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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, 2002
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number 000-24181
Southwest Partners III, L.P.
(Exact name of registrant as specified
in its limited partnership agreement)
Delaware 75-2699554________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
407 N. Big Spring, Suite 300
Midland, Texas 79701
(Address of principal executive offices)
(915) 686-9927
(Registrant's telephone number,
including area code)
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days:
Yes X No
The total number of pages contained in this report is 13.
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, 2001 which are found in the Registrant's Form
10-K Report for 2001 filed with the Securities and Exchange Commission.
The December 31, 2001 balance sheet included herein has been taken from the
Registrant's 2001 Form 10-K Report. Operating results for the three and
six month periods ended June 30, 2002 are not necessarily indicative of the
results that may be expected for the full year.
Southwest Partners III, L.P.
(a Delaware limited partnership)
Balance Sheets
June 30, December 31,
2002 2001
---- ----
(Unaudited)
Assets
------
Current asset:
Cash and cash equivalents $ 28,243 28,120
--------
- --------
Total current assets 28,
243 28,120
--------
- --------
Investment 380,000 380,000
--------
- --------
Total assets $ 408,243
408,120
========
========
Liabilities and Partners' Equity
--------------------------------
Current liability -
Payable to General Partner $ 348,400 345,758
--------
- --------
Partners' equity:
General Partner (907,849) (907,471)
Limited partners 967,692 969,833
--------
- --------
Total partners' equity 59,
843 62,362
--------
- --------
$ 408,243
408,120
========
========
Southwest Partners III, L.P.
(a Delaware limited partnership)
Statement of Operations
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
Revenues ---- ---- ---- ----
--------
Interest income $ 63 1,419 123 3,844
--------- --------- ---------
- ---------
63 1,419 123
3,844
--------- --------- ---------
- ---------
Expenses
--------
General and administrative 1,419 2,136 2,642 3,428
--------- --------- ---------
- ---------
1,419 2,136 2,642
3,428
--------- --------- ---------
- ---------
Net income (loss) $ (1,356) (717) (2,519) 416
========= ========= =========
=========
Net income (loss) allocated to:
General Partner $ (203) (108) (378) 62
========= ========= =========
=========
Limited partners $ (1,153) (609) (2,141) 354
========= ========= =========
=========
Per limited partner unit $ (7) (4) (13) 2
========= ========= =========
=========
Southwest Partners III, L.P.
(a Delaware limited partnership)
Statement of Cash Flows
(Unaudited)
Six Months Ended
June
30,
2002 2001
---- ----
Cash flows from operating activities:
Paid to suppliers $ - (12)
Interest received 123 3,844
---------
- ---------
Net cash provided by operating activities 123 3,832
---------
- ---------
Cash flows from investing activities:
Purchase of Basic investment - (380,000)
---------
- ---------
Cash used in investing activities - (380,000)
---------
- ---------
Net (decrease) increase in cash
and cash equivalents 123 (376,168)
Beginning of period 28,120 404,112
---------
- ---------
End of period $ 28,243 27,944
=========
=========
Reconciliation of net income (loss) to net cash
provided by operating activities:
Net income (loss) $ (2,519) 416
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Increase in accounts payable 2,642 3,416
---------
- ---------
Net cash provided by operating activities $ 123 3,832
=========
=========
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, 2002, and for the
three and six months ended June 30, 2002, is unaudited. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted in this Form 10-Q pursuant
to the rules and regulations of the Securities and Exchange
Commission. However, in the opinion of management, these interim
financial statements include all the necessary adjustments to fairly
present the results of the interim periods and all such adjustments
are of a normal recurring nature. The interim financial statements
should be read in conjunction with the audited financial statements
for the year ended December 31, 2001.
3. Liquidity - Partnership
The Partnership as of June 30, 2002 has negative working capital of
$320,157 and a payable to the General Partner of $343,507. The
Partnership does not generate operating income and has no current
means of settling the liability to the General Partner, but believes
the fair value of its assets are sufficient to meet their current
obligations if necessary. The General Partner, should it become
necessary, has agreed to either extend the payment terms until the
Partnership can comfortably pay the balance or make other mutually
acceptable arrangements to settle the payable by transfer, sale or
assignment of Partnership assets.
4. Investments
Southwest Partners III consist entirely of an investment in Basic's
common stock. Investment in Basic Energy Services, Inc. in which the
Partnership had a 5.39% and 6.32% interest at June 30, 2002 and
December 31, 2001, is accounted for by the cost method. Southwest
Partners III no longer holds a 20% or more interest in Basic and
exerts no significant influence over Basic's operations. Under the
cost method of accounting the Partnership recognizes as income
dividends received that are distributed from net accumulated earnings
of an investee subsequent to the date of acquisition of the
investment. The Partnership would recognize a loss when there is a
loss in value in the investment, which is other than a temporary
decline. In its assessment of value the Partnership considers future
cash flows either in the form of dividends or other distributions from
the investee or from selling it's investment to an unrelated party.
Prior to December 2000, the Partnership accounted for the investment
on the equity method.
Common stock ownership in Basic Energy Services, Inc. was as follows:
December 31, 1997 to March 31, 1999 45.89%
March 31, to December 21, 2000 44.94%
December 21, 2000 to December 31, 2000 10.57%
January 1, 2001 to May 20, 2001 8.11%
May 21, 2001 to February 13, 2002 6.32%
February 14, 2002 to June 30, 2002 5.39%
Southwest Partners III, L.P.
(a Delaware limited partnership)
Notes to Financial Statements
4. Investments - continued
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 paragraph 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 from 10.57% to 8.11%.
On May 21, 2001, Basic issued a Notice to Stockholders of Preemptive
Rights. The Partnership purchased an additional 19,000 shares of
common stock at $380,000. The Partnership at December 31, 2001 owned
a total of 6.32%, or 219,500 shares of Basic's outstanding common
stock.
On February 13, 2002, Basic sold 600,000 shares of common stock to a
group of related investors. Based on this transaction, the
Partnerships ownership percentage was diluted from 6.32% to 5.39%.
Following is a summary of the financial position and results of
operations of Basic Energy Services, Inc. as of June 30, 2002 and
December 31, 2001 and for the six months ended June 30, 2002 and the
year ended December 31, 2001 (in thousands):
2002 2001
---- ----
Current assets $ 40,196 28,872
Property and equipment, net 91,318 78,019
Other assets, net 19,618 18,733
------- -------
Total assets $ 151,132 125,624
======= =======
Current liabilities $ 15,119 13,414
Long-term debt 42,107 45,258
Deferred income 74 -
Deferred income taxes 8,558 8,186
------- -------
$ 65,858 66,858
======= =======
Stockholders' equity $ 85,274 58,766
======= =======
Sales $ 48,398 99,709
======= =======
Net (loss) income $ (492) 6,311
======= =======
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Southwest Partners III
General
Southwest Partners III, L.P., a Delaware limited partnership (the
"Partnership"), was formed on March 11, 1997 to invest in Basic Energy
Services, Inc. ("Basic"), an oilfield service company which provides
services and products to oil and gas operators for the workover,
maintenance and plugging of existing oil and gas wells in the southwestern
United States. As of June 30, 2002, the Partnership owned a 5.39% interest
in Basic, which is accounted for using the cost method of accounting.
Results of Operations
For the quarter ended June 30, 2002
Revenues
Revenues consisted of interest income of $63 for the quarter ended June 30,
2002 as compared to $1,419 for the quarter ended June 30, 2001. The
decrease in interest income is due to the additional investment in Basic on
May 21, 2001, which decreased the amount of cash held in the interest
bearing account.
Expenses
Direct expenses totaled $1,419 and $2,136 for the quarters ended June 30,
2002 and 2001, respectively, and consisted of general and administrative
expenses. General and administrative expenses primarily represent
independent accounting fees incurred to audit the Partnership.
Results of Operations
For the six months ended June 30, 2002
Revenues
Revenues consisted of interest income of $123 for the six months ended June
30, 2002 as compared to $3,844 for the six months ended June 30, 2001. The
decrease in interest income is due to the additional investment in Basic on
May 21, 2001, which decreased the amount of cash held in the interest
bearing account.
Expenses
Direct expenses totaled $2,642 and $3,428 for the six months ended June 30,
2002 and 2001, respectively, and consisted of general and administrative
expenses. General and administrative expenses primarily represent
independent accounting fees incurred to audit the Partnership.
Liquidity and Capital Resources
The proceeds from the sale of partnership units in March 1997 funded the
Partnership's investment in Basic.
Net Cash Provided by Operating Activities. Cash flows provided by
operating activities for the period consisted primarily of interest income
from a financial institution of $123.
Recent Accounting Pronouncements
The FASB has issued Statement No. 143 "Accounting for Asset Retirement
Obligations" which establishes requirements for the accounting of removal-
type costs associated with asset retirements. The standard is effective
for fiscal years beginning after June 15, 2002, with earlier application
encouraged. The General Partner has determined this FASB to have no impact
on the partnership.
On October 3, 2001, the FASB issued Statements No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets." This pronouncement
supercedes FAS 121 "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed" and eliminates the requirement of
Statement 121 to allocate goodwill to long-lived assets to be tested for
impairment. The provisions of this statement are effective for financial
statements issued for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years. The General Partner has
determined this FASB to have no impact on the partnership.
In April 2002, FASB issued SFAS No. 145, "Rescission of SFAS No. 4, 44, and
64, Amendment of SFAS No. 13, and Technical Corrections." This Statement
rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of
Debt", and an amendment of that Statement, SFAS No. 64, "Extinguishments of
Debt Made to Satisfy Sinking-Fund Requirements". This Statement also
rescinds or amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings, or describe their
applicability under changed conditions. This standard is effective for
fiscal years beginning after May 15, 2002. The Managing General Partner
believes that the adoption of this statement will not have a significant
impact on the Partnerships financial statements.
In July 2002, FASB issued SFAS No. 146 "Accounting for Costs Associated
with Exit or Disposal Activities" which establishes requirements for
financial accounting and reporting for costs associated with exit or
disposal activities. This standard is effective for exit or disposal
activities initiated after December 31, 2002. The Managing General Partner
is currently assessing the impact of this statement on the Partnerships'
future financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - continued
Basic Energy Services, Inc.
General
Basic derives its revenues from well servicing, liquids handling, fresh and
brine water supply and disposal and other related services. Well servicing
rigs are billed at hourly rates that are generally determined by the type
of equipment required, market conditions in the region in which the well
servicing rig operates, ancillary equipment and the necessary personnel
provided on the rig. Basic charges its customers for liquids handling and
fresh and brine water supply and disposal services on an hourly or per
barrel basis depending on the services offered. Demand for services
depends substantially upon the level of activity in the oil and gas
industry, which in turn depends, in part, on oil and gas prices,
expectations about future prices, the cost of exploring for, producing and
delivering oil and gas, the discovery rate of new oil and gas reserves in
on-shore areas, the level of drilling and workover activity and the ability
of oil and gas companies to raise capital.
Results of Operations
For the quarter ended June 30, 2002
Revenues
Basic's revenues increased to $25.4 million, or 8%, for the quarter ended
June 30, 2002 as compared to $23.5 million for the same period in 2001.
Expenses
Operating expenses increased $4.4 million, or 26%, for the quarter ended
June 30, 2002 as compared to the same period for 2001. The components of
operating expenses consisted of increases in cost of revenues of $3.8
million and general and administrative increases of $595,000. Interest
expense increased $535,000, for the quarter ended June 30, 2002 as compared
to the same period for 2001. The increase is in relation to the borrowing
under long-term debt used to make acquisitions during 2001.
Results of Operations
For the six months ended June 30, 2002
Revenues
Basic's revenues increased to $48.4 million, or 11%, for the six months
ended June 30, 2002 as compared to $43.5 million for the same period in
2001.
Expenses
Operating expenses increased $8.2 million, or 26%, for the six months ended
June 30, 2002 as compared to the same period for 2001. The components of
operating expenses consisted of increases in cost of revenues of $8.5
million and general and administrative decreases of $297,000. Interest
expense for the six months ended June 30, 2002 increased to $2.4 million
from $1.4 million for the same period 2001. The increase is in relation to
the borrowing under long-term debt used to make acquisitions during 2001.
Liquidity and Capital Resources
The primary source of cash is from operations, the receipt of income from
well services provided. Liquidity and capital resource information below
is provided in thousands.
Net Cash Provided by Operating Activities. Cash flows provided by
operating activities for the period consisted primarily of net operating
income net of expenses of $7.8 million.
Net Cash Used in Investing Activities. Cash flows used in investing
activities totaled $20.2 million for the period, and consisted primarily of
payments for businesses in the amount of $14.8 million and purchase of
property and equipment in the amount of $5.6 million.
Net Cash Provided by Financing Activities. Cash flows provided by
financing activities totaled $24.5 million for the period. The primary
source was net of payments on the revolver of 2.3 million and proceeds from
the issuance of common and preferred stock in the amount of $27 million.
Critical Accounting Policies
The Partnership used the cost method of accounting for its investment in
Basic since December 21, 2000. Prior to December 21, 2000 the Partnership
used the equity method of accounting for the investment. Under the cost
method of accounting the Partnership recognizes as income dividends
received that are distributed from net accumulated earnings of an investee
subsequent to the date of acquisition of the investment. The Partnership
would recognize a loss when there is a loss in value in the investment,
which is other than a temporary decline. In its assessment of value the
Partnership considers future cash flows either in the form of dividends or
other distributions from the investee or from selling it's investment to an
unrelated party.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Partnership is not a party to any derivative or embedded derivative
instruments.
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) Reports on Form 8-K:
No reports on Form 8-
K were filed during the quarter ended June 30, 2002.
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: August 14, 2002