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 June 30, 2000
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, 1999 which are found in the Registrant's Form
10-K Report for 1999 filed with the Securities and Exchange Commission.
The December 31, 1999 balance sheet included herein has been taken from the
Registrant's 1999 Form 10-K Report. Operating results for the three and
six month periods ended June 30, 2000 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,
2000 1999
---- ----
(Unaudited)
Assets
Current asset:
Cash and cash equivalents $ 398,338 392,709
---------- ----------
Equity investment in subsidiary - -
---------- ----------
$ 398,338 392,709
========== ==========
Liabilities and Partners' Equity
Current liability:
Payable to General Partner $ 327,906 265,535
---------- ----------
Partners' equity:
General Partner (906,261) (897,750)
Limited partners 976,693 1,024,924
---------- ----------
Total partners' equity 70,432 127,174
---------- ----------
$ 398,338 392,709
========== ==========
Southwest Partners III, L.P.
(a Delaware limited partnership)
Statement of Operations
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
Revenues ---- ---- ---- ----
Interest income $ 2,825 2,764 5,629 5,553
--------- --------- ---------
- ---------
2,825 2,764 5,629
5,553
--------- --------- ---------
- ---------
Expenses
General and administrative 31,046 34,100 62,371 65,559
Equity loss in unconsolidated
subsidiary - 960,764 - 2,004,999
--------- --------- ---------
- ---------
31,046 994,864 62,371
2,070,558
--------- --------- ---------
- ---------
Net loss $ (28,221) (992,100) (56,742) (2,065,0
05)
========= ========= =========
=========
Net loss allocated to:
General Partner $ (4,233) (148,815) (8,511) (309,751)
========= ========= =========
=========
Limited partners $ (23,988) (843,285) (48,231) (1,755,2
54)
========= ========= =========
=========
Per limited partner unit $ (140) (4,934) (282) (10,269)
========= ========= =========
=========
Southwest Partners III, L.P.
(a Delaware limited partnership)
Statement of Cash Flows
(Unaudited)
Six Months Ended
June
30,
2000 1999
---- ----
Cash flows from operating activities:
Interest received $ 5,629 5,553
---------
- ---------
Net cash provided by operating activities 5,629 5,553
---------
- ---------
Net increase in cash and cash equivalents 5,629 5,553
Beginning of period 392,709 381,545
---------
- ---------
End of period $ 398,338 387,098
=========
=========
Reconciliation of net loss to net cash
provided by operating activities:
Net loss $ (56,742) (2,065,005)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Undistributed loss of affiliate - 2,004,999
Increase in accounts payable 62,371 65,559
---------
- ---------
Net cash provided by operating activities $ 5,629 5,553
=========
=========
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, 2000, and for the
three and six months ended June 30, 2000, 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, 1999.
3. Investments
The Partnership at June 30, 2000 owned 44.04% of Basic Energy
Services, Inc. The Partnerships investment in Basic Energy upon
recording their portion of Basic Energy'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 did not record their ownership percentage
of Basic Energy's losses for the quarter ended June 30, 2000. If
Basic Energy 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.
Basic Energy on March 31, 1999 finalized a restructuring of its debt
with the lender. The restructuring of Basic Energy's debt with its
lender provided 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 Basic
Energy 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 Basic Energy is subject to possible future dilution
and/or elimination as a result of the convertible preferred stock held
by Basic Energy's lender. The Partnership's ownership percentage in
Basic Energy upon the signing of Basic Energy's debt restructuring at
March 31, 1999 remained 45.89%. However, should the lender exercise
the conversion feature of the preferred stock, the Partnership's
ownership percentage would decrease.
Basic Energy is currently in default on interest due on their senior
secured debt. The default is the result of the creditor allowing Basic
to postpone its March 30, 2000 payment to June 30, 2000 due to
expenses in preparation of the public offering of stock. Basic Energy
has not made the postponed March 30, 2000 payment or the June 30, 2000
scheduled payment. Even though Basic Energy is in technical default
the creditor has elected not to accelerate the debt while the two
parties work on a plan of action.
Southwest Partners III, L.P.
(a Delaware limited partnership)
Notes to Financial Statements
3. Investments - continued
Following is a summary of the financial position and results of
operations of Basic Energy Services, Inc. (formerly Sierra Well
Service, Inc.) as of June 30, 2000 and December 31, 1999 and for the
six months ended June 30, 2000 and the year ended December 31, 1999
(in thousands):
2000 1999
---- ----
Current assets $ 10,665 $ 8,971
Property and equipment, net 31,221 31,186
Other assets, net 7,127 6,704
------ ------
Total assets $ 49,013 $ 46,861
====== ======
Current liabilities $ 12,206 $ 7,296
Long-term debt 49,840 50,371
Deferred income taxes 1,597 2,224
------ ------
$ 63,643 $ 59,891
====== ======
Stockholders' equity $ (14,630) $(13,030)
====== ======
Sales $ 26,796 $ 37,331
====== ======
Net loss $ (1,601) $(13,401)
====== ======
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Southwest Partners III
General
Southwest Partners III, L.P., a Delaware limited partnership (the
"Partnership"), was formed on March 11, 1997 to invest in Basic Energy
Services, Inc. ("Basic Energy"), an oilfield service company which provides
services and products to oil and gas operators for the workover,
maintenance and plugging of existing oil and gas wells in the southwestern
United States. As of June 30, 2000, the Partnership owned a 44.04%
interest in Basic Energy, 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 Basic Energy's
undistributed earnings or losses for each respective period.
Results of Operations
For the quarter ended June 30, 2000
Revenues
Revenues consisted of interest income. Interest income generated $2,825
for the quarter ended June 30, 2000 as compared to $2,764 for the quarter
ended June 30, 1999.
Expenses
Direct expenses totaled $31,046 and $34,100 for the quarters ended June 30,
2000 and 1999, respectively, and consisted of general and administrative
expenses. General and administrative expenses represent management fees
paid to the Managing General Partner for costs incurred to operate the
partnership.
The Partnerships investment in Basic Energy upon recording their portion of
Basic Energy'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 did not record their
ownership percentage of Basic Energy's losses for the quarter ended June
30, 2000. If Basic Energy 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.
Equity in loss of unconsolidated subsidiary for the quarter ended June 30,
1999 was $960,764 which reflects the Partnership's weighted average
proportionate share of the $2,336,913 loss by Basic Energy in the amount of
$803,898 for the period and the amortization of goodwill in relation to the
Partnerships investment in Basic Energy of $156,866. See Basic Energy's
Management Discussion and Analysis section included in this report.
Results of Operations
For the six months ended June 30, 2000
Revenues
Revenues consisted of interest income. Interest income generated $5,629
for the six months ended June 30, 2000 as compared to $5,553 for the six
months ended June 30, 1999.
Expenses
Direct expenses totaled $62,371 and $65,559 for the six months ended June
30, 2000 and 1999, respectively, and consisted of general and
administrative expenses. General and administrative expenses represent
management fees paid to the Managing General Partner for costs incurred to
operate the partnership.
Equity in loss of unconsolidated subsidiary for the six months ended June
30, 1999 was $2,004,999 which reflects the Partnership's weighted average
proportionate share of the $4,818,680 loss by Basic Energy in the amount of
$1,657,626 for the period and the amortization of goodwill in relation to
the Partnerships investment in Basic Energy of $347,373. See Basic
Energy'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 Basic Energy. The Partnership did not sell any
additional partnership units or invest additional amounts in Basic Energy
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 $5,629.
Net Cash Used in Investing Activities. There were no amounts provided by
or used in investing activities for the quarter ended June 30, 2000.
Net Cash Used in Financing Activities. There were no amounts provided by
or used in financing activities for the quarter ended June 30, 2000.
Liquidity - Equity Investment in Subsidiary
Basic Energy has a highly leveraged capital structure. Basic Energy on
March 23, 2000 filed a Form S-1 "Registration Statement Under the
Securities Act of 1933" with the Securities and Exchange Commission.
Basic Energy planned to use the net proceeds from this offering to a)repay
$24.9 million Senior Notes; b)$16.2 million as cash consideration to
acquire businesses; c)$17.3 million to pay down Subordinated Notes;
d)redeem $5.4 million Series A Cumulative Preferred Stock; e)3.3 million to
repay long-term debt and f)$4.5 million to cover expenses in connection
with the offering and for general corporate purposes. Basic Energy on June
23, 2000 suspended its initial public offering.
Basic Energy on March 31, 1999 finalized a restructuring of its debt with
the lender. The restructuring of Basic Energy's debt with its lender
provided 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 Basic Energy 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 Basic Energy is subject to
possible future dilution and/or elimination as a result of the convertible
preferred stock held by Basic Energy's lender. The Partnership's ownership
percentage in Basic Energy upon the signing of Basic Energy's debt
restructuring at March 31, 1999 remained 45.89%. However, should the
lender exercise the conversion feature of the preferred stock, the
Partnership's ownership percentage would decrease.
Basic Energy is currently in default on interest due on their senior
secured debt. The default is the result of the creditor allowing Basic to
postpone its March 30, 2000 payment to June 30, 2000 due to expenses in
preparation of the public offering of stock. Basic Energy has not made the
postponed March 30, 2000 payment or the June 30, 2000 scheduled payment.
Even though Basic Energy is in technical default the creditor has elected
not to accelerate the debt while the two parties work on a plan of action.
Basic Energy hired an investment-banking group to evaluate all available
financial options in regard to reducing the existing leverage and halting
any further dilution by the existing creditor. The options include but are
not limited to private equity, restructuring of existing debt and a
possible return to the public market. Basic Energy is seeking a solution
that will maximize shareholder value as well as satisfy the existing debt.
Liquidity - Managing General Partner
The Managing General Partner has a highly leveraged capital structure with
over $50.1 million principal due by December 31, 2000 and $15.3 million
interest payments due within the next twelve months on its debt
obligations. The Managing General Partner is currently in the process of
renegotiating the terms of its various obligations with its creditors
and/or attempting to seek new lenders or equity investors. Additionally,
the 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.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - continued
Basic Energy Services, Inc.
General
Basic Energy derives its revenues from well servicing, liquids handling,
fresh and brine water supply and disposal and other related services. Well
servicing rigs are billed at hourly rates that are generally determined by
the type of equipment required, market conditions in the region in which
the well servicing rig operates, ancillary equipment and the necessary
personnel provided on the rig. Basic Energy charges its customers for
liquids handling and fresh and brine water supply and disposal services on
an hourly or per barrel basis depending on the services offered. Demand
for services depends substantially upon the level of activity in the oil
and gas industry, which in turn depends, in part, on oil and gas prices,
expectations about future prices, the cost of exploring for, producing and
delivering oil and gas, the discovery rate of new oil and gas reserves in
on-shore areas, the level of drilling and workover activity and the ability
of oil and gas companies to raise capital.
Results of Operations
For the quarter ended June 30, 2000
Revenues
Basic's Energy revenues increased to $13.9 million, or 67%, for the quarter
ended June 30, 2000 as compared to $8.3 million for the same period in
1999.
Expenses
The increase in revenues experienced in the oil and gas industry has also
caused operating expenses to increase $3.3 million, or 41%, for the quarter
ended June 30, 2000 as compared to the same period for 1999. The
components of operating expenses consisted of increases in cost of revenues
of $3.4 million and general and administrative decreases of $106,000.
Interest expense for the quarters ended June 30, 2000 and 1999 remained at
approximately $1.6 million.
Results of Operations
For the six months ended June 30, 2000
Revenues
Basic Energy's revenues increased to $26.8 million, or 70%, for the six
months ended June 30, 2000 as compared to $15.7 million for the same period
in 1999. The increase was primarily attributable to the increase in oil and
gas prices, which raised rig utilization, and in turn raised activity
levels.
Expenses
The increase in revenues experienced in the oil and gas industry has also
caused operating expenses to increase $7.7 million, or 51%, for the six
months ended June 30, 2000 as compared to the same period for 1999. The
components of operating expenses consisted of increases in cost of revenues
of $6.7 million and general and administrative increases of $973,000.
Interest expense for the six months ended June 30, 2000 increased to $3.2
million from $3.1 million for the same period 1999.
Liquidity and Capital Resources
The primary source of cash is from operations, the receipt of income from
well services provided. Liquidity and capital resource information below
is provided in thousands.
Net Cash Provided by Operating Activities. Cash flows provided by
operating activities for the period consisted primarily of net operating
income net of expenses of $2.7 million.
Net Cash Used in Investing Activities. Cash flows used in investing
activities totaled $2.2 million 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 $1.2 million for the period. The use of these funds
included $356,000 for payment of debt and $866,000 for IPO costs.
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/ J Steven Person
------------------------------
J Steven Person, Vice-President
Of Marketing and Chief Financial
Officer of Southwest Royalties, Inc.,
the Managing General Partner
Date: August 15, 2000