FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[x] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 2003
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 (I.R.S. Employer
of incorporation or organization) Identification No.)
407 N. Big Spring, Suite 300, Midland, Texas 79701
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (915) 686-9927
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
limited partnership interests
Indicate by check mark whether registrant (1) has filed reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days: Yes x No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. [x]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes No X
The registrant's outstanding securities consist of Units of limited
partnership interests for which there exists no established public market
from which to base a calculation of aggregate market value.
The total number of pages contained in this report is 31. The exhibits
begin on page 29.
Table of Contents
Item Page
Part I
1. Business 3
2. Properties 4
3. Legal Proceedings 5
4. Submission of Matters to a Vote of Security Holders 5
Part II
5. Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities 6
6. Selected Financial Data 7
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
7A. Quantitative and Qualitative Disclosures About Market Risk 9
8. Financial Statements and Supplementary Data 10
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 21
9A. Controls and Procedures 21
Part III
10. Directors and Executive Officers of the Registrant 22
11. Executive Compensation 24
12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 24
13. Certain Relationships and Related Transactions 25
14. Principal Accountant Fees and Services 25
Part IV
15. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 26
Signatures 27
Part I
Item 1. Business
General
Southwest Partners III, L.P., a Delaware limited partnership (the
"Partnership") was organized March 11, 1997 to invest in oil field service
companies and assets. The Partnership's business strategy was to acquire
interests in oil field service companies and assets with a view to
providing capital appreciation in the value of the Partnership's units of
limited partnership interest (the "Units"). The Partnership concluded its
acquisition of oil field service company assets in December 1997.
Private Placement
From March 15, 1997 to June 30, 1997, the Partnership originally conducted
a "blind pool" offering of the Units in accordance with Regulation D
promulgated under the Securities Act (the "Private Placement"). On July 1,
1997, the Partnership amended the offering, which was concluded on
September 30, 1997, to invest the entire proceeds in the common stock of
Basic Energy Services, Inc. ("Basic"), an oil field service company
affiliated with the General Partner. A total of 170.92511 Units were sold
to 525 Investors for an aggregate net price of $17,092,510. The
Partnership invested a total of $17,054,500 (including the capital
contribution of the General Partner) in 2,005 shares of Basic's common
stock.
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.
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%.
Basic's Board of Directors according to the Supplemental Warrant Agreement
awarded all holders of EBITDA Contingent Warrants 50% of the maximum
warrants that could have been earned, if the financial goals of Basic were
achieved. The Partnership exercised their warrants on May 5, 2003 and
purchased 50,632 shares of stock for $.01 per share. The Partnership at
December 31, 2003 owned a total of 6.39%, or 270,132 shares of Basic's
outstanding common stock.
The General Partner
The general partner of the Partnership is Southwest Royalties, Inc. (the
"General Partner"). The General Partner was formed in 1983 to acquire and
develop oil and gas properties. The General Partner initially financed the
acquisition of oil and gas reserves and its exploration and development
efforts through public and private limited partnership offerings. The
General Partner has raised approximately $115 million in 31 public and
private limited partnership offerings. The General Partner is a general
partner of these limited partnerships, owns interests in these partnerships
and receives management fees and operating cost reimbursements from such
partnerships. Since its inception, The General Partner, on behalf of itself
and the investment partnerships, has acquired over $320 million of oil and
gas properties, primarily in the Permian Basin of West Texas and New
Mexico.
The principal executive offices of the Partnership are located at 407 N.
Big Spring, Suite 300, Midland, Texas, 79701. The General Partner of the
Partnership, and its staff of 81 individuals, together with certain
independent consultants used on an "as needed" basis, perform various
services on behalf of the Partnership. The Partnership has no employees.
The Partnership
The sole business of the Partnership is holding Basic stock. The
Partnership has no employees and has no operations, except through Basic.
Basic Energy Services, Inc.
Basic provides a broad range of services used for the drilling, completion
and operation of oil and gas wells, including well servicing, liquids
handling and fresh and brine water supply and disposal services. Basic
provides services in its areas of operation in Texas, New Mexico, Oklahoma
and Louisiana. These services are used by oil and gas companies to
complete newly drilled oil and gas wells, maintain and optimize the
performance of existing wells, recomplete wells to additional producing
zones and plug and abandon wells at the end of their useful lives. Basic's
well servicing and fluid service equipment fleets includes well servicing
rigs and fluid service trucks.
Basic uses its well servicing rigs to provide completion, maintenance,
workover and plugging and abandonment services. Basic's related trucking
services are used to move large equipment to and from the job sites of its
customers. Basic also provides an integrated mix of liquids handling
services, including vacuum truck services, frac tank rentals, test tank
rentals and Enviro-Vat system rentals. Basic'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. Basic also provides certain
other well services, including pit lining services and hot oil services.
Environmental
Hazards in the operation of oil field service companies, such as employee
injuries on the job site and accidental petroleum or waste spills, are
sometimes encountered. Such hazards may cause substantial liabilities to
third parties or governmental entities, the payment of which could reduce
ultimately the funds available for distribution. Although it is
anticipated that customary insurance will be obtained, the Partnership may
be subject to liability for pollution and other damages due to hazards,
which cannot be insured against or will not be insured against due to
prohibitive premium costs or for other reasons. Environmental regulatory
matters also could increase the cost of doing business or require the
modification of operations in certain areas. Environmental expenditures
are expensed or capitalized depending on their future economic benefit.
Expenditures that relate to an existing condition caused by past operations
and that have no future economic benefits are expensed. Liabilities for
expenditures of a noncapital nature are recorded when environmental
assessment and/or remediation is probable, and the costs can be reasonably
estimated.
Industry Regulations and Guidelines
Certain industry regulations and guidelines apply to the registration,
qualification and operation of limited partnerships. The Partnership is
subject to these guidelines, which regulate and restrict transactions
between the General Partner and the Partnership. The Partnership complies
with these guidelines and the General Partner does not anticipate that
continued compliance would have a material adverse effect on Partnership
operations.
Partnership Employees
The Partnership has no employees; however the General Partner has a staff
of geologists, engineers, accountants, landmen and clerical staff who
engage in Partnership activities and operations and perform additional
services for the Partnership as needed. In addition to the General
Partner's staff, the Partnership engages independent consultants such as
petroleum engineers and geologists as needed. As of December 31, 2003
there were 81 individuals directly employed by the General Partner in
various capacities.
Item 2. Properties
The Partnership does not currently own or lease any property. The
Partnership operates from the offices of its General Partner in Midland,
Texas.
Basic's corporate office is located in Midland, Texas, which complements
the core of its operations in the Permian Basin of West Texas and eastern
New Mexico ("the Permian Basin"). Within the Permian Basin, Basic owns and
leases field offices. Additionally, Basic has field offices in South
Texas, East Texas and Oklahoma.
Basic's well servicing equipment fleet includes well servicing rigs, fluid
service trucks, Enviro-Vat systems and frac and test tanks. Additionally,
the Company operates injection wells and fresh or brine water stations.
Basic uses its well servicing rigs to provide completion, maintenance,
workover and plugging and abandonment services. Basic's related trucking
services are used to move large equipment to and from the job sites of its
customers as well as provide an integrated mix of liquids handling
services, including vacuum truck services, frac tank rentals, test tank
rentals and Enviro-Vat system rentals. Basic'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.
Basic believes it has satisfactory title to all of its properties in
accordance with standards generally accepted within the well servicing
industry.
Item 3. Legal Proceedings
The Partnership is not currently involved in any legal proceeding nor is it
party to any pending or threatened claims that could reasonably be expected
to have a material adverse effect on its financial condition or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during the fourth
quarter of 2003 through the solicitation of proxies or otherwise.
Part II
Item 5. Market for the Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
Market Information
There is no trading market for the Units, and it is unlikely that a trading
market will exist at any time in the future. The Partnership does not have
any units (i) that are subject to outstanding options or warrants to
purchase, or securities convertible into, common equity of the Partnership,
(ii) that could be sold pursuant to Rule 144 under the Securities Act or
that we have agreed to register under the Securities Act for sale by
security holders, or (iii) that are being, or have been publicly proposed
to be, publicly offered by the Partnership, the offering of which could
have a material effect on the market price of the limited partnership
units. Any transfer of the Units is severely restricted by certain
conditions outlined in the Partnership Agreement and requires the consent
of the General Partner.
There have been no cash distributions to the Limited Partners to date. In
general, the Partnership expects to reinvest all cash flow received from
operations and does not expect to make distributions until liquidation of
the Partnership. The following is a summary of certain allocation
provisions of the Partnership Agreement and is qualified in its entirety by
reference to the Partnership Agreement, which was filed as an Exhibit to
the partnership's Form 10, filed April 1998. Any distributions of cash
flow, income, gain, profit, or loss will be allocated 85% to the Limited
Partners and 15% to the General Partner in accordance with their capital
accounts until the Limited Partners have recovered, through cumulative
distributions 100% of their capital contributions plus a 10% cumulative
(but not compounded) return. Thereafter, distributions will be made 75% to
the Limited Partners and 25% to the General Partner.
The revenues generated and capital appreciation, if any, from the
Partnership's investment in Basic 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
Basic will generate little, if any, current income.
The General Partner has the right, but not the obligation in accordance
with the obligations set forth in the partnership agreement, to purchase
limited partnership units should an investor desire to sell. The investor
must give written notice of intentions to dispose of their units to the
General Partner along with the nature and terms of the proposed
disposition. The notice shall be deemed to constitute an offer to sell the
units to the General Partner. The General Partner has 15 days from the
date of the offer to indicate in writing to the investor its decision as to
whether it will purchase all or any of the offered units.
Issuer Purchases of Equity Securities
Maximum
Total Number (or
Number
of Units Approximat
e
Purchased Value) of
as Units
Part of that May
Publicly Yet Be
Total Announced Purchased
Number
of Units Average Plans or Under the
Price Plans
Period(1) Purchased Paid Per Programs or
Unit Programs
October 1-
31,
2003 - $ - - N/A
November 1-
30,
2003 - - - N/A
December 1-
31,
2003 - - - N/A
TOTALS - $ -
(1) In January 2003, the General Partner purchased a total of 0.25 limited
partner units from limited partners at an average base price of $100,000
per unit. As of December 31, 2002, no limited partner units were purchased
by the General Partner. As of December 31, 2001 the General Partner
purchased 0.15 limited partner units for $13,950. These discretionary
repurchases were made based upon the partnership agreement criteria.
Number of Limited Partner Interest Holders
As of December 31, 2003, there were 524 holders of limited partner units in
the Partnership.
Distributions
Pursuant to Section 4.1 of the Partnership's Certificate and Agreement of
Limited Partnership, "Net Cash From Operations and Net Cash From Sales or
Refinancings" shall be distributed, at such times as the General Partner
may determine in its sole discretion. "Net Cash From Operations" is
defined as "the gross cash proceeds from Partnership operations less the
portion thereof used to pay or establish reasonable reserves for all
Partnership expenses, fees, commissions, debt payments, new investments,
capital improvements, replacements, repairs and contingencies, and such
other purposes deemed appropriate, all as determined by the General
Partner." "Net Cash From Sales or Refinancings" is defined as "the net
cash proceeds from all sales and other dispositions (other than in the
ordinary course of business) and all refinancings of Partnership Property,
less any portion thereof used to establish reserves, all as determined by
the General Partner. There have been no cash distributions to date.
Item 6. Selected Financial Data
The following selected financial data for the years ended December 31,
2003, 2002, 2001, 2000 and 1999 should be read in conjunction with the
financial statements included in Item 8:
Years ended December 31,
--------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Revenues $ 103 220 4,021 11,403 11,164
Equity loss in
unconsolidated
subsidiary - - - - (2,005,0
00)
Net loss (10,755) (5,611) (1,643) (63,169) (2,120,4
33)
Partners' share of net
loss:
General partner (1,613) (842) (246) (9,475) (318,065
)
Limited partners (9,142) (4,769) (1,397) (53,694) (1,802,3
68)
Limited partners' net
loss per unit (53) (28) (8) (314) (10,545)
Total assets $ 404,931 404,828 408,120 404,112 392,709
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Southwest Partners III, L.P.
General
Southwest Partners III, L.P. was organized as a Delaware limited
partnership on March 11, 1997. The Partnership was formed for the purpose
of investing in Basic Energy Services, Inc., an oilfield service company
which provides services and products to oil and gas operators for the
workover, maintenance and plugging of existing oil and gas wells in the
southwestern United States.
The Partnership intends to wind up its operations and distribute its assets
or the proceeds therefrom on or before December 31, 2008, at which time the
Partnership's existence will terminate, unless sooner terminated or
extended in accordance with the terms of the Partnership agreement. As of
December 31, 2003, the Partnership owned a 6.39% interest in Basic, which
is accounted for using the cost method of accounting.
Results of Operations
For the year ended December 31, 2003
Revenues
Revenues consisted of interest income. The surplus cash remaining before
and after the May 21, 2001 additional investment in Basic generated
interest income of $103.
Expenses
Direct expenses totaled $10,858 for the year, relating to general and
administrative. General and administrative expenses primarily represent
independent accounting fees incurred to perform quarterly reviews and the
annual audit of the Partnership.
Results of Operations
For the year ended December 31, 2002
Revenues
Revenues consisted of interest income. The surplus cash remaining before
and after the May 21, 2001 additional investment in Basic generated
interest income of $220.
Expenses
Direct expenses totaled $5,831 for the year, relating to general and
administrative. General and administrative expenses primarily represent
independent accounting fees incurred to audit the Partnership.
Revenue and Distribution Comparison
Partnership losses for the years ended December 31, 2003, 2002 and 2001
were $10,755, $5,611 and $1,643, respectively. Since inception of the
Partnership, no cash distributions have been made to the partners.
Liquidity and Capital Resources
Cash flows provided by (used in) operating activities were approximately
$103 in 2003 compared to $(3,292) in 2002 and approximately $4,008 in 2001.
Cash flows provided by operating activities for 2003 represent interest
income.
Cash flows used in investing activities were approximately $500 in 2003.
There were no cash flows used in investing activities during 2002. Cash
flows used in investing activities were approximately $380,000 in 2001.
There were no cash flows used in financing activities during 2003, 2002 and
2001.
The Partnership as of December 31, 2003 has negative working capital of
$334,510, which includes a payable to the General Partner of $358,936. 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.
Liquidity - Investment in Subsidiary
Southwest Partners III consist 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
accounted 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'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.
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%.
Basic's Board of Directors according to the Supplemental Warrant Agreement
awarded all holders of EBITDA Contingent Warrants 50% of the maximum
warrants that could have been earned, if the financial goals of Basic were
achieved. The Partnership exercised their warrants on May 5, 2003 and
purchased 50,632 shares of stock for $.01 per share. The Partnership at
December 31, 2003 owned a total of 6.39%, or 270,132 shares of Basic's
outstanding common stock.
Liquidity - General Partner
As of December 31, 2003, the Managing General Partner is in violation of
several covenants pertaining to their Amended and Restated Revolving Credit
Agreement due June 1, 2006 and their Senior Second Lien Secured Credit
Agreement due October 15, 2008. Due to the covenant violations, the
Managing General Partner is in default under their Amended and Restated
Revolving Credit Agreement and the Senior Second Lien Secured Credit
Agreement, and all amounts due under these agreements have been classified
as a current liability on the Managing General Partner's balance sheet at
December 31, 2003. The significant working capital deficit and debt being
in default at December 31, 2003, raise substantial doubt about the Managing
General Partner's ability to continue as a going concern.
Subsequent to December 31, 2003, the Board of Directors of the Managing
General Partner announced its decision to explore a merger, sale of the
stock or other transaction involving the Managing General Partner. The
Board has formed a Special Committee of independent directors to oversee
the sales process. The Special Committee has retained independent
financial and legal advisors to work closely with the management of the
Managing General Partner to implement the sales process. There can be no
assurance that a sale of the Managing General Partner will be consummated
or what terms, if consummated, the sale will be on.
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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Partnership is not a party to any derivative or embedded derivative
instruments.
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements
Page
Independent Auditors' Report 11
Balance Sheets 12
Statements of Operations 13
Statement of Changes in Partners' Equity 14
Statements of Cash Flows 15
Notes to Financial Statements 16
INDEPENDENT AUDITORS' REPORT
The Partners
Southwest Partners III, L.P.
(A Delaware Limited Partnership):
We have audited the accompanying balance sheets of Southwest Partners III,
L.P. (the "Partnership") as of December 31, 2003 and 2002, and the related
statements of operations, changes in partners' equity and cash flows for
each of the years in the three year period ended December 31, 2003. These
financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Southwest Partners III,
L.P. as of December 31, 2003 and 2002 and the results of its operations and
its cash flows for each of the years in the three year period ended
December 31, 2003 in conformity with accounting principles generally
accepted in the United States of America.
KPMG LLP
Midland, Texas
March 19, 2004, except as to Note 8, which is as of May 3, 2004
Southwest Partners III, L.P.
(a Delaware limited partnership)
Balance Sheets
December 31, 2003 and 2002
2003 2002
---- ----
Assets
Current asset:
Cash and cash equivalents $ 24,425 24,828
-------- --------
-- --
Total current assets 24,425 24,828
-------- --------
-- --
Investment 380,506 380,000
-------- --------
-- --
Total assets $ 404,931 404,828
====== ======
Liabilities and Partners'
Equity
Current liabilities:
Payable to General Partner $ 358,935 348,077
-------- --------
-- --
Total current liabilities 358,935 348,077
-------- --------
-- --
Partners' equity:
General Partner (909,926 (908,313
) )
Limited partners 955,922 965,064
-------- --------
-- --
Total partners' equity 45,996 56,751
-------- --------
-- --
$ 404,931 404,828
====== ======
The accompanying notes are an integral
part of these financial statements.
Southwest Partners III, L.P.
(a Delaware limited partnership)
Statements of Operations
Years Ended December 31, 2003, 2002 and 2001
2003 2002 2001
---- ---- ----
Revenues
Interest income $ 103 220 4,021
-------- -------- --------
-- -- --
103 220 4,021
-------- -------- --------
-- -- --
Expenses
General and 10,858 5,831 5,664
administrative
-------- -------- --------
-- -- --
10,858 5,831 5,664
-------- -------- --------
-- -- --
Net loss $ (10,755) (5,611) (1,643)
====== ====== ======
Net loss allocated to:
General Partner $ (1,613) (842) (246)
====== ====== ======
Limited partners $ (9,142) (4,769) (1,397)
====== ====== ======
Per limited partner $ (53) (28) (8)
unit
====== ====== ======
The accompanying notes are an integral
part of these financial statements.
Southwest Partners III, L.P.
(a Delaware limited partnership)
Statement of Changes in Partners' Equity
Years Ended December 31, 2003, 2002 and 2001
General Limited
Partner Partners Total
-------- -------- -----
Balance - December 31, 2000 $ (907,225 971,230 64,005
)
Net loss (246) (1,397) (1,643)
-------- -------- --------
-- ---- --
Balance - December 31, 2001 (907,471 969,833 62,362
)
Net loss (842) (4,769) (5,611)
-------- -------- --------
-- ---- --
Balance - December 31, 2002 (908,313 965,064 56,751
)
Net loss (1,613) (9,142) (10,755)
-------- -------- --------
-- ---- --
Balance - December 31, 2003 $ (909,926 955,922 45,996
)
====== ======= ======
The accompanying notes are an integral
part of these financial statements.
Southwest Partners III, L.P.
(a Delaware limited partnership)
Statements of Cash Flows
Years Ended December 31, 2003, 2002 and 2001
2003 2002 2001
---- ---- ----
Cash flows from operating activities:
Paid to suppliers $ - (3,512) (13)
Interest received 103 220 4,021
------- ------- -------
--- ----- ---
Net cash provided by (used in)
operating
activities 103 (3,292) 4,008
------- ------- -------
--- ----- ---
Cash flows from investing activities:
Purchase of Basic Investment (506) - (380,00
0)
------- ------- -------
--- ----- ---
Net decrease in cash and cash equivalents (403) (3,292) (375,99
2)
Beginning of period 24,828 28,120 404,112
------- ------- -------
--- ----- ---
End of period $ 24,425 24,828 28,120
====== ======= ======
Reconciliation of net loss to net cash
(used in) provided by operating
activities:
Net loss $ (10,755 (5,611) (1,643)
)
Adjustments to reconcile net loss to net
cash
(used in) provided by operating
activities:
Increase in accounts payable 10,858 2,319 5,651
------- ------- -------
---- ----- ---
Net cash provided by (used in)
operating activities $ 103 (3,292) 4,008
====== ======= ======
The accompanying notes are an integral
part of these financial statements.
Southwest Partners III, L.P.
(a Delaware limited partnership)
Notes to Financial Statements
1. Organization
Southwest Partners III, L.P. (the "Partnership") was organized under
the laws of the state of Delaware on March 11, 1997 for the purpose of
investing in or acquiring oil field service companies' assets. The
Partnership intends to wind up its operations and distribute its
assets or the proceeds therefrom on or before December 31, 2008, at
which time the Partnership's existence will terminate, unless sooner
terminated or extended in accordance with the terms of the Partnership
Agreement. Southwest Royalties, Inc., a Delaware corporation formed
in 1983, is the General Partner of the Partnership. Revenues, costs
and expenses are allocated as follows:
Limited General
Partners Partner
------- --------
Interest income on capital (1) (1)
contributions
All other revenues 85% 15%
Organization and offering 100% -
costs
Syndication costs 100% -
Amortization of organization 100% -
costs
Gain or loss on property 85% 15%
disposition
Operating and administrative 85% 15%
costs
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 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 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
Investment
Investment in Basic Energy Services, Inc. in which the Partnership had
a 6.39% interest at December 31, 2003, 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.
Estimates and Uncertainties
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Southwest Partners III, L.P.
(a Delaware limited partnership)
Notes to Financial Statements
2. Summary of Significant Accounting Policies - continued
Syndication Costs
Syndication costs are accounted for as a reduction of partnership
equity.
Income Taxes
No provision for income taxes is reflected in these financial
statements, since the tax effects of the Partnership's income or loss
are passed through to the individual partners.
In accordance with the requirements of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," the
Partnership's tax basis in its assets is $17,054,500 and $17,054,500
more, as of December 31, 2003 and 2002 as that shown on the
accompanying Balance Sheet in accordance with generally accepted
accounting principles.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Partnership considers
all highly liquid debt instruments purchased with a maturity of three
months or less to be cash equivalents. The Partnership maintains its
cash at one financial institution.
Number of Limited Partner Units
There were 170.93 limited partner units outstanding as of December 31,
2003, held by 524 partners.
Concentrations of Credit Risk
All partnership revenues are received by the General Partner and
subsequently remitted to the partnership and all expenses are paid by
the General Partner and subsequently reimbursed by the partnership.
Fair Value of Financial Instruments
The carrying amount of cash approximates fair value due to the short
maturity of these instruments.
Net loss per limited partnership unit
The net loss per limited partnership unit is calculated by using the
number of outstanding limited partnership units.
3. Liquidity - Partnership
The Partnership as of December 31, 2003 has negative working capital
of $334,510, which includes a payable to the General Partner of
$358,936. 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.
Southwest Partners III, L.P.
(a Delaware limited partnership)
Notes to Financial Statements
4. Liquidity - General Partner
As of December 31, 2003, the Managing General Partner is in violation
of several covenants pertaining to their Amended and Restated
Revolving Credit Agreement due June 1, 2006 and their Senior Second
Lien Secured Credit Agreement due October 15, 2008. Due to the
covenant violations, the Managing General Partner is in default under
their Amended and Restated Revolving Credit Agreement and the Senior
Second Lien Secured Credit Agreement, and all amounts due under these
agreements have been classified as a current liability on the Managing
General Partner's balance sheet at December 31, 2003. The significant
working capital deficit and debt being in default at December 31,
2003, raise substantial doubt about the Managing General Partner's
ability to continue as a going concern.
Subsequent to December 31, 2003, the Board of Directors of the
Managing General Partner announced its decision to explore a merger,
sale of the stock or other transaction involving the Managing General
Partner. The Board has formed a Special Committee of independent
directors to oversee the sales process. The Special Committee has
retained independent financial and legal advisors to work closely with
the management of the Managing General Partner to implement the sales
process. There can be no assurance that a sale of the Managing
General Partner will be consummated or what terms, if consummated, the
sale will be on.
5. Investment
Common stock ownership in Basic Energy Services, Inc. was as follows:
December 31, 1997 to March 45.89%
31, 1999
March 31, to December 21, 44.94%
2000
December 21, 2000 to 10.57%
December 31, 2000
January 1, 2001 to May 20, 8.11%
2001
May 21, 2001 to February 13, 6.32%
2002
February 14, 2002 to May 4, 5.39%
2003
May 5, 2003 to December 31, 6.39%
2003
Southwest Partners III consist 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 changed its accounting for the investment to 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'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.
Southwest Partners III, L.P.
(a Delaware limited partnership)
Notes to Financial Statements
5. Investment - continued
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%.
Basic's Board of Directors according to the Supplemental Warrant
Agreement awarded all holders of EBITDA Contingent Warrants 50% of the
maximum warrants that could have been earned, if the financial goals
of Basic were achieved. The Partnership exercised their warrants on
May 5, 2003 and purchased 50,632 shares of stock for $.01 per share.
The Partnership at December 31, 2003 owned a total of 6.39%, or
270,132 shares of Basic's outstanding common stock.
6. Commitments and Contingent Liabilities
As a marketing incentive, brokers who sold in excess of one Unit
received three percent (3%) of the Partnership liquidation proceeds
which are distributed to the General Partner in proportion to the
dollar amount of Units sold by each such broker; provided, however
that no broker shall receive such interest unless the Partnership has
returned to the Limited Partners 100% of their Limited Partner Capital
Contribution plus a 10% cumulative (but not compounded) return at the
time of liquidation. As of December 31, 1998, there were 13 such
brokers who sold in excess of one Unit qualifying for the special
distribution.
The Partnership is subject to various federal, state and local
environmental laws and regulations, which establish standards and
requirements for protection of the environment. The Partnership
cannot predict the future impact of such standards and requirements,
which are subject to change and can have retroactive effectiveness.
The Partnership continues to monitor the status of these laws and
regulations.
As of December 31, 2003, 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.
7. Related Party Transactions
Accounts payable to the General Partner at December 31, 2003 and 2002
totaled $358,935 and $348,077 and primarily represents management fees
billed in previous years.
Southwest Partners III, L.P.
(a Delaware limited partnership)
Notes to Financial Statements
8. Subsequent Event
Subsequent to December 31, 2003, the Managing General Partner
announced that its Board of Directors had decided to explore a merger
or sale of the stock of the Company. The Board formed a Special
Committee of independent directors to oversee the sale process. The
Special Committee retained independent financial and legal advisors to
work closely with management to implement the sale process.
On May 3, 2004, the Managing General Partner entered into a cash
merger agreement to sell all of its stock to Clayton Williams Energy,
Inc. The cash merger price is being negotiated, but is expected to be
approximately $45 per share. The transaction, which is subject to
approval by the Managing General Partner's shareholders, is expected
to close no later than May 21, 2004.
9. Selected Quarterly Financial Results - (unaudited)
Quarter
--------------------------------------
--------
First Second Third Fourth
2003: ------ ------- ------ ------
Total revenues $ 27 27 25 24
Total expenses 1,267 8,007 2,823 (1,239)
Net income (loss) (1,240) (7,980) (2,798) 1,263
Net income (loss)
per
limited partner (6) (40) (14) 7
unit
2002:
Total revenues $ 61 63 60 36
Total expenses 1,223 1,419 1,929 1,260
Net loss (1,162) (1,356) (1,869) (1,224)
Net loss per
limited partner (6) (7) (9) (6)
unit
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None
Item 9A. Controls and
Procedures
Disclosure Controls and Procedures
As of the year ended December 31, 2003, H.H. Wommack, III, President and
Chief Executive Officer of the Managing General Partner, and Bill E.
Coggin, Executive Vice President and Chief Financial Officer of the
Managing General Partner, evaluated the effectiveness of the Partnership's
disclosure controls and procedures. Based on their evaluation, they
believe that:
The disclosure controls and procedures of the Partnership were
effective in ensuring that information required to be disclosed by the
Partnership in the reports it files or submits under the Exchange Act
was recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms; and
The disclosure controls and procedures of the Partnership were
effective in ensuring that material information required to be
disclosed by the Partnership in the report it filed or submitted under
the Exchange Act was accumulated and communicated to the Managing
General Partner's management, including its President and Chief
Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure.
Internal Control Over Financial Reporting
There has not been any change in the Partnership's internal control over
financial reporting that occurred during the year ended December 31, 2003
that has materially affected, or is reasonably likely to materially affect,
it internal control over financial reporting.
Part III
Item 10. Directors and Executive Officers of the Registrant
Management of the Partnership is provided by Southwest Royalties, Inc., as
General Partner. The names, ages, offices, positions and length of service
of the directors and executive officers of Southwest Royalties, Inc. are
set forth below. Each director and executive officer serves for a term of
one year.
Name Age Position
H. H. Wommack, III 48 Chairman of the Board,
President, Director
and Chief Executive Officer
James N. Chapman(1) 41 Director
William P. Nicoletti(2) 58 Director
Joseph J. Radecki, Jr. 45 Director
(2)
Richard D. Rinehart(1) 68 Director
John M. White(2) 48 Director
Herbert C. Williamson, 55 Director
III(1)
Bill E. Coggin 49 Executive Vice President and
Chief Financial Officer
J. Steven Person 45 Vice President, Marketing
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
H. H. Wommack, III has served as Chairman of the Board, President, Chief
Executive Officer and a director since Southwest's founding in 1983. Since
1997 Mr. Wommack has served as President, Chief Executive Officer and
Chairman of SRH, Southwest's former parent and current holder of 10% of its
voting share capital. SRH holds an equity investment in Southwest and in
Basic Energy Services. Since 1997 Mr. Wommack has served as chairman of
the board of directors of Midland Red Oak Realty, Inc. Midland Red Oak
Realty owns and manages commercial real estate properties, including
shopping centers and office buildings, in secondary real estate markets in
the Southwestern United States. From 1997 until December 2000, Mr. Wommack
served as chairman of the board of directors of Basic Energy Services, Inc.
and since December 2000 has continued to serve on Basic's board of
directors. Basic provides certain well services for oil and gas companies.
Prior to Southwest's formation, 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 graduated from the University of North Carolina at Chapel Hill and
received his law degree from the University of Texas.
James N. Chapman has served as a director since April 19, 2002. Mr.
Chapman is associated with Regiment Capital Advisors, LLC, which he joined
in January 2003. Prior to Regiment, Mr. Chapman acted as a capital markets
and strategic planning consultant with private and public companies, as
well as hedge funds, across a range of industries. Prior to establishing an
independent consulting practice, Mr. Chapman worked for The Renco Group,
Inc. from December 1996 to December 2001. Prior to Renco, Mr. Chapman was
a founding principal of Fieldstone Private Capital Group in August 1990.
Prior to joining Fieldstone, Mr. Chapman worked for Bankers Trust Company
from July 1985 to August 1990, most recently in the BT Securities capital
markets area. Mr. Chapman serves as a member of the board of directors of
Anchor Glass Container Corporation, Davel Communications, Inc., Coinmach
Corporation, as well as a number of private companies.
William P. Nicoletti has served as a director since April 19, 2002. Mr.
Nicoletti is Managing Director of Nicoletti & Company Inc., an investment
banking and financial advisory firm he founded in 1991. He was previously
a senior officer and head of the Energy Investment Banking Groups of E. F.
Hutton & Company Inc. and Paine Webber, Incorporated. From March 1998
until June 1990 he was a managing director and co-head of Energy Investment
Banking at McDonald Investments Inc. Mr. Nicoletti is a director and
Chairman of the Audit Committee of Star Gas Partners, L.P., the nation's
largest retail distributor of home heating oil and a major retail
distributor of propane gas. He is also a director of MarkWest Energy
Partners, L.P., a business engaged in the gathering and processing of
natural gas and the fractionation and storage of natural gas liquids, and
Russell-Stanley Holdings, Inc., a manufacturer and marketer of steel and
plastic industrial containers. Mr. Nicoletti is a graduate of Seton Hall
University and received an MBA degree from Columbia University Graduate
School of Business.
Joseph J. Radecki, Jr. has served as a director since April 19, 2002. Mr.
Radecki is currently a Managing Director in the Leveraged Finance Group of
CIBC World Markets where he is principally responsible for the firm's
financial restructuring and distressed situation advisory practice. Prior
to joining CIBC World Markets in 1998, Mr. Radecki was an Executive Vice
President and Director of the Financial Restructuring Group of Jefferies &
Company, Inc. beginning in 1990. From 1983 until 1990, Mr. Radecki was
First Vice President in the International Capital Markets Group at Drexel
Burnham Lambert, Inc., where he specialized in financial restructurings and
recapitalizations. Over the past fourteen years, Mr. Radecki has been
integrally involved in over 120 transactions totaling nearly $50 billion in
recapitalized securities. Mr. Radecki currently serves as a Director of
RBX Corporation, a manufacturer of rubber and plastic foam and other
polymer products. He previously served as a Director of Wherehouse
Entertainment, Inc., a music and video specialty retailer, as Chairman of
the Board of American Rice, Inc., an international rice miller and
marketer, as a member of the Board of Directors of Service America
Corporation, a national food service management firm, Bucyrus
International, Inc., a mining equipment manufacturer, and ECO-Net, a non-
profit engineering related network firm. Mr. Radecki graduated magna cum
laude in 1980 from Georgetown University with a B.A. in Government.
Richard D. Rinehart has served as a director since April 19, 2002. Mr.
Rinehart is a founding principal of PetroCap, Inc. and president of Kestrel
Resources, Inc. PetroCap, Inc. provides investment and merchant banking
services to a variety of clients active in the oil and gas industry.
Kestrel Resources, Inc. is a privately owned oil and gas operating company.
He served as Director of Coopers & Lybrand's Energy Systems and Services
Division prior to the founding of Kestrel Resources, Inc. in 1992. Prior to
joining Coopers & Lybrand, he was chief executive officer/founder of Dawn
Information Resources, Inc., formed in 1986 and acquired by Coopers &
Lybrand in early 1991. Mr. Rinehart served as CEO of Terrapet Energy
Corporation during the period 1982 through 1986. Prior to the formation of
Terrapet in 1982, he was employed as President of the Terrapet Division of
E.I. DuPont de Nemours and Company. Before its acquisition by DuPont, he
served as CEO and President of Terrapet Corp., a privately owned E & P
company. Before the formation of Terrapet Corp. in 1972, he was manager of
supplementary recovery methods and senior evaluation engineer with H. J.
Gruy and Associates, Inc., Dallas, Texas.
John White has served as a director since April 19, 2002. Mr. White became
an equity analyst for Harris Nesbitt Gerard following the acquisition by
BMO Financial Group in 2003. He had joined BMO Nesbitt Burns in 1998,
responsible for high yield research on oil, gas and energy companies.
Previously, Mr. White worked at John S. Herold, Inc., an independent oil
and gas research and consulting firm, where he was responsible for fixed
income research on the oil and gas industry. His prior experience also
included four years managing a portfolio of oil and gas loans for The Bank
of Nova Scotia. Before entering financial services, Mr. White was with BP,
where he worked in exploration and production for seven years. At BP, his
experience was primarily in the basins of the Mid-Continent and Rocky
Mountain regions. Mr. White is a graduate of The University of Oklahoma.
Herbert C. Williamson, III has served as a director since April 19, 2002.
At present, Mr. Williamson is self-employed as a consultant. From March
2001 to March 2002 Mr. Williamson served as an investment banker with
Petrie Parkman & Co. From April 1999 to March 2001 Mr. Williamson served
as chief financial officer and from August 1999 to March 2001 as a director
of Merlon Petroleum Company, a private oil and gas company involved in
exploration and production in Egypt. Mr. Williamson served as executive
vice president, chief financial officer and director of Seven Seas
Petroleum, Inc., a publicly traded oil and gas exploration company, from
March 1998 to April 1999. From 1995 through April 1998, he served as
director in the Investment Banking Department of Credit Suisse First
Boston. Mr. Williamson served as vice chairman and executive vice
president of Parker and Parsley Petroleum Company, a publicly traded oil
and gas exploration company (now Pioneer Natural Resources Company) from
1985 through 1995.
Bill E. Coggin has served as Vice President and Chief Financial Officer
since joining the Managing General Partner in 1985. Previously, Mr. Coggin
was Controller for Rod Ric Corporation, an oil and gas drilling company,
and for C.F. Lawrence & Associates, a large independent oil and gas
operator. Mr. Coggin received a B.S. in Education and a B.A. in Accounting
from Angelo State University.
J. Steven Person has served as Vice President, Marketing since joining the
Managing General Partner in 1989. Mr. Person began in the investment
industry with Dean Witter in 1983. Prior to joining the Managing General
Partner, Mr. Person was a senior wholesaler with Capital Realty, Inc. While
at Capital Realty, he was involved in the syndication of mortgage based
securities through the major brokerage houses. Mr. Person received a
B.B.A. degree from Baylor University and an M.B.A. from Houston Baptist
University.
Key Employees
Jon P. Tate, age 46, has served as Vice President, Land and Assistant
Secretary of the Managing 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.
R. Douglas Keathley, age 48, has served as Vice President, Operations of
the Managing General Partner since 1992. Before joining us, 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.
Code of Ethics
Neither the Partnership nor the Managing General Partner has adopted a code
of ethics for employees, or any principal executive officers, principal
financial officers, principal accounting officers or the Board of Directors
of the Managing General Partner. The Board of the Managing General Partner
believes that the Partnership's existing internal control procedures and
current business practices are adequate to promote ethical conduct and to
deter wrongdoing on the part of these executives. The Managing General
Partner of the Partnership intends to implement during 2004 a code of
ethics that will apply to these executives. In accordance with applicable
SEC rules, the code of ethics will be made publicly available.
Audit Committee
The current members of the Audit Committee of the Managing General Partner
are William P. Nicoletti, John M. White and Joseph J. Radecki, Jr. The
Board of Directors of the Managing General Partner has determined that Mr.
Nicoletti, the Chairman of the Audit Committee, meets the definition of an
"audit committee financial expert" under Item 401(h)(2) of Regulation S-K
and has also determined that all of the members of the Audit Committee,
including Mr. Nicoletti, meet the independence requirements of Section
10A(m)(3) of the Securities Exchange Act of 1934, as amended, and the rules
and regulations promulgated thereunder.
Item 11. Executive Compensation
The Partnership does not have any directors or executive officers. The
executive officers of the General Partner do not receive any cash
compensation, bonuses, deferred compensation or compensation pursuant to
any type of plan, from the Partnership.
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
There are no limited partners who own of record, or are known by the
General Partner to beneficially own, more than five percent of the
Partnership's limited partnership interests.
The General Partner owns a 15 percent interest in the Partnership as a
general partner. Through repurchase, the General Partner also owns 0.40
limited partner units, a 0.20% limited partner interest. The General
Partner's total percentage interest ownership in the Partnership is 15.20%.
No officer or director of the General Partner directly owns units in the
Partnership. The officers and directors of the General Partner are
considered beneficial owners of the limited partner units acquired by the
General Partner by virtue of their status as such. A list of beneficial
owners of limited partner units, known to the General Partner, is as
follows:
Amount and
Nature of Percen
t
Name and Address of Beneficial of
Title of Class Beneficial Owner Ownership Class
- ------------------- --------------------- ---------- ------
-------------- -------------- ------ -----
Limited Partnership Southwest Royalties, Directly 0.20%
Interest Inc. Owns
Managing General 0.40 Units
Partner
407 N. Big Spring
Street
Midland, TX 79701
Limited Partnership H. H. Wommack, III Indirectly 0.20%
Interest Owns
Chairman of the 0.40 Units
Board,
President, and CEO
of Southwest
Royalties, Inc.,
the Managing General
Partner
407 N. Big Spring
Street
Midland, TX 79701
There are no arrangements known to the General Partner, which may at a
subsequent date result in a change of control of the Partnership.
Item 13. Certain Relationships and Related Transactions
The General Partner contributed $1,692,698, which entitled it to receive
100% of the Partnership's general partner interest. The general partner
interest entitles the General Partner to 15% interest in the Partnership.
See "Item 5."
In 2003, the General Partner received no administrative fees. The General
Partner ceased to charge the Partnership for administrative fees effective
July 31, 2000.
The Partnership originally invested primarily all of the proceeds of the
Private Placement in 2,005 shares 45.9% of Basic common stock. 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, 2003 owns a total of 6.39%, or
270,132 shares of Basic's outstanding common stock.
In the opinion of management, the terms of the above transactions are
similar to ones with unaffiliated third parties.
Item 14. Principal Accountant Fees and Services
The following table presents fees for professional audit services rendered
by KPMG, LLP for the audit of the Partnership's annual financial statements
for the years ended December 31, 2003 and 2002 and fees billed for other
services rendered by KPMG during those periods.
For the Year Ended December 2003
31, 2002
Audit Fees $8,630 $
4,763
Audit Related Fees - -
Tax Fees -
-
All Other Fees -
-
TOTAL $8,630 $
4,763
The Audit Committee of the Managing General Partner reviewed and approved,
in advance, all audit and non-audit services provided by KPMG, LLP.
Part IV
Item 15. Exhibits, Financial Statements Schedules and Reports on Form 8-K
(a)(1) Financial Statements:
Southwest Partners III, L.P. Financial Statements
Included in Part II Item 8 of this report -
Independent Auditors Report
Balance Sheets
Statements of Operations
Statement of Changes in Partners' Equity
Statements of Cash Flows
Notes to Financial Statements
(2) Schedules required by Article 12 of Regulation S-
X are either omitted because they are not applicable or
because the required information is shown in the
financial statements or the notes thereto.
(3) Exhibits:
4 (a)
Certificate of Limited Partnership of Southwest
Partners III, L.P., dated March 11, 1997.
(Incorporated by reference from Partnership's
Form 10-K for the fiscal year ended December 31,
1998).
(b) Agreement of Limited Partnership of
Southwest Partners III, L.P., dated March 11,
1997. (Incorporated by reference from
Partnership's Form 10-K for the fiscal year ended
December 31, 1998).
31.1 Rule 13a-14(a)/15d-
14(a) Certification
31.2 Rule 13a-14(a)/15d-
14(a) Certification
32.1 Certification of Chief
Executive Officer Pursuant to 18 U.S.C. Section 1350, as
adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
32.2 Certification of Chief
Financial Officer Pursuant to 18 U.S.C. Section 1350, as
adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during the
quarter ended December 31, 2003.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Partnership has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Southwest Partners III, L.P.
a Delaware limited partnership
By:
Southwest Royalties, Inc.,
General Partner
By: /s/ H. H. Wommack, III
------------------------------------------
- -----
H. H. Wommack, III, President
Date: May 12, 2004
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and
on the dates indicated.
/s/ H. H. Wommack, III /s/ Bill E. Coggin
- ---------------------------- ------------------------
- ------------------- -----------------------
H. H. Wommack, III, Chairman Bill E. Coggin,
of the Board, Executive Vice President
President, Director and and Chief Financial
Chief Executive Officer Officer
Date: May 12, 2004 Date: May 12, 2004
/s/ William P. Nicoletti /s/ James N. Chapman
- ---------------------------- ------------------------
- ------------------- -----------------------
William P. Nicoletti, James N. Chapman,
Director Director
Date: May 10, 2004 Date: May 12, 2004
/s/ Richard D. Rinehart /s/ Joseph J. Radecki,
Jr.
- ---------------------------- ------------------------
- ------------------- -----------------------
Richard D. Rinehart, Joseph J. Radecki, Jr.,
Director Director
Date: May 12, 2004 Date: May 12, 2004
/s/ Herbert C. Williamson,
III
- ---------------------------- ------------------------
- ------------------- -----------------------
Herbert C. Williamson, III, John M. White, Director
Director
Date: May 11, 2004 Date:
SECTION 302 CERTIFICATION Exhibit 31.1
I, H.H. Wommack, III, certify that:
1. I have reviewed this
annual report on Form 10-K of Southwest Partners III, L.P.
2.Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered
by this report;
3.Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4.The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules 13a-
15(f) and 15d-15(f) for the registrant and have:
a)Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b)Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
c)Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d)Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5.The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a)All significant deficiencies and material weaknesses in the design or
operation of internal controls over financial reporting which
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b)Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls over financial reporting.
Date: May 12, 2004 /s/ H.H. Wommack, III
H. H. Wommack, III
Chairman, President and Chief Executive
Officer
of Southwest Royalties, Inc., the
Managing General Partner of
Southwest Partners III, L.P.
SECTION 302 CERTIFICATION Exhibit 31.2
I, Bill E. Coggin, certify that:
1. I have reviewed this
annual report on Form 10-K of Southwest Partners III, L.P.
2.Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered
by this report;
3.Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4.The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules 13a-
15(f) and 15d-15(f) for the registrant and have:
a)Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b)Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
c)Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d)Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5.The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a)All significant deficiencies and material weaknesses in the design or
operation of internal controls over financial reporting which
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b)Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls over financial reporting.
Date: May 12, 2004 /s/ Bill E. Coggin
Bill E. Coggin
Executive Vice President
and Chief Financial Officer of
Southwest Royalties, Inc., the
Managing General Partner of
Southwest Partners III, L.P.
CERTIFICATION PURSUANT TO Exhibit 32.1
19 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Southwest Partners III, L.P.
(the "Company") on Form 10-K for the period ending December 31, 2003 as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, H.H. Wommack, III, Chief Executive Officer of the Managing
General Partner of the Company, certify, pursuant to 18 U.S.C. 1350, as
adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operation of
the Company.
Date: May 12, 2004
/s/ H.H. Wommack, III
H. H. Wommack, III
Chairman, President, Director and Chief Executive Officer
of Southwest Royalties, Inc., the
Managing General Partner of
Southwest Partners III, L.P.
CERTIFICATION PURSUANT TO Exhibit 32.2
19 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Southwest Partners III, L.P. (the
"Company") on Form 10-K for the period ending December 31, 2003 as filed
with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Bill E. Coggin, Chief Financial Officer of the Managing
General Partner of the Company, certify, pursuant to 18 U.S.C. 1350, as
adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operation of
the Company.
Date: May 12, 2004
/s/ Bill E. Coggin
Bill E. Coggin
Executive Vice President
and Chief Financial Officer of
Southwest Royalties, Inc., the
Managing General Partner of
Southwest Partners III, L.P.