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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, 2001
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 45. 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 13
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 24
Part III
10. Directors and Executive Officers of the Registrant 25
11. Executive Compensation 26
12. Security Ownership of Certain Beneficial Owners and
Management 26
13. Certain Relationships and Related Transactions 26
Part IV
14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 27
Signatures 28
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.
On May 21, 2001, Basic issued a Notice to Stockholders of Preemptive
Rights. The Partnership purchased an additional 19,000 shares of common
stock at $380,000. The Partnership as of December 31, 2001 owns a total of
6.32%, or 219,500 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 89 individuals, together with certain independent consultants used
on an "as needed" basis, perform various services on behalf of the
Partnership. 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 well servicing
rigs and fluid service trucks.
Formed in 1992 by the General Partner, Basic has grown primarily through
selective acquisitions. It has completed 21 purchases of well services
companies as well as purchases of additional equipment. Basic's revenues
have grown from $932,000 in 1992 to approximately $99.7 million in 2001.
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, 2001
there were 89 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 and
leases field offices. Additionally, Basic has field offices in South
Texas, East Texas and Oklahoma.
Basic's well servicing equipment fleet includes well servicing rigs, fluid
service trucks, Enviro-Vat systems and frac and test tanks. Additionally,
the Company operates injection wells and 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 2001 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 investor
must give written notice of intentions to dispose of their units to the
General Partner along with the nature and terms of the proposed
disposition. The notice shall be deemed to constitute an offer to sell the
units to the General Partner. The General Partner has 15 days from the
date of the offer to indicate in writing to the investor its decision as to
whether it will purchase all or any of the offered units. As of December
31, 2001 the General Partner purchased 0.15 limited partner units for
$13,950.
Number of Limited Partner Interest Holders
As of December 31, 2001, 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 2001, no distributions were made.
Item 6. Selected Financial Data
The following selected financial data for the years ended December 31,
2001, 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
------------------------------------------------
- -
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Revenues $ 4,021 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 (1,643) (63,169)(2,120,433)(14,702,959)(420,813)
Partners' share of net loss:
General partner (246) (9,475) (318,065)(2,195,181) (68,107)
Limited partners (1,397) (53,694)(1,802,368)(12,507,778)(352,706)
Limited partners' net
loss per unit (8) (314) (10,545) (73,177) (2,054)
Total assets $ 408,120 404,112 392,709 2,386,54517,081,587
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, 2001, the Partnership owned a 6.32% interest in Basic, which
is accounted for using the cost method of accounting.
Results of Operations
For the year ended December 31, 2001
Revenues
Revenues consisted of interest income. The surplus cash remaining before
and after the May 21, 2001 additional investment in Basic generated
interest income of $4,021.
Expenses
Direct expenses totaled $5,664 for the year, relating to general and
administrative. General and administrative expenses primarily represent
independent accounting fees incurred to audit the Partnership.
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.
Revenue and Distribution Comparison
Partnership loss for the years ended December 31, 2001, 2000 and 1999 were
$1,643, $63,169 and $2,120,433, respectively. Since inception of the
Partnership, no cash distributions have been made to the partners.
Liquidity and Capital Resources
Cash flows provided by operating activities were approximately $4,008 in
2001 compared to $11,403 in 2000 and approximately $11,164 in 1999. The
source of the 2001 cash flow from operating activities was interest income.
Cash flows used in investing activities were approximately $380,000 in
2001. There were no cash flows used in investing activities during 2000
and 1999. The use of the 2001 cash flow from investing was the additional
investment in May 2001 of Basic stock.
There were no cash flows used in financing activities during 2001, 2000 and
1999.
The Partnership as of December 31, 2001 has negative working capital of
$317,638 and a payable to the General Partner of $341,643. The Partnership
does not generate operating income and has no current means of settling the
liability to the General Partner, but believes the fair value of its assets
are sufficient to meet their current obligations if necessary. The General
Partner, should it become necessary, has agreed to either extend the
payment terms until the Partnership can comfortably pay the balance or make
other mutually acceptable arrangements to settle the payable by transfer,
sale or assignment of Partnership assets.
Liquidity - 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
accounted for the investment using the cost method. Southwest Partners III
no longer holds a 20% or more interest in Basic and exerts no significant
influence over Basic's operations.
On December 21, 2000, Basic entered into a refinancing and restructuring of
its debt and equity. Upon the signing of the documents, the Partnership's
percentage of ownership was diluted from 44.94% to 10.57%. A new equity
investor, in exchange for 1,441,730 shares of Basic's common stock,
purchased and retired $24.5 million of Basic's debt from its previous
lender. The equity investor received a 76% ownership. Additionally, $10.5
million of the debt held by the previous lender was refinanced with a new
lender. The remaining debt held by the previous lender of approximately
$21.7 million was cancelled.
Basic's new equity investor mentioned in the above paragraphs purchased an
additional 576,709 shares, during the first part of the year, thereby
increasing their ownership from 76% to 81.6%. As a result of the purchase,
the Partnership's ownership decreased at that time from 10.57% to 8.11%.
On May 21, 2001, Basic issued a Notice to Stockholders of Preemptive
Rights. The Partnership purchased an additional 19,000 shares of common
stock at $380,000. The Partnership at December 31, 2001 owns a total of
6.32%, or 219,500 shares of Basic's outstanding common stock.
Liquidity - General Partner
The General Partner has a highly leveraged capital structure with $50.0
million and $123.7 million of principal due in August of 2003 and October
of 2004, respectively. The General Partner will incur approximately $17.6
million in interest payments in 2002 on its debt obligations. Due to the
depressed commodity prices experienced during the last quarter of 2001, the
General Partner is experiencing difficulty in generating sufficient cash
flow to meet its obligations and sustain its operations. The General
Partner is currently in the process of renegotiating the terms of its
various obligations with its creditors and/or attempting to seek new
lenders or equity investors. Additionally, the General Partner would
consider disposing of certain assets in order to meet its obligations.
There can be no assurance that the General Partner's debt restructuring
efforts will be successful or that the lenders will agree to a course of
action consistent with the General Partners requirements in restructuring
the obligations. Even if such agreement is reached, it may require
approval of additional lenders, which is not assured. Furthermore, there
can be no assurance that the sales of assets can be successfully
accomplished on terms acceptable to the General Partner. Under current
circumstances, the General Partner's ability to continue as a going concern
depends upon its ability to (1) successfully restructure its obligations or
obtain additional financing as may be required, (2) maintain compliance
with all debt covenants, (3) generate sufficient cash flow to meet its
obligations on a timely basis, and (4) achieve satisfactory levels of
future earnings. If the General Partner is unsuccessful in its efforts, it
may be unable to meet its obligations making it necessary to undertake such
other actions as may be appropriate to preserve asset values. Upon the
occurrence of any event of dissolution by the General Partner, the holders
of a majority of limited partnership interests may, by written agreement,
elect to continue the business of the Partnership in the Partnership's
name, with Partnership property, in a reconstituted partnership under the
terms of the partnership agreement and to designate a successor General
Partner.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No.133, "Accounting
for Derivative Instruments and Hedging Activities." SFAS No. 133, as
amended by SFAS No. 138, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded
in other contracts and for hedging activities. Assessment by the General
Partner revealed this pronouncement to have no impact on the partnership.
The FASB has issued Statement No. 143 "Accounting for Asset Retirement
Obligations" which establishes requirements for the accounting of removal-
type costs associated with asset retirements. The standard is effective
for fiscal years beginning after June 15, 2002, with earlier application
encouraged. Assessment by the General Partner revealed this pronouncement
to have no impact on the partnership.
On October 3, 2001, the FASB issued Statements No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets." This pronouncement
supercedes FAS 121 "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed" and eliminates the requirement of
Statement 121 to allocate goodwill to long-lived assets to be tested for
impairment. The provisions of this statement are effective for financial
statements issued for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years. The General Partner is
currently assessing the impact to the partnerships financial statements.
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, 2001
Revenues
Basic's revenues increased to $99.7 million, or 77%, for the year ended
December 31, 2001 as compared to $56.5 million for the same period in 2000.
The increase was primarily attributable to acquisitions made by Basic
during 2001.
Expenses
Operating expenses increased $26.3 million, or 56%, for the year ended
December 31, 2001 as compared to the same period for 2000. The components
of operating expenses consisted of increases in cost of revenues of $22.2
million and general and administrative increases of $4.1 million. The
increase in operating and general and administrative expenses is a result
of the acquisitions made by Basic during 2001. Interest expense for the
year ended December 31, 2001 decreased to $3.4 million from $6.9 million
for the same period in 2000. The decrease for the year 2001 is due to the
early extinguishment of debt.
In addition the Company recorded stock based compensation in 2001 of $1.4
million in relation to their EBITDA contingent warrants.
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.
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 $14.1 million.
Net Cash Used in Investing Activities. Cash flows used in investing
activities totaled $60.2 million for the period, and consisted primarily of
payments for businesses and the purchase of property and equipment.
Net Cash Provided by Financing Activities. Cash flows provided by
financing activities totaled $50.7 million for the period and consisted
primarily of borrowing under long-term debt and issuance of common stock
largely offset by payments of long-term debt.
Liquidity - 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
accounted for the investment using the cost method. Southwest Partners III
no longer holds a 20% or more interest in Basic and exerts no significant
influence over Basic's operations.
On December 21, 2000, Basic entered into a refinancing and restructuring of
its debt and equity. Upon the signing of the documents, the Partnership's
percentage of ownership was diluted from 44.94% to 10.57%. A new equity
investor, in exchange for 1,441,730 shares of Basic's common stock,
purchased and retired $24.5 million of Basic's debt from its previous
lender. The equity investor received a 76% ownership. Additionally, $10.5
million of the debt held by the previous lender was refinanced with a new
lender. The remaining debt held by the previous lender of approximately
$21.7 million was cancelled.
Basic's new equity investor mentioned in the above paragraphs purchased an
additional 576,709 shares, during the first part of the year, thereby
increasing their ownership from 76% to 81.6%. As a result of the purchase,
the Partnership's ownership decreased at that time from 10.57% to 8.11%.
On May 21, 2001, Basic issued a Notice to Stockholders of Preemptive
Rights. The Partnership purchased an additional 19,000 shares of common
stock at $380,000. The Partnership at December 31, 2001 owns a total of
6.32%, or 219,500 shares of Basic's outstanding common stock.
Critical Accounting Policies
The Partnership used the cost method of accounting for its investment in
Basic since December 21, 2000. Prior to December 21, 2000 the Partnership
used the equity method of accounting for the investment. Under the cost
method of accounting the Partnership recognizes as income dividends
received that are distributed from net accumulated earnings of an investee
subsequent to the date of acquisition of the investment. The Partnership
would recognize a loss when there is a loss in value in the investment,
which is other than a temporary decline. In its assessment of value the
Partnership considers future cash flows either in the form of dividends or
other distributions from the investee or from selling it's investment to an
unrelated party.
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements
Page
Independent Auditors Report 14
Balance Sheets 15
Statements of Operations 16
Statements of Changes in Partners' Equity 17
Statements of Cash Flows 18
Notes to Financial Statements 19
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, 2001 and 2000, 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, 2001. 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, 2001 and 2000 and the results of its operations and
its cash flows for each of the years in the three year period ended
December 31, 2001 in conformity with accounting principles generally
accepted in the United States of America.
KPMG LLP
Midland, Texas
March 10, 2002
Southwest Partners III, L.P.
(a Delaware limited partnership)
Balance Sheets
December 31, 2001 and 2000
2001 2000
---- ----
Assets
Current asset:
Cash and cash equivalents $ 28,120 404,112
----------
- ----------
Total current assets 28,
120 404,112
----------
- ----------
Investment 380,000 -
----------
- ----------
Total assets $ 408,120
404,112
==========
==========
Liabilities and Partners' Equity
Current liabilities:
Payable to General Partner $ 345,758 340,107
----------
- ----------
Partners' equity:
General Partner (907,471) (907,225)
Limited partners 969,833 971,230
----------
- ----------
Total partners' equity 62,
362 64,005
----------
- ----------
$ 408,120
404,112
==========
==========
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, 2001, 2000 and 1999
2001 2000 1999
---- ---- ----
Revenues
Interest income $ 4,021 11,403 11,164
---------- ----------
- ----------
4,021 11,403
11,164
---------- ----------
- ----------
Expenses
General and administrative 5,664 74,572 126,597
Equity loss in unconsolidated subsidiary - -
2,005,000
---------- ----------
- ----------
5,664 74,572
2,131,597
---------- ----------
- ----------
Net loss $ (1,643) (63,169) (2,120,433)
========== ==========
==========
Net loss allocated to:
General Partner $ (246) (9,475) (318,065)
========== ==========
==========
Limited partners $ (1,397) (53,694) (1,802,368)
========== ==========
==========
Per limited partner unit $ (8) (314) (10,545)
========== ==========
==========
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, 2001, 2000 and 1999
General Limited
Partner Partners Total
-------- -------- -----
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
Net loss (246) (1,397) (1,643)
--------- --------------------
Balance - December 31, 2001 $(907,471) 969,833 62,362
========= ====================
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, 2001, 2000 and 1999
2001 2000 1999
---- ---- ----
Cash flows from operating activities:
Paid to suppliers $ (13) - -
Interest received 4,021 11,403 11,164
----------
- ---------- -----------
Net cash provided by operating
activities 4,008 11,403
11,164
----------
- ---------- -----------
Cash flows from investing activities:
Purchase of Basic Investment (380,000) - -
----------
- ---------- -----------
Net (decrease) increase in cash and cash
equivalents (375,992) 11,403 11,164
Beginning of period 404,112 392,709 381,545
----------
- ---------- -----------
End of period $ 28,120 404,112 392,709
==========
========== ===========
Reconciliation of net loss to net cash
provided by operating activities:
Net loss $ (1,643) (63,169) (2,120,433)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Undistributed loss of affiliate - - 2,005,000
Increase in accounts payable 5,651 74,572 126,597
----------
- ----------- ----------
Net cash provided by operating activities $ 4,008 11,403
11,164
==========
=========== ==========
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
Investment
Investment in Basic Energy Services, Inc. in which the Partnership had
a 6.32% and 10.57% interest at December 31, 2001 and 2000, is
accounted for by the cost method. Southwest Partners III no longer
holds a 20% or more interest in Basic and exerts no significant
influence over Basic's operations. Under the cost method of
accounting the Partnership recognizes as income dividends received
that are distributed from net accumulated earnings of an investee
subsequent to the date of acquisition of the investment. The
Partnership would recognize a loss when there is a loss in value in
the investment, which is other than a temporary decline. In its
assessment of value the Partnership considers future cash flows either
in the form of dividends or other distributions from the investee or
from selling it's investment to an unrelated party. Prior to December
2000, the Partnership accounted for the investment on the equity
method.
Southwest Partners III, L.P.
(a Delaware limited partnership)
Notes to Financial Statements
2. Summary of Significant Accounting Policies - continued
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.
Syndication Costs
Syndication costs are accounted for as a reduction of partnership
equity.
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 $17,059,762 and $17,075,550
more, as of December 31, 2001 and 2000 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, 2001, held by 524 partners.
Concentrations of Credit Risk
All partnership revenues are received by the General Partner and
subsequently remitted to the partnership and all expenses are paid by
the 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.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No.133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133, as amended by SFAS No. 138, establishes accounting and
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging
activities. Assessment by the General Partner revealed this
pronouncement to have no impact on the partnership.
Southwest Partners III, L.P.
(a Delaware limited partnership)
Notes to Financial Statements
Recent Accounting Pronouncements - continued
The FASB has issued Statement No. 143 "Accounting for Asset Retirement
Obligations" which establishes requirements for the accounting of
removal-type costs associated with asset retirements. The standard is
effective for fiscal years beginning after June 15, 2002, with earlier
application encouraged. Assessment by the General Partner revealed
this pronouncement to have no impact on the partnership.
On October 3, 2001, the FASB issued Statements No. 144 "Accounting for
the Impairment or Disposal of Long-Lived Assets." This pronouncement
supercedes FAS 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed" and eliminates the
requirement of Statement 121 to allocate goodwill to long-lived assets
to be tested for impairment. The provisions of this statement are
effective for financial statements issued for fiscal years beginning
after December 15, 2001, and interim periods within those fiscal
years. The General Partner is currently assessing the impact to the
partnerships financial statements.
3. Liquidity - Partnership
The Partnership as of December 31, 2001 has negative working capital
of $317,638 and a payable to the General Partner of $341,643. The
Partnership does not generate operating income and has no current
means of settling the liability to the General Partner, but believes
the fair value of its assets are sufficient to meet their current
obligations if necessary. The General Partner, should it become
necessary, has agreed to either extend the payment terms until the
Partnership can comfortably pay the balance or make other mutually
acceptable arrangements to settle the payable by transfer, sale or
assignment of Partnership assets.
4. Liquidity - General Partner
The General Partner has a highly leveraged capital structure with
$50.0 million and $123.7 million of principal due in August of 2003
and October of 2004, respectively. The General Partner will incur
approximately $17.6 million in interest payments in 2002 on its debt
obligations. Due to the depressed commodity prices experienced during
the last quarter of 2001, the General Partner is experiencing
difficulty in generating sufficient cash flow to meet its obligations
and sustain its operations. The General Partner is currently in the
process of renegotiating the terms of its various obligations with its
creditors and/or attempting to seek new lenders or equity investors.
Additionally, the General Partner would consider disposing of certain
assets in order to meet its obligations.
There can be no assurance that the General Partner's debt
restructuring efforts will be successful or that the lenders will
agree to a course of action consistent with the General Partners
requirements in restructuring the obligations. Even if such agreement
is reached, it may require approval of additional lenders, which is
not assured. Furthermore, there can be no assurance that the sales of
assets can be successfully accomplished on terms acceptable to the
General Partner. Under current circumstances, the General Partner's
ability to continue as a going concern depends upon its ability to (1)
successfully restructure its obligations or obtain additional
financing as may be required, (2) maintain compliance with all debt
covenants, (3) generate sufficient cash flow to meet its obligations
on a timely basis, and (4) achieve satisfactory levels of future
earnings. If the General Partner is unsuccessful in its efforts, it
may be unable to meet its obligations making it necessary to undertake
such other actions as may be appropriate to preserve asset values.
Upon the occurrence of any event of dissolution by the General
Partner, the holders of a majority of limited partnership interests
may, by written agreement, elect to continue the business of the
Partnership in the Partnership's name, with Partnership property, in a
reconstituted partnership under the terms of the partnership agreement
and to designate a successor General Partner.
Southwest Partners III, L.P.
(a Delaware limited partnership)
Notes to Financial Statements
5. 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%
January 1, 2001 to May 20, 2001 8.11%
May 21, 2001 to December 31, 2001 6.32%
Southwest Partners III consist entirely of an investment in Basic's
common stock. The investment had been accounted for using the equity
method. Based on the December 21, 2000 transaction discussed below,
the Partnership accounted for the investment using the cost method.
Southwest Partners III no longer holds a 20% or more interest in Basic
and exerts no significant influence over Basic's operations.
On December 21, 2000, Basic entered into a refinancing and
restructuring of its debt and equity. Upon the signing of the
documents, the Partnership's percentage of ownership was diluted from
44.94% to 10.57%. A new equity investor, in exchange for 1,441,730
shares of Basic's common stock, purchased and retired $24.5 million of
Basic's debt from its previous lender. The equity investor received a
76% ownership. Additionally, $10.5 million of the debt held by the
previous lender was refinanced with a new lender. The remaining debt
held by the previous lender of approximately $21.7 million was
cancelled.
Basic's new equity investor mentioned in the above paragraphs
purchased an additional 576,709 shares, during the first part of 2001,
thereby increasing their ownership from 76% to 81.6%. As a result of
the purchase, the Partnership's ownership decreased at that time from
10.57% to 8.11%.
On May 21, 2001, Basic issued a Notice to Stockholders of Preemptive
Rights. The Partnership purchased an additional 19,000 shares of
common stock at $380,000. The Partnership at December 31, 2001 owns a
total of 6.32%, or 219,500 shares of Basic's outstanding common stock.
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, 2001, 2000 and 1999 (in thousands):
2001 2000 1999
Current assets $ 28,872 13,283 8,971
Property and equipment, net 78,019 32,780 31,186
Other assets, net 18,733 6,955
6,704
------- ------ ------
Total assets $ 125,624 53,018 46,861
======= ====== ======
Current liabilities $ 13,414 11,322 7,296
Long-term debt 45,258 15,390 50,371
Deferred income taxes 8,186 5,052 2,224
------- ------ ------
$ 66,858 31,764 59,891
======= ====== ======
Stockholders' equity $ 58,766 21,254 (13,030)
======= ====== ======
Sales $ 99,709 56,466
37,331
======= ====== ======
Net income (loss) $ 6,311 13,849
(12,971)
======= ====== ======
Southwest Partners III, L.P.
(a Delaware limited partnership)
Notes to Financial Statements
6. 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, 2001, 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.
7. Related Party Transactions
Southwest Royalties, Inc., the General Partner, was paid a management
fee of $70,000 and $120,000 during 2000 and 1999 for indirect general
and administrative expenses. Effective July 2000, the General Partner
ceased to charge the Partnership management fees.
In addition, a director and officer of the General Partner is a
partner in a law firm, with such firm providing legal services to the
Partnership. There were approximately $1,000, none and $2,500 in
legal services provided for the years ended December 31, 2001, 2000
and 1999.
Accounts payable to the General Partner at December 31, 2001 and 2000
totaled $345,758 and $340,107 and primarily represents management fees
billed in previous years.
Southwest Partners III, L.P.
(a Delaware limited partnership)
Notes to Financial Statements
7. Selected Quarterly Financial Results - (unaudited)
Quarter
----------------------------------------------
First Second Third Fourth
------ ------- ------ ------
2001:
Total revenues $ 2,425 1,419 104 73
Total expenses 1,292 2,136 1,000 1,236
Net income (loss) 1,133 (717) (896) (1,163)
Net income (loss) per
limited partner unit 6 (4) (4) (6)
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
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
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 46
Chairman of the Board, President,
Chief Executive Officer, Treasurer
and Director
H. Allen Corey 45 Secretary and Director
Bill E. Coggin 47
Vice President and Chief Financial
Officer
J. Steven Person 43 Vice President, Marketing
Paul L. Morris 60 Director
H. H. Wommack, III, is Chairman of the Board, President, Chief Executive
Officer, Treasurer, principal stockholder and a director of the 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 General Partner, has served as the 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 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 General Partner as National Marketing Director in 1989. Prior to
joining the eneral 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 44, assumed
his responsibilities with the General Partner in 1989. Prior to joining
the 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, age 46, assumed his
responsibilities with the General Partner as a Production Engineer in
October 1992. Prior to joining the 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, as an annual administrative fee.
Effective July 31, 2000, the General Partner ceased billing management fees
to the Partnership.
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.
Through repurchase, the General Partner also owns 0.15 limited partner
units, a 0.09% limited partner interest. 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 2001, the General Partner received no administrative fees. The General
Partner ceased to charge the Partnership for administrative fees effective
July 31, 2000.
The Partnership originally invested primarily all of the proceeds of the
Private Placement in 2,005 shares 45.9% of Basic common stock. On May 21,
2001, Basic issued a Notice to Stockholders of Preemptive Rights. The
Partnership purchased an additional 19,000 shares of common stock at
$380,000. The Partnership at December 31, 2001 owns a total of 6.32%, or
219,500 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 approximately $1,000 legal fees for 2001.
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 Basic Energy Services,
Inc.
Independent Auditors' Report 30
Balance Sheets
31
Statements of Operations 32
Statements of Stockholders' Equity 33
Statements of Cash Flows 34
Notes to Financial Statements 35
(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, 2001.
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.,
General Partner
By: /s/ H. H. Wommack, III
-----------------------------
H. H. Wommack, III, President
Date: April 15, 2002
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: April 15, 2002
By: /s/ H. Allen Corey
-----------------------------
H. Allen Corey, Secretary and
Director
Date: April 15, 2002
BASIC ENERGY SERVICES, INC.
Financial Statements
December 31, 2001 and 2000
(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. as of December 31, 2001 and 2000, and the related statements of
operations, stockholders' equity and cash flows for each of the years in
the three-year period ended December 31, 2001. 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, 2001 and 2000, and the results of its operations
and its cash flows for each of the years in the three-year period ended
December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America.
As described in Note 1 to the financial statements, effective July 1, 2001,
the Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 141, Business Combinations, and certain provisions
of SFAS No. 142, Goodwill and Other Intangible Assets.
KPMG LLP
March 10, 2002
BASIC ENERGY SERVICES, INC.
BALANCE SHEETS
As of December 31, 2001 and 2000
(in thousands, except share data)
ASSETS
2001 2000
Current assets
Cash and cash equivalents $ $
7,645 3,118
Trade accounts receivable, net of
allowance of $565 and $531,
respectively 17,233 9,675
Accounts receivable-related party
82 14
Income tax refund receivable
2,471
Inventories
448 104
Prepaids and other
993 372
Total current assets
28,872 13,283
Property and equipment, net
78,019 32,780
Other assets
Deferred debt costs, net of amortization
of $188 and $8 in 2001 and 2000, 2,054 1,151
respectively
Goodwill, net of amortization of $18,207
and $17,399 in 2001 and 2000, 14,905 4,873
respectively
Other 1,774 931
Total other assets 6,955
18,733
Total assets $125,62 $53,018
4
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt $ 5,420 $
4,226
Accounts payable 3,197 3,594
Accrued expenses 4,616 2,390
Deferred income 728
Income tax payable 181 200
Deferred income tax 184
Total current liabilities 13,414
11,322
Long-term debt 45,258 15,390
Deferred income tax 8,186 5,052
Commitments & contingencies
Stockholders' equity
Common stock - $.01 par; 5,000,000
shares authorized; 3,473,722 and
1,897,013 and shares issued and
outstanding at December 31, 2001 and 35 19
2000, respectively
Additional paid-in capital 86,307 51,217
Accumulated deficit (27,576 (29,982
) )
Total stockholders' equity
58,766 21,254
Total liabilities and stockholders' $ $ 53,01
equity 125,624 8
The accompanying notes are an integral part of these financial
statements.
BASIC ENERGY SERVICES, INC.
STATEMENTS OF OPERATIONS
For the years ended December 31, 2001, 2000 and 1999
(in thousands)
2001
2000 1999
Revenues
Well servicing $62,858 $37,784 $24,453
Fluid servicing 36,851 18,682 12,878
99,709 56,466 37,331
Expenses
Operating expenses 62,269 40,114 29,777
General and administration,
including management fees
and computer services from 10,813 6,683 5,229
related parties of $43, $138, and
$234, respectively
Depreciation and amortization 10,182 6,795 6,747
Unsuccessful offering and 2,073
acquisition costs
Stock-based compensation expense 1,401 _
_
84,665 55,665 41,753
Operating income (loss) 15,044 801 (4,422)
Other income (expense)
Interest income 123 93 100
Interest expense (3,426) (6,930) (6,065)
Other, net 26 167 (256)
(3,277) (6,670) (6,221)
Income (loss) before income taxes
and extraordinary item 11,767 (5,869) (10,643
)
Provision for income tax (expense) 2,037 (2,328)
benefit (4,491)
Income (loss) before extraordinary $ 7,27 $(3,83 $(12,9
item 6 2) 71)
Extraordinary gain (loss) from
early extinguishments of
debt, net of tax of $497 and (96 17,681 -
$4,434 in 2001 and 2000, 5)
respectively
Net income (loss) $6,311 $13,849 $(12,9
71)
Preferred stock dividend 645 430
Net income (loss) to common
stockholders' interest $6,311 $13,204 $(13,4
01)
1942: 1943:
The accompanying notes are an integral part of these financial
statements.
BASIC ENERGY SERVICES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 2001, 2000 and 1999
(in thousands, except share data)
Series A Total
Series B Series C
Addit Stockhold
Convertibl Convertib ional ers'
le
Paid-In Accum Equity
Preferred Preferred Common ulated
Stock Stock
Amo Deficit (deficit)
s Amou Share unt Sha Amou Shares Amou Capita
nt s res nt nt l
Balance
- - - $4 $24,84 $(29,7 $
December 31,1998
- - - 437,07 5 85) (4,936)
1
Stock
- - - 9,106 -
compensation
- - - _
granted
$1 -
issued
00 1,000 1 $1 _ 5,002
Preferred stock
- - (305) _
dividend _stock - - - _
Preferred stock
- - - - (125) (125)
dividend _ cash - - - _
Net loss
- - - - (12,971 (12,971)
- - _ )
Balance -
530 $5,3 1,000 $ 1 $ $4 $24,8 $(43,1 $
December 31, 1999
05 1 1 446,17 45 86) (13,030)
7
Stock
- - - - - $1 $ - $ $
compensation
- 9,106 1
granted
Preferred stock
(1) $(1) - _
retired ) 50) 0) (1)
4,001 (1,951)
Exchange debt for
common stock 1,441, 14
Costs related to
730 24,486 24,500
issuance of
common stock
Preferred stock 65 645 (2,115 (645) (2,115)
dividend - stock )
_
Net income
- - - - - - 13,849
- - - 13,849
Balance
$ $ $ 1,897, $19 $51,2 $(29,9 $
December 31, 2000
17 82) 21,254
Common stock
- $ - $- $ 1,576, $16 $29,78 $ $
issued - - - 709 4 29,800
EBITDA
contingent
- - - - (3,905)
warrants
- - - 5,306 1,401
(See Note 9)
Net income
- - - - 6,311
- - - 6,311
2015:
Balance - - $ - $- $ 3,473 $35 $86,3
$(27,5 $
December 31, 2001
- - ,722 07 76) 58,766
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, 2001, 2000 and 1999
(In thousands)
2001
2000 1999
Cash flows from operating activities
Net income (loss) $6,311 $13,84 $(12
9 ,971)
Depreciation 8,933 5,494
5,676
Amortization 1,249 1,253
1,119
Bad debt expense 6 125
113
Noncash interest expense 584 2,494
6,657
Noncash compensation expense 1,401
Gain (loss) on retirement of debt 767
Write-off of unsuccessful offering (22,11 -
and acquisition costs 5)
2,073
(Gain) loss on sale of assets (10) 301
(91)
Deferred income tax expense 2,126 2,328
(benefit) 2,397
Changes in operating assets and
liabilities, net of acquisitions
- (7,33 (1,051)
Accounts receivable 6) (2,314
)
Inventories 201 14
40
Other current assets (606) 46
(157)
Accounts payable (630) 2,518
(1,061
)
Deferred income (728)
728
Accrued expenses 1,612 314
442
Deposits 180
(38)
Net cash provided by operating 14,060 865
activities 7,318
Cash flows from investing activities
Purchase of property and equipment (15,2 (2,287)
08) (4,255
)
Proceeds from sale of property and 1,210
equipment 435
Collections of notes receivable 56 3
118
Proceeds from sale of other long- 205
term assets
Payments for other long-term (167) (101)
assets
Payments for businesses, net of (44,9 -
cash acquired 28) (80)
Net cash used in investing (60,2 (970)
activities 47) (3,782
)
Cash flows from financing activities
Borrowings under long-term debt 99,752 -
15,988
Payments of long-term debt (76,5 (497)
24) (12,81
6)
Costs related to
common stock (1,540
)
Proceeds from common stock 29,800
issuance
Dividends paid (125)
Deferred loan costs and
unsuccessful offering and (2,314 (1,057)
acquisition costs ) (3,112
)
Net cash provided by (used in)
financing activities 50,714 (1,679)
(1,480
)
Net increase (decrease) in cash and
cash equivalents 4,527 (1,784)
2,056
Cash and cash equivalents - 3,118 2,846
beginning of year 1,062
Cash and cash
$1,062
year 3,118
Supplemental disclosures of cash
flow information $2,795 $ $5,106
Interest paid 273
Supplemental schedule of noncash
investing and financing activities -
Capital leases issued for 3,894
equipment 2,170 353
Notes receivable-non cash 7
138 83
Preferred stock dividend
645 305
Transfer of debt for preferred
stock 5,002
Accrued interest capitalized into
long-term debt
1,614
Common stock issued to retire debt
24,500
Note issued to retire all
preferred stock 2,500
EBITDA common stock warrants 5,306
issued
Costs related to issuance of
common stock 575
The accompanying notes are an integral part of these financial
statements.
1. Summary of Significant Accounting Policies
Organization & Business - Basic Energy Services, Inc. ("Basic" or the
"Company"), a Delaware corporation, was formed in 1992. 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.
Fair Value of Financial Instruments- The carrying value amount of cash,
accounts receivable, accounts payable, and accrued liabilities approximates
fair value because the short maturity of these instruments.
The carrying amount of long-term debt approximates fair value because the
Company's current borrowing rate is based on a variable market rate of
interest.
Inventories - Inventories, mainly consisting of rig supplies, 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.
Stock-Based Compensation - The Company accounts for stock-based
compensation using the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"). Accordingly, the Company has adopted the disclosure provision
of Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123").
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: