Page 13 of 13
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number 000-24181
Southwest Partners III, L.P.
(Exact name of registrant as specified
in its limited partnership agreement)
Delaware 75-2699554________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
407 N. Big Spring, Suite 300
Midland, Texas 79701
(Address of principal executive offices)
(915) 686-9927
(Registrant's telephone number,
including area code)
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days:
Yes X No
The total number of pages contained in this report is 13.
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
The unaudited condensed financial statements included herein have been
prepared by the Registrant (herein also referred to as the "Partnership")
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01
of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments necessary for a fair presentation have been included and are of
a normal recurring nature. The financial statements should be read in
conjunction with the audited financial statements and the notes thereto for
the year ended December 31, 1999 which are found in the Registrant's Form
10-K Report filed with the Securities and Exchange Commission. The
December 31, 1999 balance sheet included herein has been taken from the
Registrant's 1999 Form 10-K Report. Operating results for the three months
ended March 31, 2000 are not necessarily indicative of the results that may
be expected for the full year.
Southwest Partners III, L.P.
(a Delaware limited partnership)
Balance Sheets
March 31, December 31,
2000 1999
---- ----
(Unaudited)
Assets
Current asset:
Cash and cash equivalents $ 395,514 392,709
========== ==========
Liabilities and Partners' Equity
Current liabilities:
Payable to General Partner and subsidiary $ 296,861 265,535
---------- ----------
Total current liabilities 296,861 265,535
---------- ----------
Partners' equity:
General Partner (902,028) (897,750)
Limited partners 1,000,681 1,024,924
---------- ----------
Total partners' equity 98,653
127,174
---------- ----------
$ 395,514 392,709
========== ==========
Southwest Partners III, L.P.
(a Delaware limited partnership)
Statement of Operations
(Unaudited)
Three Months Ended
March 31,
2000 1999
Revenues ---- ----
Interest income $ 2,805 2,789
---------
- ---------
2,805
2,789
---------
- ---------
Expenses
General and administrative 31,326 31,458
Equity loss in unconsolidated subsidiary - 1,044,236
---------
- ---------
31,326
1,075,694
---------
- ---------
Net loss $ (28,521) (1,072,905)
=========
=========
Net loss allocated to:
General Partner $ (4,278) (160,936)
=========
=========
Limited partners $ (24,243) (911,969)
=========
=========
Per limited partner unit $ (142) (5,335)
=========
=========
Southwest Partners III, L.P.
(a Delaware limited partnership)
Statement of Cash Flows
(Unaudited)
Three Months Ended
March
31,
Cash flows from operating activities: 2000 1999
---- ----
Interest received $ 2,805 2,789
---------
- --------
Net cash provided by operating activities 2,805 2,789
---------
- --------
Net increase in cash and cash equivalents 2,805 2,789
Beginning of period 392,709 381,545
---------
- ---------
End of period $ 395,514 384,334
=========
=========
Reconciliation of net loss to net cash
provided by operating activities:
Net loss $ (28,521) (1,072,905)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Undistributed loss of affiliate - 1,044,236
Increase in accounts payable 31,326 31,458
---------
- ---------
Net cash provided by operating activities $ 2,805 2,789
=========
=========
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.
Southwest Partners III, L.P.
(a Delaware limited partnership)
Notes to Financial Statements
2. Summary of Significant Accounting Policies
The interim financial information as of March 31, 2000, and for the
three months ended March 31, 2000, is unaudited. Certain information
and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles
have been condensed or omitted in this Form 10-Q pursuant to the rules
and regulations of the Securities and Exchange Commission. However,
in the opinion of management, these interim financial statements
include all the necessary adjustments to fairly present the results of
the interim periods and all such adjustments are of a normal recurring
nature. The interim financial statements should be read in
conjunction with the audited financial statements for the year ended
December 31, 1999.
3. Investments
Following is a summary of the financial position and results of
operations of Sierra Well Service, Inc. as of March 31, 2000 and
December 31, 1999 and for the three months ended March 31, 2000 and
the year ended December 31, 1999 (in thousands):
2000 1999
---- ----
Current assets $ 9,739 $ 8,971
Property and equipment, net 31,155 31,186
Other assets, net 6,686 6,704
------ ------
Total assets $ 47,580 $ 46,861
====== ======
Current liabilities $ 9,984 $ 7,296
Long-term debt 49,645 50,371
Deferred income taxes 1,746 2,224
------ ------
$ 61,375 $ 59,891
====== ======
Stockholders' equity $ (13,795) $(13,030)
====== ======
Sales $ 12,880 $ 37,331
====== ======
Net loss $ (1,201) $(13,401)
====== ======
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Southwest Partners III
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 March 31, 2000, the Partnership owned a 44.94%
interest in Sierra, which is accounted for using the equity method of
accounting. The equity method adjusts the carrying value of the
Partnership's investment by its proportionate share of Sierra's
undistributed earnings or losses for each respective period.
Results of Operations
For the quarter ended March 31, 2000
Revenues
Revenues consisted of interest income of $2,805 for the quarter ended March
31, 2000 as compared to $2,789 for the quarter ended March 31, 1999.
Expenses
Direct expenses totaled $31,326 and $31,458 for the quarters ended March
31, 2000 and 1999, respectively, and consisted of general and
administrative expenses. General and administrative expenses represent
management fees paid to the Managing General Partner for costs incurred to
operate the partnership.
The Partnerships investment in Sierra upon recording their portion of
Sierra's losses for the six months ended June 30, 1999 was reduced to zero.
Therefore, according to General Accepted Accounting Principles, the equity
method was suspended. The Partnership did not record their ownership
percentage of Sierra's losses for the quarter ended March 31, 2000. If
Sierra subsequently begins to report net income, the Partnership will
resume applying the equity method only after its share of net income equals
the share of net losses not recognized during the period the equity method
is suspended. Equity in loss of unconsolidated subsidiary for the quarter
ended March 31, 1999 of $1,044,236 reflects the Partnership's weighted
average proportionate share of the $2,481,766 loss by Sierra in the amount
of $853,728 for the period and the amortization of goodwill in relation to
the Partnerships investment in Sierra of $190,508. See Sierra's Management
Discussion and Analysis section included in this report.
Liquidity and Capital Resources
The proceeds from the sale of partnership units in March 1997 funded the
Partnership's investment in Sierra. The Partnership did not sell any
additional partnership units or invest additional amounts in Sierra
subsequent to December 31, 1997.
Net Cash Provided by Operating Activities. Cash flows provided by
operating activities for the period consisted primarily of interest income
from a financial institution of $2,805.
Net Cash Used in Investing Activities. There were no amounts provided by
or used in investing activities for the quarter ended March 31, 2000.
Net Cash Used in Financing Activities. There were no amounts provided by
or used in financing activities for the quarter ended March 31, 2000.
Liquidity - Equity Investment in Subsidiary
Sierra has a highly leveraged capital structure. Sierra on March 23, 2000
filed a Form S-1 "Registration Statement Under the Securities Act of 1933"
with the Securities and Exchange Commission. Sierra plans to use the net
proceeds from this offering to a)repay $25 million in existing Subordinated
Notes; b)finalize $14.5 million as cash consideration to acquire
businesses; c)redeem $5.3 million Series A Cumulative Preferred Stock and
d)cover expenses in connection with the offering and for general corporate
purposes.
Sierra on March 31, 1999 finalized a restructuring of its debt with the
lender. The restructuring of Sierra's debt with its lender provided for a
senior subordinated credit facility and three classes of preferred stock.
According to the redemption and/or conversion features of the three classes
of preferred stock, if Sierra does not meet repayment of scheduled senior
subordinated debt starting at December 31, 1999 with final payment due June
30, 2004, the lender has the right to exercise their conversion features.
The conversion amount as a percentage of post-conversion outstanding common
stock can range from 25% to 100%. Therefore, the Partnership's investment
in Sierra is subject to possible future dilution and/or elimination as a
result of the convertible preferred stock held by Sierra's lender. The
Partnership's ownership percentage in Sierra upon the signing of Sierra's
debt restructuring at March 31, 1999 remained 45.89%. However, should the
lender exercise the conversion feature of the preferred stock, the
Partnership's ownership percentage would decrease by 14.11%.
Liquidity - Managing General Partner
The Managing General Partner has a highly leveraged capital structure with
over $50.1 million principal and $17.5 million interest payments due in
2000 on its debt obligations. Due to the severely depressed commodity
prices experienced during the last quarter of 1997, throughout 1998 and
continuing through the second quarter of 1999 the Managing General Partner
is experiencing difficulty in generating sufficient cash flow to meet its
obligations and sustain its operations. The Managing General Partner is
currently in the process of renegotiating the terms of its various
obligations with its creditors and/or attempting to seek new lenders or
equity investors. Additionally, the Managing General Partner would
consider disposing of certain assets in order to meet its obligations.
There can be no assurance that the Managing General Partner's debt
restructuring efforts will be successful or that the lenders will agree to
a course of action consistent with the Managing General Partners
requirements in restructuring the obligations. Even if such agreement is
reached, it may require approval of additional lenders, which is not
assured. Furthermore, there can be no assurance that the sales of assets
can be successfully accomplished on terms acceptable to the Managing
General Partner. Under current circumstances, the Managing General
Partner's ability to continue as a going concern depends upon its ability
to (1) successfully restructure its obligations or obtain additional
financing as may be required, (2) maintain compliance with all debt
covenants, (3) generate sufficient cash flow to meet its obligations on a
timely basis, and (4) achieve satisfactory levels of future earnings. If
the Managing General Partner is unsuccessful in its efforts, it may be
unable to meet its obligations making it necessary to undertake such other
actions as may be appropriate to preserve asset values.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - continued
Sierra Well Service, Inc.
General
Sierra derives its revenues from well servicing, liquids handling, fresh
and brine water supply and disposal and other related services. Well
servicing rigs are billed at hourly rates that are generally determined by
the type of equipment required, market conditions in the region in which
the well servicing rig operates, ancillary equipment and the necessary
personnel provided on the rig. Sierra charges its customers for liquids
handling and fresh and brine water supply and disposal services on an
hourly or per barrel basis depending on the services offered. Demand for
services depends substantially upon the level of activity in the oil and
gas industry, which in turn depends, in part, on oil and gas prices,
expectations about future prices, the cost of exploring for, producing and
delivering oil and gas, the discovery rate of new oil and gas reserves in
on-shore areas, the level of drilling and workover activity and the ability
of oil and gas companies to raise capital.
Results of Operations
For the quarter ended March 31, 2000
Revenues
Sierra's revenues increased to $12.9 million, or 72%, for the quarter ended
March 31, 2000 as compared to $7.4 million for the same period in 1999.
The increase was primarily attributable to the rise in oil and gas prices,
which increased Sierra's activity and equipment utilization.
Expenses
Operating expenses increased $4.5 million, or 62%, for the quarter ended
March 31, 2000 as compared to the same period for 1999. The increase in
operating expenses is directly associated to the increase in revenues. The
components of operating expenses consisted of increases in cost of revenues
of $3.4 million and general and administrative increases of $1.1 million.
Interest expense for the quarter ended March 31, 2000 decreased to $1.6
million from $1.9 million for the same period in 1999. The decrease was
due to a decrease in amortized interest related to deferred loan costs of
approximately $300,000.
Liquidity and Capital Resources
The primary source of cash is from operations, the receipt of income from
well services provided. Liquidity and capital resource information below
is provided in thousands.
Net Cash Provided by Operating Activities. Cash flows provided by
operating activities for the period consisted primarily of net operating
income net of expenses of $752,000.
Net Cash Used in Investing Activities. Cash flows used in investing
activities totaled $1.1 million for the period, and consisted primarily of
purchase of property and equipment and payments for other long-term assets.
Net Cash Used in Financing Activities. Cash flows used in financing
activities totaled $231,000 for the period. The use of these funds
included $147,000 for payment of debt and $84,000 for IPO costs.
Liquidity - Equity Investment by Investors
Sierra has a highly leveraged capital structure. Sierra on March 23, 2000
filed a Form S-1 "Registration Statement Under the Securities Act of 1933"
with the Securities and Exchange Commission. Sierra plans to use the net
proceeds from this offering to a)repay $25 million in existing Subordinated
Notes; b)finalize $14.5 million as cash consideration to acquire
businesses; c)redeem $5.3 million Series A Cumulative Preferred Stock and
d)cover expenses in connection with the offering and for general corporate
purposes.
Sierra on March 31, 1999 finalized a restructuring of its debt with the
lender. The restructuring of Sierra's debt with its lender provided for a
senior subordinated credit facility and three classes of preferred stock.
According to the redemption and/or conversion features of the three classes
of preferred stock, if Sierra does not meet repayment of scheduled senior
subordinated debt starting at December 31, 1999 with final payment due June
30, 2004, the lender has the right to exercise their conversion features.
The conversion amount as a percentage of post-conversion outstanding common
stock can range from 25% to 100%. Therefore, the Partnership's investment
in Sierra is subject to possible future dilution and/or elimination as a
result of the convertible preferred stock held by Sierra's lender. The
Partnership's ownership percentage in Sierra upon the signing of Sierra's
debt restructuring at March 31, 1999 remained 45.89%. However, should the
lender exercise the conversion feature of the preferred stock, the
Partnership's ownership percentage would decrease by 14.11%.
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matter to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter
for which this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTHWEST PARTNERS III, L.P.
a Delaware limited partnership
By: Southwest Royalties, Inc.
Managing General Partner
By: /s/ J Steven Person
------------------------------
J Steven Person, Vice-President of
Marketing and Chief Financial Officer
of Southwest Royalties, Inc.
the Managing General Partner
Date: May 15, 2000