September 9, 2005
Mr. Kenneth V. Huseman
President
Basic Energy Services, Inc.
400 W. Illinois, Suite 800
Midland, Texas 79701
Re: Basic Energy Services, Inc.
Registration Statement on Form S-1
Filed August 12, 2005
File No. 333-127517
Dear Mr. Huseman:
We have reviewed your filing and have the following
comments.
Where indicated, we think you should revise your document in
response
to these comments. If you disagree, we will consider your
explanation
as to why our comment is inapplicable or a revision is
unnecessary.
Please be as detailed as necessary in your explanation. In some
of
our comments, we may ask you to provide us with supplemental
information so we may better understand your disclosure. After
reviewing this information, we may raise additional comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your filing.
We
look forward to working with you in these respects. We welcome
any
questions you may have about our comments or on any other aspect
of
our review. Feel free to call us at the telephone numbers listed
at
the end of this letter.
Form S-1
General
1. Many of our comments apply to disclosure that appears in more
than
one place. To eliminate the need for us to issue repetitive
comments,
please make corresponding changes to all affected disclosure
throughout your document.
2. We will need time to review all new disclosure, including any
additional proposed artwork or graphics, prior to completing our
examination. Similarly, we will need time to review all omitted
exhibits, including the opinion of counsel. To expedite the
review
process, please provide all this information and all these
documents
promptly. We may have additional comments.
3. Please provide the estimated per share price range of the
offering
or advise us of the proposed price range. You will need to
include a
definitive price range prior to effectiveness.
4. Provide current and updated disclosure with each amendment.
For
example, update the status of your pending application with the
New
York Stock Exchange. Also, provide updated accountants` consents
with
each amendment.
Cautionary Note Regarding Industry and Market Data, page i
5. You are responsible for the accuracy and completeness of all
disclosure that appears in your filings with the Commission. If
you
retain the references to your sources, move this information so
that
it does not precede the summary and risk factor sections, and
revise
it to eliminate any suggestion that the disclosure that appears in
your document may be unreliable or another party`s responsibility.
Also make clear that you believe all disclosure that appears in
your
document is accurate and reliable.
Prospectus Summary, page 1
6. Revise to provide a concise and balanced summary of the
material
information you disclose elsewhere. For example, ensure that you
balance the positive aspects of your business with a discussion of
the
risks and limitations that could harm your business or inhibit
your
strategic plans.
7. In the summary and elsewhere, you make the following and
similar
subjective claims:
* You have a market "leadership" position;
* your rig fleet is "among the most modern" in the industry;
* your operations are located in the "most attractive" U.S. well
services markets;
* you enjoy a "competitive advantage" (page 61);
* you provide "among the largest" well site construction services
(page 65);
* you enjoy "brand recognition" and a "leadership position" in
your
core operating areas; and
* you have been a "leading consolidator" in the domestic land-
based
well services industry.
Where practicable, replace such language with quantifiable data
based
on objective sources. Define in context subjective terms,
including
what it means to be a "leader" in each case. Unless you can
provide
us with objective support for these types of claims, please revise
accordingly.
8. Also ensure that your disclosure is balanced, as the prior
comment
noted. For example, if you rank a distant third behind your two
largest competitors in terms of market share, ensure that this
point
is not omitted. And explain your basis for the assertion at page
3
that only 62% of your competitors` rig fleets is active and
available.
Risk Factors, page 11
9. Revise or delete the second and third italicized sentences to
eliminate the suggestion that you have not included all material
risks.
10. All risk factors should be no longer than one or two short
paragraphs. Identify the risk, include a cross-reference to more
detailed disclosure elsewhere if appropriate, and eliminate all
excess
detail. Many of your risk factors are too detailed, for example
"Our
indebtedness could restrict our operations...." Where you discuss
multiple risks under one caption, break the discussion into
separate
factors and include appropriate captions for each.
11. In a number of places in the risk factor section you use
phrases
such as "materially and adversely affect" or "negatively affect."
In
each case, concisely identify the specific adverse effects. Also,
rather than indicating that you give "no assurance of" or "cannot
predict" a particular outcome, revise to state the risk plainly
and
directly.
12. Eliminate language that tends to mitigate the risk you
discuss.
Examples include clauses that begin "although" or "while," the
first
two sentences in the third paragraph under "Our auditors have
previously identified," the third and fourth sentences under "Our
success depends on key members" and the first sentence on page 15.
Instead, focus on the underlying risk and the harm that could
result.
You may provide other details later in your document.
13. We note that one of your selling stockholders owns a majority
of
the shares of your outstanding common stock and is also an
affiliate
of Credit Suisse First Boston, one of the underwriters of this
offering. Advise us of the consideration given to adding a risk
factor addressing possible conflicts of interest that may arise
from
this affiliation. For example, an affiliate of an underwriter
participating in this offering may receive a portion of the net
proceeds of this offering or may receive payments in connection
with
transactions related to this offering. Also, in this risk factor,
please identify Goldman, Sachs & Co. as your qualified independent
underwriter.
Our auditors have previously identified material weaknesses....,
page
12
14. Disclose in greater detail the nature of the material
weaknesses
identified in your disclosure. Expand your disclosures addressing
what specific steps the company
has taken, if any, to remediate each weakness and disclose whether
the
company believes that the material weakness still exists at the
end of
the latest period covered in your filing. If practicable,
disclose a
time frame for when you expect the material weaknesses to be fully
remedied.
Risks Related to this Offering, page 17
15. Advise us of the consideration given to including a risk
factor
explaining that a majority of the proceeds from this offering will
be
used to repay debt and therefore you do not expect to have
proceeds to
expand or invest in your business.
Use of Proceeds, page 23
16. Disclose in necessary detail how you intend to use the
"remainder"
and quantify the amount the remainder represents. The reference
to
"general corporate purposes" is too vague. Use tabular disclosure
if
it would assist in the presentation of the intended uses.
17. We note you indicate that your offering, in part, may be used
for
general corporate purposes, which may include cash payments made
in
connection with acquisitions. Please clarify whether you are
referring
to pending acquisitions or previously acquired businesses. In the
case
of the former, please describe the significance and general terms
of
the business to be acquired.
Selected Historical Financial Data, page 27
18. It is unclear whether or not your non-GAAP financial measure,
Adjusted EBITDA, also presented elsewhere in your filing, is a
performance measure that excludes recurring charges or is a
liquidity
measure which excludes charges or liabilities which may be settled
in
cash. Accordingly it appears that you need to remove your
disclosure
of this measure. Refer to Item 10(e)1.ii.(A)-(B) of Regulation S-K
and
Question 8 to the Frequently Asked Questions Regarding the Use of
Non-
GAAP Financial Measures located at
http://www.sec.gov/divisions/corpfin/faqs/nongaapfaq.htm).
Management`s Discussion and Analysis..., page 30
Management`s Overview, page 30
19. Consider revising your overview to identify the material
opportunities, challenges and risks on which management is most
focused, both on a short and long-term basis. Please refer to FRC
501.12 and Release No. 34-48960 for additional guidance.
20. We note your use of operating margin metrics and ratios both
under
your Operating Data caption on page 10, and Segment Overview
caption
beginning on 32. Expand your disclosure to explain how you
calculated
the operating margin and how it differs from operating income.
Compare
and contrast these measures with the most directly comparable GAAP
measure and provide all the disclosures necessary under Item 10(e)
of
Regulation S-K.
Liquidity and Capital Resources, page 47
Table of Contractual Obligations, page 48
21. We note you have several employment agreements with various
officers and directors although it is unclear whether you have
included these obligations in your tabular presentation. Please
tell
us in what line caption you have presented these obligations in
your
table or modify your table to include these obligations.
Other Debt, page 50
22. Revise to quantify the aggregate amount of this debt, if
material.
Business, page 53
Legal Proceedings, page 69
23. Quantify the damages sought in the litigation brought by David
Hudson, Jr. et al.
Management, page 70
24. Revise the biographical sketches as necessary to eliminate any
gaps or ambiguities regarding time in the five year periods.
Examples
include the sketches you provide for Messrs. Webster, Krenek,
Chiles,
Fulton and Wommack.
Employment Agreements, page 79
25. Explain why Mr. Huseman received a bonus of $500,000 in 2004,
when
his new employment agreement appears to contemplate a limit of
$325,000 for the bonus, and the prior agreement had a lower
ceiling.
Certain Relationships and Related Party Transactions, page 81
26. Add a risk factor addressing the potential conflict of
interest
that may arise due to Mr. Steven Webster`s responsibilities to
Avista
and his duties as Chairman of your Board of Directors, or explain
why
you believe this is unnecessary.
27. Disclose whether the transactions you list were on terms at
least
as favorable to you as could have been obtained from unaffiliated
third parties as a result of arm`s length negotiations. Also
explain
going forward how you intend to address those transactions
involving
potential conflicts of interest, including those with Mr. Webster.
Principal and Selling Stockholders, page 82
28. Please disclose the natural persons who exercise voting
control or
are able to dispose of the securities to be offered for resale.
For
example, you do not list a natural person for the shares held by
First
Reserve Fund VIII, L.P. See Exchange Act Rule 13d-3;
Interpretation
I.60 of the July 1997 manual of publicly available CF telephone
interpretations; and interpretation 4S of the Regulation S-K
portion
of the March 1999 supplement to the CF telephone interpretation
manual.
29. Advise us whether any selling shareholder is a registered
broker-
dealer or affiliate of a registered broker-dealer. If a
registered
broker-dealer, identify the selling shareholder as an underwriter
unless the securities you are registering on its behalf
compensated
the shareholder for investment banking services. If any selling
shareholder is an affiliate of a registered broker-dealer, confirm
to
us that the shareholder purchased the securities you are
registering
on its behalf in the ordinary course of business, and that at the
time
of the purchase of the securities to be resold, the shareholder
had no
agreements or understandings, directly or indirectly, with any
party
to distribute the securities. Otherwise, identify the selling
shareholder as an underwriter. We may have additional comments.
Description of Capital Stock, page 85
30. Revise to describe in the prospectus the transactions in which
the
selling shareholders received the warrants and shares of your
common
stock. See Item 507 of Regulation S-K. Also reconcile the
selling
shareholder table with the disclosure in Item 15.
Underwriting, page 95
31. Rather than referring to "among" the factors to be considered,
identify all material factors that will be used to determine the
initial public offering price.
32. Please clarify whether your underwriters will engage in an
electronic offer, sale or distribution of the shares. If so,
please
describe their procedures to us supplementally. If you become
aware
of any additional members of the underwriting syndicate that may
engage in electronic offers, sales or distributions after you
respond
to this comment, promptly supplement your response to identify
those
members and provide us with a description of their procedures.
Briefly describe any electronic distribution in the filing.
Consult
Release Nos. 33-7233 and 33-7289 for guidance.
Also, in your discussion of your procedures, tell us how your
procedures ensure that the distribution complies with Section 5 of
the
Securities Act. In particular, address:
* the communications used;
* the availability of the preliminary prospectus;
* the manner of conducting the distribution and sale, such as the
use
of indications of interest or conditional offers;
* how offers and final confirmations will be made; and
* the funding of an account and payment of the purchase price.
We may comment further.
33. Please clarify whether a prospectus in electronic format may
be
made available on the websites maintained by one or more of the
underwriters. If so, identify the underwriters and the websites.
If
agreements exist outlining these arrangements, provide us a copy
of
such agreements and describe their material terms. Provide us
with
copies of all information concerning your company or prospectus
that
has appeared or will appear on their websites. If you
subsequently
enter into any arrangements with a third party to host or access
your
preliminary prospectus on the Internet, promptly supplement your
response. We may comment further.
34. We note that you will conduct a directed share program.
Therefore, please provide the following information:
(a) Tell us on a supplemental basis the approximate percentage of
common stock and dollar value you plan to offer in this program.
(b) Explain the types and number of parties that will be able to
participate in the program, including identifying whether any of
these
parties are venture capital firms.
(c) Provide description of the Directed Share Program and the
mechanics of the offering.
(d) Specify the party or parties that will administer the program.
(e) Ensure that your beneficial ownership disclosure includes any
shares of common stock that may be acquired within 60 days.
(f) Discuss whether the program requires any related party
transaction
disclosure under Item 404 of Regulation S-K.
(g) Detail the timing and nature of any communications with
directed
share participants that have occurred or that you plan to make.
(h) Provide us with all materials sent and that you plan to send
to
potential direct share participants.
(i) Describe in adequate detail any account funding requirements.
We may issue additional comments.
Basic Energy Services, Inc. Financial Statements, F1-2
General
35. Please provide us with the comprehensive significance analysis
relating to your business acquisitions for all years presented
that
you used to determine the financial statements and number of
periods
required to comply with Rule 3-05 of Regulation S-X. In the event
you
believe that certain acquisitions were asset purchases please
demonstrate how you considered and applied Rule 11-01(d) of
Regulation
S-X and EITF 98-3 in your determination on a case by case basis.
Please disclose and characterize any purchases of assets
separately
from that of your business combinations.
36. We note that you have excluded certain business acquisitions
from
being included in disclosures required by paragraphs 51-54 of SFAS
141. Please demonstrate how you concluded this literature would
not
apply to these acquisitions individually and in the aggregate and
provide us with your evaluation of materiality. Refer to SAB Topic
1:M. As part of your evaluation clearly quantify and describe how
you
considered your business acquisitions in relation to historical
net
income or loss.
37. Please update the financial statements in the filing as
required
by Rule 3-12 of Regulation S-X.
Report of Independent Registered Public Accounting Firm, page F1-
38. We note that your auditors have not issued an audit report for
the
historical financial statements of Basic Energy Services, Inc.
Please
include a signed and dated audit report in your next amendment as
required by Rule 2-02(a)(2) of Regulation S-X.
Income Statement, page F1-3
39. Please revise your statement of operations to include gains
and
losses from disposal of assets as a component of operating income.
Refer to SAB Topic 13, footnote 68.
Note 2, Summary of Significant Accounting Policies, page F1-6
Organization and Restructuring, F1-6
40. Please expand your disclosures to provide an understanding of
when
your organization was formed and describe the type and number of
shares of New Basic exchanged for the common and preferred stock
of
Historical Basic.
Principles of Consolidation, page F1-6
41. Please expand your disclosures to indicate the specific voting
percentage and control criteria management uses to determine
whether
to consolidate a less than wholly owned subsidiary.
Derivative Instruments and Hedging Activities, page F1-12
42. Disclose how you account for the ineffective portion of your
cash
flow hedges and where the related amounts are reflected in your
financial statements.
Note 8, Manadatorily Redeemable Preferred Stock and Stockholders`
Equity, F1-27
43. Please expand your disclosure to clarify whether the entire
discount associated with the warrants issued with your Series A
Preferred Stock was accreted on or before October 3, 2003.
Indicate to
us whether the Series A Preferred Stock had an embedded conversion
feature and explain why the Series A shareholders were willing to
forego the future cash redemption value.
Note 11, EBITDA Contingent Warrants, page F1-31
44. We note your disclosure in which you issued 1,149,705
contingent
warrants on December 21, 2000 and on August 23, 2001. It appears
that
you have valued the warrants, designated as dividends, on the date
of
issuance although the actual declaration of the dividend was
contingent on future events. Please demonstrate how your
accounting
is appropriate since stock dividends are typically valued in an
amount
equivalent to the fair value of the shares to be received on the
date
of declaration. Refer to paragraph 10 of ARB 43 Chapter 7 Section
B.
Please describe in detail under which model you valued the
warrants
and the assumptions used in your valuation. Please support how it
is
appropriate that the date of declaration is other than that of
when a
legal obligation to issue your common shares has occurred, if that
is
your view. Please cite the accounting literature providing a
basis
for your conclusion.
45. Please describe any variable terms associated with your
warrants
and how you determined the amount of compensation expense
recorded.
46. Additionally, tell us how you determined the valuation of your
compensatory contingent warrants upon the modification of the
warrant
terms which eliminated the contingency. In this regard it is
unclear
how you considered the modification to accelerate the exercise of
the
warrants given their contingent nature prior to the modification.
Please cite the authoritative literature providing support for
your
conclusions.
Note 11 Commitments and Contingencies, page F1-25
47. Where appropriate please modify your disclosure to include
assessments of the likelihood of loss and obligations that are
consistent with the terms used in paragraph 3 of SFAS 5.
Note 12 Related Party Transactions, page F1-32
48. Please expand your disclosure to clarify the nature and
relationship of the related parties. Refer to paragraph 2(a) of
SFAS
57.
Note 14 Earnings Per Share, page F1-32
49. Please clarify how you considered your preferred stock in your
computation of earnings per share. In this regard we note that you
converted your preferred stock into common shares on October 3,
2003,
although it is unclear whether a conversion feature was embedded
in
your preferred stock instrument.
Note16 Business Segment Information, page F1-35
50. We note your disclosure in which you identify "direct costs"
associated with your operating segments. Because you identify
assets
by segment it is unclear whether depreciation has been allocated
as a
direct cost in arriving at your segment profit or why you have not
disclosed depreciation expense by segment as required by paragraph
27
of SFAS 131.
FESCO Holdings, Inc., Financial Statements
Report of Independent Auditors, page F2-1
51. We note that PricewaterhouseCoopers LLP did not designate the
city
or state of the office which performed the audit of FESCO
Holdings,
Inc., on their audit report. Please have your auditors revise
their
report to include this information. Refer to Rule 2-02 of
Regulation
S-X.
PWI Financial Statements
Report of Independent Auditors, page F3-1
52. We note the audit report date referenced in KPMG`s consent
letter
regarding PWI`s financial statements is August 5, 2005 while the
actual report date appears to be August 3, 2005. Please have your
auditors revise their consent or audit report, as appropriate.
Closing Comments
As appropriate, please amend your registration statement in
response to these comments. You may wish to provide us with a
marked
copy of the amendment to expedite our review. Please furnish a
cover
letter with your amendment that keys your responses to our
comments
and provides any requested information. Detailed cover letters
greatly facilitate our review. Please understand that we may have
additional comments after reviewing your amendment and responses
to
our comments.
We urge all persons who are responsible for the accuracy and
adequacy of the disclosure in the filing to be certain that the
filing
includes all information required under the Securities Act of 1933
and
that they have provided all information investors require for an
informed investment decision. Since the company and its
management
are in possession of all facts relating to a company`s disclosure,
they are responsible for the accuracy and adequacy of the
disclosures
they have made.
Notwithstanding our comments, in the event the company
requests
acceleration of the effective date of the pending registration
statement, it should furnish a letter, at the time of such
request,
acknowledging that:
* should the Commission or the staff, acting pursuant to delegated
authority, declare the filing effective, it does not foreclose the
Commission from taking any action with respect to the filing;
* the action of the Commission or the staff, acting pursuant to
delegated authority, in declaring the filing effective, does not
relieve the company from its full responsibility for the adequacy
and
accuracy of the disclosure in the filing; and
* the company may not assert staff comments and the declaration of
effectiveness as a defense in any proceeding initiated by the
Commission or any person under the federal securities laws of the
United States.
In addition, please be advised that the Division of
Enforcement
has access to all information you provide to the staff of the
Division
of Corporation Finance in connection with our review of your
filing or
in response to our comments on your filing.
We will consider a written request for acceleration of the
effective date of the registration statement as confirmation of
the
fact that those requesting acceleration are aware of their
respective
responsibilities under the Securities Act of 1933 and the
Securities
Exchange Act of 1934 as they relate to the proposed public
offering of
the securities specified in the above registration statement. We
will
act on the request and, pursuant to delegated authority, grant
acceleration of the effective date.
We direct your attention to Rules 460 and 461 regarding
requesting acceleration of a registration statement. Please allow
adequate time after the filing of any amendment for further review
before submitting a request for acceleration. Please provide this
request at least two business days in advance of the requested
effective date.
You may contact Jonathan Duersh at (202) 551-3719 or Jill
Davis,
Branch Chief, at (202) 551-3683 if you have questions regarding
comments on the financial statements and related matters. Please
contact Jason Wynn at (202) 551-3756 or Timothy Levenberg, Special
Counsel, at (202) 551-3707 with any other questions. Direct all
correspondence to the following ZIP code: 20549-7010.
Sincerely,
H. Roger Schwall
Assistant Director
cc: J. Duersh
J. Davis
J. Wynn
T. Levenberg
via facsimile
David C. Buck
Andrews Kurth L.L.P.
(713) 238-7126
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Mr. Kenneth V. Huseman
Basic Energy Services, Inc.
September 9, 2005
page 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
DIVISION OF
CORPORATION FINANCE
MAIL STOP 7010