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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 March 31, 2002
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 14.
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, 2001, which are found in the Registrant's Form
10-K Report filed with the Securities and Exchange Commission. The
December 31, 2001 balance sheet included herein has been taken from the
Registrant's 2001 Form 10-K Report. Operating results for the three months
ended March 31, 2002 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,
2002 2001
---- ----
(Unaudited)
Assets
------
Current asset:
Cash and cash equivalents $ 28,181 28,120
--------
- --------
Total current assets 28,
181 28,120
--------
- --------
Investment 380,000 380,000
--------
- --------
Total assets $ 408,181
408,120
========
========
Liabilities and Partners' Equity
--------------------------------
Current liability -
Payable to General Partner $ 346,981 345,758
--------
- --------
Partners' equity:
General Partner (907,645) (907,471)
Limited partners 968,845 969,833
--------
- --------
Total partners' equity 61,
200 62,362
--------
- --------
$ 408,181
408,120
========
========
Southwest Partners III, L.P.
(a Delaware limited partnership)
Statement of Operations
(Unaudited)
Three Months Ended
March 31,
2002 2001
---- ----
Revenues
--------
Interest income $ 61 2,425
------
- ------
61
2,425
------
- ------
Expenses
--------
General and administrative 1,223 1,292
------
- ------
1,223
1,292
------
- ------
Net income (loss) $ (1,162) 1,133
======
======
Net income (loss) allocated to:
General Partner $ (174) 170
======
======
Limited partners $ (988) 963
======
======
Per limited partner unit $ (6) 6
======
======
Southwest Partners III, L.P.
(a Delaware limited partnership)
Statement of Cash Flows
(Unaudited)
Three Months Ended
March
31,
2002 2001
---- ----
Cash flows from operating activities:
Interest received $ 61 2,425
-------
- -------
Net cash provided by operating activities 61 2,425
-------
- -------
Net increase in cash and cash equivalents 61 2,425
Beginning of period 28,120 404,112
-------
- -------
End of period $ 28,181 406,537
=======
=======
Reconciliation of net income (loss) to net
cash provided by operating activities:
Net income (loss) $ (1,162) 1,133
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Increase in accounts payable 1,223 1,292
-------
- -------
Net cash provided by operating activities $ 61 2,425
=======
=======
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
The interim financial information as of March 31, 2002, and for the
three months ended March 31, 2002, 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, 2001.
Southwest Partners III, L.P.
(a Delaware limited partnership)
Notes to Financial Statements
3. Liquidity - Partnership
The Partnership as of March 31, 2002 has negative working capital of
$318,800 and a payable to the General Partner of $342,510. The
Partnership does not generate operating income and has no current
means of settling the liability to the General Partner, but believes
the fair value of its assets are sufficient to meet their current
obligations if necessary. The General Partner, should it become
necessary, has agreed to either extend the payment terms until the
Partnership can comfortably pay the balance or make other mutually
acceptable arrangements to settle the payable by transfer, sale or
assignment of Partnership assets.
4. Liquidity - General Partner
The General Partner has a highly leveraged capital structure with
$50.0 million and $123.7 million of principal due in August of 2003
and October of 2004, respectively. The General Partner will incur
approximately $17.6 million in interest payments in 2002 on its debt
obligations. Due to the depressed commodity prices experienced during
the last quarter of 2001, the General Partner is experiencing
difficulty in generating sufficient cash flow to meet its obligations
and sustain its operations. The 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 General Partner would consider disposing of certain
assets in order to meet its obligations.
There can be no assurance that the General Partner's debt
restructuring efforts will be successful or that the lenders will
agree to a course of action consistent with the 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
General Partner. Under current circumstances, the 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 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.
Upon the occurrence of any event of dissolution by the General
Partner, the holders of a majority of limited partnership interests
may, by written agreement, elect to continue the business of the
Partnership in the Partnership's name, with Partnership property, in a
reconstituted partnership under the terms of the partnership agreement
and to designate a successor General Partner. The Managing General
Partner as of April 19, 2002, successfully completed an exchange of a
portion of their bond debt for equity and performed a refinancing of
its revolving credit facility.
Southwest Partners III, L.P.
(a Delaware limited partnership)
Notes to Financial Statements
5. Investments
Southwest Partners III consist entirely of an investment in Basic's
common stock. Investment in Basic Energy Services, Inc. in which the
Partnership had a 5.39% and 6.32% interest at March 31, 2002 and
December 31, 2001, is accounted for by 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. Under the
cost method of accounting the Partnership recognizes as income
dividends received that are distributed from net accumulated earnings
of an investee subsequent to the date of acquisition of the
investment. The Partnership would recognize a loss when there is a
loss in value in the investment, which is other than a temporary
decline. In its assessment of value the Partnership considers future
cash flows either in the form of dividends or other distributions from
the investee or from selling it's investment to an unrelated party.
Prior to December 2000, the Partnership accounted for the investment
on the equity method.
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 February 13, 2002 6.32%
February 14, 2002 to March 31, 2002 5.39%
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's new equity investor mentioned in the above paragraphs
purchased an additional 576,709 shares, during the first part of 2001,
thereby increasing their ownership from 76% to 81.6%. As a result of
the purchase, the Partnership's ownership decreased at that time 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 December 31, 2001 owns a
total of 6.32%, or 219,500 shares of Basic's outstanding common stock.
On February 13, 2002, Basic sold 600,000 shares of common stock to a
group of related investors. Based on this transaction, the
Partnerships ownership percentage was diluted from 6.32% to 5.39%.
Southwest Partners III, L.P.
(a Delaware limited partnership)
Notes to Financial Statements
5. Investments (continued)
Following is a summary of the financial position and results of
operations of Basic Energy Services, Inc. as of March 31, 2002 and
December 31, 2001 and for the three months ended March 31, 2002 and
the year ended December 31, 2001 (in thousands):
2002 2001
---- ----
Current assets $ 28,154 $ 28,872
Property and equipment, net 89,740 78,019
Other assets, net 20,244 18,733
------- -------
Total assets $ 138,138 $125,624
======= =======
Current liabilities $ 14,735 $ 13,414
Long-term debt 44,396 45,258
Deferred income 175 -
Deferred income taxes 8,369 8,186
------- -------
$ 67,675 $ 66,858
======= =======
Stockholders' equity $ 70,463 $ 58,766
======= =======
Sales $ 22,986 $ 99,709
======= =======
Net income (loss) $ (303) $ 6,311
======= =======
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"), 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, 2002, the Partnership owned a 5.39%
interest in Basic, which is accounted for using the cost method of
accounting.
Results of Operations
For the quarter ended March 31, 2002
Revenues
Revenues consisted of interest income of $61 for the quarter ended March
31, 2002 as compared to $2,425 for the quarter ended March 31, 2001. The
decrease in interest income is due to the additional investment in Basic on
May 21, 2001, which decreased the amount of cash held in the interest
bearing account.
Expenses
Direct expenses totaled $1,223 and $1,292 for the quarters ended March 31,
2002 and 2001, respectively, and consisted of general and administrative
expenses. General and administrative expenses primarily represent
independent accounting fees incurred to audit the Partnership.
Liquidity and Capital Resources
The proceeds from the sale of partnership units in March 1997 funded the
Partnership's investment in Basic.
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 $61.
Recent Accounting Pronouncements
The FASB has issued Statement No. 143 "Accounting for Asset Retirement
Obligations" which establishes requirements for the accounting of removal-
type costs associated with asset retirements. The standard is effective
for fiscal years beginning after June 15, 2002, with earlier application
encouraged. The General Partner is currently assessing the impact on the
partnerships financial statements.
On October 3, 2001, the FASB issued Statements No. 144 "Accounting for
the Impairment or Disposal of Long-Lived Assets." This pronouncement
supercedes FAS 121 "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed" and eliminates the requirement of
Statement 121 to allocate goodwill to long-lived assets to be tested for
impairment. The provisions of this statement are effective for financial
statements issued for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years. Assessment by the General
Partner revealed this pronouncement to have no impact on the partnership.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - continued
Basic Energy Services, Inc.
General
Basic 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 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, 2002
Revenues
Basic's revenues increased to $23.0 million, or 15%, for the quarter ended
March 31, 2002 as compared to $20.0 million for the same period in 2001.
The increase was primarily attributable to acquisitions made by Basic
during 2001.
Expenses
Operating expenses increased $3.8 million, or 25%, for the quarter ended
March 31, 2002 as compared to the same period for 2001. The components of
operating expenses consisted of increases in cost of revenues of $4.7
million and general and administrative decreases of $896,000. The increase
in operating and general and administrative expenses is a result of the
acquisitions made by Basic during 2001. Interest expense for the quarter
ended March 31, 2002 increased to $1.2 million from $682,000 for the same
period in 2001. The increase is in relation to the borrowing under long-
term debt used to make acquisitions during 2001.
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 $5.5 million.
Net Cash Used in Investing Activities. Cash flows used in investing
activities totaled $15.8 million for the period, and consisted primarily of
$13.8 million payments for business and $2.2 million purchase of property
and equipment.
Net Cash Provided by Financing Activities. Cash flows provided by
financing activities totaled $11.5 million for the period. The source of
these funds included the proceeds from the issuance of common stock in the
amount of $12.0 million.
Critical Accounting Policies
The Partnership used the cost method of accounting for its investment in
Basic since December 21, 2000. Prior to December 21, 2000 the Partnership
used the equity method of accounting for the investment. Under the cost
method of accounting the Partnership recognizes as income dividends
received that are distributed from net accumulated earnings of an investee
subsequent to the date of acquisition of the investment. The Partnership
would recognize a loss when there is a loss in value in the investment,
which is other than a temporary decline. In its assessment of value the
Partnership considers future cash flows either in the form of dividends or
other distributions from the investee or from selling it's investment to an
unrelated party.
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:
None
(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.
General Partner
By: /s/ Bill E. Coggin
------------------------------
Bill E. Coggin, Vice-President
and Chief Financial Officer
of Southwest Royalties, Inc.
the General Partner
Date: May 15, 2002