Page 15 of 15
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 September 30, 1999
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 15.
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
The Registrant (herein also referred to as the "Partnership" has prepared
the unaudited condensed financial statements included herein in accordance
with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments necessary for a fair presentation have been included and are of
a normal recurring nature. The financial statements should be read in
conjunction with the audited financial statements and the notes thereto for
the year ended December 31, 1998 which are found in the Registrant's Form
10-K Report for 1998 filed with the Securities and Exchange Commission.
The December 31, 1998 balance sheet included herein has been taken from the
Registrant's 1998 Form 10-K Report. Operating results for the three and
nine month periods ended September 30, 1999 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
September 30, December 31,
1999 1998
---- ----
(Unaudited)
Assets
Current asset:
Cash and cash equivalents $ 389,894 381,545
---------- ----------
Total current assets 389,894 381,545
---------- ----------
Equity investment in subsidiary - 2,005,000
---------- ----------
$ 389,894 2,386,545
========== ==========
Liabilities and Partners' Equity
Current liabilities:
Payable to General Partner and subsidiary $ 234,906 138,938
---------- ----------
Total current liabilities 234,986 138,938
---------- ----------
Partners' equity:
General Partner (893,578) (579,685)
Limited partners 1,048,566 2,827,292
---------- ----------
Total partners' equity 154,988 2,247,607
---------- ----------
$ 389,894 2,386,545
========== ==========
Southwest Partners III, L.P.
(a Delaware limited partnership)
Statement of Operations
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
Revenues ---- ---- ---- ----
Interest income $ 2,795 3,077 8,349 8,593
--------- --------- ---------
- ---------
2,795 3,077 8,349
8,593
--------- --------- ---------
- ---------
Expenses
General and administrative 30,408 35,926 95,968 104,656
Amortization - 3,947 - 11,841
Equity loss in unconsolidated
subsidiary - 1,333,760 2,005,000 2,877,119
--------- --------- ---------
- ---------
30,408 1,373,633 2,100,968
2,993,616
--------- --------- ---------
- ---------
Net loss $ (27,613) (1,370,556)
(2,092,619) (2,985,023)
========= ========= =========
=========
Net loss allocated to:
General Partner $ (4,142) (204,991) (313,893) (445,977)
========= ========= =========
=========
Limited partners $ (23,471) (1,165,565)
(1,778,726) (2,539,046)
========= ========= =========
=========
Per limited partner unit $ (137) (6,819) (10,406) (14,855)
========= ========= =========
=========
Southwest Partners III, L.P.
(a Delaware limited partnership)
Statement of Cash Flows
(Unaudited)
Nine Months Ended
Sep
tember 30,
Cash flows from operating activities: 1999 1998
---- ----
Cash paid to Managing General Partner
for administrative fees $ - (33)
Interest received 8,349 8,593
---------
- ---------
Net cash provided by operating activities 8,349 8,560
---------
- ---------
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 - 37,580
Syndication costs - (98,837)
---------
- ---------
Net cash used in financing activities - (67,507)
---------
- ---------
Net increase (decrease)
in cash and cash equivalents 8,349 (122,461)
Beginning of period 381,545 501,086
---------
- ---------
End of period $ 389,894 378,625
=========
=========
Reconciliation of net loss to net cash
provided by operating activities:
Net loss $(2,092,619) (2,985,023)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Amortization - 11,841
Undistributed loss of affiliate 2,005,000 2,877,119
Increase in accounts payable 95,968 104,623
---------
- ---------
Net cash provided by operating activities $ 8,349 8,560
=========
========
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 September 30, 1999, and for
the three and nine months ended September 30, 1999, is unaudited.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted in this Form 10-Q
pursuant to the rules and regulations of the Securities and Exchange
Commission. However, in the opinion of management, these interim
financial statements include all the necessary adjustments to fairly
present the results of the interim periods and all such adjustments
are of a normal recurring nature. The interim financial statements
should be read in conjunction with the audited financial statements
for the year ended December 31, 1998.
3. Investments
The Partnerships investment in Sierra upon recording their portion of
Sierra's losses for the six months ended June 30, 1999 was reduced to
zero. Therefore, according to General Accepted Accounting Principles,
the equity method was suspended. The Partnership will not record
their ownership percentage of Sierra's losses beyond June 30, 1999.
If Sierra subsequently begins to report net income, the Partnership
will resume applying the equity method only after its share of net
income equals the share of net losses not recognized during the period
the equity method is suspended.
Following is a summary of the financial position and results of
operations of Sierra Well Service, Inc. as of September 30, 1999 and
December 31, 1998 and for the nine months ended September 30, 1999 and
the year ended December 31, 1998 (in thousands):
1999 1998
---- ----
Current assets $ 8,130 11,828
Property and equipment, net 38,657 45,015
Other assets, net 20,989 24,197
------ ------
Total assets $ 67,776 81,040
====== ======
Current liabilities $ 5,346 58,330
Long-term debt 50,410 650
Deferred income taxes - 3,724
------ ------
$ 55,756 62,704
====== ======
Stockholders' equity $ 12,020 18,336
====== ======
Sales $ 25,761 36,185
====== ======
Net loss $ (8,214) (5,024)
====== ======
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 September 30, 1999, the Partnership owned a 33.8%
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 September 30, 1999
Revenues
Revenues consisted of interest income. Interest income generated $2,795
for the quarter ended September 30, 1999 as compared to $3,077 for the
quarter ended September 30, 1998.
Expenses
Direct expenses totaled $30,408 and $39,873 for the quarters ended
September 30, 1999 and 1998, respectively, and consisted of general and
administrative expenses and $3,947 amortization expense for the quarter
ended September 30,1998. General and administrative expenses represent
management fees paid to the Managing General Partner for costs incurred to
operate the partnership.
Equity in loss of unconsolidated subsidiary - See Footnote 3 Investments
and Sierra's Management Discussion and Analysis section included in this
report.
Results of Operations
For the nine months ended September 30, 1999
Revenues
Revenues consisted of interest income. Interest income generated $8,349
for the nine months ended September 30, 1999 as compared to $8,593 for the
nine months ended September 30, 1998.
Expenses
Direct expenses totaled $95,968 and $116,497 for the nine months ended
September 30, 1999 and 1998, respectively, and consisted of general and
administrative expenses and $11,841 amortization expense for the nine
months ended September 30,1998. General and administrative expenses
represent management fees paid to the Managing General Partner for costs
incurred to operate the partnership.
Equity in loss of unconsolidated subsidiary of $2,005,000 reflects the
Partnership's weighted average proportionate share of the $4,818,680 loss
by Sierra in the amount of $1,657,626 for the period and the amortization
of goodwill in relation to the Partnerships investment in Sierra of
$347,373. Equity in loss of unconsolidated subsidiary for the nine months
ended September 30, 1998 was $2,877,119. For an explanation as to the
decrease in equity in loss of unconsolidated subsidiary see Footnote 3 and
Sierra's Management Discussion and Analysis section included in this
report.
Liquidity and Capital Resources
The proceeds from the sale of partnership units in March 1997 funded the
Partnership's investment in Sierra. The Partnership did not sell any
additional partnership units or invest additional amounts in Sierra
subsequent to December 31, 1997.
Net Cash Provided by Operating Activities. Cash flows provided by
operating activities for the period consisted primarily of interest income
from a financial institution of $8,349.
Net Cash Used in Investing Activities. There were no amounts provided by
or used in investing activities for the nine months ended September 30,
1999.
Net Cash Used in Financing Activities. There were no amounts provided by
or used in financing activities for the nine months ended September 30,
1999.
Liquidity - Equity Investment in Subsidiary
Sierra has a highly leveraged capital structure. Sierra, on March 31, 1999
finalized a restructuring of its debt with their 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.
Liquidity - Managing General Partner
The Managing General Partner has a highly leveraged capital structure with
over $21.0 million of interest payments due within the next twelve months
on its debt obligations. Due to the severely depressed commodity prices
experienced by the oil & gas industry during the last quarter of 1997,
throughout 1998 and continuing throughout the first quarter of 1999 and
lagging rental property utilization, the Managing General Partner is
experiencing difficulty in generating sufficient cash flow to meet its
obligations and sustain its operations. The Managing General Partner is
currently in the process of attempting to renegotiate the terms of its
various obligations with its creditors and/or attempting to seek new
lenders or equity investors. Additionally, the Managing General Partner
would consider disposing of certain assets in order to meet its
obligations.
There can be no assurance that the Managing General Partner's debt
restructuring efforts will be successful or that the lenders will agree to
a course of action consistent with the Managing General Partners
requirements in restructuring the obligations. Even if such agreement is
reached, it may require approval of additional lenders, which is not
assured. Furthermore, there can be no assurance that the sales of assets
can be successfully accomplished on terms acceptable to the Managing
General Partner. Under current circumstances, the Managing General
Partner's ability to continue as a going concern depends upon its ability
to (1) successfully restructure its obligations or obtain additional
financing as may be required, (2) maintain compliance with all debt
covenants, (3) generate sufficient cash flow to meet its obligations on a
timely basis, and (4) achieve satisfactory levels of future earnings. If
the Managing General Partner is unsuccessful in its efforts, it may be
unable to meet its obligations making it necessary to undertake such other
actions as may be appropriate to preserve asset values.
Information Systems for the Year 2000
The Managing General Partner provides all data processing needs of the
Partnership. The Managing General Partner has identified and assessed its
exposure to the potential Year 2000 software and imbedded chip processing
and date sensitivity issue. Through the Managing General Partners data
processing subsidiary, Midland Southwest Software, Inc., the Managing
General Partner proactively initiated an internal plan to identify
applicable hardware and software, assess impact and effect, estimate costs,
construct and implement corrective actions, and prepare contingency plans.
Identification & Assessment
The Managing General Partner currently believes it identified the internal
and external software and hardware that had the potential for date
sensitivity problems. Four critical systems and/or functions were
identified and addressed: (1) the proprietary software of the Partnership
(OGAS) that is used for oil & gas property management and financial
accounting functions, (2) the DEC VAX/VMS hardware and operating system,
(3) various third-party application software including lease economic
analysis, fixed asset management, geological applications, and
payroll/human resource programs, and (4) External Agents.
The proprietary software of the Partnership has met compliance
requirements. Since this is an internally generated software package, the
Managing General Partner incurred approximately $25,000 in man-hours.
Modifications were made by internal staff and did not represent additional
costs to the Partnership. The Managing General Partner has not made
contingency plans at this time since the conversion is ahead of schedule
and being handled by Managing General Partner controlled internal
programmers. Given the complexity of the systems that were modified, it is
anticipated that some problems may arise, but having met the early
completion date, the Managing General Partner feels that adequate time
remains available to overcome unforeseen delays.
DEC has released a fully compliant version of its operating system that is
used by the Partnership on the DEC VAX system. It was installed, the
Managing General Partner believes that this solved any potential problems
on the system.
The Managing General Partner has identified various third-party software
that may have date sensitivity problems and is continuing to work with the
vendors to secure solutions as well as prepare contingency plans. After
review and evaluation of the vendor plans and status, the Managing General
Partner believes that the problems will be resolved prior to the year 2000
or the alternate contingency plan will sufficiently and adequately
remediate the problem so that there is no material disruption to business
functions.
The External Agents of the Partnership include suppliers, customers,
owners, vendors, banks, product purchasers including pipelines, and other
oil and gas property operators. The Managing General Partner is in the
process of identifying and communicating with each critical External Agent
about its plan and progress thereof in addressing the Year 2000 issue.
This process is on schedule and the Managing General Partner, at this time,
believes that there should be no material interference or disruption
associated with any of the critical External Agent's functions necessary to
the Partnership's business. The Managing General Partner estimates
completion of this audit by year end 1999 and believes that alternate plans
can be devised to circumvent any material problems arising from critical
External Agent noncompliance.
Cost
To date, the Managing General Partner has incurred only minimal internal
man-hour costs for identification, planning, and maintenance. The Managing
General Partner believes that the necessary additional costs will also be
minimal and most will fall under normal and general maintenance procedures
and updates. An accurate cost cannot be determined at this time, but it is
expected that the total cost to remediate all systems to be less than
$50,000.
Risks/Contingency
The failure to correct critical systems of the Partnership, or the failure
of a material business partner or External Agent to resolve critical Year
2000 issues could have a serious adverse impact on the ability of the
Partnership to continue operations and meet obligations. Based on the
Managing General Partner's evaluation and assessment to date, it is
believed that any interruption in operation will be minor and short-lived
and pose no material monetary loss, safety, or environmental risk to the
Partnership. However, due to the external nature of the potential
problems, it is impossible to accurately identify the risks, quantify
potential impacts or establish a final contingency plan. The Managing
General Partner believes that its assessment and contingency planning will
be complete no later than year-end 1999.
Worst Case Scenario
The Securities and Exchange Commission requires public companies to
forecast the most reasonably likely worst case Year 2000 scenario, assuming
that the Managing General Partner's Year 2000 plan is not effective.
Analysis of the most reasonably likely worst case Year 2000 scenarios the
Partnership may face leads to contemplation of the following possibilities
which, though considered highly unlikely, must be included in any
consideration of worst cases: widespread failure of electrical, gas, and
similar supplies by utilities serving the Partnership; widespread
disruption of the services of communications common carriers; similar
disruption to means and modes of transportation for the Partnership and its
employees, contractors, suppliers, and customers; significant disruption to
the Partnership's ability to gain access to, and continue working in,
office buildings and other facilities; and the failure, of third-parties
systems, the effects of which would have a cumulative material adverse
impact on the Partnership's critical systems. The Partnership could
experience an inability by customers, traders, and others to pay, on a
timely basis or at all, obligations owed to the Partnership. Under these
circumstances, the adverse effect on the Partnership, and the diminution of
Partnership revenues, could be material, although not quantifiable at this
time.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - continued
Sierra Well Service, Inc.
General
Sierra derives its revenues from well servicing, liquids handling, fresh
and brine water supply and disposal and other related services. Well
servicing rigs are billed at hourly rates that are generally determined by
the type of equipment required, market conditions in the region in which
the well servicing rig operates, ancillary equipment and the necessary
personnel provided on the rig. Sierra charges its customers for liquids
handling and fresh and brine water supply and disposal services on an
hourly or per barrel basis depending on the services offered. Demand for
services depends substantially upon the level of activity in the oil and
gas industry, which in turn depends, in part, on oil and gas prices,
expectations about future prices, the cost of exploring for, producing and
delivering oil and gas, the discovery rate of new oil and gas reserves in
on-shore areas, the level of drilling and workover activity and the ability
of oil and gas companies to raise capital.
Results of Operations
For the quarter ended September 30, 1999
Revenues
Sierra's revenues decreased to $10.0 million, or 4%, for the quarter ended
September 30, 1999 as compared to $10.5 million for the same period in
1998. The decrease was primarily attributable to the decrease in oil and
gas prices, which lowered rig utilization, and in turn lowered activity
levels. In an effort to remain competitive, hourly rates were reduced.
Expenses
The decline in revenues experienced in the oil and gas industry has also
caused operating expenses to decrease $716,000, or 6%, for the quarter
ended September 30, 1999 as compared to the same period for 1998. The
components of operating expenses consisted of decreases in cost of revenues
of $19,000 and general and administrative decreases of $497,000. Interest
expense for the quarter ended September 30, 1999 decreased to $1.6 million
from $1.8 million for the same period 1998.
Results of Operations
For the nine months ended September 30, 1999
Revenues
Sierra's revenues decreased to $25.8 million, or 28%, for the nine months
ended September 30, 1999 as compared to $36.2 million for the same period
in 1998. The decrease was primarily attributable to the decrease in oil and
gas prices, which lowered rig utilization, and in turn lowered activity
levels. In an effort to remain competitive, hourly rates were reduced.
Expenses
The decline in revenues experienced in the oil and gas industry has also
caused operating expenses to decrease $7.4 million, or 20%, for the nine
months ended September 30, 1999 as compared to the same period for 1998.
The components of operating expenses consisted of decreases in cost of
revenues of $6.0 million and general and administrative decreases of $1.1
million. Interest expense for the nine months ended September 30, 1999
decreased to $5.0 million from $5.3 million for the same period 1998.
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 operating expenses in
excess of operating income of $556,000.
Net Cash Used in Investing Activities. Cash flows used in investing
activities totaled $87,000 for the period, and consisted primarily of the
purchase of property and equipment.
Net Cash Used in Financing Activities. Cash flows used in financing
activities totaled $1.5 million for the period. The primary use of these
funds included $6.5 million used for payment of debt and debt related costs
net of $5.0 million in proceeds from issuance of preferred stock.
Liquidity - Equity Investment by Investors
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 investment in
Sierra could be reduced to zero. 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
Sierra's data processing needs are provided by the same system, which the
Managing General Partner uses through their data processing subsidiary
Midland Southwest Software, Inc.
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: November 15, 1999