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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 September 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 14.
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
nine month periods ended September 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
September December
30, 31,
2002 2001
----------- ---------
(unaudited)
Assets
- ------
Current assets:
Cash and cash equivalents
$ 28,303 28,120
--------- ---------
28,303 28,120
- --------- ---------
Investment 380,000 380,000
--------- ---------
Total Assets 408,303 408,120
$ ========= =========
Liabilities and Partners' Equity
- --------------------------------
Current liability -
Payable to General Partner $ 350,329 345,758
--------- ---------
Partners' equity:
General partners (908,129) (907,471)
Limited partners 966,103 969,833
--------- ---------
Total partners' equity 57,974 62,362
--------- ---------
$ 408,303 408,120
========= =========
Southwest Partners III, L.P.
(a Delaware limited partnership)
Statement of Operations
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
Revenues
- --------
Interest income $ 60 104 183 3,948
------- ------- ------- -------
60 104 183 3,948
------- ------- ------- -------
Expenses
- --------
General and administrative 1,929 1,000 4,428
4,571
------- ------- ------- -------
1,929 1,000 4,571
4,428
------- ------- ------- -------
Net loss $ (1,869) (896) (480)
(4,388)
======= ======= ======= =======
Net loss allocated to:
General Partner $ (280) (134) (658) (72)
======= ======= ======= =======
Limited Partners $ (1,589) (762) (3,730) (408)
======= ======= ======= =======
Per limited partner unit $ (9) (4) (22) (2)
======= ======= ======= =======
Southwest Partners III, L.P.
(a Delaware limited partnership)
Statement of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
2002 2001
---- ----
Cash flows from operating activities
Paid to suppliers $ - (12)
Interest received 183 3,948
------- -------
Net cash provided by operating activities 183 3,936
------- -------
Cash flows used in investing activities
Purchase of Basic investment - (380,000
)
------- -------
Net increase (decrease) in cash and cash 183 (376,064
equivalents )
Beginning of period 28,120 404,112
------- -------
End of period $ 28,303 28,048
======= =======
Reconciliation of net loss to net cash
provided by operating activities
Net loss $ (4,388) (480)
Adjustments to reconcile net loss to net
cash provided by operating activities
Increase in accounts payable 4,571 4,416
------- -------
Net cash provided by operating activities $ 183 3,936
======= =======
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, 2002, and for
the three and nine months ended September 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 September 30, 2002 has negative working capital
of $322,026 and a payable to the General Partner of $346,313. 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 September 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 September 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 September 30, 2002 and
December 31, 2001 and for the nine months ended September 30, 2002 and
the year ended December 31, 2001 (in thousands):
2002 2001
---- ----
Current assets $ 23,930 28,872
Property and equipment, net 107,768 78,019
Other assets, net 22,223 18,733
------- -------
Total assets $ 153,921 125,624
======= =======
Current liabilities $ 15,662 13,414
Long-term debt 42,950 45,258
Deferred income 18 -
Deferred income taxes 10,058 8,186
------- -------
$ 68,688 66,858
======= =======
Stockholders' equity $ 70,291 58,766
======= =======
Sales $ 77,315 99,709
======= =======
Net (loss) income $ (475) 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 September 30, 2002, the Partnership owned a 5.39%
interest in Basic Energy, which is accounted for using the cost method of
accounting.
Results of Operations
For the quarter ended September 30, 2002
Revenues
Revenues consisted of interest income. Interest income generated $60 for
the quarter ended September 30, 2002 as compared to $104 for the quarter
ended September 30, 2001.
Expenses
Direct expenses for the quarter ended September 30, 2002 were $1,929 as
compared to $1,000 for the quarter ended September 30, 2001, 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 nine months ended September 30, 2002
Revenues
Revenues consisted of interest income. Interest income generated $183 for
the nine months ended September 30, 2002 as compared to $3,948 for the nine
months ended September 30, 2001. The decrease in interest income is due to
the additional investment in Basic, which decreased the amount of cash held
in the interest bearing account.
Expenses
Direct expenses totaled $4,571 and $4,428 for the nine months ended
September 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 $183.
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 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 September 30, 2002
Revenues
Basic Energy's revenues decreased to $28.9 million, or 3%, for the quarter
ended September 30, 2002 as compared to $29.8 million for the same period
in 2001.
Expenses
Operating expenses increased $2.2 million, or 10%, for the quarter ended
September 30, 2002 as compared to the same period for 2001. The components
of operating expenses consisted of increases in cost of revenues of $2.0
million and general and administrative increases of $275,000. Interest
expense increased $394,000, for the quarter ended September 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 nine months ended September 30, 2002
Revenues
Basic Energy's revenues increased to $77.3 million, or 5%, for the nine
months ended September 30, 2002 as compared to $73.3 million for the same
period in 2001.
Expenses
Operating expenses increased $10.4 million, or 19%, for the nine months
ended September 30, 2002 as compared to the same period for 2001. The
components of operating expenses consisted of increases in cost of revenues
of $10.5 million and general and administrative decreases of $26,000.
Interest expense for the nine months ended September 30, 2002 increased to
$3.6 million from $2.2 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. Cash flow information is provided below.
Net Cash Provided by Operating Activities. Cash flows provided by
operating activities for the period consisted primarily of operating income
in excess of operating expenses of $10.8 million.
Net Cash Used in Investing Activities. Cash flows used in investing
activities totaled $41.3 million for the period, and consisted primarily of
payments for businesses in the amount of $31.9 million and purchase of
property and equipment in the amount of $9.9 million.
Net Cash Provided by Financing Activities. Cash flows provided by
financing activities totaled $23.3 million for the period. The primary
source was net of payments on long term debt of 3.4 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.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. The chief
executive officer and chief financial officer of the Partnership's managing
general partner have evaluated the effectiveness of the design and
operation of the Partnership's disclosure controls and procedures (as
defined in Exchange Act Rule 13a-14(c)) as of a date within 90 days of the
filing date of this quarterly report. Based on that evaluation, the chief
executive officer and chief financial officer have concluded that the
Partnership's disclosure controls and procedures are effective to ensure
that material information relating to the Partnership and the Partnership's
consolidated subsidiaries is made known to such officers by others within
these entities, particularly during the period this quarterly report was
prepared, in order to allow timely decisions regarding required disclosure.
(b) Changes in Internal Controls. There have not been any significant
changes in the Partnership's internal controls or in other factors that
could significantly affect these controls subsequent to the date of their
evaluation.
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
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, Executive Vice President
and Chief Financial Officer
Date: November 14, 2002
CERTIFICATIONS
I, H.H. Wommack, III, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Southwest Partners III, L.P.;
2. Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-
14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/ H.H. Wommack, III
H. H. Wommack, III
Chairman, President and Chief Executive Officer
of Southwest Royalties, Inc., the
Managing General Partner of
Southwest Partners III, L.P.
CERTIFICATIONS
I, Bill E. Coggin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Southwest Partners III, L.P.;
2. Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-
14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/ Bill E. Coggin
Bill E. Coggin
Executive Vice President
and Chief Financial Officer of
Southwest Royalties, Inc., the
Managing General Partner of
Southwest Partners III, L.P.