8
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K/A
(Mark One)
X Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Fiscal year ended December 31, 1999
or
? Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to _______________
Commission file number: 000-23701
SOUTHWEST ROYALTIES, INC. SOUTHWEST ROYALTIES
(Exact Name of Registrant as HOLDINGS, INC.
Specified in Its Charter) (Exact Name of Registrant
as
Specified in Its Charter)
Delaware Delaware
(State or Other Jurisdiction of (State or Other
Jurisdiction of
Incorporation or Organization) Incorporation or
Organization)
75-1917432 75-2724264
(I.R.S. Employer Identification (I.R.S. Employer
Identification
Number) Number)
407 North Big Spring, Suite 300
Midland, Texas 79701
(Address of Principal Executive (Zip Code)
Offices)
Registrants' Telephone Number, Including Area Code: (915) 686-9927
Securities to be registered pursuant to Section 12(b) of the Act: None
Securities to be registered pursuant to Section 12(g) of the Act:
10.5% Senior Notes due 2004
(Title of Class)
Indicate by check whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent files pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. X
<PAGE>
As of December 31, 1999, Southwest Royalties, Inc. had outstanding 100
shares of common stock, $.10 par value, which is its only class of stock.
As of December 31, 1999, Southwest Royalties Holdings, Inc. had outstanding
1,075,868 shares of common stock, $.10 par value, which is its only class
of stock. The common stock of Southwest Royalties Holdings, Inc. is not
traded on any exchange and, therefore, its aggregate market value and the
value of shares held by nonaffiliates cannot be determined. All of the
outstanding shares of Southwest Royalties, Inc. are held by Southwest
Royalties Holdings, Inc.
EXPLANATION FOR THIS AMENDMENT:
Southwest Royalties Holdings, Inc. and Southwest Royalties, Inc. file
this Amendment No. 1 to the Annual Report, Form 10-K, for the fiscal year
ended December 31, 1999 in order to correct a date disclosed in Item 8,
Independent Auditor's Report.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Consolidated Financial Statements
Page
-----
Consolidated Financial Statements of Southwest Royalties
Holdings, Inc. and Subsidiaries
Independent Auditors' Report 42
Consolidated Balance Sheets as of December 31, 1999 and 1998 43
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997 45
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1999, 1998 and 1997 47
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997 48
Notes to Consolidated Financial Statements 50
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Southwest Royalties Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of
Southwest Royalties Holdings, Inc. and subsidiaries as of December 31, 1999
and 1998, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1999. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Southwest Royalties Holdings, Inc. and subsidiaries as of December 31, 1999
and 1998, and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 1999, in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed
in Note 2 to the consolidated financial statements, the Company is
experiencing difficulty in generating sufficient cash flow to meet its
obligations and sustain its operations which raises substantial doubt about
its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 2. The consolidated financial
statements do not include any adjustments that might result from the
outcome of this uncertainty.
KPMG LLP
Midland, Texas
March 15, 2000
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31,
------------------------
ASSETS 1999 1998
- ---------------------------------------------------------- ----- -----
Current assets
Cash and cash equivalents $ 16,983 $ 13,801
Restricted cash 10,003 5,050
Accounts receivable, net of allowance of
$440 and $342, respectively 7,134 5,248
Receivables from related parties 836 1,594
Other current assets 1,179 1,624
------- -------
Total current assets 36,135 27,317
------- -------
Oil and gas properties, using the full cost
method of accounting
Proved 193,319 194,096
Unproved 2,059 3,230
------- -------
195,378 197,326
Less accumulated depletion, depreciation
and amortization 126,742 121,841
------- -------
Oil and gas properties, net 68,636 75,485
------- -------
Rental property, net 128,685 132,120
------- -------
Rental property - construction in progress 3,984 -
------- -------
Other property and equipment, net 4,841 5,888
------- -------
Other assets
Equity investment in subsidiary and partnerships -
931
Real estate investments 3,644 4,019
Deferred debt costs, net of accumulated
amortization of $5,681 and $3,136, respectively 13,816
8,725
Noncompete covenants, net of accumulated
amortization of $563 and $269, respectively 1,041 1,335
Other, net 1,385 1,730
------- -------
Total other assets 19,886 16,740
------- -------
Total assets $262,167 $257,550
======= =======
(continued)
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - (continued)
(in thousands, except per share data)
December 31,
LIABILITIES, MINORITY INTEREST, REDEEMABLE ------------------------
COMMON STOCK AND STOCKHOLDERS' EQUITY 1999 1998
- ---------------------------------------------------------- ----- -----
Current liabilities
Current maturities of long-term debt $ 40,277 $ 12,716
Accounts payable 6,011 7,116
Accounts payable to related parties 867 173
Accrued expenses 10,670 9,737
------- -------
Total current liabilities 57,825 29,742
------- -------
Long-term debt 306,806 322,368
------- -------
Other long-term liabilities 1,220 1,797
------- -------
Minority interest 8 206
------- -------
Redeemable common stock of subsidiary 1,228 2,979
------- -------
Redeemable common stock 8,290 8,290
------- -------
Stockholders' equity
Preferred stock - $1 par value; 5,000,000 shares
authorized; none issued - -
Common stock - $.10 par value; 5,000,000 shares
authorized; 1,161,037 issued at December 31, 1999
and 1998 116 116
Additional paid-in capital 2,196 2,196
Accumulated deficit (110,784) (105,375)
Note receivable from an officer and stockholder (1,648)
(1,679)
Less: treasury stock - at cost; 214,215 shares at
December 31, 1999 and 1998 (3,090) (3,090)
------- -------
Total stockholders' deficit (113,210) (107,832)
------- -------
Total liabilities, minority interest, redeemable
common stock and stockholders' equity $262,167 $257,550
======= =======
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
For the years ended December 31,
----------------------------------
1999 1998 1997
----- ----- -----
Operating revenues
Oil and gas $ 31,425 $ 32,467 $ 38,500
Well servicing, including related party
revenues of $0, $0 and $8,
respectively - - 7,789
Real estate 31,301 25,650 9,338
Other 1,206 1,392 1,227
--------- --------- ---------
Total operating revenues 63,932 59,509 56,854
--------- --------- ---------
Operating expenses
Oil and gas production 10,833 18,395 18,500
Well servicing - - 5,600
Real estate 18,374 13,242 4,138
General and administrative, net of
related party management and
administrative fees of $3,515, $3,789
and $3,538, respectively 3,109 4,450 5,745
Depreciation, depletion and amortization 9,987 19,240
15,034
Impairment of oil and gas properties - 64,000
- -
Other 798 1,235 1,342
--------- --------- ---------
Total operating expenses 43,101 120,562 50,359
--------- --------- ---------
Operating income (loss) 20,831 (61,053) 6,495
--------- --------- ---------
Other income (expense)
Interest and dividend income 954 1,478 1,002
Interest expense (41,910) (36,490) (18,894)
Other 952 370 145
--------- --------- ---------
(40,004) (34,642) (17,747)
--------- --------- ---------
(continued)
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS - (continued)
(in thousands, except per share data)
For the years ended December 31,
----------------------------------
1999 1998 1997
----- ----- -----
Loss before income taxes, minority
interest, equity loss and extraordinary
item (19,173) (95,695) (11,252)
Income tax benefit - 2,348 2,641
--------- --------- ---------
Loss before minority interest,
equity loss and extraordinary item (19,173) (93,347) (8,611)
Minority interest in subsidiaries,
net of tax 1,820 913 430
Equity loss in subsidiary and
partnerships, net of tax (931) (3,620) (203)
--------- --------- ---------
Loss before extraordinary item (18,284) (96,054) (8,384)
Extraordinary gain (loss) from early
extinguishment of debt, net of tax 12,875 -
(3,109)
--------- --------- ---------
Net Loss $(5,409) $(96,054) $(11,493)
========= ========= =========
Loss per common share
Loss per common share before
extraordinary item $ (17.00) $ (89.28) $ (7.78)
Extraordinary gain (loss) from early
extinguishment of debt, net of tax 11.97 -
(2.88)
--------- --------- ---------
Loss per common share $ (5.03) $ (89.28) $ (10.66)
========= ========= =========
Weighted average shares outstanding 1,075,868 1,075,868 1,077,808
========= ========= =========
The accompanying notes are an integral part of these
consolidated financial statements
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1999, 1998 and 1997
(in thousands, except share data)
Note
Common StockAdditional ReceivableTreasury Stock
--------------Paid-InAccumulated from ---------------
Shares AmountCapital DeficitStockholderShares Amount
------- ------------- ---------------------------------
- -
Balance -
January 1, 19971,160,537 $116 $2,196 $ 2,172 $(1,735)204,575 $(2,508)
Stock option exercised 500 - - - - - -
Payments received on
note receivable - - - - 28 - -
Purchase of treasury stock - - - - - 9,640
(582)
Net loss - - - (11,493) - - -
--------- ---- ----- ------- ------ ------- ------
Balance -
December 31, 19971,161,037 116 2,196 (9,321) (1,707)
214,215 (3,090)
Payments received on
note receivable - - - - 28 - -
Net loss - - - (96,054) - - -
--------- ---- ----- ------- ------ ------- ------
Balance -
December 31, 19981,161,037 116 2,196 (105,375) (1,679)
214,215 (3,090)
Payments received on
note receivable - - - - 31 - -
Net loss - - - (5,409) - - -
--------- ---- ----- ------- ------ ------- ------
Balance -
December 31, 19991,161,037 $ 116 $ 2,196 $ (110,784) $ (1,648)
214,215 $ (3,090)
========= ==== ===== ======= ====== ======= ======
The accompanying notes are an integral part of these
consolidated financial statements.
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the years ended December 31,
----------------------------------
1999 1998 1997
----- ----- -----
Cash flows from operating activities
Net loss $ (5,409) $(96,054) $(11,493)
Adjustments to reconcile net
loss to net cash provided by (used in)
operating activities:
Depreciation, depletion and amortization 9,987 19,240
15,034
Impairment of oil and gas properties - 64,000
- -
Noncash interest expense 6,344 2,963 1,311
Extraordinary (gain) loss from early
extinguishment of debt (12,875) - 1,411
Gain (Loss) on sale of assets (167) (275) 84
Equity in loss of subsidiary and
partnerships 187 3,620 203
Impairment of equity investment 744 - -
Other noncash items 329 3 (176)
Amortization of lease commissions 525 184 -
Bad debt expense 438 501 241
Deferred income taxes - (2,348) (2,606)
Minority interest in loss of subsidiary (1,820) (913)
(430)
Changes in operating assets and liabilities-
Accounts receivable (1,704) 3,709 (6,029)
Other current assets 60 (226) (594)
Deferred lease costs (398) (773) (402)
Accounts payable and accrued expenses (512) 166
6,612
Accrued interest payable (853) 227 2,898
Income taxes payable - - (30)
Change in restricted cash (5,284) - -
------- ------- -------
Net cash provided by (used in) operating
activities (10,408) (5,976) 6,034
------- ------- -------
Cash flows from investing activities
Proceeds from sale of oil and gas properties 5,575 5,706
1,538
Purchase of oil and gas properties (3,688) (10,046) (103,205)
Purchase of other property and equipment
and rental property (3,277) (54,462) (61,645)
Purchase of other assets (733) (712) (3,121)
Purchase of noncompete covenants - (1,604) -
Increase in construction in progress (3,984) -
- -
Proceeds from sale of other assets 515 1,317 219
Proceeds from sale of other property,
equipment and rental property 3,446 50 209
Purchase of real estate investments - (333) (91)
Proceeds from sale of real estate investment 660 765
- -
Change in restricted cash 331 3,014 (8,064)
Other 31 22 258
------- ------- -------
Net cash used in investing activities (1,124) (56,283) (173,902)
------- ------- -------
(continued)
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (continued)
(in thousands)
For the years ended December 31,
----------------------------------
1999 1998 1997
----- ----- -----
Cash flows from financing activities
Proceeds from borrowings 144,740 54,589 309,870
Payments on debt (120,388) (3,877) (113,381)
Decrease in other long-term liabilities (52) (12)
(1,325)
Cash received on subscriptions receivable - -
2,807
Purchase of treasury stock - - (582)
Deferred debt costs (8,546) (1,576) (9,842)
Issuance of redeemable common stock, net
of issue costs - - 32
Net proceeds from sale of subsidiaries
common stock - - 1,007
Prepayment penalty on early
extinguishment of debt (887) - (341)
Dividends paid to minority interest owners (121) (120)
(122)
Purchase of minority interest in subsidiary - (309)
- -
Purchase of treasury stock by subsidiary (32) -
(1,174)
------- ------- -------
Net cash provided by financing activities 14,714 48,695
186,949
------- ------- -------
Net increase (decrease) in unrestricted
cash and cash equivalents 3,182 (13,564) 19,081
Unrestricted cash and cash equivalents -
beginning of period 13,801 27,365 8,284
------- ------- -------
Unrestricted cash and cash equivalents -
end of period $ 16,983 $ 13,801 $27,365
======= ======= =======
Supplemental disclosures of cash flow
information
Interest paid $ 36,419 $ 31,695 $14,802
The accompanying notes are and integral part of these
consolidated financial statements.
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
Business
Southwest Royalties Holdings, Inc. ("SRH"), a Delaware corporation was
formed in June 1997 to serve as a holding company for Southwest Royalties
Inc. ("Southwest"), Sierra Well Service Inc. ("Sierra") and Midland Red Oak
Realty, Inc. ("Red Oak") (collectively, the "Company"). Each shareholder
of Southwest was issued one share in SRH for each share of Southwest stock
held. Prior to the formation of SRH, Red Oak and Sierra were subsidiaries
of Southwest. Southwest paid a dividend of the shares it owned in Red Oak
and Sierra to SRH. After the formation of SRH, Southwest and Red Oak became
subsidiaries of SRH and, as of July 1, 1997, Sierra was deconsolidated.
Southwest is principally involved in the business of oil and gas
development and production, as well as organizing and serving as managing
general partner for various public and private limited partnerships engaged
in oil and gas acquisitions, exploration, development and production.
Southwest is also the general partner of Southwest Partners II and III,
which own common stock in Sierra. Southwest sells its oil and gas
production to a variety of purchasers, with the prices it receives being
dependent upon the oil and gas commodity prices. Red Oak is principally
involved in real estate investment and development. Sierra is principally
involved in the business of oil and gas well services.
Principles of Consolidation
The consolidated financial statements include the accounts of SRH and
its subsidiaries. As of December 31, 1999 and 1998, the Company owned
approximately 81% of Red Oak, 39% of Sierra, 100% of Blue Heel, 99% of MSS
and 100% and 98%, respectively, of TPI. Blue Heel, MSS and TPI are
subsidiaries of Southwest. Effective July 1, 1997, Sierra was
deconsolidated and is accounted for using the equity method (see Note 4).
Effective November 1999, TPI was liquidated. The consolidated financial
statements include the Company's proportionate share of the assets,
liabilities, income and expenses of oil and gas limited partnerships for
which it serves as managing general partner. The Company accounts for its
investments in Southwest Partners II and III using the equity method, as
the Company exercises significant influence over the operations of these
partnerships. All significant intercompany transactions have been
eliminated.
Estimates and Uncertainties
Preparation of the accompanying consolidated 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 those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased
with a maturity of three months or less to be cash equivalents. In
addition, the Company maintains its excess cash in several interest bearing
accounts in various financial institutions.
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Restricted Cash
Restricted cash represents amounts required to be reserved in separate
accounts by financial lenders. The interest sinking fund is cash set aside
to pay interest on the 10.5% Senior Notes.
Restricted cash accounts have been established for the following
purposes (in thousands):
1999 1998
---- ----
Cash bonds $ 35 -
Certificate of Deposits 112 105
Tenant security deposits 512 412
Interest reserves - 707
Capital expenditures account 552 1,229
Tax and insurance reserve 2,465 1,009
Tenant bankruptcy reserve - 767
Lockbox 439 217
Customer service reserve 10 10
Escrow fund 627 594
Interest sinking fund 5,251 -
------ -----
$10,003 5,050
====== =====
Real Estate Revenue Recognition
The Company leases offices and retail shopping centers under
noncancelable operating leases. The Company reports base rental revenue
for financial statement purposes straight-line over the terms of the
respective leases. Accrued straight-line rents represent the amount that
straight-line rental revenue exceeds rents collected in accordance with the
lease agreements. Management, considering current information and events
regarding the tenants' ability to fulfill their lease obligations,
considers accrued straight-line rents to be impaired if it is probable that
the Company will be unable to collect all rents due according to the
contractual lease terms. If accrued straight-line rents associated with a
tenant are considered to be impaired, the amount of the impairment is
measured based on the present value of expected future cash flows.
Impairment losses, if any, are recorded through a loss on the write-off of
assets. Cash receipts on impaired accrued straight-line rents are applied
to reduce the remaining outstanding balance and as rental revenue,
thereafter.
Some leases provide for percentage rents based on the tenant's
revenue. Percentage rents are accrued monthly based on prior experience or
current tenant financial information. Some leases require tenants to
reimburse the Company for certain expenses of operating the property.
Concentrations of Credit Risk
The Company is subject to credit risk through oil and gas trade
receivables and real estate lease receivables. Although a substantial
portion of its customers' ability to pay is dependent upon conditions in
the oil and gas industry as well as general economic conditions, credit
risk is reduced due to a large customer base.
Commodity Hedging and Derivative Financial Instruments
The Company has only limited involvement with derivative financial
instruments and generally does not use them for trading purposes. They are
used to manage commodity price risks. The Company is exposed to credit
losses in the event of nonperformance by the counter-parties to its
commodity hedges. The Company anticipates, however, that such counter-
parties will be able to fully satisfy their obligations under the
contracts. The Company does not obtain collateral or other security to
support financial instruments subject to credit risk but monitors the
credit standing of the counter-parties.
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The derivative financial instruments that the Company accounts for as
hedging contracts must meet the following criteria: the underlying asset
must expose the Company to price risk that is not offset in another asset
or liability, the hedging contract must reduce that price risk, and the
instrument must be designated as a hedge at the inception of the contract
and throughout the contract period. In order to qualify as a hedge, there
must be clear correlation between changes in the fair value of the
financial instrument and the fair value of the underlying asset such that
changes in the market value of the financial instrument will be offset by
the effect of price changes on the exposed items.
Premiums paid for commodity option contracts which qualify as hedges
are amortized to oil and gas sales over the term of the agreements.
Unamortized premiums are included in other assets in the consolidated
balance sheet. Amounts receivable or payable under the commodity option
contracts are accrued as an increase or decrease in oil and gas sales for
the applicable periods.
Oil and Gas Properties
All of the Company's oil and gas properties are located in the United
States and are accounted for at cost under the full cost method. Under
this method, all productive and nonproductive costs incurred in connection
with the acquisition, exploration and development of oil and gas reserves
are capitalized. No gain or loss is recognized on the sale of oil and gas
properties unless nonrecognition would significantly alter the relationship
between capitalized costs and remaining proved reserves for the affected
amortization base. When gain or loss is not recognized, the amortization
base is reduced by the amount of sales proceeds.
Net capitalized costs of oil and gas properties, including the
estimated future costs to develop proved reserves, are amortized using the
units of revenue method, whereby the provision is computed on the basis of
current gross revenues from production in relation to future gross
revenues, based on current prices, from estimated production of proved oil
and gas reserves. Should the net capitalized costs net of related deferred
income taxes exceed the estimated present value of oil and gas reserves
discounted at 10% and adjusted for related income taxes, such excess costs
would be charged to expense in the Consolidated Statements of Operations.
As of December 31, 1999, no write down of the capitalized costs of oil and
gas properties was deemed necessary. As of December 31, 1998, the net
capitalized cost exceeded the estimated present value of oil and gas
reserves resulting in a noncash charge of $64.0 million. Once incurred, a
writedown of oil and gas properties is not reversible at a later date, even
if oil or natural gas prices increase.
It is reasonably possible that the estimates of anticipated future
gross revenues, the remaining estimated economic life of the product, or
both could change significantly in the near term due to the fluctuation of
oil and gas prices or production. Depletion estimates would also be
affected by such changes.
Property and Equipment
Rental property and other property and equipment is stated at cost.
Repairs and maintenance are charged to expense as incurred, with additions
and improvements being 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 the
Consolidated Statements of Operations.
Depreciation is provided on the straight-line method based on the
estimated useful lives of the depreciable assets as follows:
Building and improvements 20 to 30 years
Rental property and improvements 5 to 30 years
Leasehold improvements 2 to 10 years
Machinery and equipment 3 to 5 years
Furniture and fixtures 3 to 5 years
Equipment under capital lease 3 to 5 years
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Rental Property - Construction in Progress
All costs associated with construction in progress are capitalized and
subject to depreciation when each project is completed. Interest is
capitalized for construction in progress. The capitalized interest is
recorded as part of the asset to which it relates and is amortized over the
assets useful life. In 1999 and 1998, no interest costs were capitalized.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
In accordance with the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of, the Company reviews its long-lived assets, excluding oil and gas
properties accounted for using the full cost method of accounting, and
certain identifiable intangibles for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. In this circumstance, the Company recognizes an impairment
loss for the amount by which the carrying amount of the asset exceeds the
estimated fair value of the asset.
Deferred Debt Costs
The Company capitalizes certain costs incurred in connection with
issuing debt. These costs are being amortized to interest expense on the
straight-line method over the term of the related debt.
Gas Balancing
The Company utilizes the sales method of accounting for over or under
deliveries of natural gas. Under this method, the Company recognizes sales
revenue on all natural gas sold. As of December 31, 1999, 1998 and 1997,
the Company was underproduced by approximately 587 MMcf, 620 MMcf and 697
MMcf, respectively.
Income Taxes
Deferred tax assets and liabilities are recognized for the estimated
future tax effects attributable to differences between the financial
statement carrying amount of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rate
is recognized in income in the period that includes the enactment date.
Deferred tax assets are reduced, if necessary, by a valuation allowance for
the amount of tax benefits that may not be realized.
SRH and its eligible subsidiaries file a consolidated U.S. federal
income tax return. Sierra (through June 30, 1997) and Red Oak are
consolidated for financial reporting purposes, but beginning January 1,
1996, were not eligible to be included in the consolidated U.S. federal
income tax return. Separate provisions for income taxes have been
determined for these entities.
Reclassifications
Certain reclassifications have been made to the 1998 and 1997 amounts
to conform to the 1999 presentation.
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Derivative Instruments and Hedging Activities
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133") which established 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.
Income (loss) per share
Basic net income (loss) per share is computed by dividing income
available to common stockholders by the weighted average number of common
shares outstanding for the period. The computation of diluted net income
(loss) per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock
that would then share in the earnings of the entity. For 1999, 1998 and
1997, the computation of diluted net loss per share was antidilutive;
therefore, the amounts reported for basic and diluted net income (loss) per
share were the same.
Noncompete covenants
Noncompete covenants are carried at cost less accumulated
amortization. The covenants are being amortized over their contractual
lives, generally three to five years.
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
2. Liquidity
The accompanying consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets and
the satisfaction of liabilities in the normal course of business. The
consolidated financial statements do not include any adjustments relating
to the recoverability and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern.
SRH has a highly leveraged capital structure with, approximately,
$30.8 million of cash interest and $40.3 million of principal due at
December 31, 1999. Subsequent to year end, SRH drew down the remaining
$15.0 million on the Revolving Loan Facility. As a result, $32.1 million
of cash interest payments and $55.3 million of principal will be due in
2000 (See Note 18). Due to severely depressed commodity prices experienced
throughout 1998 and into the first half of 1999, and lagging rental
property utilization, SRH is experiencing difficulty in generating
sufficient cash flow to meet its obligations and sustain its operations.
Management is currently in the process of renegotiating the terms of SRH's
various obligations with its note holders and/or attempting to seek new
lenders or equity investors. Additionally, management would consider
disposing of certain assets in order to meet its obligations.
There can be no assurance that SRH's debt restructuring efforts will
be successful or that the note holders will agree to a course of action
consistent with SRH's requirements in restructuring the obligations. Even
if such agreement is reached, it may require approval of additional note
holders, or possibly, agreements of other creditors of SRH, none of which
is assured. Furthermore, there can be no assurance that the sales of
assets can be successfully accomplished on terms acceptable to SRH. Under
current circumstances, SRH's ability to continue as a going concern depends
upon its ability to (1) successfully restructure its Revolving Loan
Facility, the 10.5% Senior Notes and other obligations or obtain additional
financing as may be required, (2) maintain compliance with all debt
covenants, (3) generate sufficient cash flow to meet its obligations on a
timely basis, and (4) achieve satisfactory levels of future earnings. If
SRH is unsuccessful in its efforts, it may be unable to meet its
obligations on the Revolving Loan Facility, the 10.5% Senior Notes, as well
as other obligations, making it necessary to undertake such other actions
as may be appropriate to preserve asset values.
3. Subsidiaries, Acquisitions and Dispositions
During 1994, Red Oak sold 62,384 shares of redeemable common stock for
approximately $1,560,000 million through a private placement offering.
During 1995, Red Oak sold an additional 39,616 shares of redeemable common
stock for approximately $990,000 and 34,611 shares of its Series A
cumulative convertible preferred stock, for approximately $1,731,000. The
redeemable common stock is redeemable at the stockholder's option at a
price equal to the purchase price plus a 6% annual return computed on a
cumulative, but not compounded basis. Redemptions are to be paid out of
future earnings of Red Oak. If there are no future earnings, redemptions
will be paid out of additional paid-in capital. The redemption rights
expired on 58,384 of the redeemable common shares on December 1, 1999. The
remaining shares' redemption rights will expire in March through June of
2000.
On September 26, 1996, Red Oak formed a subsidiary with an unrelated
third party. On October 15, 1996, the subsidiary acquired three shopping
centers for a total purchase price of $12.5 million. The transaction was
funded through a $2.3 million contribution from Red Oak and a $1.2 million
contribution from the unrelated third party. In April 1997 Red Oak
purchased the interest of the unrelated third party and merged the
subsidiary into Red Oak.
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
On October 14, 1997, Southwest acquired various working interests in
431 producing oil and gas wells, located in seven oil and gas fields in the
Permian Basin of West Texas and southeastern New Mexico for $72.3 million.
Southwest operates 133 of these wells. Southwest funded this acquisition
through the issuance of 10.5% Senior Notes (see Note 7). The results of
operations of the properties acquired are included in the Consolidated
Statement of Operations beginning October 14, 1997.
In 1997, Red Oak acquired five shopping centers and two office
buildings in Texas, Oklahoma and Arizona for a total cost of $50.9 million.
The transactions were accounted for using the purchase method. The results
of operations of the properties acquired are included in the Consolidated
Statements of Operations as of the close of each acquisition.
In June 1998, Red Oak acquired a retail shopping center in Texas for
$13.5 million. The acquisition was financed by the variable note payable
due July 2001 described in Note 7. The operations of the retail shopping
center from the date of acquisition through December 31, 1998 have been
included in the Consolidated Statement of Operations for the year ended
December 31, 1998.
In December 1998, Red Oak acquired a retail shopping center in Texas
for $21.0 million. The acquisition was financed by the variable note
payable due December 2001 described in Note 7. The operations of the
retail shopping center from the date of acquisition through December 31,
1998 have been included in the Consolidated Statement of Operations for the
year ended December 31, 1998.
4. Equity Investment in Subsidiary and Partnerships
As of December 31, 1999, the investment in subsidiary held by the
Company consists of a 28% direct ownership interest in Sierra as well as an
additional 11% indirect interest the Company obtained through limited
partnerships, Southwest Partners II and Southwest Partners III, for which
Southwest serves as the managing general partner. The investment is
accounted for using the equity method. A Financial Institution owns
preferred stock in Sierra, which can be converted to common stock at the
Financial Institutions option. If the Financial Institution elects to
convert its preferred stock to common stock, the Companys direct ownership
would decrease to 20% and its indirect ownership would decrease to 7%.
Effective July 1, 1997, Southwest Partner III purchased additional shares
of Sierra stock, decreasing Southwest's total direct and indirect ownership
percentage below 50%. Therefore, with the change of Southwest's ownership
percentage from a majority to a minority interest, Sierra was
deconsolidated. The deconsolidation of Sierra required an adjustment to
the investment account to reflect the change in accounting from the
consolidation method to the equity method.
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Pertinent financial information for Sierra Well Service, Inc. as of
December 31, 1999 and 1998 and for the years ended December 31, 1999 and
1998 and for the six months ended December 31, 1997 is as follows (in
thousands):
December 31, December 31,
1999 1998
---- ----
Balance Sheets
Assets $ 53,327 $ 46,861
====== ======
Liabilities $ 58,263 $ 59,891
Stockholders' deficit (4,936) (13,030)
------ ------
Total liabilities and stockholders' deficit $ 53,327
$ 46,861
====== ======
For the year For the year Six months
ended ended ended
December 31, December 31, December 31,
1999 1998 1997
---- ---- ----
Statements of Operations
Revenues $ 37,331 $ 45,319 $ 18,370
Expenses 50,732 50,944 19,163
Impairment of long lived assets - 22,671
- -
------ ------ ------
Net Income/(Loss) (13,401) (28,296) (793)
====== ====== ======
Company's share of net loss $ (931) $ (3,620) $ (203)
====== ====== ======
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
5. Property and Equipment
Property and equipment, including rental property and other, consists of
the following (in thousands):
Years Ended December 31,
------------------------
1999 1998
----- -----
Land $ 2,352 $ 2,287
Building and improvements 1,051 1,419
Machinery and equipment 2,896 3,048
Furniture and fixtures 1,536 2,367
Equipment under capital lease 56 93
Rental property 137,535 137,059
------- ------
145,426 146,273
Less accumulated depreciation 11,900 8,265
------- ------
$133,526 $138,008
======= ======
6. Future Lease Receivables
Red Oak leases office and retail shopping centers under noncancelable
operating leases that expire at various dates through 2035. The following
is a summary of minimum future rentals expected to be received under
noncancelable operating leases as of December 31, 1999 (in thousands):
2000 $ 19,407
2001 15,279
2002 12,145
2003 9,207
2004 6,886
Thereafter 24,262
------
$ 87,186
======
The preceding future minimum rentals do not include percentage rents
or reimbursements.
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
7. Long-term Debt
Long-term debt consists of the following (in thousands):
December 31,
-------------------
1999 1998
----- -----
10.5% Senior Notes, interest payable semi-annually due
October 15, 2004, net of discount of $1,487 and $2,116,
respectively $160,598 $197,884
13.5% Notes payable, due April 2000. Cash interest of
10.5% payable monthly with additional interest payable
based on excess cash flow or through the issuance of
additional notes. Collateralized by real estate. -
72,273
Revolving Loan Facility with variable rate interest,
due December 2000. Collateralized by oil and
gas properties. 35,000 -
Variable Rate Notes Payables:
Notes payable due July 2001, accrued interest due and
payable monthly at 7.1%, per annum with additional
1% payable in cash or additional notes.
Net of discount of $944 and $1,611, respectively 15,883
13,891
Notes payable due December 2001, accrued interest due and
payable monthly at 7.1%, per annum with additional
1.5% payable in cash or additional notes.
Net of discount of $2,556 and $3,889, respectively 25,298
21,806
Notes payable due July 2002, interest at 8.5% minimum
per annum, accrued interest due and payable monthly.
Net of discount of $4,229, respectively 101,835 -
Other 8,469 29,230
------- -------
347,083 335,084
Less current maturities 40,277 12,716
------- -------
$306,806 $322,368
======= =======
10.5% Senior Notes
In October 1997, the Company issued $200 million aggregate principal
amount of 10.5% Senior Notes due October 15, 2004 (the "Notes"). The Notes
were sold at a discount and interest is payable April 15 and October 15 of
each year, commencing April 15, 1998. The Notes are general unsecured
senior obligations of the Company and rank equally in right of payment with
all other senior indebtedness of the Company and senior in right of payment
of all existing future subordinated indebtedness of the issuer. Net
proceeds from the issuance of the Notes were used primarily to repay
existing debt of approximately $84 million, purchase oil and gas properties
for approximately $72 million, purchase additional stock in Red Oak for
approximately $10 million, invest $1.7 million in an affiliate, with the
remaining balance used for working capital.
The Indenture imposes certain limitations on the ability of the
Company and its restricted subsidiaries to, among other things, incur
additional indebtedness or issue disqualified capital stock, make payments
in respect to capital stock, enter into transactions with affiliates, incur
liens, sell assets, change the nature of its business, merge or consolidate
with any other person and sell, lease, transfer or otherwise dispose of
substantially all of its properties or assets. The indenture requires the
issuer to repurchase notes under certain circumstances with the excess cash
of certain asset sales. The limitations are subject to a number of
important qualifications and exceptions. The issuer must report to the
Trustee on compliance with such limitations on a quarterly basis.
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
13.5% Note Payable
In April 1997 MRO Properties Inc. ("MROP"), a 100% owned subsidiary of
Red Oak entered into a $42 million credit facility maturing in April 2000
with an institutional lender (the "MROP Facility"). The MROP Facility was
executed in order to consolidate nine mortgage loans, originally incurred
to complete the acquisition of certain Red Oak properties and to finance
the acquisition of an additional real estate property. Borrowings under
the facility bear interest at a rate of 13%, with 10% payable in cash and
the remaining 3% payable in cash or additional notes. The facility
contains a number of covenants that, among other things, restrict the
ability of MROP to incur additional indebtedness and dispose of assets.
The facility is secured by a first lien on substantially all of MROP's
properties. In September 1997, the Company negotiated an additional $30.5
million in loan proceeds which was used to acquire a retail shopping center
and office building in Oklahoma City, Oklahoma and a retail shopping center
in San Antonio, Texas. The loan is collateralized by the properties
purchased, and by properties contributed by Red Oak. This note was repaid
with a portion of the proceeds from the June 1999 Variable Rate Note
Payable.
Revolving Loan Facility
In December 1999, Southwest entered into a Revolving Loan Facility
with Bank One Texas, N.A., which provided a borrowing base of $50 million
with a maturity date of December 29, 2000. Funds from the Revolving Loan
Facility may be used for working capital and other general corporate
purposes, including the repurchase of a portion of Southwest's outstanding
10.5% Senior Notes due 2004. Advances on the Revolving Loan Facility bear
interest at the option of Southwest, based on the prime rate of Bank One
Texas, N.A. (8.5% at December 31, 1999) plus one fourth of one percent
(.25%), when the borrowing base usage is equal to or greater than 80% or
zero percent (0%) when the borrowing base usage is less than 80% or, a
Eurodollar rate (substantially equal to the London InterBank Offered Rate
("LIBOR")) plus 1.25% up to 2.0% based on the borrowing base usage
percentage. The Revolving Loan Facility is secured by no less than 85% of
Southwest's oil and gas properties. As of December 31, 1999, the company
has drawn $35.0 million. The remaining $15.0 million was drawn in January
2000(See Note 18).
The Revolving Loan Facility imposes certain limitations on the ability
of Southwest to, among other things, incur additional indebtedness or issue
disqualified capital stock, make payments in respect to capital stock,
enter into transactions with affiliates, incur liens, sell assets, change
the nature of its business, merge or consolidate with any other person and
sell, lease, transfer or otherwise dispose of substantially all of its
properties or assets. The Revolving Loan Facility required Southwest to
establish a sinking fund account with an initial deposit of $3.5 million.
Southwest is to transfer monthly one-twelfth of the annual interest
payments on the 10.5% Senior Notes beginning December 31, 1999 into this
sinking fund account for the purpose of making interest payments on the
10.5% Senior Notes.
Variable Rate Notes Payable
In June 1998, MRO N Cross, Inc., a wholly owned subsidiary of Red Oak
negotiated two notes payable in the amount of $13.5 million, net of a $2
million discount, and $2.5 million. The $13.5 million note was used for the
acquisition of rental property in the amount of $12.9 million with the
remaining $600,000 to be used for capital improvements to the rental
property purchased. The $2.5 million note is reserved for capital
improvements to the rental property purchased of which $1.3 million has
been utilized as of December 31, 1999. The notes are collateralized by the
property purchased.
In December 1998, MRO Commercial, Inc., a wholly owned subsidiary of
Red Oak negotiated two notes payable in the amount of $21.7 million, net of
a $4 million discount, and $9.7 million. The $21.7 million note was used
for the acquisition of a retail shopping center and the funding of various
escrow balances. The $9.7 million note is for capital improvements to the
rental property purchased of which $1.9 million has been utilized as of
December 31, 1999. The notes are collateralized by the property purchased.
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
In June 1999, MRO Southwest, Inc., a wholly owned subsidiary of Red
Oak negotiated two notes payable in the amount of $97.5 million and $8.0
million, net of discounts of $5.3 million. Borrowings for both notes accrue
interest in arrears at a rate per annum equal to the greater of 8.6% or
LIBOR plus 360 basis points. The interest rate includes a servicing fee of
.10%. Approximately $91.4 million of the $97.5 million note was used to
retire existing debt on properties contributed to MRO Southwest by Red Oak,
$1.5 million was deposited into various restricted cash accounts and the
remaining proceeds were used for general corporate purposes. The $8.0
million note is for capital improvements to rental property and $3.4
million has been utilized as of December 31, 1999. The notes are
collateralized by the properties owned by MRO Southwest. The notes impose
certain restrictive covenants including restrictions on the incurrence of
additional indebtedness, dissolution, termination or liquidation of all or
substantially all of the assets, changes in the legal structure of the
assets, making any loans or advances to any third party and commingling its
assets with the assets of any of its affiliates or of any other person or
entity.
Extinguishment of Debt
In 1997, the Company repaid certain notes payable with proceeds from
the 10.5% Senior Notes. The remaining unamortized deferred debt costs
associated with these notes resulted in an extraordinary charge of
$3,109,000, net of $1,241,000 of tax benefit, or $2.88 per share.
In June 1999, MRO Southwest repaid certain notes payable with proceeds
from the aforementioned Variable Note Payable issued in June of 1999.
Prepayment penalties and the remaining unamortized deferred debt costs
associated with these notes resulted in an extraordinary charge of,
approximately, $1,598,000 or $(1.49) per share. Since there is no recorded
income tax benefits on continuing operations there is no income tax
benefits recorded on the extraordinary loss.
In December of 1999, Southwest purchased approximately 19%, or
approximately $37.9 million original face amount, of its 10.5% Senior Notes
with the proceeds from the aforementioned Revolving Loan facility.
Southwest paid approximately $22.0 million, including all fees, to purchase
the 10.5% Senior Notes and wrote off approximately $349,000 of deferred
loan issue costs and approximately $980,000 of the original issue discount
to recognize a $14.5 million extraordinary gain on the purchase of the
Notes. Southwest has not recorded any income tax benefits on continuing
operations and therefore there is no income tax expense recognized on the
extraordinary gain. The extraordinary gain per share is approximately
$13.48. Southwest purchased an additional 19% or approximately $38.4
million original face amount of its 10.5% Senior Notes in January of 2000
(See Note 18).
Aggregate maturities of all long-term debt as of December 31, 1999 are
as follows (in thousands):
2000 $ 40,277
2001 41,412
2002 101,926
2003 391
2004 160,680
Thereafter 2,397
-------
$347,083
=======
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
8. Income Taxes
Income tax provision (benefit) and amounts separately allocated were
as follows (in thousands):
December 31,
----------------------------
1999 1998 1997
----- ----- -----
Loss before minority interest, equity loss
and extraordinary item $ - $(2,348) $
(2,641)
Equity loss in subsidiary - - (106)
Extraordinary loss from early extinguishment - -
(1,241)
------ ------ -----
$ - $(2,348) $
(3,988)
====== ====== =====
The U.S. Federal tax provision (benefit) attributable to loss before
income taxes, minority interest and extraordinary item consists of the
following (in thousands):
December 31,
----------------------------
1999 1998 1997
----- ----- -----
Current $ - $ - $ (35)
Benefit of net operating loss carryforward (11,307)
(14,165) (7,340)
Deferred 9,266 (20,237)
3,341
Valuation allowance 2,041 32,054 1,393
------ ------ -----
$ - $(2,348) $(2,641)
====== ====== =====
Reconciliation's between the amount determined by applying the U.S.
federal statutory rate to loss before income taxes, minority interest and
extraordinary item with the income tax provision (benefit) is as follows
(in thousands):
December 31,
----------------------------
1999 1998 1997
----- ----- -----
Computed "expected" tax expense using the
U.S. federal statutory rate $(6,488) $(34,510) $
(3,826)
Reduction in available net operating loss
carryforwards 4,944 - -
Meals and entertainment 16 16 16
Change in valuation allowance 2,041 32,054 1,156
Other (513) 92 13
------ ------ -----
Provision (benefit) for income taxes $ - $(2,348) $(2,641)
====== ====== =====
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities were as
follows (in thousands):
December 31,
-------------------
1999 1998
Deferred tax assets: ----- -----
Net operating loss carry forwards $ 28,226 21,862
Alternative minimum tax credit carryforwards 170 170
Receivables 278 152
Oil and gas properties, principally due to differences in
the tax and book basis and depletion methods and the
deduction of intangible drilling costs for tax purposes 2,356
7,833
Equity investment in subsidiary 1,081 1,103
Other long term assets 2,192 1,817
Other long term liabilities 286 463
Covenant not to complete 64 57
Other 243 29
------ -------
Total gross deferred tax assets 34,896 33,486
------ -------
Less valuation allowance (34,727) (32,686)
------ -------
Total gross deferred tax assets 169 800
------ -------
Deferred tax liabilities:
Other property and equipment (158) (663)
Real estate investments - (21)
Accounts payable and accrued expenses (11) (7)
Other - (109)
------ -------
Total gross deferred tax liabilities (169) (800)
------ -------
Net deferred tax asset (liability) $ - $ -
====== =======
A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax assets will not be realized. Based on
expectations for the future, management has determined that taxable income
of Southwest will likely not be sufficient to fully utilize available
carryforwards prior to their ultimate expiration. As such, Southwest has
recorded a valuation allowance of $27,598,000 to reflect the realizability
of its net deferred tax assets. 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, 1999, Southwest had net operating loss
carryforwards for U.S. federal income tax purposes of approximately
$65,180,000, which are available to offset future regular taxable income,
if any. The net operating loss carryforwards expire in various periods
from 2012 through 2017. Southwest has alternative minimum tax credit
carryforwards totaling $170,000 to offset regular income tax, which have no
scheduled expiration date.
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Red Oak files an independent return exclusive of Southwest and has net
operating loss carryforwards of $17,836,000 expiring in various periods
through 2017. Based on expectations for the future, management has
determined that taxable income of Southwest will likely not be sufficient
to fully utilize available carryforwards prior to their ultimate
expiration. Approximately $7,129,000 of the valuation allowance relates
primarily to the uncertainty of the realizability of Red Oak's
carryforwards, the amount of the valuation allowance could be reduced if
estimates of future taxable income during the carryforward period are
increased.
9. Profit Sharing Plan
On January 1, 1991, the Company adopted an employee profit sharing
plan that is intended to provide participating employees with additional
income upon retirement. Employees may contribute between 1% and 15% of
their base salary up to a maximum of $10,000 for the years ended December
31, 1999 and 1998 and $9,500 for the year ended December 31, 1997. For the
years ended December 31, 1999, 1998 and 1997, the Company matched 20% of
the employees' contributions. For the year ended December 31, 2000, the
Company will match 20% of the employees' contributions. For subsequent
years, the Company will make contributions to the plan on a discretionary
basis.
Employee contributions are fully vested at all times. Employer
contributions are fully vested upon retirement or after five years of
service. For the years ended December 31, 1999, 1998 and 1997, the Company
contributed approximately $72,000, $61,000 and $66,000, respectively, to
the plan.
10. Redeemable Common Stock
In August 1996, the Company issued 129,046 shares of redeemable common
stock through a private placement offering for $68 per share. The stock is
redeemable at the stockholder's option at any time beginning five years
from the issuance of the stock (December 31, 2001) at a purchase price
determined as follows:
(i) The Company shall review no less than five and no more than
ten publicly traded oil and gas companies each with a market
capitalization between $50 million and $150 million ("Public
Company"). The Company shall determine the ratio of each Public
Company's market capitalization to EBITDA for the most recent
fiscal year. The Company shall then average such multiples and
take this averaged multiple and apply it to the Company's EBITDA
for the most recent fiscal year, to estimate a value for the
Company's common stock.
(ii) The Company will determine the multiple of the market
capitalization of each Public Company relating to the present
value of such Public Company's oil and gas reserves. Present
value will be determined by discounting the expected net cash
flow from the oil and gas reserves by 10%. The Company will then
take the average multiple based on this methodology and apply it
to the present value of the Company's oil and gas reserves
discounted by 10% to determine a value for the expected net cash
flow from the Company's common stock.
The Company will then take the average of (i) and (ii) to
determine the value of the Company's common stock. The
redemption right terminates on the effective date of any
registration statement filed with the Securities and Exchange
Commission relative to the offer and sale of the Company's common
stock to the public.
11. Stockholders' Equity
During 1994, the Company issued a 6% note to a stockholder. The note
requires semi-monthly payments of $5,500 and is collateralized by the
Company's common stock held by the stockholder.
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
12. Commitments and Contingencies
The partnership agreements relating to certain limited partnerships
for which Southwest serves as managing general partner provide for
Southwest to offer to repurchase such limited partner units. Under the
terms of three of the partnership agreements, Southwest is obligated to
repurchase a maximum of $100,000 annually of the units of limited
partnerships' interests originally outstanding. Under the terms of nine
other partnership agreements, Southwest's obligation to repurchase units in
any one year is limited to 10% of the capital contributed by all of the
respective limited partners. The repurchase price is based on the
discounted future revenues from oil and gas reserves of the respective
partnership and the value of other partnership assets. Such amounts
required for repurchase in connection with the acceptance by a portion of
the limited partners is approximately $2,447,000 at December 31, 1999. The
total amount of limited partner unit repurchases for the years ended
December 31, 1999 and 1998 was approximately $71,000 and $287,000,
respectively.
The Company is subject to extensive federal, state and local
environmental laws and regulations. These laws, which are constantly
changing, regulate the discharge of materials into the environment and may
require the Company to remove or mitigate the environmental effects of the
disposal or release of petroleum or chemical substances at various sites.
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 expensed
when environmental assessment and/or remediation is probable and the costs
can be reasonably estimated.
Management recognizes a financial exposure that may require future
expenditures presently existing for oil and gas properties and other
operations. Other long-term liabilities at December 31, 1999 includes
$663,000 for estimated future remedial actions and cleanup costs. As of
December 31, 1999, the Company has not been fined, cited or notified of any
environmental violations which would have a material adverse effect upon
capital expenditures, earnings or the competitive position in the oil and
gas industry. However, management does recognize that by the very nature of
its business, significant costs could be incurred to bring the Company into
total compliance. The amount of such future expenditures is not readily
determinable due to several factors, including the unknown magnitude of
possible contaminations, 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 indemnifications from prior
owners of the Company's properties. It is reasonably possible this
estimate could change materially in the near term.
In the normal course of its business, the Company is subject to
pending or threatened legal actions; in the opinion of management, any such
matters will be resolved without material effect on the Company's
operations, cash flow or financial position.
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
13. Commodity Hedging and Derivative Financial Instruments
The Company, from time to time, uses option contracts to mitigate the
volatility of price changes on commodities the Company produces and sells
as well as to lock in prices to protect the economics related to certain
capital projects.
On July 9, 1999, Southwest entered into a commodity swap agreement to
hedge a portion of its crude oil sales. The agreement is for a notional
amount of 1,000 BBls of oil a day with a strike price of $20.22, based on
West Texas Intermediate - NYMEX. The contract is for the period August 1,
1999 through October 31, 1999. At the option of the counter-party the
contract has been extended to January 31, 2000.
On December 30, 1999, Southwest entered into a basket revenue
protection agreement, which provides the Company with an oil and gas
revenue floor. The contract is for the period January 1, 2000 through
December 31, 2000. The agreement is to be calculated on a calendar year
quarter as disclosed in the following table based on NYMEX Natural Gas and
NYMEX Crude Oil:
Notional Volumes Strike Prices
------------------------- -----------------------------
Crude Natural Crude Natural Minimum
Oil (bbl) Gas (MMBtu) Oil Gas Boe Revenue
---------- ----------- ----- ------- ---- --------
Quarter 1 269,254 976,676 $ 21.12 $ 1.91 $ 28.76 $7,552,096
Quarter 2 263,058 910,325 $ 18.80 $ 1.92 $ 26.56 $6,714,359
Quarter 3 257,206 857,728 $ 18.00 $ 1.97 $ 25.88 $6,319,432
Quarter 4 251,914 813,400 $ 18.00 $ 2.20 $ 26.80 $6,323,932
Payments shall be made no later than five business days, after each
quarterly floating price is determinable by NYMEX. The cost of the floor
was approximately $638,000 and is amortized monthly as a reduction of oil
and gas revenues.
14. Related Party Transactions
Southwest is the managing general partner for several public and
private oil and gas limited partnerships, with an officer of Southwest also
serving as a general partner for certain of the limited partnerships. As
is usual in the oil and gas industry, the operator is paid an amount for
administrative overhead attributable to operating such properties and
management fees attributable to serving as managing general partner. As
provided for in the partnership agreements, such amounts paid by the
partnerships to Southwest approximated $3,515,000, $3,789,000 and
$3,538,000 for the years ended December 31, 1999, 1998 and 1997,
respectively. Included in these amounts, an affiliate of Southwest paid
management fees of approximately $136,000 and $147,000, for the years ended
December 31, 1999 and 1998, and approximately $54,000, for the six months
ended December 31, 1997. In addition, Southwest and certain officers and
employees may have an interest in some of the partnership properties.
An affiliate of the company performs various oilfield services for
limited partnerships managed by Southwest. Such services aggregated
$365,000, $115,000 and $155,000 for the years ended December 31, 1999, 1998
and 1997. The same affiliate performed services for Southwest that
aggregated approximately $313,000 and $131,000, for the years ended
December 31, 1999 and 1998 and approximately $47,000, for the six months
ended December 31, 1997.
15. Disclosures About Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses, other current assets and other
current liabilities approximates fair value because of the short maturity
of these instruments.
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The fair value of the Company's 10.5% Senior Notes is estimated based
on the quoted market price for the notes.
1999 1998
----- -----
Carrying Fair Carrying Fair
Amount Value Amount Value
------- ------ ------- ------
10.5% Senior notes, net discount of
$1,487 and 2,116, respectively $160,598 $89,935 $197,884 $79,154
The fair value of all other long-term debt approximates the carrying
amount as of December 31, 1999 and 1998, based on the borrowing rates
currently estimated to be available to the Company for loans with similar
terms.
The Company purchased the Basket Revenue Protection Agreement on
December 31, 1999, and therefore deems the carrying value of $638,000 to
equate to fair market value at December 31, 1999.
The carrying amount of investment in subsidiary at December 31, 1999
is recorded at zero because the investor's proportionate share of the
investee's net loss exceeded the original investment. The fair value of
SRH's investment in Sierra is undeterminable at December 31, 1999, as
Sierra is highly leveraged and is not publicly traded. If Sierra
subsequently begins to report net income, Southwest 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.
16. Lines of Business
The Company operates in three major segments: Oil and Gas Activities
(oil and gas acquisition, development, exploration and production, as well
as organizing and serving as managing general partner for various public
and private limited partnerships engaged in oil and gas development and
production), Oil and Gas Well Servicing (provides well completion,
recompletion and production equipment, transportation services, tank supply
rental services and other support and well maintenance services to
operating oil and gas companies) and Real Estate Investment and Management
(owns and manages retail shopping centers and office buildings). Other
items include eliminations, manufacturing, computer service and the holding
Company. Effective July 1, 1997, Sierra, the oil and gas well servicing
business, was deconsolidated, therefore only six months of income statement
information is displayed in the tables and no balance sheet information is
displayed as of December 31, 1998 (see Note 4.)
1999 1998 1997
----- ----- -----
(in thousands)
Operating Revenue
Oil and gas $31,998 $ 32,599 $38,662
Well service - - 7,833
Real estate 31,301 25,650 9,338
Other and eliminations 633 1,260 1,021
------ ------ ------
$63,932 $ 59,509 $56,854
====== ====== ======
Operating profit (loss)
Oil and gas $14,146 $(68,633) $ 3,654
Well service - - 184
Real estate 6,812 7,605 3,074
Other and eliminations (127) (25) (417)
------ ------ ------
$20,831 $(61,053) $ 6,495
====== ====== ======
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
1999 1998 1997
----- ----- -----
(in thousands)
Interest Expense
Oil and gas $22,381 $ 22,536 $12,329
Well Service - - 184
Real Estate 19,664 13,969 6,320
Other and eliminations (135) (15) 61
------ ------- -------
$41,910 $ 36,490 $18,894
====== ======= =======
Depreciation, depletion and amortization
Oil and gas $ 5,392 $ 16,118 $12,803
Well Service - - 747
Real Estate 4,485 2,935 1,313
Other and eliminations 110 187 171
------- ------- -------
$ 9,987 $ 19,240 $15,034
======= ======= =======
Identifiable assets
Oil and gas $115,520 $ 111,876
$ 205,054
Well service - - -
Real estate 150,269 148,340 98,890
Other and eliminations (3,622) (2,666) 1,499
------- ------- -------
$262,167 $ 257,550
$ 305,443
======= ======= =======
Capital expenditures
Oil and gas properties $ 3,688 $ 10,046 $103,205
Oil and gas, other 233 618 1,135
Real estate 6,723 53,411 53,626
Other 306 433 236
------- ------- -------
$10,950 $ 64,508 $158,202
======= ======= =======
17. Condensed Issuer Financial Data
Summarized consolidated financial information for Southwest is as
follows (in thousands):
December 31,
---------------------------------
1999 1998 1997
----- ----- -----
Consolidated Balance Sheet Data:
Current assets $28,276 $ 20,486 $35,545
Net property and equipment 73,477 81,373 156,302
Other assets, net 10,814 8,417 11,789
------- ------- -------
$112,567 $ 110,276
$ 203,636
======= ======= =======
Current liabilities $46,597 $ 12,299 $14,614
Long-term debt 161,553 199,058 198,938
Other liabilities 841 1,361 1,412
Deferred income taxes - - 2,522
Minority interest 8 7 202
Stockholders deficit (96,432) (102,449)
(14,052)
------- ------- -------
$112,567 $ 110,276
$ 203,636
======= ======= =======
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
December 31,
---------------------------------
1999 1998 1997
----- ----- -----
Consolidated Cash Flow Data:
Net cash provided by (used in) operating
activities $ (8,412) $(5,309) $ 4,920
Net cash provided by (used in) investing
activities 3,022 (5,803) (104,912)
Net cash provided by (used in) financing
activities 8,543 (770) 116,680
------- ------- -------
Net increase (decrease) in unrestricted
cash and cash equivalents $ 3,153 $(11,882) $16,688
======= ======= =======
Consolidated Statement of Operations Data (in thousands):
SRH SouthwestSierraRed Oak ElimConsolidated
---- ---------------------------------------
For the year ended December 31, 1999:
Operating revenues $ - $32,637 $ - $31,301 $ (6) $
63,932
Depreciation, depletion
and amortization - 5,502 - 4,485 - 9,987
Operating income (loss) (55) 14,074 - 6,812 - 20,831
Interest expense - 22,382 - 19,664 (136)
41,910
Loss before taxes, minority interest,
equity loss and extraordinary item (39) (7,623) -
(11,419) (92) (19,173)
Net income (loss) (39) 5,986 - (13,017) 1,661
(5,409)
For the year ended December 31, 1998:
Operating revenues $ - $33,879 $ - $25,650 $ 20 $
59,509
Depreciation, depletion
and amortization - 16,305 - 2,935 - 19,240
Impairment of properties - 64,000 - - - 64,000
Operating income (loss) (44) (68,614) - 7,605 -
(61,053)
Interest expense - 22,544 - 13,969 23
36,490
Loss before taxes, minority interest,
equity loss and extraordinary item (28) (89,769) -
(5,806) 92 (95,695)
Net loss (2,645) (88,425) - (5,858)
(874) (96,054)
For the year ending December 31, 1997:
Operating revenues $ - $39,727 $7,833 $9,338 $ (44) $
56,854
Depreciation, depletion
and amortization - 12,974 747 1,313 - 15,034
Operating income - 3,237 184 3,074 - 6,495
Interest expense - 12,372 184 6,320 18 18,894
Income (loss) before taxes, minority
interest, equity loss and
extraordinary item 15,249 (8,097) (5) (3,125)
(15,274) (11,252)
Net income (loss) 15,046 (7,733) (4) (3,987)
(14,815) (11,493)
18. Subsequent Events
In January of 2000, Southwest drew down the remaining $15.0 million on
the Revolving Loan Facility and applied the proceeds towards the purchase
of an additional 19% or approximately $38.4 million original face amount of
its 10.5% Senior Notes. Southwest paid approximately $23.0 million,
including all fees, to purchase the 10.5% Senior Notes and wrote off an
additional $349,000 of deferred loan issue costs and an additional $980,000
of the original issue discount to recognize an additional $14.0 million
extraordinary gain on the purchase of the notes. Southwest has not
recorded any income tax benefits on the continuing operations and therefore
there is no income tax expense recognized on the extraordinary gain.
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
19. Supplemental Financial Data - Oil and Gas Producing Activities
(unaudited):
The following information is presented in accordance with Statement of
Financial Accounting Standards No. 69, "Disclosure about Oil and Gas
Producing Activities," (SFAS No. 69), except as noted.
Costs incurred in connection with oil and gas producing activities are as
follows (in thousands):
Years ended December 31,
--------------------------------
1999 1998 1997
----- ----- -----
Acquisition of properties $ 417 $ 1,315 $ 80,797
Exploration costs 76 834 2,769
Development costs 3,195 7,897 19,639
------ ------ -------
Total costs incurred $ 3,688 $ 10,046 $103,205
====== ====== =======
Results of operations for oil and gas producing activities are as follows
(in thousands):
Years ended December 31,
--------------------------------
1999 1998 1997
----- ----- -----
Revenues $ 31,425 $ 32,467 $ 38,500
------ ------- ------
Production costs 10,833 18,395 18,500
Depletion 4,901 15,601 12,419
Impairment of oil and gas
properties - 64,000 -
------ ------- ------
15,691 (65,529) 7,581
Income tax provision 5,335 - 2,578
------- ------- ------
Results of operations from oil and
gas producing activities
(excluding corporate overhead) $ 10,356 $ (65,529) $
5,003
======= ======= ======
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Reserve Quantity Information
The estimates of the Company's proved oil and gas reserves, which are
located in the United States, are based on evaluations reviewed by
independent petroleum engineers. Reserves were estimated in accordance
with guidelines established by the U. S. Securities and Exchange Commission
and the Financial Accounting Standards Board, which require that reserve
estimates be prepared under existing economic and operating conditions with
no provision for price and cost escalations except by contractual
arrangements. The reserve estimates at December 31, 1999 assume an average
oil price of $23.90/Bbl (reflecting adjustments for oil quality and
gathering and transportation costs) and an average gas price of $2.06/Mcf
(reflecting adjustments for BTU content, gathering and transportation costs
and gas processing and shrinkage).
Oil and gas reserve quantity estimates are subject to numerous
uncertainties inherent in the estimation of quantities of proved reserves
and the projection of future rates of production and the timing of
development expenditures. The accuracy of such estimates is a function of
the quality of available data, engineering and geological interpretation
and judgement. Results of subsequent drilling, testing and production may
cause either upward or downward revision of previous estimates. Further,
the volumes considered to be commercially recoverable fluctuate with the
changes in prices and operating costs. The Company emphasizes that reserve
estimates are inherently imprecise and that estimates of new discoveries
are more imprecise than those of currently producing oil and gas
properties. Accordingly, these estimates are expected to change, as
additional information becomes available in the future.
Oil and Natural Barrels of
Condensate Gas Oil Equivalent
(MBbls) (MMcf) (Mboe)
------ ------ -------
Total Proved Reserves:
Balance, January 1, 1997 18,806 76,776 31,602
Extensions and discoveries 474 1,230 679
Purchase of minerals-in-place 16,419 7,274 17,631
Sales of minerals-in-place (83) (91) (98)
Revisions of previous estimates (4,642) (14,825)
(7,113)
Production (1,308) (5,639) (2,248)
------ ------ ------
Balance, December 31, 1997 29,666 64,725 40,453
Extensions and discoveries 27 1,526 282
Purchase of minerals-in-place 288 895 437
Sales of minerals-in-place (1,024) (6,132) (2,046)
Revisions of previous estimates (6,324) 2,815
(5,855)
Production (1,689) (5,556) (2,615)
------ ------ ------
Balance, December 31, 1998 20,944 58,273 30,656
Purchase of minerals-in-place 261 1,329 483
Sales of minerals-in-place (1,704) (2,751) (2,163)
Revisions of previous estimates 6,633 12,855 8,776
Production (1,306) (4,627) (2,077)
------ ------ ------
Balance, December 31, 1999 24,828 65,079 35,675
====== ====== ======
Total proved developed reserves
January 1, 1997 10,302 58,961 20,129
December 31, 1997 18,472 46,585 26,236
December 31, 1998 12,006 37,481 18,253
December 31, 1999 16,618 43,023 23,789
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Standardized Measure of Discounted Future Net Cash Flows
The standardized measure of discounted future net cash flows is
computed by applying year-end prices of oil and gas (with consideration of
price changes only to the extent provided by contractual arrangements) to
the estimated future production of proved oil and gas reserves less
estimated future expenditures (based on year-end costs) to be incurred in
developing and producing the proved reserves, discounted using a rate of
10% per year to reflect the estimated timing of the future cash flows.
Future income taxes are calculated by comparing discounted future cash
flows to the tax basis of oil and gas properties plus available
carryforwards and credits and applying the current tax rates to the
difference.
Discounted future cash flow estimates like those shown below are not
intended to represent estimates of the fair value of oil and gas
properties. Estimates of fair value should also consider probable
reserves, anticipated future oil and gas prices, interest rates, changes in
development and production costs and risks associated with future
production. Because of these and other considerations, any estimate of
fair value is necessarily subjective and imprecise.
During most of 1996 and 1997, the Company benefited from higher oil
and gas prices as compared to previous years. However, during the fourth
quarter of 1997 and the year 1998, oil prices began a downward trend that
has continued throughout 1998 and the first half of 1999. A continuation
of the oil price environment experienced throughout 1998 and the first half
of 1999 will have an adverse affect on the Company's revenues and operating
cash flow, and may result in a downward adjustment to the Company's current
2000 capital budget.
December 31,
---------------------------------------
1999 1998 1997
----- ----- -----
(in thousands)
Future cash inflows $ 727,615 $315,709 $ 620,418
Future production and development
costs (284,354) (181,627) (303,406)
-------- -------- --------
Future net cash flows before
income taxes 443,261 134,082 317,012
Future income tax expense (103,067) - (59,764)
-------- -------- --------
Future net cash flows 340,194 134,082 257,248
10% annual discount for estimated
timing of cash flows (164,634) (62,182) (117,427)
-------- -------- --------
Standardized measure of discounted
future net cash flows $ 175,560 $ 71,900 $ 139,821
======== ======== ========
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The principal sources of change in the standardized measure of
discounted future net cash flows are as follows:
December 31,
---------------------------------------
1999 1998 1997
----- ----- -----
(in thousands)
Sales of oil and gas produced,
net of production costs $(20,592) $(14,072) $(20,000)
Net change in sales prices net of production
costs 116,644 (76,234) (119,553)
Extensions and discoveries, net of future
production and development costs - 1,195 3,540
Revisions to estimated future development
costs (4,059) 3,103 (4,833)
Purchases of minerals-in-place 1,866 1,334 80,690
Revisions of previous quantity estimates 60,317 (18,054)
(37,403)
Accretion of discount 7,190 17,230 25,217
Net change in income taxes (53,188) 32,483 46,887
Sales of minerals-in-place (5,685) (5,899) (384)
Changes in production rates, timing
and other 1,167 (9,007) (12,881)
------- ------- -------
103,660 (67,921) (38,720)
Discounted future net cash flows -
Beginning of period 71,900 139,821 178,541
------- ------- -------
End of period $ 175,560 $ 71,900 $ 139,821
======= ======= =======
<PAGE>
SIGNATURES
SOUTHWEST ROYALTIES, INC.
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereto duly authorized.
SOUTHWEST ROYALTIES, INC.
By: /s/ H. H. Wommack, III
----------------------------------------
H.H. Wommack, III, Chairman, President,
and Chief Executive Officer
Date: May 9, 2000
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
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- -----
/s/ H. H. Wommack, III
------------------------ Chairman/President/ May 9, 2000
H. H. Wommack, III Chief Executive Officer
/s/ J Steven Person
-------------------------Vice President of
J Steven Person Marketing/Chief May 9, 2000
Financial Officer
/s/ H. Allen Corey
-------------------------
H. Allen Corey Director/Secretary May 9, 2000
<PAGE>
SIGNATURES
SOUTHWEST ROYALTIES HOLDINGS, INC.
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereto duly authorized.
SOUTHWEST ROYALTIES HOLDINGS, INC.
By: /s/ H. H. Wommack, III
----------------------------------------
H.H. Wommack, III, Chairman, President,
and Chief Executive Officer
Date: May 9, 2000
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
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- -----
/s/ H. H. Wommack, III
------------------------ Chairman/President/ May 9, 2000
H. H. Wommack, III Chief Executive Officer
/s/ J Steven Person
-------------------------Vice President of
J Steven Person Marketing/Chief May 9, 2000
Financial Officer
/s/ H. Allen Corey
------------------------
H. Allen Corey Director/Secretary May 9, 2000
<PAGE>
