribute to the capital of the
Partnership the amount necessary to restore such deficit balance
to zero in compliance with Regulations Section 1.704-
1(b)(2)(ii)(b)(3). If any Unit Holder who is not a General
Partner has a deficit balance in his Capital Account (after
giving effect to all contributions, distributions, and
allocations for all taxable years, including the year during
which such liquidation occurs), such Unit Holder shall have no
obligation to make any contribution to the capital of the
Partnership with respect to such deficit, and such deficit shall
not be considered a debt owed to the Partnership or any other
Person for any purpose whatsoever. In the discretion of the
General Partner, a pro rata portion of the distributions that
would otherwise be made to the General Partner and Unit Holders
pursuant to this Section 11 may be:
<PAGE>
(a) distributed to a trust established for the
benefit of the General Partner and Unit Holders for the purposes
of liquidating Partnership assets, collecting amounts owed to the
Partnership, and paying any contingent or unforeseen liabilities
or obligations of the Partnership or of the General Partner
arising out of or in connection with the Partnership. The assets
of any such trust shall be distributed to the General Partner and
Unit Holders from time to time, in the reasonable discretion of
the General Partner, in the same proportions as the amount
distributed to such trust by the Partnership would otherwise have
been distributed to the General Partner and Unit Holders pursuant
to this Agreement; or
(b) withheld to provide a reasonable reserve for
Partnership liabilities (contingent or otherwise) and to reflect
the unrealized portion of any installment obligations owed to the
Partnership, provided that such withheld amounts shall be distrib
uted to the General Partner and Unit Holders as soon as practica
ble.
11.4 Deemed Distribution and Recontribution.
Notwithstanding any other provisions of this Section 11, in the
event the Partnership is liquidated within the meaning of
Regulations Section 1.704-1(b)(2)(ii)(g) but no Liquidating Event
has occurred, the Property shall not be liquidated, the Partner
ship's liabilities shall not be paid or discharged, and the
Partnership's affairs shall not be wound up. Instead, the
Partnership shall be deemed to have distributed the Property in
kind to the General Partner and Unit Holders, who shall be deemed
to have assumed and taken subject to all Partnership liabilities,
all in accordance with their respective Capital Accounts.
Immediately thereafter, the General Partner and Unit Holders
shall be deemed to have recontributed the Property in kind to the
Partnership, which shall be deemed to have assumed and taken
subject to all such liabilities.
11.5 Rights of Unit Holders. Except as otherwise
provided in this Agreement, (i) each Unit Holder shall look
solely to the assets of the Partnership for the return of his
Capital Contribution and shall have no right or power to demand
or receive property other than cash from the Partnership and (ii)
no Unit Holder shall have priority over any other Unit Holder as
to the return of his Capital Contributions, distributions, or
allocations.
11.6 Notice of Dissolution. In the event a Liquidating
Event occurs or an event occurs that would, but for provisions of
Section 11.1, result in a dissolution of the Partnership, the
General Partner shall, within 30 days thereafter, provide written
notice thereof to each of the Partners.
<PAGE>
Section 12
POWER OF ATTORNEY
12.1 General Partner as Attorney-In-Fact. Each Limited
Partner hereby makes, constitutes, and appoints the General
Partner and each successor General Partner, with full power of
substitution and resubstitution, his true and lawful attorney-in-
fact for him and in his name, place, and stead and for his use
and benefit, to sign, execute, certify, acknowledge, swear to,
file, and record (i) this Agreement and all agreements,
certificates, instruments, and other documents amending or
changing this Agreement as now or hereafter amended which the
General Partner may deem necessary, desirable, or appropriate
including, without limitation, amendments or changes to reflect
(a) the exercise by any General Partner of any power granted to
him under this Agreement; (b) any amendments adopted by the
Partners in accordance with the terms of this Agreement; (c) the
admission of any substituted Partner; and (d) the disposition by
any Partner of his interest in the Partnership; and (ii) any
certificates, instruments, and documents as may be required by,
or may be appropriate under, the laws of the State of Delaware or
any other state or jurisdiction in which the Partnership is doing
or intends to do business. Each Limited Partner authorizes each
such attorney-in-fact to take any further action which such
attorney-in-fact shall consider necessary or advisable in
connection with any of the foregoing, hereby giving each such
attorney-in-fact full power and authority to do and perform each
and every act or thing whatsoever requisite or advisable to be
done in connection with the foregoing as fully as such Limited
Partner might or could do personally, and hereby ratifying and
confirming all that any such attorney-in-fact shall lawfully do
or cause to be done by virtue thereof or hereof.
12.2 Nature as Special Power. The power of attorney
granted pursuant to this Section 12:
(a) is a special power of attorney coupled with
an interest and is irrevocable;
(b) may be exercised by any such attorney-in-fact
by listing the Limited Partners executing any agreement,
certificate, instrument, or other document with the single
signature of any such attorney-in-fact acting as attorney-in-fact
for such Limited Partners; and
(c) shall survive the death, disability, legal
incapacity, bankruptcy, insolvency, dissolution, or cessation of
existence of a Limited Partner and shall survive the delivery of
an assignment by a Limited Partner of the whole or a portion of
his interest in the Partnership, except that where the assignment
is of such Limited Partner's entire interest in the Partnership
and the assignee, with the consent of the General Partner, is
admitted as a Substituted Limited Partner, the power of attorney
shall survive the delivery of such assignment for the sole
purpose of enabling any such attorney-in-fact to effect such
substitution.
<PAGE>
Section 13
MISCELLANEOUS
13.1 Notices. Any notice, payment, demand, or
communication required or permitted to be given by any provision
of this Agreement shall be in writing and shall be delivered
personally to the Person or to an officer of the Person to whom
the same is directed, or sent by regular, registered, or
certified mail, addressed as follows: if to the Partnership, to
the Partnership at the address set forth in Section 1.4 hereof,
or to such other address as the Partnership may from time to time
specify by notice to the Partners; if to the General Partner, at
the address set forth in Section 2.1 hereof, or to such other
address as the General Partner may from time to time specify by
notice to the Partners; if to a Limited Partner, to such Limited
Partner at the address set forth in Section 2.2 hereof or on
Exhibit A hereto, or to such other address as such Limited
Partner may from time to time specify by notice to the
Partnership. Any such notice shall be deemed to be delivered,
given, and received for all purposes as of the date so delivered,
if delivered personally or if sent by regular mail, or as of the
date on which the same was deposited in a regularly maintained
receptacle for the deposit of United States mail, if sent by
registered or certified mail, postage and charges prepaid.
13.2 Binding Effect. Except as otherwise provided in
this Agreement, every covenant, term, and provision of this Agree
ment shall be binding upon and inure to the benefit of the
Partners and their respective heirs, legatees, legal representa
tives, successors, transferees, and assigns.
13.3 Construction. Every covenant, term, and provision
of this Agreement shall be construed simply according to its fair
meaning and not strictly for or against any Partner.
13.4 Time. Time is of the essence with respect to this
Agreement.
13.5 Headings. Section and other headings contained in
this Agreement are for reference purposes only and are not
intended to describe, interpret, define, or limit the scope,
extent, or intent of this Agreement or any provision hereof.
13.6 Severability. Every provision of this Agreement
is intended to be severable. If any term or provision hereof is
illegal or invalid for any reason whatsoever, such illegality or
invalidity shall not affect the validity or legality of the
remainder of this Agreement.
13.7 Incorporation by Reference. Every exhibit,
schedule, and other appendix attached to this Agreement and
referred to herein is hereby incorporated in this Agreement by
reference.
13.8 Further Action. Each Partner, upon the request of
the General Partner, agrees to perform all further acts and
execute, acknowledge, and deliver any documents which may be
reasonably necessary, appropriate, or desirable to carry out the
provisions of this Agreement.
13.9 Variation of Pronouns. All pronouns and any
variations thereof shall be deemed to refer to masculine,
feminine, or neuter, singular or plural, as the identity of the
Person or Persons may require.
13.10 Governing Law. The laws of the State of
Delaware shall govern the validity of this Agreement, the
construction of its terms, and the interpretation of the rights
and duties of the Partners.
<PAGE>
13.11 Waiver of Action for Partition. Each of the
Partners irrevocably waives any right that he may have to
maintain any action for partition with respect to any of the
Partnership Property.
13.12 Counterpart Execution. This Agreement may be
executed in any number of counterparts with the same effect as if
all of the Partners had signed the same document. All
counterparts shall be construed together and shall constitute one
agreement.
13.13 Sole and Absolute Discretion. Except as
otherwise provided in this Agreement, all actions which any
General Partner may take and all determinations which any General
Partner may make pursuant to this Agreement may be taken and made
at the sole and absolute discretion of such General Partner.
IN WITNESS WHEREOF, the parties have entered into this
Agreement of Limited Partnership as of the day first above set
forth.
GENERAL PARTNER
/s/ H.H. Wommack, III
Southwest Partners III, L.P.
ORIGINAL LIMITED PARTNER
/s/ Bill E. Coggin
Bill E. Coggin
LIMITED PARTNERS
The Limited Partners whose names
are set forth on Exhibit A hereto
By: Southwest Royalties, Inc.,
General Partner
By: /s/ H.H. Wommack, III
Title: President
<PAGE>
Exhibit A
to
AGREEMENT OF LIMITED PARTNERSHIP
OF
SOUTHWEST PARTNERS III, L.P.
Names and Addresses of Limited Partners Number of Units
<PAGE>
Exhibit B
Promissory Note
<PAGE>
State of Delaware
Office of the Secretary of State
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF
DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND
CORRECT COPY OF THE CERTIFICATE OF LIMITED PARTNERSHIP OF
"SOUTHWEST PARTNERS III, L.P.", FILED IN THIS OFFICE ON THE
ELEVENTH DAY OF MARCH, A.D. 1997, AT 4:30 O'CLOCK P.M.
By: /s/ Edward J. Freel
Title: Secretary of State
2727705 8100 AUTHENTICATION:
8370927
971080083 DATE: 03-13-
97
<PAGE>
CERTIFICATE OF LIMITED PARTNERSHIP OF
SOUTHWEST PARTNERS III, L.P.
THIS CERTIFICATE OF LIMITED PARTNERSHIP of Southwest
Partners III, L.P. ( the "Partnership") entered into this
11th day of March, 1997, is being executed by the
undersigned for the purpose of forming a limited partnership
pursuant to the Delaware Revised Uniform Limited Partnership
Act. The undersigned does hereby agree as follows:
1. The name of the Partnership is Southwest Partners III,
L.P.
2. Name and Address of Registered Agent:
The Corporation Trust Company
1209 Orange Street
Wilmington, Delaware 19801
3. Name and Address of Registered Agent for Service of
Process:
The Corporation Trust Company
1209 Orange Street
Wilmington, Delaware 19801
4. Name and Business Address of the General Partner:
Southwest Royalties, Inc.
407 N. Big Spring
Midland, TX 79701
IN WITNESS WHEREOF, the undersigned, being the sold
general partner of the Partnership, has caused this
Certificate of Limited Partnership to be duly executed as of
the 11th day of March, 1997.
General Partner
Southwest Royalties, Inc.
By: /s/ Bill E. Coggin
Bill E. Coggin, Vice
President
and Chief Financial Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Balance Sheet at December 31, 1997 and the Statment of Operations for the
Year Ended December 31, 1997 and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 501,086
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 501,086
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 17,081,587
<CURRENT-LIABILITIES> 162,351
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 16,919,236
<TOTAL-LIABILITY-AND-EQUITY> 17,081,587
<SALES> 147,356
<TOTAL-REVENUES> 147,356
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 25,755
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (420,813)
<INCOME-TAX> 0
<INCOME-CONTINUING> (420,813)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (420,813)
<EPS-PRIMARY> (2,054)
<EPS-DILUTED> (2,054)
</TABLE>
