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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[x] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [Fee Required]
For the fiscal year ended December 31, 2000
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
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 (I.R.S. Employer
of incorporation or organization) Identification No.)
407 N. Big Spring, Suite 300, Midland, Texas 79701
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (915) 686-9927
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
limited partnership interests
Indicate by check mark whether registrant (1) has filed 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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. [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 42. There is no
exhibit index.
Table of Contents
Item Page
Part I
1. Business 3
2. Properties 4
3. Legal Proceedings 5
4. Submission of Matters to a Vote of Security Holders 5
Part II
5. Market for Registrant's Common Equity and Related
Stockholder Matters 6
6. Selected Financial Data 7
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
8. Financial Statements and Supplementary Data 12
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 22
Part III
10. Directors and Executive Officers of the Registrant 23
11. Executive Compensation 24
12. Security Ownership of Certain Beneficial Owners and
Management 24
13. Certain Relationships and Related Transactions 24
Part IV
14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 25
Signatures 26
Part I
Item 1. Business
General
Southwest Partners III, L.P., a Delaware limited partnership (the
"Partnership") was organized March 11, 1997 to invest in oil field service
companies and assets. The Partnership's business strategy was to acquire
interests in oil field service companies and assets with a view to
providing capital appreciation in the value of the Partnership's units of
limited partnership interest (the "Units"). The Partnership concluded its
acquisition of oil field service company assets in December 1997.
Private Placement
From March 15, 1997 to June 30, 1997, the Partnership originally conducted
a "blind pool" offering of the Units in accordance with Regulation D
promulgated under the Securities Act (the "Private Placement"). On July 1,
1997, the Partnership amended the offering, which was concluded on
September 30, 1997, to invest the entire proceeds in the common stock of
Basic Energy Services, Inc. ("Basic"), an oil field service company
affiliated with the General Partner. A total of 170.92511 Units were sold
to 525 Investors for an aggregate net price of $17,092,510. The
Partnership invested a total of $17,054,500 (including the capital
contribution of the General Partner) in 2,005 shares of the Basic common
stock.
Basic in March 2000 filed a restated certificate of incorporation
increasing its authorized common shares to 25,000,000 and completed a 400-
for-1 stock split. All shares had been restated as if the stock split had
occurred at the beginning of 1998. The 400-for-1 stock split was reversed
during 2000. Basic on December 21, 2000 completed a 100-for-1 dividend.
The Partnership at December 31, 2000 owns 10.57% or 200,500 shares of
Basic's outstanding common stock.
The General Partner
The general partner of the Partnership is Southwest Royalties, Inc. (the
"General Partner"). The General Partner was formed in 1983 to acquire and
develop oil and gas properties. The General Partner initially financed the
acquisition of oil and gas reserves and its exploration and development
efforts through public and private limited partnership offerings. The
General Partner has raised approximately $115 million in 31 public and
private limited partnership offerings. The General Partner is a general
partner of these limited partnerships, owns interests in these partnerships
and receives management fees and operating cost reimbursements from such
partnerships. Since its inception, The General Partner, on behalf of itself
and the investment partnerships, has acquired over $320 million of oil and
gas properties, primarily in the Permian Basin of West Texas and New
Mexico.
The principal executive offices of the Partnership are located at 407 N.
Big Spring, Suite 300, Midland, Texas, 79701. The General Partner of the
Partnership, Southwest Royalties, Inc. (the " General Partner") and its
staff of 92 individuals, together with certain independent consultants used
on an "as needed" basis, perform various services on behalf of the
Partnership, including the selection of oil and gas properties and the
marketing of production from such properties. The Partnership has no
employees.
The Partnership
The sole business of the Partnership is holding Basic stock. The
Partnership has no employees and has no operations, except through Basic.
Basic Energy Services, Inc.
Basic provides a broad range of services used for the drilling, completion
and operation of oil and gas wells, including well servicing, liquids
handling and fresh and brine water supply and disposal services. Basic
provides services in its areas of operation in Texas, New Mexico, Oklahoma
and Louisiana. These services are used by oil and gas companies to
complete newly drilled oil and gas wells, maintain and optimize the
performance of existing wells, recomplete wells to additional producing
zones and plug and abandon wells at the end of their useful lives. Basic's
well servicing and fluid service equipment fleets includes 93 well
servicing rigs and 133 fluid service trucks.
Formed in 1992 by the General Partner, Basic has grown primarily through
selective acquisitions. It has completed 14 purchases of well services
companies as well as purchases of additional equipment. Basic's revenues
have grown from $932,000 in 1992 to approximately $56.5 million in 2000.
Basic's strategy emphasizes diversification and expansion through internal
growth and the acquisition of well servicing companies to provide an
integrated group of oil field services.
Basic uses its well servicing rigs to provide completion, maintenance,
workover and plugging and abandonment services. Basic's related trucking
services are used to move large equipment to and from the job sites of its
customers. Basic also provides an integrated mix of liquids handling
services, including vacuum truck services, frac tank rentals, test tank
rentals and Enviro-Vat system rentals. Basic's fresh and brine water supply
and disposal services include the production and sale of fresh and brine
water which is used in drilling, completion and workover processes, as well
as operation of injection wells that dispose of produced salt water and
incidental non-hazardous oil field wastes. Basic also provides certain
other well services, including pit lining services and hot oil services.
Environmental
Hazards in the operation of oil field service companies, such as employee
injuries on the job site and accidental petroleum or waste spills, are
sometimes encountered. Such hazards may cause substantial liabilities to
third parties or governmental entities, the payment of which could reduce
ultimately the funds available for distribution. Although it is
anticipated that customary insurance will be obtained, the Partnership may
be subject to liability for pollution and other damages due to hazards,
which cannot be insured against or will not be insured against due to
prohibitive premium costs or for other reasons. Environmental regulatory
matters also could increase the cost of doing business or require the
modification of operations in certain areas. Environmental expenditures
are expensed or capitalized depending on their future economic benefit.
Expenditures that relate to an existing condition caused by past operations
and that have no future economic benefits are expensed. Liabilities for
expenditures of a noncapital nature are recorded when environmental
assessment and/or remediation is probable, and the costs can be reasonably
estimated.
Industry Regulations and Guidelines
Certain industry regulations and guidelines apply to the registration,
qualification and operation of limited partnerships. The Partnership is
subject to these guidelines, which regulate and restrict transactions
between the General Partner and the Partnership. The Partnership complies
with these guidelines and the General Partner does not anticipate that
continued compliance would have a material adverse effect on Partnership
operations.
Partnership Employees
The Partnership has no employees; however the General Partner has a staff
of geologists, engineers, accountants, landmen and clerical staff who
engage in Partnership activities and operations and perform additional
services for the Partnership as needed. In addition to the General
Partner's staff, the Partnership engages independent consultants such as
petroleum engineers and geologists as needed. As of December 31, 2000
there were 92 individuals directly employed by the General Partner in
various capacities.
Item 2. Properties
The Partnership does not currently own or lease any property. The
Partnership operates from the offices of its General Partner in Midland,
Texas.
Basic's corporate office is located in Midland, Texas, which complements
the core of its operations in the Permian Basin of West Texas and eastern
New Mexico ("the Permian Basin"). Within the Permian Basin, Basic owns
eight field offices and leases one field office over a short-term period.
Additionally, Basic leases a field office in South Texas and owns two field
offices in East Texas. Basic leases two field offices in Oklahoma.
Basic's well servicing equipment fleet includes 93 well servicing rigs, 133
fluid service trucks, 90 Enviro-Vat systems and 314 frac and test tanks.
Additionally, the Company operates nine injection wells and 32 fresh or
brine water stations.
Basic uses its well servicing rigs to provide completion, maintenance,
workover and plugging and abandonment services. Basic's related trucking
services are used to move large equipment to and from the job sites of its
customers as well as provide an integrated mix of liquids handling
services, including vacuum truck services, frac tank rentals, test tank
rentals and Enviro-Vat system rentals. Basic's fresh and brine water
supply and disposal services include the production and sale of fresh and
brine water which is used in drilling, completion and workover processes,
as well as operation of injection wells that dispose of produced salt water
and incidental non-hazardous oil field wastes.
Basic believes it has satisfactory title to all of its properties in
accordance with standards generally accepted within the well servicing
industry.
Item 3. Legal Proceedings
The Partnership is not currently involved in any legal proceeding nor is it
party to any pending or threatened claims that could reasonably be expected
to have a material adverse effect on its financial condition or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during the fourth
quarter of 2000 through the solicitation of proxies or otherwise.
Part II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
Market Information
There is no trading market for the Units, and it is unlikely that a trading
market will exist at any time in the future. The Partnership does not have
any units (i) that are subject to outstanding options or warrants to
purchase, or securities convertible into, common equity of the Partnership,
(ii) that could be sold pursuant to Rule 144 under the Securities Act or
that we have agreed to register under the Securities Act for sale by
security holders, or (iii) that are being, or have been publicly proposed
to be, publicly offered by the Partnership, the offering of which could
have a material effect on the market price of the limited partnership
units. Any transfer of the Units is severely restricted by certain
conditions outlined in the Partnership Agreement and requires the consent
of the General Partner.
There have been no cash distributions to the Limited Partners to date. In
general, the Partnership expects to reinvest all cash flow received from
operations and does not expect to make distributions until liquidation of
the Partnership. The following is a summary of certain allocation
provisions of the Partnership Agreement and is qualified in its entirety by
reference to the Partnership Agreement, which was filed as an Exhibit to
the partnership's Form 10, filed April 1998. Any distributions of cash
flow, income, gain, profit, or loss will be allocated 85% to the Limited
Partners and 15% to the General Partner in accordance with their capital
accounts until the Limited Partners have recovered, through cumulative
distributions 100% of their capital contributions plus a 10% cumulative
(but not compounded) return. Thereafter, distributions will be made 75% to
the Limited Partners and 25% to the General Partner.
The revenues generated and capital appreciation, if any, from the
Partnership's investment in Basic is highly dependent upon the future
prices and demand for oil and gas in that the level of use of oil field
services and equipment is directly related to the amount of activity in the
oil fields. In addition, investments in oil field service companies, while
presenting significant potential for capital appreciation, may take from
four to seven years from the date of initial investment to reach such a
state of maturity that disposition can be considered. Thus, it is
anticipated that capital gains or losses typically will take two to five
years or longer to realize. In view of these factors, it is unlikely that
any significant distributions of the proceeds from the disposition of
investments will be made until such time. The Partnership's investment in
Basic will generate little, if any, current income.
The General Partner has the right, but not the obligation, to purchase
limited partnership units should an investor desire to sell. The value of
the unit is determined by adding the sum of (1) current assets less
liabilities and (2) the present value of the future net revenues
attributable to proved reserves and by discounting the future net revenues
at a rate not in excess of the prime rate charged by NationsBank, N.A. of
Midland, Texas plus one percent (1%), which value shall be further reduced
by a risk factor discount of no more than one-third (1/3) to be determined
by the General Partner in its sole and absolute discretion. As of December
31, 2000 the General Partner purchased no limited partner units.
Number of Limited Partner Interest Holders
As of December 31, 2000, there were 524 holders of limited partner units in
the Partnership.
Distributions
Pursuant to Section 4.1 of the Partnership's Certificate and Agreement of
Limited Partnership, "Net Cash From Operations and Net Cash From Sales or
Refinancings" shall be distributed, at such times as the General Partner
may determine in its sole discretion. "Net Cash From Operations" is
defined as "the gross cash proceeds from Partnership operations less the
portion thereof used to pay or establish reasonable reserves for all
Partnership expenses, fees, commissions, debt payments, new investments,
capital improvements, replacements, repairs and contingencies, and such
other purposes deemed appropriate, all as determined by the General
Partner." "Net Cash From Sales or Refinancings" is defined as "the net
cash proceeds from all sales and other dispositions (other than in the
ordinary course of business) and all refinancings of Partnership Property,
less any portion thereof used to establish reserves, all as determined by
the General Partner. During 2000, no distributions were made.
Item 6. Selected Financial Data
The following selected financial data for the years ended December 31 2000,
1999, 1998 and March 11, 1997 (date of inception) through December 31, 1997
should be read in conjunction with the financial statements included in
Item 8:
March 11, 1997
through
Years ended December 31, December 31, 1997
--------------------------------------------------
- ---
2000 1999 1998 1997
---- ---- ---- ----
Revenues $ 11,403 11,164 11,514 147,356
Equity loss in unconsolidated
subsidiary -(2,005,000)(5,046,321) (542,414)
Impairment of equity investment
of unconsolidated subsidiary - - (9,460,765)
- -
Net loss (63,169)(2,120,433)(14,702,959) (420,813)
Partners' share of net loss:
General partner (9,475) (318,065)(2,195,181) (68,107)
Limited partners (53,694)(1,802,368)(12,507,778) (352,706)
Limited partners' net
loss per unit (314) (10,545) (73,177) (2,054)
Total assets $ 404,112 392,709 2,386,545 17,081,587
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Southwest Partners III, L.P.
General
Southwest Partners III, L.P. was organized as a Delaware limited
partnership on March 11, 1997. The Partnership was formed for the purpose
of investing in Basic Energy Services, Inc., 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.
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. As of
December 31, 2000, the Partnership owned a 10.57% interest in Basic, 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's undistributed earnings or losses for each
respective period.
Results of Operations
For the year ended December 31, 2000
Revenues
Revenues consisted of interest income. The surplus cash remaining after
the periodic investments in Basic generated interest income of $11,403.
Expenses
Direct expenses totaled $74,572 for the year, relating to general and
administrative. General and administrative expenses represent management
fees paid to the General Partner for costs incurred to operate the
Partnership. Effective July 31, 2000, the General Partner ceased to charge
the Partnership management fees.
Results of Operations
For the year ended December 31, 1999
Revenues
Revenues consisted of interest income. The surplus cash remaining after
the periodic investments in Basic generated interest income of $11,164.
Expenses
Direct expenses totaled $126,597 for the year, relating to general and
administrative. General and administrative expenses represent management
fees paid to the General Partner for costs incurred to operate the
partnership.
The Partnerships investment in Basic upon recording their portion of
Basic's losses for the six months ended June 30, 1999 was reduced to zero.
Therefore, according to Generally Accepted Accounting Principles, the
equity method was suspended. The Partnership did not record their
ownership percentage of Basic's losses beyond June 30, 1999. If Basic
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.
Revenue and Distribution Comparison
Partnership loss for the years ended December 31, 2000, 1999 and 1998 was
$63,169, $2,120,433 and $14,702,959, respectively. Excluding the effects
of amortization, net loss would have been $63,169 in 2000, $2,120,433 in
1999 and $14,634,544 in 1998. Since inception of the Partnership, no cash
contributions have been made to the partners.
Liquidity and Capital Resources
Cash flows provided by operating activities were approximately $11,403 in
2000 compared to $11,164 in 1999 and approximately $11,480 in 1998. The
source of the 2000 cash flow from operating activities was interest.
There were no cash flows used in investing activities during 2000 and 1999
as compared to $63,514 in 1998.
There were no cash flows used in financing activities during 2000 and 1999
as compared to $67,507 in 1998.
As of December 31, 2000, the Partnership had approximately $64,000 in
working capital. The General Partner knows of no other commitments.
Liquidity - Equity Investment in Subsidiary
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
will be accounting 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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Partnership is not a party to any derivative or embedded derivative
instruments.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations - continued
Basic Energy Services, Inc.
General
Basic derives its revenues from well servicing, liquids handling, fresh and
brine water supply and disposal and other related services. Well servicing
rigs are billed at hourly rates that are generally determined by the type
of equipment required, market conditions in the region in which the well
servicing rig operates, ancillary equipment and the necessary personnel
provided on the rig. Basic charges its customers for liquids handling and
fresh and brine water supply and disposal services on an hourly or per
barrel basis depending on the services offered. Demand for services
depends substantially upon the level of activity in the oil and gas
industry, which in turn depends, in part, on oil and gas prices,
expectations about future prices, the cost of exploring for, producing and
delivering oil and gas, the discovery rate of new oil and gas reserves in
on-shore areas, the level of drilling and workover activity and the ability
of oil and gas companies to raise capital.
Results of Operations
For the year ended December 31, 2000
Revenues
Basic's revenues increased to $56.5 million, or 52%, for the year ended
December 31, 2000 as compared to $37.3 million for the same period in 1999.
The increase was primarily attributable to the increase in oil and gas
prices, resulting in a rise in oilfield service activity.
Expenses
Operating expenses increased $11.8 million, or 34%, for the year ended
December 31, 2000 as compared to the same period for 1999. The components
of operating expenses consisted of increases in cost of revenues of $10.3
million and general and administrative increases of $1.5 million. The
increase in operating and general and administrative expenses is a direct
reflection of the increase in oilfield service activity. Interest expense
for the year ended December 31, 2000 increased to $6.9 million from $6.1
million for the same period in 1999. The increase for the year 2000 is due
to quarterly escalating interest rates in effect per the credit facility
with the previous lender.
Results of Operations
For the year ended December 31, 1999
Revenues
Basic's revenues decreased to $37.3 million, or 18%, for the year ended
December 31, 1999 as compared to $45.3 million for the same period in 1998.
The decrease was primarily attributable to a severe decline in oil prices,
resulting in reduced oilfield service activity.
Expenses
Operating expenses decreased $5.1 million, or 14%, for the year ended
December 31, 1999 as compared to the same period for 1998. The components
of operating expenses consisted of decreases in cost of revenues of $4.8
million and general and administrative decreases of $300,000. The decrease
reflects Basic's cost cutting measures taken after the hiring of a new
chief executive officer in early 1999. Interest expense for the year ended
December 31, 1999 decreased to $6.1 million from $7.2 million for the same
period in 1998. The decrease was due to a decrease in long-term debt as a
result of the March 1999 refinancing and a decrease in amortization of debt
issuance costs.
Liquidity and Capital Resources
The primary source of cash is from operations, the receipt of income from
well services provided.
Net Cash Provided by Operating Activities. Cash flows provided by
operating activities for the period consisted primarily of net operating
income net of expenses of $7.3 million.
Net Cash Used in Investing Activities. Cash flows used in investing
activities totaled $3.8 million for the period, and consisted primarily of
the purchase of property and equipment partially offset by proceeds from
the sale of property and equipment.
Net Cash Used in Financing Activities. Cash flows used in financing
activities totaled $1.5 million for the period and consisted primarily of
payments on long-term debt and unsuccessful offering and acquisition costs
greatly offset by borrowings under long-term debt.
Liquidity - Equity Investment by Investors
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
will be accounting 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.
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements
Page
Independent Auditors Report 13
Balance Sheets 14
Statements of Operations 15
Statements of Changes in Partners' Equity 16
Statements of Cash Flows 17
Notes to Financial Statements 18
INDEPENDENT AUDITORS REPORT
The Partners
Southwest Partners III, L.P.
(A Delaware Limited Partnership):
We have audited the accompanying balance sheets of Southwest Partners III,
L.P. (the "Partnership") as of December 31, 2000 and 1999, and the related
statements of operations, changes in partners' equity and cash flows for
each of the years in the three-year period ended December 31, 2000. These
financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Southwest Partners III,
L.P. as of December 31, 2000 and 1999 and the results of its operations and
its cash flows for each of the years in the three-year period ended
December 31, 2000 in conformity with accounting principles generally
accepted in the United States of America.
KPMG LLP
Midland, Texas
April 16, 2001
Southwest Partners III, L.P.
(a Delaware limited partnership)
Balance Sheets
December 31, 2000 and 1999
2000 1999
---- ----
Assets
Current asset:
Cash and cash equivalents $ 404,112 392,709
==========
==========
Liabilities and Partners' Equity
Current liabilities:
Payable to General Partner $ 340,107 265,535
----------
- ----------
Partners' equity:
General Partner (907,225) (897,750)
Limited partners 971,230 1,024,924
----------
- ----------
Total partners' equity 64,
005 127,174
----------
- ----------
$ 404,112
392,709
==========
==========
The accompanying notes are an integral
part of these financial statements.
Southwest Partners III, L.P.
(a Delaware limited partnership)
Statements of Operations
Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
---- ---- ----
Revenues
Interest income $ 11,403 11,164 11,514
---------- ----------
- ----------
11,403 11,164
11,514
---------- ----------
- ----------
Expenses
General and administrative 74,572 126,597 138,972
Amortization - - 68,415
Equity loss in unconsolidated subsidiary - 2,005,000
5,046,321
Impairment of equity investment of
unconsolidated subsidiary - - 9,460,765
---------- ----------
- ----------
74,572 2,131,597
14,714,473
---------- ----------
- ----------
Net loss $ (63,169) (2,120,433) (14,702,959)
========== ==========
==========
Net loss allocated to:
General Partner $ (9,475) (318,065) (2,195,181)
========== ==========
==========
Limited partners $ (53,694) (1,802,368) (12,507,778)
========== ==========
==========
Per limited partner unit $ (314) (10,545) (73,177)
========== ==========
==========
The accompanying notes are an integral
part of these financial statements.
Southwest Partners III, L.P.
(a Delaware limited partnership)
Statement of Changes in Partners' Equity
Years Ended December 31, 2000, 1999 and 1998
General Limited Notes
Partner Partners Receivable Total
-------- -------- ---------- -----
Balance - December 31, 1997 $1,615,496 15,410,070(106,330) 16,919,236
Capital contributions - 31,330 31,330
Refund of down payment-note
receivable uncollectible (75,000) 75,000 -
Net loss (2,195,181)(12,507,778) -(14,702,959)
------------------- --------
- ----------
Balance - December 31, 1998 (579,685) 2,827,292 - 2,247,607
Net loss (318,065)(1,802,368) -(2,120,433)
- --------- ---------- ------------------
Balance - December 31, 1999 (897,750) 1,024,924 - 127,174
Net loss (9,475) (53,694) - (63,169)
------------------- --------
- ----------
Balance - December 31, 2000 $(907,225) 971,230 - 64,005
=================== ========
==========
The accompanying notes are an integral
part of these financial statements.
Southwest Partners III, L.P.
(a Delaware limited partnership)
Statements of Cash Flows
Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
---- ---- ----
Cash flows from operating activities:
Cash paid to General Partner
for administrative fees $ - (34)
Interest received 11,403 11,164 11,514
----------
- ---------- -----------
Net cash provided by operating
activities 11,403 11,164
11,480
----------
- ---------- -----------
Cash flows from investing activities:
Organization costs - - (63,514)
----------
- ---------- -----------
Net cash used in investing activities - -
(63,514)
----------
- ---------- -----------
Cash flows from financing activities:
Capital contributed by limited partners - -
(6,250)
Repayment of notes receivable from limited
partners - - 37,580
Syndication costs - - (98,837)
----------
- ---------- -----------
Net cash used in financing activities - -
(67,507)
----------
- ---------- -----------
Net increase (decrease) in cash and cash
equivalents 11,403 11,164 (119,541)
Beginning of period 392,709 381,545 501,086
----------
- ---------- -----------
End of period $ 404,112 392,709 381,545
==========
========== ===========
Reconciliation of net loss to net cash
provided by operating activities:
Net loss $ (63,169) (2,120,433)(14,702,959)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Amortization - - 68,415
Undistributed loss of affiliate - 2,005,000 5,046,321
Impairment of equity investment - - 9,460,765
Increase in accounts payable 74,572 126,597 138,938
----------
- ----------- ----------
Net cash provided by operating activities $ 11,403 11,164
11,480
==========
=========== ==========
The accompanying notes are an integral
part of these financial statements.
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 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 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
Equity investment in subsidiary
Investment in Basic Energy Services, Inc. in which the Partnership had
a 10.57% and 44.94% interest at December 31, 2000 and 1999, is
accounted for by the equity method and the carrying amount is adjusted
for the Partnership's proportionate share of Basic's undistributed
earnings or losses. The Partnerships investment in Basic upon
recording their portion of Basic's losses for the six months ended
June 30, 1999 was reduced to zero. Therefore, according to Generally
Accepted Accounting Principles, the equity method was suspended. The
Partnership has not recorded their ownership percentage of Basic's
losses beyond June 30, 1999. Effective January 1, 2001, the
Partnership will be recording the investment on the cost method (See
Note 3).
Estimates and Uncertainties
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Southwest Partners III, L.P.
(a Delaware limited partnership)
Notes to Financial Statements
2. Summary of Significant Accounting Policies - continued
Syndication Costs
Syndication costs are accounted for as a reduction of partnership
equity.
Environmental
Hazards in the operation of oil field service companies, such as
employee injuries on the job site and accidental petroleum or waste
spills, are sometimes encountered. Such hazards may cause substantial
liabilities to third parties or governmental entities, the payment of
which could reduce ultimately the funds available for distribution.
Although it is anticipated that customary insurance will be obtained,
the Partnership may be subject to liability for pollution and other
damages due to hazards, which cannot be insured against or will not be
insured against due to prohibitive premium costs or for other reasons.
Environmental regulatory matters also could increase the cost of doing
business or require the modification of operations in certain areas.
Environmental expenditures are expensed or capitalized depending on
their future economic benefit. Expenditures that relate to an
existing condition caused by past operations and that have no future
economic benefits are expensed. Liabilities for expenditures of a
noncapital nature are recorded when environmental assessment and/or
remediation is probable, and the costs can be reasonably estimated.
Income Taxes
No provision for income taxes is reflected in these financial
statements, since the tax effects of the Partnership's income or loss
are passed through to the individual partners.
In accordance with the requirements of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," the
Partnership's tax basis in its assets is $17,075,550 and $17,091,339
more, as of December 31, 2000 and 1999 as that shown on the
accompanying Balance Sheet in accordance with generally accepted
accounting principles.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Partnership considers
all highly liquid debt instruments purchased with a maturity of three
months or less to be cash equivalents. The Partnership maintains its
cash at one financial institution.
Number of Limited Partner Units
There were 170.925 limited partner units outstanding as of December
31, 2000, held by 524 partners.
Concentrations of Credit Risk
All partnership revenues are received by the Managing General Partner
and subsequently remitted to the partnership and all expenses are paid
by the Managing General Partner and subsequently reimbursed by the
partnership.
Fair Value of Financial Instruments
The carrying amount of cash approximates fair value due to the short
maturity of these instruments.
Net loss per limited partnership unit
The net loss per limited partnership unit is calculated by using the
number of outstanding limited partnership units.
Southwest Partners III, L.P.
(a Delaware limited partnership)
Notes to Financial Statements
3. Investment
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%
The Partnerships investment in Basic upon recording their portion of
Basic's losses for the six months ended June 30, 1999 was reduced to
zero. Therefore, according to Generally Accepted Accounting
Principles, the equity method was suspended. The Partnership has not
recorded their ownership percentage of Basic's losses beyond June 30,
1999.
Southwest Partners III consists 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 will be accounting 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.
Basic on March 31, 1999 finalized a restructuring of its debt with the
lender. The restructuring of Basic's debt with its lender provided
for a senior subordinated credit facility and three classes of
preferred stock. Based on the December 21, 2000 transaction discussed
above, this credit facility was retired and cancelled.
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 in March 2000 filed a restated certificate of incorporation
increasing its authorized common shares to 25,000,000 and completed a
400-for-1 stock split. All shares had been restated as if the stock
split had occurred at the beginning of 1998. The 400-for-1 stock
split was reversed during 2000. Basic on December 21, 2000 completed
a 100-for-1 dividend. The Partnership at December 31, 2000 owns 10.57%
or 200,500 shares of Basic's outstanding common stock.
Southwest Partners III, L.P.
(a Delaware limited partnership)
Notes to Financial Statements
3. Investment - continued
Following is a summary of the financial position and results of
operations of Basic Energy Services, Inc. as of and for the years
ended December 31, 2000, 1999 and 1998 (in thousands):
2000 1999 1998
Restated
Current assets $ 13,283 8,971 9,882
Property and equipment, net 32,780 31,186 35,634
Other assets, net 6,955 6,704
7,811
------ ------ ------
Total assets $ 53,018 46,861 53,327
====== ====== ======
Current liabilities $ 11,322 7,296 3,599
Long-term debt 15,390 50,371 54,664
Deferred income taxes 5,052 2,224 -
------ ------ ------
$ 31,764 59,891 58,263
====== ====== ======
Stockholders' equity $ 21,254 (13,030) (4,936)
====== ====== ======
Sales $ 56,466 37,331
45,319
====== ====== ======
Net income (loss) $ 13,849 (12,971)
(28,296)
====== ====== ======
4. Commitments and Contingent Liabilities
As a marketing incentive, brokers who sold in excess of one Unit
received three percent (3%) of the Partnership liquidation proceeds
which are distributed to the General Partner in proportion to the
dollar amount of Units sold by each such broker; provided, however
that no broker shall receive such interest unless the Partnership has
returned to the Limited Partners 100% of their Limited Partner Capital
Contribution plus a 10% cumulative (but not compounded) return at the
time of liquidation. As of December 31, 1998, there were 13 such
brokers who sold in excess of one Unit qualifying for the special
distribution.
The Partnership is subject to various federal, state and local
environmental laws and regulations, which establish standards and
requirements for protection of the environment. The Partnership
cannot predict the future impact of such standards and requirements,
which are subject to change and can have retroactive effectiveness.
The Partnership continues to monitor the status of these laws and
regulations.
As of December 31, 2000, the Partnership has not been fined, cited or
notified of any environmental violations and management is not aware
of any unasserted violations, which would have a material adverse
effect upon capital expenditures, earnings or the competitive position
in the oil field service industry.
5. Related Party Transactions
Southwest Royalties, Inc., the General Partner, was paid an
administrative fee of $70,000, $120,000 and $120,000 during 2000, 1999
and 1998 for indirect general and administrative overhead expenses.
In addition, a director and officer of the Managing General Partner is
a partner in a law firm, with such firm providing legal services to
the Partnership. There were no legal fees in 2000 and approximately
$2,500 and $3,400 in legal services provided for the years ended
December 31, 1999 and 1998.
Accounts payable to the General Partner at December 31, 2000 and 1999
totaled $340,107 and $265,535 and primarily represents management
fees.
Southwest Partners III, L.P.
(a Delaware limited partnership)
Notes to Financial Statements
6. Selected Quarterly Financial Results - (unaudited)
Quarter
----------------------------------------------
First Second Third Fourth
------ ------- ------ ------
2000:
Total revenues $ 2,805 2,825 2,876 2,897
Total expenses 31,326 31,046 10,904 1,296
Net income (loss) (28,521) (28,221) (8,028) 1,601
Net income (loss) per
limited partner unit (142) (140) (40) 8
1999:
Total revenues $ 2,789 2,764 2,795 2,816
Total expenses 1,075,694 994,864 30,408 30,631
Net loss (1,072,905) (992,100) (27,613) (27,815)
Net loss per
limited partner unit (5,335) (4,934) (137) (139)
Included in total expenses for the first and second quarters of 1999 was
an equity loss in unconsolidated subsidiary of $1,044,236 and $960,764,
respectively. For further information concerning the equity loss, see
Management's Discussion and Analysis of Financial Condition and Results
of Operations for Southwest Partners III for the year ended December 31,
1999.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None
Part III
Item 10. Directors and Executive Officers of the Registrant
Management of the Partnership is provided by Southwest Royalties, Inc., as
Managing General Partner. The names, ages, offices, positions and length
of service of the directors and executive officers of Southwest Royalties,
Inc. are set forth below. Each director and executive officer serves for a
term of one year.
Name Age Position
- -------------------- --- -----------------------------------
- --
H. H. Wommack, III 45
Chairman of the Board, President,
Chief Executive Officer, Treasurer
and Director
H. Allen Corey 44 Secretary and Director
Bill E. Coggin 46
Vice President and Chief Financial
Officer
J. Steven Person 42 Vice President, Marketing
Paul L. Morris 59 Director
H. H. Wommack, III, is Chairman of the Board, President, Chief Executive
Officer, Treasurer, principal stockholder and a director of the Managing
General Partner, and has served as its President since the Company's
organization in August, 1983. Prior to the formation of the Company, Mr.
Wommack was a self-employed independent oil producer engaged in the
purchase and sale of royalty and working interests in oil and gas leases,
and the drilling of exploratory and developmental oil and gas wells. Mr.
Wommack holds a J.D. degree from the University of Texas from which he
graduated in 1980, and a B.A. from the University of North Carolina in
1977.
H. Allen Corey, a founder of the Managing General Partner, has served as
the Managing General Partner's secretary and a director since its
inception. Mr. Corey is President of Trolley Barn Brewery, Inc., a brew
pub restaurant chain based in the Southeast. Prior to his involvement with
Trolley Barn, Mr. Corey was a partner at the law firm of Miller & Martin in
Chattanooga, Tennessee. He is currently of counsel to the law firm of
Baker, Donelson, Bearman & Caldwell, with the offices in Chattanooga,
Tennessee. Mr. Corey received a J.D. degree from the Vanderbilt University
Law School and B.A. degree from the University of North Carolina at Chapel
Hill.
Bill E. Coggin, Vice President and Chief Financial Officer, has been with
the Managing General Partner since 1985. Mr. Coggin was Controller for Rod
Ric Corporation of Midland, Texas, an oil and gas drilling company, during
the latter part of 1984. He was Controller for C.F. Lawrence & Associates,
Inc., an independent oil and gas operator also of Midland, Texas during the
early part of 1984. Mr. Coggin taught public school for four years prior
to his business experience. Mr. Coggin received a B.S. in Education and a
B.B.A. in Accounting from Angelo State University.
J. Steven Person, Vice President, Marketing, assumed his responsibilities
with the Managing General Partner as National Marketing Director in 1989.
Prior to joining the Managing General Partner, Mr. Person served as Vice
President of Marketing for CRI, Inc., and was associated with Capital
Financial Group and Dean Witter (1983). He received a B.B.A. from Baylor
University in 1982 and an M.D.A. from Houston Baptist University in 1987.
Paul L. Morris has served as a Director of Southwest Royalties Holdings,
Inc. since August 1998 and Southwest Royalties, Inc. since September 1998.
Mr. Morris is President and CEO of Wagner & Brown, Ltd., one of the largest
independently owned oil and gas companies in the United States. Prior to
his position with Wagner & Brown, Mr. Morris served as President of Banner
Energy and in various managerial positions with the Columbia Gas System,
Inc.
Key Employees
Jon P. Tate, Vice President, Land and Assistant Secretary, age 43, assumed
his responsibilities with the Managing General Partner in 1989. Prior to
joining the Managing General Partner, Mr. Tate was employed by C.F.
Lawrence & Associates, Inc., an independent oil and gas company, as Land
Manager from 1981 through 1989. Mr. Tate is a member of the Permian Basin
Landman's Association and American Association of Petroleum Landmen. Mr.
Tate received his B.B.S. degree from Hardin-Simmons University.
R. Douglas Keathley, Vice President, Operations, assumed his
responsibilities with the Managing General Partner as a Production Engineer
in October, 1992. Prior to joining the Managing General Partner, Mr.
Keathley was employed for four (4) years by ARCO Oil & Gas Company as
senior drilling engineer working in all phases of well production (1988-
1992), eight (8) years by Reading & Bates Petroleum Company as senior
petroleum engineer responsible for drilling (1980-1988) and two (2) years
by Tenneco Oil Company as drilling engineer responsible for all phases of
drilling (1978-1980). Mr. Keathley received his B.S. in Petroleum
Engineering in 1977 from the University of Oklahoma.
Item 11. Executive Compensation
The Partnership does not have any directors or executive officers. The
executive officers of the General Partner do not receive any cash
compensation, bonuses, deferred compensation or compensation pursuant to
any type of plan, from the Partnership. The General Partner billed $70,000
during 2000 and $120,000 during 1999 and 1998, as an annual administrative
fee.
Item 12. Security Ownership of Certain Beneficial Owners and Management
There are no limited partners who own of record, or are known by the
General Partner to beneficially own, more than five percent of the
Partnership's limited partnership interests.
The General Partner owns a 15 percent interest in the Partnership as a
general partner.
No officer or director of the General Partner owns Units in the
Partnership. There are no arrangements known to the General Partner which
may at a subsequent date result in a change of control of the Partnership.
Item 13. Certain Relationships and Related Transactions
The General Partner contributed $1,692,698, which entitled it to receive
100% of the Partnership's general partner interest. The general partner
interest entitles the General Partner to 15% interest in the Partnership.
See "Item 5."
In 2000, the General Partner received $70,000 as an administrative fee.
This amount is part of the general and administrative expenses incurred by
the Partnership. The General Partner ceased to charge the Partnership for
administrative fees effective July 31, 2000.
The Partnership originally invested all of the proceeds of the Private
Placement in 2,005 shares 45.9% of Basic common stock. The General Partner
at December 31, 2000 directly owns 6.65% of Basic's common stock. Basic in
March 2000 filed a restated certificate of incorporation increasing its
authorized common shares to 25,000,000 and completed a 400-for-1 stock
split. All shares had been restated as if the stock split had occurred at
the beginning of 1998. The 400-for-1 stock split was reversed during 2000.
Basic on December 21, 2000 completed a 100-for-1 dividend. The Partnership
at December 31, 2000 now owns 10.57% or 200,500 shares of Basic's
outstanding common stock.
H. Allen Corey, who is an officer and director of the General Partner, is
of counsel with Baker, Donelson, Bearman & Caldwell, a law firm, which
provides legal services to the General Partner and the Partnership. The
Partnership paid no legal fees for 2000.
In the opinion of management, the terms of the above transactions are
similar to ones with unaffiliated third parties.
Part IV
Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K
(a)(1) Financial Statements:
Southwest Partners III, L.P. Financial Statements
Included in Part II Item 8 of this report -
Independent Auditors Report
Balance Sheets
Statements of Operations
Statement of Changes in Partners' Equity
Statements of Cash Flows
Notes to Financial Statements
Index to Financial Statements of Unconsolidated
Subsidiary
Independent Auditors' Report 28
Balance Sheets
29
Statements of Operations 30
Statements of Stockholders' Equity 31
Statements of Cash Flows 32
Notes to Financial Statements 33
(2) Schedules required by Article 12 of Regulation S-
X are either omitted because they are not applicable or
because the required information is shown in the
financial statements or the notes thereto.
(3) Exhibits:
4 (a)
Certificate of Limited Partnership of Southwest
Partners III, L.P., dated March 11, 1997.
(Incorporated by reference from Partnership's
Form 10-K for the fiscal year ended December 31,
1998).
(b) Agreement of Limited Partnership of
Southwest Partners III, L.P., dated March 11,
1997. (Incorporated by reference from
Partnership's Form 10-K for the fiscal year ended
December 31, 1998).
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during the
quarter ended December 31, 2000.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Partnership 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/ H. H. Wommack, III
-----------------------------
H. H. Wommack, III, President
Date: May 8, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Partnership and in the capacities and on the dates indicated.
By: /s/ H. H. Wommack, III
-----------------------------------
H. H. Wommack, III, Chairman of the
Board, President, Chief Executive
Officer, Treasurer and Director
Date: May 8, 2001
By: /s/ H. Allen Corey
-----------------------------
H. Allen Corey, Secretary and
Director
Date: May 8, 2001
BASIC ENERGY SERVICES, INC.
Financial Statements
December 31, 2000 and 1999
(With Independent Auditors' Report Thereon)
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Basic Energy Services, Inc.:
We have audited the accompanying balance sheets of Basic Energy Services,
Inc. (formerly Sierra Well Service, Inc.) as of December 31, 2000 and 1999,
and the related statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31,
2000. These financial statements are the responsibility of the Company's
management.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Basic Energy Services,
Inc. as of December 31, 2000 and 1999, and the results of its operations
and its cash flows for each of the years in the three-year period ended
December 31, 2000, in conformity with auditing principles generally
accepted in the United States of America.
KPMG LLP
February 10, 2001
Midland, Texas
BASIC ENERGY SERVICES, INC.
BALANCE SHEETS
As of December 31, 2000 and 1999
(in thousands, except share data)
ASSETS 2000 1999
Current assets
Cash and cash equivalents $ $
3,118 1,062
Trade accounts receivable, net of
allowance 9,675 7,477
of $531 and $271, respectively
Accounts receivable-related party 14 73
Inventories 104 144
Other current assets 372 215
Total current assets 13,283 8,971
Property and equipment, net 32,780 31,186
Other assets
Deferred loan costs, net of amortization
of $8 and $2,198, respectively 1,151 494
Goodwill, net of amortization of $17,399
and $17,024, respectively 4,873 4,633
Other 931 1,577
Total other assets 6,955 6,704
Total assets $53,01 $46,86
8 1
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt $ $
4,226 1,164
Accounts payable 3,594 4,281
Accounts payable-related party - 49
Accrued expenses 2,390 1,698
Deferred income 728 -
Income tax payable 200 -
Deferred income tax 184 104
Total current liabilities 11,322 7,296
Long-term debt 15,390 50,371
Deferred income tax 5,052 2,224
Commitments & contingencies - -
Stockholders' equity
Series A Redeemable 10% Preferred Stock,
$10,000 par, 1,000 shares authorized,
530.45 shares issued at December 31, - 5,305
1999
Series B Convertible Preferred Stock,
$1 par, 1,000 shares authorized, 1,000
issued at December 31, 1999 - 1
Series C Convertible Preferred Stock,
$1,000 par, 1 share authorized, one
issued at December 31, 1999 - 1
Common stock - $.01 par; 5,000,000
shares authorized; 1,897,013 and
446,177
shares issued and outstanding at 19 4
December 31, 2000 and 1999,
respectively
Additional paid-in capital 51,217 24,845
Accumulated deficit (29,98 (43,18
2) 6)
Total stockholders' equity 21,254 (13,03
(deficit) 0)
Total liabilities and stockholders' equity $53,01 $46,86
8 1
The accompanying notes are an integral part of these financial statements.
BASIC ENERGY SERVICES, INC.
STATEMENTS OF OPERATIONS
For the years ended December 31, 2000, 1999 and 1998
(in thousands, except per share and share data)
2000
1999 1998
Revenues
Well Servicing $37,784 $24,453 $26,687
Fluid Services 18,682 12,878 18,632
56,466 37,331 45,319
Expenses
Well Servicing 27,475 20,164 21,640
Fluid Services 12,639 9,613 13,009
General and administration,
including
management fees and computer
services 6,683 5,229 5,471
from related parties of $138,
$234,
and $241, respectively
Depreciation and amortization 6,795 6,747 8,624
Impairment of long lived assets - - 22,671
(Note 4)
Unsuccessful offering and 2,073 - 990
acquisition costs
55,665 41,753 72,405
Operating income (loss) 801 (4,422) (27,086)
Other income (expense)
Interest income 93 100 263
Interest expense (6,930) (6,065) (7,166)
Gain (loss) on sale of assets 91 (301) (93)
Other, net 76 45 16
(6,670) (6,221) (6,980)
Loss before income taxes and (5,869) (10,643 (34,066)
extraordinary item )
Provision for income tax (expense) 2,037 (2,328) 5,770
benefit
Loss before extraordinary item $(3,83 $(12,971 $(28,296
2) ) )
Extraordinary gain from early
extinguishments 17,681 - -
of debt, net of tax of $4,434
Net income (loss) $13,849 $(12,971 $(28,296
) )
Preferred stock dividend 645 430 -
Net income (loss) to common $13,204 $(13,401 $(28,296
stockholders' interest ) )
The accompanying notes are an integral part of these financial statements.
BASIC ENERGY SERVICES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
1812:
1814: Series B Series C
Additi
onal
Paid- Accumul
Stock Preferred Preferred Common Stock In ated
Stock
1820: Shares Shares Amount Capita Deficit
Amount Shares Amount Shares Amount l
1822:
(in thousands, except share data)
Balance -
- - - - - 437,071 $ 4 $24,845 $(1,489)
- - - - - - (28,296)
Balance -
- - - - - 437,071 4 24,845 (29,785)
- - - - - 9,106 - - -
granted
500 $ 5,0 1,000 $ 1 1 $ - - - -
issued 00 1
305 - - - - - - - (305)
1838:Preferred stock
- - - - - - - - (125)
- - - - - - - (12,971)
Balance -
- - - - - $ 1 $ - $ -
granted 9,106
(1) $(1) - - -
retired (595) 0) (1,000) (1) 4,001
- - - - - 14 -
- - - - 1,441,730 - 24,486 -
645 - - - - - (645)
- (2,115)
stock _
Preferred stock -
dividend - stock _
- - - - - - - - 13,849
Balance -
$ 0 0 $ 0 $ 0 1,897,013 $19 $51,217 $(29,982)
The accompanying notes are an integral part of these financial statements.
BASIC ENERGY SERVICES, INC.
STATEMENTS OF CASH FLOWS
For the years ended December 31, 2000, 1999 and 1998
(In thousands)
2000 1999 1998
Cash flows from operating activities
Net Income (loss) $13,849 $(12,9 $
71) (28,29
6)
Depreciation 5,676 5,494
6,322
Amortization 1,119 1,253
2,302
Impairment of long lived assets - -
22,671
Bad debt expense 113 125
442
Noncash interest expense 6,657 2,494
1,435
Gain on retirement of debt (22,115 -
Write-off of unsuccessful offering and ) - -
acquisition costs 2,073
990
(Gain) loss on sale of assets (91) 301
93
Deferred income tax expense (benefit) 2,397 2,328
(5,770
)
Changes in operating assets and
liabilities, net of
acquisitions - (2,314) (1,051
Accounts receivable ) 1,011
Inventories 40 14
92
Other current assets (157) 46
(152)
Accounts payable (1,061) 2,518
(1,333
)
Deferred Income 728 -
-
Accrued expenses 442 314
(468)
Deposits (38) -
-
Net cash provided by (used in) operating 7,318 865
activities (661)
Cash flows from investing activities
Purchase of property and equipment (4,255) (2,287
) (2,435
)
Proceeds from sale of property and 435 1,210
equipment 309
Collections of notes receivable 118 3
-
Proceeds from sale of other long-term - 205
assets 85
Payments for other long-term assets - (101)
(92)
Payments for businesses, net of cash (80) -
acquired (1,800
)
Net cash used in investing (3,782) (970)
activities (3,933
)
Cash flows from financing activities
Borrowings under long-term debt 15,988 -
2,100
Payments of long-term debt (12,816 (497)
) (595)
Costs related to issuance of common stock (1,540) -
-
Dividends paid - (125) -
Deferred loan costs and unsuccessful (3,112) (1,057
offering and acquisition costs ) (602)
Net cash provided by (used in) (1,480) (1,679
financing activities ) 903
Net increase (decrease) in cash and cash 2,056 (1,784
equivalents ) (3,691
)
Cash and cash equivalents - beginning of 1,062 2,846
year 6,537
Cash and cash equivalents - end of year $3,118 $1,062 $
2,846
Supplemental disclosures of cash flow
information - $ 273 $5,106 $
Interest paid 5,732
Supplemental schedule of noncash investing
and financing
activities -
Capital leases issued for equipment 2,170 353
252
Notes receivable-non cash 138 83
-
Preferred stock dividend 645 305
-
Transfer of debt for preferred stock - 5,002
-
Accrued interest capitalized into long- - 1,614
term debt -
Common stock issued to retire debt 24,500 -
-
Note issued to retire all preferred stock 2,500 -
-
Costs related to issuance of common stock 575 -
__-
The accompanying notes are an integral part of these financial statements.
BASIC ENERGY SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Organization & Business - Basic Energy Services, Inc. (the "Company"), a
Delaware corporation, was formed in 1992 as a subsidiary of Southwest
Royalties, Inc. ("SWR"). In June 1997, Southwest Royalties Holding, Inc.
("SRH") was formed to serve as a holding company for SWR, the Company and
other subsidiaries of SWR. At that time, SWR's investment in the Company
was transferred by dividend to SRH and the Company became a subsidiary of
SRH. Due to sales of the Company's common stock to Southwest Partners II,
L.P. and Southwest Partners III, L.P. (limited partnerships for which SWR
serves as general partner) in 1996 and 1997, SRH's ownership interest in
the Company was reduced to a point where the Company's financial position
and results of operations were no longer consolidated with SRH, effective
July 1, 1997.
The Company provides a range of well site services to oil and gas
drilling and producing companies through the Company's fleet of well
servicing rigs and fluid handling assets. The Company's operations are
concentrated in the major United States oil and gas producing regions of
Texas, New Mexico, Oklahoma and Louisiana.
Common Stock Split and Change of Name - On May 23, 2000, the Company
filed a restated certificate of incorporation changing its name to Basic
Energy Services, Inc. from Sierra Well Service, Inc. On December 21, 2000,
the Company filed a restated certificate of incorporation, changing its
authorized common shares to 5,000,000 and issuing a 100-for-1 stock split.
All share and per share amounts have been restated as if the stock split
had occurred at the beginning of the earliest period presented.
Estimates and Uncertainties - The preparation of these financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
Cash and Cash Equivalents - The Company considers all highly liquid
instruments purchased with a maturity of three months or less to be cash
equivalents. The Company maintains its excess cash in various financial
institutions, where deposits may exceed federally insured amounts at times.
Inventories - Inventories mainly consist of pipe, are held for use in
the operations of the Company and are stated at the lower of cost or
market, with cost being determined on the first-in, first-out (FIFO)
method.
Property and Equipment - Property and equipment are stated at cost.
Expenditures for repairs and maintenance are charged to expense as incurred
and additions and improvements that significantly extend the lives of the
assets are capitalized. Upon sale or other retirement of depreciable
property, the cost and accumulated depreciation are removed from the
related accounts and any gain or loss is reflected in operations. All
assets are depreciated on the straight-line method and the estimated useful
lives of the assets are as follows:
Buildings and improvements 20-30
years
Well servicing rigs and equipment 5-15
years
Fluid service equipment 5-10
years
Brine/fresh water stations 15 years
Enviro-Vat units and fluid service 10 years
Disposal facilities 10 years
Vehicles 3-5 years
BASIC ENERGY SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
The Company reviews property and equipment and certain identifiable
intangibles for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. An
impairment loss is indicated if the sum of the expected undiscounted future
cash flows is less than the carrying amount, including any related
goodwill, of such assets. Expected future cash flows and carrying values
are aggregated at their lowest identifiable level, which is on a rig-by-rig
basis for the Company's well service rigs and by local service area for the
Company's truck fleets and water stations. The Company recognizes an
impairment loss for the difference between the asset's, or group of assets,
carrying value and estimated fair value, if the carrying value exceeds the
expected undiscounted future cash flows.
Deferred Debt Costs - The Company capitalizes certain costs in
connection with obtaining its borrowings, such as lender's fees and related
attorney's fees. These costs are being amortized to interest expense on the
straight-line method over the terms of the related debt. Amortization
calculated using the straight line method is not materially different from
the amount calculated using the effective interest method.
Goodwill - The Company classifies as goodwill the cost in excess of fair
value of the net tangible assets acquired in purchase transactions.
Goodwill is being amortized on a straight-line basis over the estimated
period benefited by it of fifteen years. Management continually evaluates
whether events or circumstances have occurred that indicate the remaining
useful life of goodwill may warrant revision or the remaining balance of
goodwill may not be recoverable.
Income Taxes - Deferred income taxes are recognized for the tax
consequences of temporary differences between financial statement carrying
amounts and the tax basis of existing assets and liabilities. The
measurement of current and deferred tax assets and liabilities is based on
enacted tax law. The effect on deferred tax assets and liabilities of a
change in tax rate is recognized in income in the period of change. A
valuation allowance for deferred tax assets is recognized when it is "more
likely than not" that the benefit of deferred tax assets will not be
realized.
Concentrations of Credit Risk - Financial instruments, which potentially
subject the Company to concentration risk, consist primarily of temporary
cash investments and trade receivables. The Company restricts investment of
temporary cash investments to financial institutions with high credit
standing. The Company's customer base consists primarily of multi-national
and independent oil and natural gas producers. The Company performs ongoing
credit evaluations of its customers but generally does not require
collateral on its trade receivables. Credit risk is considered by
management to be limited due to the large number of customers comprising
the Company's customer base. The Company maintains reserves for potential
credit losses, and such losses have been within management's expectations.
Recent Accounting Pronouncements - In June 1998, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards No. 133 "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS 133") which establishes standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. It
establishes conditions under which a derivative may be designated as a
hedge, and establishes standards for reporting changes in the fair value of
a derivative. SFAS 133, as amended by SFAS 137, is required to be
implemented for all fiscal quarters of all fiscal years beginning after
June 15, 2000. Early adoption is permitted. Based on the Company's
assessment of the implications of this new statement, the Company believes
they have no freestanding or embedded derivative instruments that would
need to be accounted for under SFAS 133.
BASIC ENERGY SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
2. Acquisitions
In 2000 and 1999 Basic acquired for cash either substantially all of the
assets or all of the outstanding capital stock of each of the following
businesses, which were accounted for using the purchase method of
accounting:
Closing Date Total Purchase
Price
(in thousands)
Harrison Well Service, Inc. August 2000 $ 1,250
Accurate Petroleum Services, April 1998 $ 1,800
Inc.
The operations of each of the aforementioned acquisitions are included
in the Company's statement of operations as of each respective closing
date.
In 2000 and 1998, the Company expensed previously deferred costs from
foregone acquisitions and costs associated with equity offerings not
consummated, totaling approximately $2,073,000 and $990,000, respectively.
3. Property and Equipment
Property and equipment consists of the following as of December 31 (in
thousands):
2000 1999
Land $ 284 $ 236
Buildings and improvements 1,716 1,673
Well service units and equipment 26,702 22,507
Water hauling equipment 7,104 7,052
Brine/fresh water stations 8,679 8,620
Enviro-Vat units and frac/test tanks 3,215 3,211
Disposal facilities 5,659 5,348
Vehicles 4,984 4,389
Other 976 672
59,319 53,708
Less accumulated depreciation 26,539 22,522
Property and equipment, net $32,78 $31,186
0
The Company is obligated under various capital leases for certain
vehicles and equipment that expire at various dates during the next ten
years. The gross amount of property and equipment and related accumulated
amortization recorded under capital leases and included above consists of
the following as of December 31 (in thousands):
2000
1999
Vehicles $2,274 $924
Water hauling equipment 626 375
Other 44 44
2,944 1,343
Less accumulated amortization 1,065 594
$1,879 $749
Amortization of assets held under capital leases of approximately
$587,000, $155,000 and $273,000 for the years ended December 31, 2000, 1999
and 1998, respectively, is included with depreciation expense.
BASIC ENERGY SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
4. Impairment
At December 31, 1998, the Company recorded an impairment loss on its
well servicing and fluid services business segments of approximately
$1,392,000 and $21,280,000, respectively, for a total impairment of
approximately $22,672,000. The amount of goodwill impaired relating to the
well servicing and fluid services segments, and included in the total
impairment, was approximately $1,235,000 and $13,686,000, respectively. In
determining if an impairment loss was indicated, management projected
future undiscounted cash flows through the estimated life of each asset,
for each of the Company's well service rigs and by local service area for
the Company's trucks and water stations, based on generally increasing
utilization rates based on management's expectations, hours, estimated
future rates and expenses. Where an impairment was indicated, the carrying
value of the related goodwill was first reduced. If additional impairment
was indicated the related equipment was reduced to estimated fair market
value, based upon a recent appraisal.
5. Long-Term Debt
Long-term debt consists of the following as of December 31 (in
thousands):
2000
1999
Credit Facility
Senior Notes $ $24,40
- 8
Subordinated Notes - 26,535
New Credit Facility
Revolving Line of Credit 1,040 -
Term Loan 15,000 -
Cash Flow Participation Note (net of discount 1,960 -
of $540)
Capital leases and equipment notes 1,616 592
19,616 51,535
Less current portion 4,22 1,164
6
$15,39 $50,37
0 1
Credit Facility
On March 31, 1999, the Company entered into three security purchase
agreements (collectively, the "Credit Facility") that provided up to
$54,410,000, the proceeds of which were used to retire certain outstanding
indebtedness. The Company accounted for this restructuring under FAS 15,
"Accounting by Debtors and Creditors for Troubled Debt Restructuring"
because the maturity of the debt was extended from March 31, 1999 to June
2004 and the interest rate was maintained at a level below the rate that
the Company could have obtained from an alternate lender. In fact, it
would have been unlikely that the Company could have obtained alternative
financing from any source. In addition, the lender accepted preferred stock
in exchange for $5 million of the debt. The Company issued preferred stock
with an estimated fair value of $5 million to the lender on March 31, 1999,
as partial settlement of the outstanding balance of the Credit Facility. In
accordance with FAS 15, no gain or loss was recognized on the restructuring
because there was not a complete settlement of the outstanding debt and the
total of the future payments under the terms of the restructured debt
exceeded the carrying value.
2000 Refinancing
On December 21, 2000, the Company entered into a new term loan and a
revolving line of credit (collectively, the "New Credit Facility") that
provided up to $16,040,000 to the Company for the year ended December 31,
2000. The proceeds were used to retire amounts outstanding under the Credit
Facility and for costs associated with the recapitalization and
refinancing. In 2000, the Company incurred approximately $508,800 in costs
related to the refinancing. The Company used $10,500,000 of the proceeds
of the term loan to retire the December 21, 2000 outstanding balance of the
Subordinated Notes plus accrued interest of approximately $30,220,000.
This transaction resulted in an extraordinary gain of approximately
$19,720,000 before taxes. See discussion of the terms of the New Credit
Facility below.
BASIC ENERGY SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
On December 21, 2000, the Company also entered into a securities purchase
agreement with an investor whereby the investor purchased the December 21,
2000 outstanding balance of the Senior Notes plus accrued interest of
approximately $26,895,000, for $24,500,000. The investor then exchanged
this debt for 1,441,730 shares of the Company's common stock, resulting in
an extraordinary gain of approximately $2,395,000 before taxes. In 2000,
the Company incurred approximately $2,115,000 in costs related to the
issuance of this common stock. The Company and this investor entered into
a Commitment Agreement dated December 21, 2000, whereby the investor could
purchase an additional 576,709 shares of the Company's common stock at a
purchase price of $16.993 per share, for a total additional purchase price
of up to $9,800,000, for the purpose of providing funds to the Company to
complete acquisitions of businesses and assets. The Company and the
investor exercised this Commitment Agreement in January of 2001 (See Note
13).
In addition, the Credit Facility lender exchanged all the preferred
stock, plus accrued and unpaid dividends, for a Cash Flow Participation
Note. See discussion of the terms of this Cash Flow Participation Note
below.
New Credit Facility
Term Note
The Term Note has a principal balance of $15,000,000 with monthly
interest payable at a rate per annum equal to the lesser of 1.25% above the
Chase Bank prime rate or 3.75% above the LIBOR rate. The principal is
payable monthly, in installments of $227,273, beginning February 2001. All
outstanding principal and accrued and unpaid interest is due and payable in
full on December 31, 2004. In the event the Company has Surplus Cash
(earnings before income taxes, depreciation and amortization less non-
financed capital expenditures less fixed charges) in any fiscal year
beginning December 31, 2001, then in April of the next succeeding fiscal
year, the Company must make a mandatory prepayment of the Term Note by an
amount equal to 50% of the calculated Surplus Cash.
Revolving Line of Credit
The Revolving Line of Credit provides $10,000,000 with monthly interest
payable at a rate per annum equal to the lesser of 0.50% above the Chase
Bank prime rate or 3.0% above the LIBOR rate. All outstanding principal
and accrued and unpaid interest is due and payable in full on December 31,
2004. The borrowing base is equal to 85% of eligible accounts receivable.
The Term Note and Revolving Line of Credit have restrictive covenants which
restrict dividends, investments, capital expenditures, capital leases, and
the sale of assets. Additionally, the covenants require the Company to
maintain a fixed charge coverage ratio (as defined) of at least 1.2:1 for
each quarter beginning March 31, 2001, a ratio of indebtedness to equity
(as defined) of not more than 1.25: 1, at all times, and maintain during
each fiscal quarter a tangible net worth (as defined) greater than the
minimum tangible net worth determined for such fiscal quarter.
Cash Flow Participation Note
On December 21, 2000, the Credit Facility lender exchanged all Series A
Cumulative Preferred Stock, Series B Convertible Preferred Stock, Series C
Convertible Preferred Stock, plus all accrued and unpaid dividends, whether
in cash or securities, for the Cash Flow Participation Note (the "Note").
Beginning with the calendar year ending December 31, 2001, the Company is
required to make an annual payment equal to 45% of Consolidated Annual Free
Cash Flow (earnings before interest expense, income tax expense,
depreciation and amortization expense less the then-prevailing Adjustment
Amount). The Adjustment Amount is $9,000,000 and can be lowered by an
amount that equals the then - current balance of the suspended payment
obligation for such calendar year divided by the payout percentage.
Payments are subject to a Lifetime Cap of $5,000,000 and a Yearly Cap of
$1,000,000.
BASIC ENERGY SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
Any amount not paid when due shall bear interest at 14% per annum.
After March 31, 2001, the Company has the option to purchase the Note at
the Call Exercise Price then in effect as follows:
Period Amount
April 1, 2001 to March 31, 2002 $2,500,000
April 1, 2002 to March 31, 2003 $2,500,000
April 1, 2003 to March 31, 2004 $3,000,000
April 1, 2004 to March 31, 2005 $3,500,000
April 1, 2005 to September 30, 2005 $4,000,000
Thereafter $5,000,000
As a result of the conditions above, it was determined that the fair
market value of the Note is $2,500,000 as of December 31, 2000. As this
note is non-interest bearing, the current value was further reduced by
$540,000 of imputed interest until maturity, using an effective interest
rate of 12.75%.
As of December 31, 2000, the aggregate maturities of debt, including
capital leases, for each of the five years subsequent to December 31, 2000,
are as follows (in thousands):
Year Ending
December 31,
2001 $4,226
2002 4,357
2003 3,987
2004 7,046
2005
-
$19,616
6. Income Taxes
Income tax provision (benefit) and amounts separately allocated were as
follows (in thousands):
December 31,
2000 1999 1998
Loss before income taxes and $(2,037 $2,328 $(5,770)
extraordinary item )
Extraordinary gain from early 4,434 - -
extinguishments of debt
$ 2,39 $2,328 $ (5,77
7 0)
The provision (benefit) for income taxes attributable to loss before
income taxes and extraordinary item consists of the following as of
December 31 (in thousands):
2000 1999 1998
Current $ - $ - $ -
Deferred (1,983) 5,392 (2,924)
Benefit of net operating loss (54) (2,555 (3,355)
carryforward )
Change in valuation allowance - (509) 509
$(2,03 $2,328 $(5,77
7) 0)
BASIC ENERGY SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
A reconciliation between the amount determined by applying the federal
statutory rate to loss before income taxes and extraordinary item with the
provision (benefit) for income taxes is as follows as of December 31 (in
thousands):
2000 1998
1999
Statutory federal income tax $ $ (3,619) $ (11,582)
(1,995)
Amortization of non-deductible goodwill 95 227 5,195
and property
Meals and entertainment 61 75 95
Change in valuation allowance - (509) 509
Reduction in net operating loss - 6,101 -
carryforwards
Adjustment for changes in estimates (363) - -
State tax 146 - -
Other 19 53 13
$ (2,037 $ 2,328 $ (5,770)
)
As a result of issuing preferred stock and convertible preferred stock
to its primary lender on March 31, 1999, the Company's net operating loss
carryforwards accumulated prior to that date were effectively reduced to
zero under Section 382 of the Internal Revenue Code. Deferred tax assets
related to operating loss carryforwards existing at December 31, 1999 arose
from losses occurring subsequent to March 31, 1999. The valuation
allowance at December 31, 1998 was reduced because the net operating loss
carryforwards to which it related were lost as described above.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are as follows as of
December 31 (in thousands):
2000
1999 1998
Deferred tax assets:
Operating loss carryforwards $ 54 $2,555 $
5,082
Alternative minimum tax credit 109 -
carryforwards -
Receivables 185 148
-
Other intangibles 376 -
-
Other - 1
202
Valuation allowance -
- (509)
Total deferred tax assets 724
2,757 4,722
Deferred tax liabilities:
Property and equipment (5,652) (4,505
(4,794) )
Real estate investments - (23)
-
Goodwill (137) (157)
(145)
Receivables - -
(104)
Other (171)
(42) (37)
Total deferred tax liabilities (5,960)
(5,085) (4,722
)
Net deferred tax liability $(5,23 $ $
6) (2,328) -
A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax assets will not be realized. The valuation
allowance relates primarily to the uncertainty of the realizability of the
Company's carryforwards. The amount of the valuation allowance could be
reduced if estimates of future taxable income during the carryforward
period are increased.
As of December 31, 2000, the Company had net operating loss
carryforwards for U.S. federal income tax purposes of approximately
$160,000, which are available to offset future regular taxable income, if
any. The net operating loss carryforwards expire in various periods through
2019. As described above, this amount relates only to tax losses since
March 31, 1999. The Company has alternative minimum tax carryforwards
totaling $109,000 to offset regular income tax, which have no scheduled
expiration date.
BASIC ENERGY SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
7. Commitments and Contingencies
Environmental
The Company is subject to various federal, state and local environmental
laws and regulations which establish standards and requirements for
protection of the environment. The Company cannot predict the future impact
of such standards and requirements which are subject to change and can have
retroactive effectiveness. The Company continues to monitor the status of
these laws and regulations. Management does not believe that the
disposition of any of these items will result in a material adverse impact
to the financial position, liquidity, capital resources or future results
of operations of the Company.
Currently, the Company has not been fined, cited or notified of any
environmental violations which would have a material adverse effect upon
the financial position, liquidity or capital resources of the Company.
However, management does recognize that by the very nature of its business,
material costs could be incurred in the near term to bring the Company into
total compliance. The amount of such future expenditures is not
determinable due to several factors including the unknown magnitude of
possible contamination, the unknown timing and extent of the corrective
actions which may be required, the determination of the Company's liability
in proportion to other responsible parties and the extent to which such
expenditures are recoverable from insurance or indemnification.
Litigation
From time to time, the Company is a party to litigation or other legal
proceedings that the Company considers to be a part of the ordinary course
of business. The Company is not currently involved in any legal proceedings
that could reasonably be expected to have a material adverse effect on the
Company's financial condition or results of operations.
Leases
The Company leases certain equipment under non-cancelable operating
leases which expire at various dates through December 2001. The term of the
operating leases generally run from 36 to 60 months with varying payment
dates throughout each month.
The future minimum lease payments under non-cancelable operating leases
total $575,289 for the year ending December 31, 2001. Rent expense
approximated $865,000, $942,000 and $979,000 for 2000, 1999 and 1998,
respectively. The Company rents various equipment for short-term periods
in order to assist day-to-day operations.
8. Stock Compensation
The Company granted an officer 9,106 common shares with nominal value in
March of 1999 and an additional 9,106 shares with a nominal value in March
of 2000. The value of these shares was determined to be nominal because the
Company's financial condition and prospects at the time of issuance. The
Company was experiencing significant negative cash flow, all of its debt
was scheduled for repayment on March 31, 1999 and the Company had no source
of funds for the repayment, and there was no expectation that the Company
would have the ability to meet interest requirements.
BASIC ENERGY SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
9. EBITA Contingent Warrants
On December 21, 2000, the Company issued EBITDA Contingent Warrants to
purchase up to an aggregate of 146,341 or 229,941, or 16,260 or 57,485,
shares, at $0.01 per share, of the Company's common stock as a dividend to
stockholders of record on December 18, 2000 or as part of an authorized
issuance to certain members of management of the Company, respectively. If
the Company achieves average adjusted EBITDA for the fiscal years ended
December 31, 2001 and 2002 of at least $14 million but less than $15
million, the stockholders and certain members of management shall be
entitled to purchase a total of 146,341 and 16,260 shares, respectively; if
the Company achieves average adjusted EBITDA of $15 million or more, the
stockholders and certain members of management shall be entitled to
purchase a total of 229,941 and 57,485 shares, respectively. The warrants
shall become exercisable no later than March 31, 2003 based on actual
EBITDA results for 2001 and 2002 and will expire on May 1, 2003.
When the Company determines that it is probable that the EBITDA levels
mentioned above can be achieved, the Company will recognize the
compensation expense related to the warrants issued to certain members of
management and will record the value of the warrants issued to stockholders
as a preferred stock dividend.
10. Related Party Transactions
The Company provided services and products for workover, maintenance and
plugging of existing oil and gas wells to a related party for approximately
$685,000, $1,010,000 and $906,000 in 2000, 1999 and 1998, respectively. The
Company had receivables from this related party, of $14,000 and $73,000 as
of December 31, 2000 and 1999, respectively.
The Company paid a related party management fees for accounting,
bookkeeping, tax preparation, banking and computer services in 2000 and
1999. All services, except for computer and tax preparation services, were
terminated by the Company as of December 31, 1999. Tax services were
terminated in the first quarter of 2001.
The Company leased three well service rigs from a related party under an
operating lease entered into in October 1999. The lease required monthly
payments of approximately $11,000 through October 2004. Rent expense
related to this lease approximated $132,000 in 2000 and $24,000 in 1999.
These rigs were purchased by the Company in January 2001.
The Company leased two well service rigs from a related party under two
separate operating leases entered into in February and September 2000. The
leases required monthly payments of $21,190 and $11,085 through February
2001 and August 2003, respectively. Rent expense related to these leases
approximated $245,000 in 2000. These rigs were purchased by the Company in
December 2000. The Company also incurred $325,000 in consulting fees to
this related party during 2000 related to the Company's debt refinancing.
A director of the Company is a partner in a law firm that provides legal
services to the Company. During 2000, 1999 and 1998, the Company paid
approximately $161,000, $64,000 and $112,000, respectively, in fees for
legal services performed to this law firm. This director resigned as
director of the Company on July 1, 2000.
BASIC ENERGY SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
11. Profit Sharing Plan
The Company has a contributory retirement plan that covers substantially
all employees. Employees may contribute up to 15% of their base salary with
the maximum amount determined by law. Employee contributions are fully
vested at all times and discretionary employer contributions are fully
vested upon the first to occur of retirement and five years of service.
Employer contributions to the 401(k) plan approximated $67,000 for 2000,
$56,000 for 1999 and $18,000 for 1998.
12. Major Customers
No customers accounted for over 10% sales in 2000, 1999 and 1998. The
Company performs ongoing evaluations of its customers' financial condition
and generally requires no collateral to secure outstanding receivables.
13. Subsequent Events
On January 2, 2001, the Company purchased three rigs that it previously
leased from a related party for $540,000 plus the applicable sales tax.
This was funded by the revolving line of credit.
On January 9, 2001, the Company's investor purchased an additional
576,709 shares of the Company's common stock for approximately $9,800,000
or $16.993 per share. After the purchase of this stock, this investor owns
81.6% of the outstanding stock of the Company. The proceeds of this stock
sale plus cash on hand were used to acquire the assets of D&W Services,
Inc.
On January 11, 2001, the Company purchased all of the operating assets
and the accounts receivable of D&W Services, Inc. (D&W). The total
purchase price was approximately $12,148,000 plus the assumption of the
plugging cost of a disposal well. D&W operated approximately 24 vacuum
tractor and trailers, 72 frac tanks, five disposal wells, and three
acid/pressure trucks in the east Texas/north Louisiana market area, along
with various other equipment to support these operations.
On February 22, 2001, the Company purchased the operating assets,
consisting of six well servicing rigs and support equipment, from Real Well
Service, Inc. for approximately $2.2 million. The acquisition was funded
by the revolving line of credit.