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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, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number 000-24181
Southwest Partners III, L.P.
(Exact name of registrant as specified
in its limited partnership agreement)
Delaware 75-2699554________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
407 N. Big Spring, Suite 300
Midland, Texas 79701
(Address of principal executive offices)
(915) 686-9927
(Registrant's telephone number,
including area code)
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days:
Yes X No
The total number of pages contained in this report is 15.
<PAGE>
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
The Registrant (herein also referred to as the "Partnership" has prepared
the unaudited condensed financial statements included herein in accordance
with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments necessary for a fair presentation have been included and are of
a normal recurring nature. The financial statements should be read in
conjunction with the audited financial statements and the notes thereto for
the year ended December 31, 1999 which are found in the Registrant's Form
10-K Report for 1999 filed with the Securities and Exchange Commission.
The December 31, 1999 balance sheet included herein has been taken from the
Registrant's 1999 Form 10-K Report. Operating results for the three and
nine month periods ended September 30, 2000 are not necessarily indicative
of the results that may be expected for the full year.
<PAGE>
Southwest Partners III, L.P.
(a Delaware limited partnership)
Balance Sheets
September 30, December 31,
2000 1999
---- ----
(Unaudited)
Assets
Current asset:
Cash and cash equivalents $ 401,215 392,709
---------- ----------
Total current assets 401,215 392,709
---------- ----------
Equity investment in subsidiary - -
---------- ----------
$ 401,215 392,709
====== ======
Liabilities and Partners' Equity
Current liabilities:
Payable to General Partner
and subsidiary $ 338,810 265,535
---------- ----------
Total current liabilities 338,810 265,535
---------- ----------
Partners' equity:
General Partner (907,465) (897,750)
Limited partners 969,870 1,024,924
---------- ----------
Total partners' equity 62,405 127,174
---------- ----------
$ 401,215 392,709
======= ==========
<PAGE>
Southwest Partners III, L.P.
(a Delaware limited partnership)
Statement of Operations
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
Revenues ---- ---- ---- ----
Interest income $ 2,876 2,795 8,506 8,349
--------- --------- ---------
---------
2,876 2,795 8,506
8,349
--------- --------- ---------
---------
Expenses
General and administrative 10,904 30,408 73,275 95,968
Equity loss in unconsolidated
subsidiary - - - 2,005,000
--------- --------- ---------
---------
10,904 30,408 73,275
2,100,968
--------- --------- ---------
---------
Net loss $ (8,028) (27,613) (64,769) (2,092,6
19)
========= ========= =========
=========
Net loss allocated to:
General Partner $ (1,204) (4,142) (9,715) (313,893)
========= ========= =========
=========
Limited partners $ (6,824) (23,471) (55,054) (1,778,7
26)
========= ========= =========
=========
Per limited partner unit $ (40) (137) (322) (10,406)
========= ========= =========
=========
<PAGE>
Southwest Partners III, L.P.
(a Delaware limited partnership)
Statement of Cash Flows
(Unaudited)
Nine Months Ended
Sep
tember 30,
Cash flows from operating activities: 2000 1999
---- ----
Interest received $ 8,506 8,349
---------
---------
Net cash provided by operating activities 8,506 8,349
---------
---------
Net increase in cash and cash equivalents 8,506 8,349
Beginning of period 392,709 381,545
---------
---------
End of period $ 401,215 389,894
=========
=========
Reconciliation of net loss to net cash
provided by operating activities:
Net loss $ (64,769) (2,092,619)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Undistributed loss of affiliate - 2,005,000
Increase in accounts payable 73,275 95,968
---------
---------
Net cash provided by operating activities $ 8,506 8,349
=========
========
<PAGE>
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.
<PAGE>
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, 2000, and for
the three and nine months ended September 30, 2000, is unaudited.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted in this Form 10-Q
pursuant to the rules and regulations of the Securities and Exchange
Commission. However, in the opinion of management, these interim
financial statements include all the necessary adjustments to fairly
present the results of the interim periods and all such adjustments
are of a normal recurring nature. The interim financial statements
should be read in conjunction with the audited financial statements
for the year ended December 31, 1999.
3. Investments
The Partnership at September 30, 2000 owned 44.04% of Basic Energy
Services, Inc. The Partnerships investment in Basic Energy upon
recording their portion of Basic Energy's losses for the six months
ended June 30, 1999 was reduced to zero. Therefore, according to
General Accepted Accounting Principles, the equity method was
suspended. The Partnership did not record their ownership percentage
of Basic Energy's losses for the quarter ended September 30, 2000. If
Basic Energy subsequently begins to report net income, the Partnership
will resume applying the equity method only after its share of net
income equals the share of net losses not recognized during the period
the equity method is suspended.
Basic Energy on March 31, 1999 finalized a restructuring of its debt
with the lender. The restructuring of Basic Energy's debt with its
lender provided for a senior subordinated credit facility and three
classes of preferred stock. According to the redemption and/or
conversion features of the three classes of preferred stock, if Basic
Energy does not meet repayment of scheduled senior subordinated debt
starting at December 31, 1999 with final payment due June 30, 2004,
the lender has the right to exercise their conversion features. The
conversion amount as a percentage of post-conversion outstanding
common stock can range from 25% to 100%. Therefore, the Partnership's
investment in Basic Energy is subject to possible future dilution
and/or elimination as a result of the convertible preferred stock held
by Basic Energy's lender. The Partnership's ownership percentage in
Basic Energy upon the signing of Basic Energy's debt restructuring at
March 31, 1999 remained 45.89%. However, should the lender exercise
the conversion feature of the preferred stock, the Partnership's
ownership percentage would decrease.
Basic Energy is currently in default on interest due on their senior
secured debt. The default is the result of the creditor allowing Basic
Energy to postpone its March 30, 2000 payment due to expenses in
preparation of the public offering of stock. Basic Energy has not made
the postponed March 30, 2000 payment or the June 30, 2000 and
September 30, 2000 scheduled payments. Even though Basic Energy is in
technical default the creditor has elected not to accelerate the debt
while the two parties work on a plan of action.
Southwest Partners III, L.P.
(a Delaware limited partnership)
Notes to Financial Statements
3. Investments-continued
Following is a summary of the financial position and results of
operations of Basic Energy Services, Inc. (formerly Sierra Well
Service, Inc.) as of September 30, 2000 (unaudited) and December 31,
1999 and for the nine months ended September 30, 2000 (unaudited) and
the year ended December 31, 1999 (in thousands):
2000 1999
---- ----
Current assets $ 12,537 $ 8,971
Property and equipment, net 32,971 31,186
Other assets, net 8,010 6,704
------ ------
Total assets $ 53,518 $ 46,861
====== ======
Current liabilities $ 14,762 $ 7,296
Long-term debt 52,223 50,371
Deferred income taxes 2,003 2,224
------ ------
$ 68,988 $ 59,891
====== ======
Stockholders' equity $ (15,470) $(13,030)
====== ======
Sales $ 41,677 $ 37,331
====== ======
Net loss $ (2,274) $(13,401)
====== ======
<PAGE>
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, 2000, the Partnership owned a 44.04%
interest in Basic Energy, which is accounted for using the equity method of
accounting. The equity method adjusts the carrying value of the
Partnership's investment by its proportionate share of Basic Energy's
undistributed earnings or losses for each respective period.
Results of Operations
For the quarter ended September 30, 2000
Revenues
Revenues consisted of interest income. Interest income generated $2,876
for the quarter ended September 30, 2000 as compared to $2,795 for the
quarter ended September 30, 1999.
Expenses
Direct expenses for the quarter ended September 30, 2000 were $10,904 as
compared to $30,408 for the quarter ended September 30, 1999, and
consisted of general and administrative expenses. General and
administrative expenses represent management fees paid to the Managing
General Partner for costs incurred to operate the partnership. Effective
August 1, 2000 the Managing General Partner ceased to charge the
Partnership for management fees.
Results of Operations
For the nine months ended September 30, 2000
Revenues
Revenues consisted of interest income. Interest income generated $8,506
for the nine months ended September 30, 2000 as compared to $8,349 for the
nine months ended September 30, 1999.
Expenses
Direct expenses totaled $73,275 and $95,968 for the nine months ended
September 30, 2000 and 1999, respectively, and consisted of general and
administrative expenses. General and administrative expenses represent
management fees paid to the Managing General Partner for costs incurred to
operate the partnership. Effective August 1, 2000 the Managing General
Partner ceased to charge the Partnership for management fees.
Equity in loss of unconsolidated subsidiary of $2,005,000 reflects the
Partnership's weighted average proportionate share of the $4,818,680 loss
by Basic Energy in the amount of $1,657,626 for the period and the
amortization of goodwill in relation to the Partnerships investment in
Basic Energy of $347,373. See Basic Energy's Management Discussion and
Analysis section included in this report.
<PAGE>
Liquidity and Capital Resources
The proceeds from the sale of partnership units in March 1997 funded the
Partnership's investment in Basic Energy. The Partnership did not sell any
additional partnership units or invest additional amounts in Basic Energy
subsequent to December 31, 1997.
Net Cash Provided by Operating Activities. Cash flows provided by
operating activities for the period consisted primarily of interest income
from a financial institution of $8,506.
Net Cash Used in Investing Activities. There were no amounts provided by
or used in investing activities for the nine months ended September 30,
2000.
Net Cash Used in Financing Activities. There were no amounts provided by
or used in financing activities for the nine months ended September 30,
2000.
Liquidity - Equity Investment in Subsidiary
Basic Energy has a highly leveraged capital structure. Basic Energy on
March 23, 2000 filed a Form S-1 "Registration Statement Under the
Securities Act of 1933" with the Securities and Exchange Commission.
Basic Energy planned to use the net proceeds from this offering to a)repay
$24.9 million Senior Notes; b)$16.2 million as cash consideration to
acquire businesses; c)$17.3 million to pay down Subordinated Notes;
d)redeem $5.4 million Series A Cumulative Preferred Stock; e)3.3 million to
repay long-term debt and f)$4.5 million to cover expenses in connection
with the offering and for general corporate purposes. Basic Energy on June
23, 2000 suspended its initial public offering.
Basic Energy on March 31, 1999 finalized a restructuring of its debt with
the lender. The restructuring of Basic Energy's debt with its lender
provided for a senior subordinated credit facility and three classes of
preferred stock. According to the redemption and/or conversion features of
the three classes of preferred stock, if Basic Energy does not meet
repayment of scheduled senior subordinated debt starting at December 31,
1999 with final payment due June 30, 2004, the lender has the right to
exercise their conversion features. The conversion amount as a percentage
of post-conversion outstanding common stock can range from 25% to 100%.
Therefore, the Partnership's investment in Basic Energy is subject to
possible future dilution and/or elimination as a result of the convertible
preferred stock held by Basic Energy's lender. The Partnership's ownership
percentage in Basic Energy upon the signing of Basic Energy's debt
restructuring at March 31, 1999 remained 45.89%. However, should the
lender exercise the conversion feature of the preferred stock, the
Partnership's ownership percentage would decrease.
Basic Energy is currently in default on interest due on their senior
secured debt. The default is the result of the creditor allowing Basic
Energy to postpone its March 30, 2000 payment due to expenses in
preparation of the public offering of stock. Basic Energy has not made the
postponed March 30, 2000 payment or the June 30, 2000 and September 30,
2000 scheduled payments. Even though Basic Energy is in technical default
the creditor has elected not to accelerate the debt while the two parties
work on a plan of action.
Basic Energy hired an investment-banking group to evaluate all available
financial options in regard to reducing the existing leverage and halting
any further dilution by the existing creditor. The options include but are
not limited to private equity, restructuring of existing debt and a
possible return to the public market. Basic Energy is seeking a solution
that will maximize shareholder value as well as satisfy the existing debt.
Liquidity - Managing General Partner
The Managing General Partner has a highly leveraged capital structure with
approximately, $33.8 million of cash interest and $5.9 million of principal
due within the next twelve months. The Managing General Partner is
currently in the process of renegotiating the terms of its various
obligations with its note holders and/or attempting to seek new lenders or
equity investors. Additionally, the Managing General Partner would
consider disposing of certain assets in order to meet its obligations.
There can be no assurance that the Managing General Partner's continuing
debt restructuring efforts will be successful or that the lenders will
agree to a course of action consistent with the Managing General Partners
requirements in restructuring the obligations. Even if such agreement is
reached, it may require approval of additional lenders, which is not
assured. Furthermore, there can be no assurance that the sales of assets
can be successfully accomplished on terms acceptable to the Managing
General Partner. Under current circumstances, the Managing General
Partner's ability to continue as a going concern depends upon its ability
to (1) successfully restructure its obligations or obtain additional
financing as may be required, (2) maintain compliance with all debt
covenants, (3) generate sufficient cash flow to meet its obligations on a
timely basis, and (4) achieve satisfactory levels of future earnings. If
the Managing General Partner is unsuccessful in its efforts, it may be
unable to meet its obligations making it necessary to undertake such other
actions as may be appropriate to preserve asset values.
<PAGE>
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, 2000
Revenues
Basic Energy's revenues increased to $14.9 million, or 49%, for the quarter
ended September 30, 2000 as compared to $10.0 million for the same period
in 1999.
Expenses
The increase in revenues experienced in the oil and gas industry has also
caused operating expenses to increase $2.7 million, or 29%, for the quarter
ended September 30, 2000 as compared to the same period for 1999. The
components of operating expenses consisted of increases in cost of revenues
of $2.4 million and general and administrative increases of $348,000.
Interest expense for the quarter ended September 30, 2000 increased to $1.7
million from $1.6 million for the same period 1999.
Results of Operations
For the nine months ended September 30, 2000
Revenues
Basic Energy's revenues increased to $41.7 million, or 62%, for the nine
months ended September 30, 2000 as compared to $25.8 million for the same
period in 1999. The increase was primarily attributable to the increase in
oil and gas prices, which raises rig utilization, and in turn raised
activity levels.
Expenses
The increase in revenues experienced in the oil and gas industry has also
caused operating expenses to increase $10.5 million, or 43%, for the nine
months ended September 30, 2000 as compared to the same period for 1999.
The components of operating expenses consisted of increases in cost of
revenues of $9.6 million and general and administrative increases of
$932,000. Interest expense for the nine months ended September 30, 2000
decreased to $4.9 million from $5.2 million for the same period 1999.
<PAGE>
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 $5.9 million.
Net Cash Used in Investing Activities. Cash flows used in investing
activities totaled $3.3 million for the period, and consisted primarily of
the purchase of property and equipment.
Net Cash Used in Financing Activities. Cash flows used in financing
activities totaled $2.3 million for the period. The primary use of these
funds included $580,000 used for payment of debt and $1.7 million for IPO
costs.
<PAGE>
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matter to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter
for which this report is filed.
<PAGE>
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: November 15, 2000
<PAGE>
