Page 1 of 16
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, 2004
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___
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes No X
The registrant's outstanding securities consist of Units of limited
partnership interests for which there exists no established public market
from which to base a calculation of aggregate market value.
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, 2003, which are found in the Registrant's Form
10-K Report for 2003 filed with the Securities and Exchange Commission.
The December 31, 2003 balance sheet included herein has been taken from the
Registrant's 2003 Form 10-K Report. Operating results for the three months
ended March 31, 2004 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,
2004 2003
----- -----
(unaudit
ed)
Assets
- ----------
Current asset:
Cash and cash equivalents $ 24,449 24,425
-------- --------
-- --
Total current assets 24,449 24,425
-------- --------
-- --
Investment 380,506 380,506
-------- --------
-- --
Total assets $ 404,955 404,931
====== ======
Liabilities and Partners'
Equity
- ----------------------------
- ------------
Current liability:
Payable to General Partner $ 362,534 358,935
-------- --------
-- --
Total current liabilities 362,534 358,935
-------- --------
-- --
Partners' equity:
General Partner (910,462 (909,926
) )
Limited partners 952,883 955,922
-------- --------
-- --
Total partners' equity 42,421 45,996
-------- --------
-- --
$ 404,955 404,931
====== ======
Southwest Partners III, L.P.
(a Delaware limited partnership)
Statement of Operations
(Unaudited)
Three Months Ended
March 31,
2004 2003
---- ----
Revenues
- -------------
Interest income $ 24 27
-------- --------
-
24 27
-------- --------
-
Expenses
- ------------
General and administrative 3,599 1,267
-------- --------
-
3,599 1,267
-------- --------
-
Net loss $ (3,575) (1,240)
===== =====
Net loss allocated to:
General Partner $ (536) (186)
===== =====
Limited partners $ (3,039) (1,054)
===== =====
Per limited partner unit $ (18) (6)
===== =====
Southwest Partners III, L.P.
(a Delaware limited partnership)
Statement of Cash Flows
(Unaudited)
Three Months Ended
March 31,
2004 2003
----- -----
Cash flows from operating
activities:
Interest received 24 27
-------- --------
- --
Net cash provided by 24 27
operating activities
-------- --------
- --
Cash flows from investing
activities:
Purchase of Basic - -
Investment
-------- --------
- --
Net cash used in investing - -
activities
-------- --------
- --
Net increase in cash and 24 27
cash equivalents
Beginning of period 24,425 24,828
-------- --------
--- --
End of period $ 24,449 24,855
====== ======
Reconciliation of net loss
to net cash
provided by operating
activities:
Net loss $ (3,575) (1,240)
Adjustment to reconcile net
loss to net
cash provided by operating
activities:
Increase in payables 3,599 1,267
-------- --------
--- --
Net cash provided by $ 24 27
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, 2004, and for the
three months ended March 31, 2004, 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, 2003.
3. Liquidity - Partnership
The Partnership as of March 31, 2004 has negative working capital of
$338,085, which includes a payable to the General Partner of $357,349.
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.
Southwest Partners III, L.P.
(a Delaware limited partnership)
Notes to Financial Statements
4. Liquidity - General Partner
As of December 31, 2003, the General Partner is in violation of
several covenants pertaining to their Amended and Restated Revolving
Credit Agreement due June 1, 2006 and their Senior Second Lien Secured
Credit Agreement due October 15, 2008. Due to the covenant
violations, the General Partner is in default under their Amended and
Restated Revolving Credit Agreement and the Senior Second Lien Secured
Credit Agreement, and all amounts due under these agreements have been
classified as a current liability on the General Partner's balance
sheet at December 31, 2003. The significant working capital deficit
and debt being in default at December 31, 2003, raise substantial
doubt about the General Partner's ability to continue as a going
concern.
Subsequent to December 31, 2003, the Board of Directors of the General
Partner announced its decision to explore a merger, sale of the stock
or other transaction involving the General Partner. The Board has
formed a Special Committee of independent directors to oversee the
sales process. The Special Committee has retained independent
financial and legal advisors to work closely with the management of
the General Partner to implement the sales process. There can be no
assurance that a sale of the General Partner will be consummated or
what terms, if consummated, the sale will be on.
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 May 4, 5.39%
2003
May 5, 2003 to March 31, 6.39%
2004
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 changed its accounting for the investment to 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%.
Basic's Board of Directors according to the Supplemental Warrant
Agreement awarded all holders of EBITDA Contingent Warrants 50% of the
maximum warrants that could have been earned, if the financial goals
of Basic were achieved. The Partnership exercised their warrants on
May 5, 2003 and purchased 50,632 shares of stock for $.01 per share.
The Partnership at December 31, 2003 owned a total of 6.39%, or
270,132 shares of Basic's outstanding common stock.
Southwest Partners III, L.P.
(a Delaware limited partnership)
Notes to Financial Statements
6. Subsequent Event
On May 3, 2004, the Managing General Partner entered into a cash
merger agreement to sell all of its stock to Clayton Williams Energy,
Inc. The cash merger price is being negotiated, but is expected to be
approximately $45 per share. The transaction, which is subject to
approval by the Managing General Partner's shareholders, is expected
to close no later than May 21, 2004.
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, 2004, the Partnership owned a 6.39%
interest in Basic, which is accounted for using the cost method of
accounting.
Results of Operations
For the quarter ended March 31, 2004
Revenues
Revenues consisted of interest income of $24 for the quarter ended March
31, 2004 as compared to $27 for the quarter ended March 31, 2003.
Expenses
Direct expenses totaled $3,599 and $1,267 for the quarters ended March 31,
2004 and 2003, 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 $24.
Liquidity - General Partner
As of December 31, 2003, the General Partner was in violation of several
covenants pertaining to their Amended and Restated Revolving Credit
Agreement due June 1, 2006 and their Senior Second Lien Secured Credit
Agreement due October 15, 2008. Due to the covenant violations, the
General Partner is in default under their Amended and Restated Revolving
Credit Agreement and the Senior Second Lien Secured Credit Agreement, and
all amounts due under these agreements have been classified as a current
liability on the General Partner's balance sheet at December 31, 2003. The
significant working capital deficit and debt being in default at December
31, 2003, raise substantial doubt about the General Partner's ability to
continue as a going concern.
Subsequent to March 31, 2004, the Board of Directors of the General Partner
announced its decision to explore a merger, sale of the stock or other
transaction involving the General Partner. The Board has formed a Special
Committee of independent directors to oversee the sales process. The
Special Committee has retained independent financial and legal advisors to
work closely with the management of the General Partner to implement the
sales process. There can be no assurance that a sale of the General
Partner will be consummated or what terms, if consummated, the sale will be
on.
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
Disclosure Controls and Procedures
As of the three months ended March 31, 2004, H.H. Wommack, III, President
and Chief Executive Officer of the Managing General Partner, and Bill E.
Coggin, Executive Vice President and Chief Financial Officer of the
Managing General Partner, evaluated the effectiveness of the Partnership's
disclosure controls and procedures. Based on their evaluation, they
believe that:
The disclosure controls and procedures of the Partnership were
effective in ensuring that information required to be disclosed by the
Partnership in the reports it files or submits under the Exchange Act
was recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms; and
The disclosure controls and procedures of the Partnership were
effective in ensuring that material information required to be
disclosed by the Partnership in the report it filed or submitted under
the Exchange Act was accumulated and communicated to the Managing
General Partner's management, including its President and Chief
Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure.
Internal Control Over Financial Reporting
There has not been any change in the Partnership's internal control over
financial reporting that occurred during the three months ended March 31,
2004 that has materially affected, or is reasonably likely to materially
affect, it internal control over financial reporting.
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
31.1 Rule 13a-14(a)/15d-14(a) Certification
31.2 Rule 13a-14(a)/15d-14(a) Certification
32.1 Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as
adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
32.2 Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as
adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
(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 14, 2004
SECTION 302 CERTIFICATION Exhibit
31.1
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 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 report;
3.Based on my knowledge, the financial statements, and other
financial information included in this 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 report;
4.The registrant's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15-
15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant
and have:
a)Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
b)Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c)Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
d)Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5.The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over
financial reporting, 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 and material weaknesses in the
design or operation of internal controls over financial
reporting which reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; 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 over financial reporting.
Date: May 15, 2004 /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.
SECTION 302 CERTIFICATION Exhibit
31.2
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 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 report;
3.Based on my knowledge, the financial statements, and other
financial information included in this 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 report;
4.The registrant's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15-
15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant
and have:
a)Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
b)Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c)Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
d)Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5.The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over
financial reporting, 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 and material weaknesses in the
design or operation of internal controls over financial
reporting which reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; 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 over financial reporting.
Date: May 14, 2004 /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.
CERTIFICATION PURSUANT TO Exhibit
32.1
19 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Southwest Partners
III, L.P. (the "Company") on Form 10-Q for the period ending March
31, 2004 as filed with the Securities and Exchange Commission on the
date hereof (the "Report"), I, H.H. Wommack, III, Chief Executive
Officer of the Managing General Partner of the Company, certify,
pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operation of the Company.
Date: May 14, 2004
/s/ H.H. Wommack, III
H. H. Wommack, III
Chairman, President, Director and Chief Executive Officer
of Southwest Royalties, Inc., the
Managing General Partner of
Southwest Partners III, L.P.
CERTIFICATION PURSUANT TO Exhibit
32.2
19 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Southwest Partners III,
L.P. (the "Company") on Form 10-Q for the period ending March 31,
2004 as filed with the Securities and Exchange Commission on the date
hereof (the "Report"), I, Bill E. Coggin, Chief Financial Officer of
the Managing General Partner of the Company, certify, pursuant to 18
U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act
of 2002, that:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operation of the Company.
Date May 14, 2004
/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.