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.
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.
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.
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.
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.
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.
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.
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.
Item 8. Financial Statements and Supplementary Data
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.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None
Part III
Item 10.
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.
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.
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.
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.
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 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 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)
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 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 (Gain) loss on sale of assets (91) 301 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 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 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
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):
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):
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 $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 - $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 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):
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 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.