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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 June 30, 2001
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 Registrant (herein also referred to as the "Partnership" has prepared
the unaudited condensed financial statements included herein 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, 2000 which are found in the Registrant's Form
10-K Report for 2000 filed with the Securities and Exchange Commission.
The December 31, 2000 balance sheet included herein has been taken from the
Registrant's 2000 Form 10-K Report. Operating results for the three and
six month periods ended June 30, 2001 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
June 30, December 31,
2001 2000
---- ----
(Unaudited)
Assets
------
Current asset:
Cash and cash equivalents $ 27,944 404,112
---------- ----------
Total current assets 27,944 404,112
---------- ----------
Investment in subsidiary 380,000 -
---------- ----------
Total assets $ 407,944 404,112
========== ==========
Liabilities and Partners' Equity
--------------------------------
Current liabilities:
Payable to General Partner
$ 343,523 340,107
---------- ----------
Total current liabilities 343,523
340,107
---------- ----------
Partners' equity:
General Partner (907,163) (907,225)
Limited partners 971,584 971,230
---------- ----------
Total partners' equity 64,421
64,005
---------- ----------
$ 407,944 404,112
========== ==========
Southwest Partners III, L.P.
(a Delaware limited partnership)
Statement of Operations
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
Revenues ---- ---- ---- ----
--------
Interest income $ 1,419 2,825 3,844 5,629
--------- --------- ---------
- ---------
1,419 2,825 3,844
5,629
--------- --------- ---------
- ---------
Expenses
--------
General and administrative 2,136 31,046 3,428 62,371
--------- --------- ---------
- ---------
2,136 31,046 3,428
62,371
--------- --------- ---------
- ---------
Net income (loss) $ (717) (28,221) 416 (56,742)
========= ========= =========
=========
Net income (loss) allocated to:
General Partner $ (108) (4,233) 62 (8,511)
========= ========= =========
=========
Limited partners $ (609) (23,988) 354 (48,231)
========= ========= =========
=========
Per limited partner unit $ (4) (140) 2 (282)
========= ========= =========
=========
Southwest Partners III, L.P.
(a Delaware limited partnership)
Statement of Cash Flows
(Unaudited)
Six Months Ended
June
30,
2001 2000
---- ----
Cash flows from operating activities:
Paid to suppliers $ (12) -
Interest received 3,844 5,629
---------
- ---------
Net cash provided by operating activities 3,832 5,629
---------
- ---------
Cash flows from investing activities:
Purchase of Basic investment (380,000) -
---------
- ---------
Cash used in investing activities (380,000) -
---------
- ---------
Net (decrease) increase in cash
and cash equivalents (376,168) 5,629
Beginning of period 404,112 392,709
---------
- ---------
End of period $ 27,944 398,338
=========
=========
Reconciliation of net income (loss) to net cash
provided by operating activities:
Net income (loss) $ 416 (56,742)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Increase in accounts payable 3,416 62,371
---------
- ---------
Net cash provided by operating activities $ 3,832 5,629
=========
=========
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 June 30, 2001, and for the
three and six months ended June 30, 2001, 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, 2000.
3. Investments
Common stock ownership in Basic Energy Services, Inc. was as follows:
December 31, 1997 to March 31, 1999 45.89%
March 31, to December 21, 2000 44.94%
December 21, 2000 to December 31, 2000 10.57%
January 1, 2001 to May 20, 2001 8.11%
May 21, 2001 to June 30, 2001 6.32%
Southwest Partners III consists entirely of an investment in Basic's
common stock. The investment had been accounted for using the equity
method. Based on the December 21, 2000 transaction discussed below,
the Partnership will be accounting for the investment using the cost
method. Southwest Partners III no longer holds a 20% or more interest
in Basic and exerts no significant influence over Basic's operations.
On December 21, 2000, Basic entered into a refinancing and
restructuring of its debt and equity. Upon the signing of the
documents, the Partnership's percentage of ownership was diluted from
44.94% to 10.57%. A new equity investor, in exchange for 1,441,730
shares of Basic's common stock, purchased and retired $24.5 million of
Basic's debt from its previous lender. The equity investor received a
76% ownership. Additionally, $10.5 million of the debt held by the
previous lender was refinanced with a new lender. The remaining debt
held by the previous lender of approximately $21.7 million was
cancelled.
Basic in March 2000 filed a restated certificate of incorporation
increasing its authorized common shares to 25,000,000 and completed a
400-for-1 stock split. All shares had been restated as if the stock
split had occurred at the beginning of 1998. The 400-for-1 stock
split was reversed during 2000. Basic on December 21, 2000 completed
a 100-for-1 dividend. The Partnership at December 31, 2000 owned
10.57% or 200,500 shares of Basic's outstanding common stock.
Basic's new equity investor mentioned in the above paragraphs
purchased an additional 576,709 shares, during the first part of the
year, thereby increasing their ownership from 76% to 81.6%. As a
result of the purchase, the Partnership's ownership decreased from
10.57% to 8.11%.
On May 21, 2001, Basic issued a Notice to Stockholders of Preemptive
Rights. The Partnership purchased an additional 19,000 shares of
common stock at $380,000. The Partnership at May 21, 2001, and as of
June 30, 2001 owns a total of 6.32%, or 219,500 shares of Basic's
outstanding common stock.
Southwest Partners III, L.P.
(a Delaware limited partnership)
Notes to Financial Statements
3. Investments - continued
Following is a summary of the financial position and results of
operations of Basic Energy Services, Inc. (formerly Sierra Well
Service, Inc.) as of June 30, 2001 and December 31, 2000 and for the
six months ended June 30, 2001 and the year ended December 31, 2000
(in thousands):
2001 2000
---- ----
Current assets $ 21,427 13,283
Property and equipment, net 45,496 32,780
Other assets, net 25,654 6,955
------ ------
Total assets $ 92,577 53,018
====== ======
Current liabilities $ 17,520 11,322
Long-term debt 14,285 15,390
Deferred income taxes 5,105 5,052
------ ------
$ 36,910 31,764
====== ======
Stockholders' equity $ 55,667 21,254
====== ======
Sales $ 43,547 56,466
====== ======
Net income $ 3,637 13,849
====== ======
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 Basic Energy
Services, Inc. ("Basic Energy"), 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 June 30, 2001, the Partnership owned a 6.32% interest
in Basic Energy, which is accounted for using the cost method of
accounting.
Results of Operations
For the quarter ended June 30, 2001
Revenues
Revenues consisted of interest income. Interest income generated $1,419
for the quarter ended June 30, 2001 as compared to $2,825 for the quarter
ended June 30, 2000. The decrease in interest income is due to the
additional investment in Basic, which decreased the amount of cash held in
the interest bearing account.
Expenses
Direct expenses totaled $2,136 and $31,046 for the quarters ended June 30,
2001 and 2000, 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. Effective August 1, 2000, the Managing General Partner ceased
to charge the Partnership for management fees.
Results of Operations
For the six months ended June 30, 2001
Revenues
Revenues consisted of interest income. Interest income generated $3,844
for the six months ended June 30, 2001 as compared to $5,629 for the six
months ended June 30, 2000. The decrease in interest income is due to the
additional investment in Basic, which decreased the amount of cash held in
the interest bearing account.
Expenses
Direct expenses totaled $3,428 and $62,371 for the six months ended June
30, 2001 and 2000, 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. Effective August 1, 2000, the Managing General
Partner ceased to charge the Partnership for management fees.
Liquidity and Capital Resources
The proceeds from the sale of partnership units in March 1997 funded the
Partnership's investment in Basic Energy. The Partnership did not sell any
additional partnership units 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 $3,844.
Net Cash Used in Investing Activities. Cash flows used in investing
activities for the period consisted of an additional investment in Basic of
$380,000.
Net Cash Used in Financing Activities. There were no amounts provided by
or used in financing activities for the period ended June 30, 2001.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - continued
Basic Energy Services, Inc.
General
Basic Energy 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. Basic Energy 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 June 30, 2001
Revenues
Basic Energy's revenues increased to $23.5 million, or 69%, for the quarter
ended June 30, 2001 as compared to $13.9 million for the same period in
2000. The increase was primarily attributable to the increase in oil and
gas prices, which raised rig utilization, and in turn raised activity
levels and acquisitions.
Expenses
The increase in revenues experienced in the oil and gas industry has also
caused operating expenses to increase $5.6 million, or 50%, for the quarter
ended June 30, 2001 as compared to the same period for 2000. The
components of operating expenses consisted of increases in cost of revenues
of $4.2 million and general and administrative increases of $1.4 million.
Interest expense decreased $950,000, for the quarter ended June 30, 2001 as
compared to the same period for 2000. The decrease was directly associated
with Basic's December 21, 2001 refinancing and restructuring of debt.
Results of Operations
For the six months ended June 30, 2001
Revenues
Basic Energy's revenues increased to $43.5 million, or 63%, for the six
months ended June 30, 2001 as compared to $26.8 million for the same period
in 2000. The increase was primarily attributable to the increase in oil and
gas prices, which raised rig utilization, and in turn raised activity
levels and acquisitions.
Expenses
The increase in revenues experienced in the oil and gas industry has also
caused operating expenses to increase $9.3 million, or 41%, for the six
months ended June 30, 2001 as compared to the same period for 2000. The
components of operating expenses consisted of increases in cost of revenues
of $6.5 million and general and administrative increases of $2.8 million.
Interest expense for the six months ended June 30, 2001 decreased to $1.4
million from $3.2 million for the same period 2000. The decrease was
directly associated with Basic's December 21, 2001 refinancing and
restructuring of debt.
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 $2.0 million.
Net Cash Used in Investing Activities. Cash flows used in investing
activities totaled $33.9 million for the period, and consisted primarily of
the payments for company acquisitions in the amount of $28.2 million and
purchase of property and equipment in the amount of $6.0 million.
Net Cash Provided by Financing Activities. Cash flows provided by
financing activities totaled $32.5 million for the period. The primary
source was the proceeds from the issuance of common stock in the amount of
$29.8 million.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Partnership is not a party to any derivative or embedded derivative
instruments.
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) 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/ Bill E. Coggin
------------------------------
Bill E. Coggin, Vice President
and Chief Financial Officer
Date: August 14, 2001