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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
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, 1997 which are found in the Registrant's Form
10 filed with the Securities and Exchange Commission on April 30, 1998.
The December 31, 1997 balance sheet included herein has been taken from the
Registrant's 1998 Form 10 Report. Operating results for the three and six
month periods ended June 30, 1998 are not necessarily indicative of the
results that may be expected for the full year.
Southwest Partners III, L.P.
(a Delaware limited partnership)
Balance Sheets
June 30, December 31,
1998 1997
---- ----
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 338,058 $ 501,086
---------- ----------
Total current assets 338,058
501,086
---------- ----------
Equity investment in subsidiary 14,968,727 16,512,086
Organization costs, net of
$18,420 and $10,525, respectively 60,521 68,415
---------- ----------
$15,367,306 $ 17,081,587
========== ==========
Liabilities and Partners' Equity
Current liabilities:
Payable to General Partner and subsidiary $ 68,707 $ 162,351
---------- ----------
Total current liabilities 68,707 162,351
---------- ----------
Partners' equity:
General Partner 1,374,510 1,615,496
Limited partners 14,011,589 15,410,070
Less notes receivable from
limited partners 87,500
106,330
---------- ----------
Total partners' equity 15,298,599
16,919,236
---------- ----------
$15,367,306 $ 17,081,587
========== ==========
Southwest Partners III, L.P.
(a Delaware limited partnership)
Statements of Operations
(Unaudited)
Three Months EndedSix Months Ended
June 30, 1998 June 30, 1998
Revenues ------------- -------------
Interest income $ 2,680 $ 5,517
--------
- ---------
2,680
5,517
--------
- ---------
Expenses
General and administrative 38,482 68,731
Amortization 3,947 7,894
Equity loss of unconsolidated subsidiary 778,907 1,543,359
--------
- ---------
821,336
1,619,984
--------
- ---------
Net loss $(818,656) $(1,614,467)
========
=========
Net loss allocated to:
General Partner $(122,206) $(240,986)
========
=========
Limited partners $(696,450) $(1,373,481)
========
=========
Per limited partner unit $ (4,056) $ (8,000)
========
=========
Southwest Partners III, L.P.
(a Delaware limited partnership)
Statement of Cash Flows
For the Six Months Ended June 30, 1998
(Unaudited)
Cash flows from operating activities:
Cash paid to Managing General Partner
for administrative fees $ (24)
Interest received 5,517
- --------
Net cash provided by operating activities 5,493
- --------
Cash flows from investing activities:
Organization costs (63,514)
- --------
Net cash used in investing activities (63,514)
- --------
Cash flows from financing activities:
Capital contributed by limited partners (6,250)
Repayment of notes receivable from
limited partners 80
Syndication costs (98,837)
- --------
Net cash used in financing activities (105,007)
- --------
Net decrease in cash and cash equivalents (163,028)
Beginning of period 501,086
- --------
End of period $ 338,058
========
(continued)
Southwest Partners III, L.P.
(a Delaware limited partnership)
Statement of Cash Flows, continued
For the Six Months Ended June 30, 1998
(Unaudited)
Reconciliation of net loss to net cash
provided by operating activities:
Net loss $(1,614,467)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Amortization 7,894
Undistributed loss of affiliate 1,543,359
Increase in accounts payable 68,707
- ---------
Net cash provided by operating activities $ 5,493
=========
Southwest Partners III, L.P.
(a Delaware limited partnership)
Notes to Financial Statements
1. Organization
Southwest Partners III, L.P. (the "Partnership")was organized under
the laws of the State of Delaware on March 11, 1997 for the purpose of
investing in or acquiring oil field service companies assets. The
Partnership intends to wind up its operations and distribute its
assets or the proceeds therefrom on or before December 31, 2008, at
which time the Partnership's existence will terminate, unless sooner
terminated or extended in accordance with the terms of the Partnership
Agreement. Southwest Royalties, Inc., a Delaware corporation formed
in 1983, is the General Partner of the Partnership. Revenues, costs
and expenses are allocated as follows:
Limited General
Partners Partner
-------- -------
Interest income on capital contributions(1) (1)
All other revenues 85% 15%
Organization and offering costs 100% -
Syndication costs 100% -
Amortization of organization costs 100% -
Gain or loss on property disposition 85% 15%
Operating and administrative costs 85% 15%
All other costs 85% 15%
After payout, allocations will be seventy-five (75%) to the limited
partners and twenty-five (25%) to the General Partner. Payout is when
the limited partners have received an amount equal to one hundred ten
percent (110%) of their limited partner capital contributions.
(1) Interest earned on promissory notes related to Capital
Contributions is allocated to the specific holders of those notes.
Method of Allocation of Administrative Costs
For the purpose of allocating Administrative Costs, the Managing
General Partner will allocate each employee's time among three
divisions: (1) operating partnerships; (2) corporate activities; and
(3) currently offered or proposed partnerships. The Managing General
Partner determines a percentage of total Administrative Costs per
division based on the total allocated time per division and personnel
costs (salaries) attributable to such time. Within the operating
partnership division, Administrative Costs are further allocated on
the basis of the total capital of each partnership invested in its
operations.
Southwest Partners III, L.P.
(a Delaware limited partnership)
Notes to Financial Statements
2. Summary of Significant Accounting Policies
The interim financial information as of June 30, 1998, and for the six
months ended June 30, 1998, 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 consolidated financial statements should be read
in conjunction with the audited financial statements for the year
ended December 31, 1997.
3. Investments
Following is a summary of the financial position and results of
operations of Sierra Well Service, Inc. as of June 30, 1998 and
December 31, 1997 and for the six months ended June 30, 1998 and the
year ended December 31, 1997 (in thousands):
1998 1997
---- ----
Current assets $ 12,757 $ 14,966
Property and equipment, net 45,930 46,163
Other assets, net 25,209 25,990
------ ------
Total assets $ 83,896 $ 87,119
====== ======
Current liabilities $ 57,671 $ 5,536
Long-term debt 650 52,480
Deferred income taxes 4,748 5,743
------ ------
$ 63,069 $ 63,759
====== ======
Stockholders' equity $ 20,827 $ 23,360
====== ======
Sales $ 25,686 $ 26,134
====== ======
Net loss $ (2,533) $ (797)
====== ======
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Southwest Partners III
General
Southwest Partners III, L.P., a Delaware limited partnership (the
"Partnership"), was formed on March 11, 1997 to invest in Sierra Well
Service, Inc. ("Sierra"), an oilfield service company which provides
services and products to oil and gas operators for the workover,
maintenance and plugging of existing oil and gas wells in the southwestern
United States. As of June 30, 1998, the Partnership owned a 45.9% interest
in Sierra, which is accounted for using the equity method of accounting.
The equity method adjusts the carrying value of the Partnership's
investment by its proportionate share of Sierra's undistributed earnings or
losses for each respective period.
Results of Operations
For the quarter ended June 30, 1998
Revenues
Revenues consisted of interest income. The surplus of cash prior to the
periodic investments in Sierra generated interest income of $2,680.
Expenses
Direct expenses totaled $42,429 for the period, which consisted of $38,482
relating to general and administrative and $3,947 of amortization. General
and administrative expenses represent management fees paid to the Managing
General Partner for costs incurred to operate the partnership.
Amortization expense for the period relates to the Partnership's
organization costs.
Equity in loss of unconsolidated subsidiary of $778,907 reflects the
Partnership's weighted average proportionate share of the $1,282,195 loss
by Sierra in the amount of $588,399 for the period and the amortization of
goodwill in relation to the Partnerships investment in Sierra of $190,508.
Results of Operations
For the six months ended June 30, 1998
Revenues
Revenues consisted of interest income. The surplus of cash prior to the
periodic investments in Sierra generated interest income of $5,517.
Expenses
Direct expenses totaled $76,625 for the period, which consisted of $68,731
relating to general and administrative and $7,894 of amortization. General
and administrative expenses represent management fees paid to the Managing
General Partner for costs incurred to operate the partnership.
Amortization expense for the period relates to the Partnership's
organization costs.
Equity in loss of unconsolidated subsidiary of $1,543,359 reflects the
Partnership's weighted average proportionate share of the $2,532,891 loss
by Sierra in the amount of $1,162,343 for the period and the amortization
of goodwill in relation to the Partnerships investment in Sierra of
$381,016.
Liquidity and Capital Resources
The proceeds from the sale of partnership units in March 1997 funded the
Partnership's investment in Sierra. The Partnership did not sell any
additional partnership units or invest additional amounts in Sierra
subsequent to December 31, 1997.
Net Cash Provided by Operating Activities. Cash flows provided by
operating activities for the period consisted primarily of interest income
from a financial institution of $5,517.
Net Cash Used in Investing Activities. Cash flows used in investing
activities totaled $63,514 for the period, which consisted of organization
costs.
Net Cash Used in Financing Activities. Cash flows used in investing
activities totaled $105,007 for the period. The use of these funds
included $98,837 in syndication costs.
Liquidity - Equity Investment in Subsidiary
Sierra has a highly leveraged capital structure with primarily all of its
outstanding debt due on March 31, 1999. Sierra did not have the available
working capital to meet this obligation, but on March 31, 1999 finalized a
restructuring of its debt with the lender. The restructuring of Sierra's
debt with its lender provides for a senior subordinated credit facility and
three classes of preferred stock. According to the redemption and/or
conversion features of the three classes of preferred stock, if Sierra does
not meet repayment of scheduled senior subordinated debt starting at
December 31, 1999 with final payment due June 30, 2004, the lender has the
right to exercise their conversion features. The conversion amount as a
percentage of post-conversion outstanding common stock can range from 25%
to 100%. Therefore, the Partnership's investment in Sierra is subject to
possible future dilution and/or elimination as a result of the convertible
preferred stock held by Sierra's lender. The Partnership's ownership
percentage in Sierra decreased from 45.89% to 34.40% upon the signing of
Sierra's debt restructuring at March 31, 1999.
Information Systems for the Year 2000
The Partnership and Sierra have reviewed and evaluated their information
systems to determine if their systems accurately process data referencing
the year 2000. Substantially all necessary programming modifications to
correct year 2000 referencing in internal accounting and operating systems
have been made to-date. However, the Partnership and Sierra have not
completed their evaluation of their vendors and suppliers systems to
determine the effect, if any, the non-compliance of such systems would have
on their operations. The Partnership and Sierra expect to have all
evaluations completed by early 1999.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Sierra Well Service, Inc.
General
Sierra derives its revenues from well servicing, liquids handling, fresh
and brine water supply and disposal and other related services. Well
servicing rigs are billed at hourly rates that are generally determined by
the type of equipment required, market conditions in the region in which
the well servicing rig operates, ancillary equipment and the necessary
personnel provided on the rig. Sierra charges its customers for liquids
handling and fresh and brine water supply and disposal services on an
hourly or per barrel basis depending on the services offered. Demand for
services depends substantially upon the level of activity in the oil and
gas industry, which in turn depends, in part, on oil and gas prices,
expectations about future prices, the cost of exploring for, producing and
delivering oil and gas, the discovery rate of new oil and gas reserves in
on-shore areas, the level of drilling and workover activity and the ability
of oil and gas companies to raise capital.
Results of Operations
For the quarter ended June 30, 1998
Revenues
Sierra's revenues increased to $12.0 million, or 160%, for the quarter
ended June 30, 1998 as compared to $4.6 million for the same period in
1997. The increase was primarily attributable to acquisitions completed in
late 1997.
Expenses
The increased activity from the acquisitions also caused operating expenses
to increase $7.5 million, or 184%, for the quarter ended June 30, 1998 as
compared to the same period for 1997. The components of operating expenses
consisted of increases in cost of revenues of $5.5 million and general and
administrative increases of $444,000. In late 1997 Sierra funded a
substantial portion of the acquisitions with borrowings of $52 million from
a financial institution. Consequently, interest expense for the quarter
ended June 30, 1998 increased to $1.8 million from $129,000 for the same
period 1997.
Results of Operations
For the six months ended June 30, 1998
Revenues
Sierra's revenues increased to $25.7 million, or 229%, for the six months
ended June 30, 1998 as compared to $7.8 million for the same period in
1997. The increase was primarily attributable to acquisitions completed in
late 1997.
Expenses
The increased activity from the acquisitions also caused operating expenses
to increase $18.0 million, or 252%, for the six months ended June 30, 1998
as compared to the same period for 1997. The components of operating
expenses consisted of increases in cost of revenues of $12.7 million and
general and administrative increases of $1.9 million. In late 1997 Sierra
funded a substantial portion of the acquisitions with borrowings of $52
million from a financial institution. Consequently, interest expense for
the six months ended June 30, 1998 increased to $3.5 million from $184,000
for the same period 1997.
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 Used in Operating Activities. Cash flows used in operating
activities for the period consisted primarily of net operating income net
of expenses of $710.
Net Cash Used in Investing Activities. Cash flows used in investing
activities totaled $3,272 for the period, and consisted primarily of
acquisitions and purchase of property and equipment.
Net Cash Provided by Financing Activities. Cash flows provided by
investing activities totaled $1,581 for the period. The source of these
funds included $2,100 in proceeds from debt issuance.
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matter to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter
for which this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTHWEST PARTNERS III, L.P.
a Delaware limited partnership
By: Southwest Royalties, Inc.
Managing General Partner
By: /s/ Bill E. Coggin
------------------------------
Bill E. Coggin, Vice President
and Chief Financial Officer
Date: June 9, 1999