Page 1 of 13
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 March 31, 2003
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, 2002, which are found in the Registrant's Form
10-K Report for 2002 filed with the Securities and Exchange Commission.
The December 31, 2002 balance sheet included herein has been taken from the
Registrant's 2002 Form 10-K Report. Operating results for the three months
ended March 31, 2003 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
March December
31, 31,
2003 2002
----- -----
(unaudit
ed)
Assets
- ----------
Current asset:
Cash and cash equivalents $ 24,855 24,828
-------- --------
-- --
Total current assets 24,855 24,828
-------- --------
-- --
Investment 380,000 380,000
-------- --------
-- --
Total assets $ 404,855 404,828
====== ======
Liabilities and Partners'
Equity
- ----------------------------
- ------------
Current liability:
Payable to General Partner $ 349,344 348,077
-------- --------
-- --
Total current liabilities 349,344 348,077
-------- --------
-- --
Partners' equity:
General Partner (908,499 (908,313
) )
Limited partners 964,010 965,064
-------- --------
-- --
Total partners' equity 55,511 56,751
-------- --------
-- --
$ 404,855 404,828
====== ======
Southwest Partners III, L.P.
(a Delaware limited partnership)
Statement of Operations
(Unaudited)
Three Months Ended
March 31,
2003 2002
---- ----
Revenues
- -------------
Interest income $ 27 61
-------- --------
-
27 61
-------- --------
-
Expenses
- ------------
General and administrative 1,267 1,223
-------- --------
-
1,267 1,223
-------- --------
-
Net loss $ (1,240) (1,162)
===== =====
Net loss allocated to:
General Partner $ (186) (174)
===== =====
Limited partners $ (1,054) (988)
===== =====
Per limited partner unit $ (6) (6)
===== =====
Southwest Partners III, L.P.
(a Delaware limited partnership)
Statement of Cash Flows
(Unaudited)
Three Months Ended
March 31,
2003 2002
----- -----
Cash flows from operating
activities:
Paid to suppliers $ - (13)
Interest received 27 61
-------- --------
- --
Net cash provided by 27 48
operating activities
-------- --------
- --
Cash flows from investing
activities:
Purchase of Basic - (380,000
Investment )
-------- --------
- --
Net cash used in investing - (380,000
activities )
-------- --------
- --
Net increase (decrease) in 27 (379,952
cash and cash equivalents )
Beginning of period 24,828 404,112
-------- --------
--- --
End of period $ 24,855 24,160
====== ======
Reconciliation of net loss
to net cash
Provided by operating
activities:
Net income $ (1,240) (1,162)
Adjustment to reconcile net
loss to net
cash provided by operating
activities:
Increase in payables 1,267 1,223
-------- --------
--- --
Net cash provided by $ 27 48
operating activities
====== ======
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 (1) (1)
capital contributions
All other revenues 85% 15%
Organization and 100% -
offering costs
Syndication costs 100% -
Amortization of 100% -
organization costs
Gain or loss on 85% 15%
property disposition
Operating and 85% 15%
administrative costs
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.
2. Summary of Significant Accounting Policies
The interim financial information as of March 31, 2003, and for the
three months ended March 31, 2003, 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, 2002.
Southwest Partners III, L.P.
(a Delaware limited partnership)
Notes to Financial Statements
3. Liquidity - Partnership
The Partnership as of March 31, 2003 has negative working capital of
$324,500 and a payable to the General Partner of $349,344. 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. Liquidity - General Partner
The Managing General Partner has a highly leveraged capital structure
with approximately $124.0 million of principal due between December
31, 2002 and December 31, 2004. The Managing General Partner is
constantly monitoring its cash position and its ability to meet its
financial obligations as they become due, and in this effort, is
continually exploring various strategies for addressing its current
and future liquidity needs. The Managing General Partner regularly
pursues and evaluates recapitalization strategies and acquisition
opportunities (including opportunities to engage in mergers,
consolidations or other business combinations) and at any given time
may be in various stages of evaluating such opportunities.
Based on current production, commodity prices and cash flow from
operations, the Managing General Partner has adequate cash flow to
fund debt service, developmental projects and day to day operations,
but it is not sufficient to build a cash balance which would allow the
Managing General Partner to meet its debt principal maturities
scheduled for 2004. Therefore the Managing General Partner must
renegotiate the terms of its various obligations or seek new lenders
or equity investors in order to meet its financial obligations,
specifically those maturing in 2004. The Managing General Partner
would also 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 debt holders will
agree to a course of action consistent with the Managing General
Partner's requirements in restructurings the obligations.
Furthermore, there can be no assurance that the sales of assets can be
successfully accomplished on terms acceptable to the Managing General
Partner.
Southwest Partners III, L.P.
(a Delaware limited partnership)
Notes to Financial Statements
5. Investments
Common stock ownership in Basic Energy Services, Inc. was as follows:
December 31, 1997 to March 45.89%
31, 1999
March 31, to December 21, 44.94%
2000
December 21, 2000 to 10.57%
December 31, 2000
January 1, 2001 to May 20, 8.11%
2001
May 21, 2001 to February 13, 6.32%
2002
February 14, 2002 to March 5.39%
31, 2003
Southwest Partners III consist entirely of an investment in Basic's
common stock. The investment had been accounted for using the equity
method. Based on the December 21, 2000 transaction discussed below,
the Partnership accounted for the investment using 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.
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 paragraphs
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 at that time 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.
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%.
The Partnership at March 31, 2003 owns a total of 5.39%, or 219,500
shares of Basic's outstanding common stock.
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 March 31, 2003, 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 March 31, 2003
Revenues
Revenues consisted of interest income of $27 for the quarter ended March
31, 2003 as compared to $61 for the quarter ended March 31, 2002.
Expenses
Direct expenses totaled $1,267 and $1,223 for the quarters ended March 31,
2003 and 2002, 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 of interest income from a
financial institution of $27.
Recent Accounting Pronouncements
The FASB has is sued 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. Assessment by the General Partner revealed this pronouncement
to have no impact on the partnership.
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.
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:
None
(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.
General Partner
By: /s/ Bill E. Coggin
----------------------------------------
Bill E. Coggin, Vice-President
and Chief Financial Officer
Date: May 15, 2003
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: May 15, 2003
/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: May 15, 2003
/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.