18
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 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 State or Other
Jurisdiction of (Jurisdiction of
Incorporation or Organization) Incorporation or
Organization)
75-1917432 75-2724264
(I.R.S. Employer (I.R.S. Employer
Identification Number) Identification Number)
407 North Big Spring, Suite 300
Midland, Texas 79701
(Address of Principal Executive Offices) (Zip Code)
Registrants' Telephone Number, Including Area Code: (915) 686-9
927
Not Applicable
(Former name, former address and former fiscal year, if changed
since last report)
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 ___
Number of shares of common stock outstanding as of March 31, 1999
for Southwest Royalties, Inc 100
Number of shares of common stock outstanding as of March 31, 1999
for Southwest Royalties Holdings, Inc. 1,075,868
<PAGE>
SOUTHWEST ROYALTIES, INC.
SOUTHWEST ROYALTIES HOLDINGS, INC.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 1999
(unaudited)
and December 31, 1998 3
Consolidated Statements of Operations for the three months
ended March 31, 1999 and 1998 (unaudited) 5
Consolidated Statements of Cash Flows for the three months
ended March 31, 1999 and 1998 (unaudited) 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition
and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 15
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
16
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
March 31,December 31,
1999 1998
-------------------
(unaudited)
ASSETS
- ---------------------------------------------------
Current assets
Cash and cash equivalents $14,696 $13,801
Accounts receivable, net of allowance
of $263 and $342, respectively 4,928 5,248
Receivables from related parties 1,393 1,594
Other current assets 1,342 1,624
------- -------
Total current assets 22,359 22,267
------- -------
Oil and gas properties, using the full cost
method of accounting
Proved 194,798 194,096
Unproved 2,481 3,230
------- -------
197,279 197,326
Less accumulated depletion, depreciation
and amortization 123,377 121,841
------- -------
Oil and gas properties, net 73,902 75,485
------- -------
Rental property, net 132,093 132,120
------- -------
Other property and equipment, net 5,720 5,888
------- -------
Other assets
Restricted cash 6,869 5,050
Equity investment in subsidiary
and partnerships - 931
Real estate investments 4,019 4,019
Deferred debt costs, net of accumulated
amortization of $3,751 and $3,136,
respectively 8,218 8,725
Noncompete covenants, net of accumulated
amortization of $343 and 269, respectively 1,261
1,335
Other, net 1,779 1,730
------- -------
Total other assets 22,146 21,790
------- -------
Total assets $256,220 $257,550
======= =======
(continued)
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(in thousands, except share data)
March 31,December 31,
1999 1998
-------------------
(unaudited)
LIABILITIES, MINORITY INTEREST, REDEEMABLE
COMMON STOCK AND STOCKHOLDERS' DEFICIT
- ---------------------------------------------------------
Current liabilities
Current maturities of long-term debt $ 5,991 $12,716
Accounts payable 4,971 7,116
Accounts payable to related parties - 173
Accrued expenses 14,875 9,737
------- -------
Total current liabilities 25,837 29,742
------- -------
Long-term debt 332,431 322,368
------- -------
Other long-term liabilities 1,813 1,797
------- -------
Minority interest 7 206
------- -------
Redeemable common stock of subsidiary 3,016 2,979
------- -------
Redeemable common stock 8,290 8,290
------- -------
Stockholders' deficit
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 March 31, 1999
and December 31, 1998 116 116
Additional paid-in capital 2,196 2,196
Accumulated deficit (112,725) (105,375)
Note receivable from an officer and stockholder (1,671)
(1,679)
Less: treasury stock - at cost; 214,215 shares
at March 31, 1999 and December 31, 1998 (3,090)
(3,090)
------- -------
Total stockholders' deficit (115,174) (107,832)
------- -------
Total liabilities, minority interest, redeemable
common stock and stockholders' deficit $256,220 $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)
(unaudited)
For the three months ended March 31,
- ------------------------------------
1999 1998
----- -----
Operating revenues
Oil and gas $ 6,094 $ 9,711
Real estate 8,209 4,911
Other 285 438
--------- ---------
Total operating revenues 14,588 15,060
--------- ---------
Operating expenses
Oil and gas production 2,868 5,453
Real estate 4,214 2,138
General and administrative, net of related
party management and administrative fees of
$870 and $897, respectively 787 1,352
Depreciation, depletion and amortization 2,744
4,265
Other 213 375
--------- ---------
Total operating expenses 10,826 13,583
--------- ---------
Operating income 3,762 1,477
--------- ---------
Other income (expense)
Interest and dividend income 154 443
Interest expense (10,688) (8,353)
Other 200 3
--------- ---------
(10,334) (7,907)
--------- ---------
Loss before income taxes, minority
interest and equity loss (6,572) (6,430)
Income tax benefit (provision) - 1,944
--------- ---------
Loss before minority interest and equity
loss (6,572) (4,486)
Minority interest in subsidiaries, net of tax 154
106
Equity in loss of subsidiary and partnerships,
net of tax (188) (322)
Impairment of equity investment, net of tax (744)
- -
--------- ---------
Net Loss $ (7,350) $ (4,702)
========= =========
Loss per common share $ (6.83) $
(4.37)
========== ==========
Weighted average shares outstanding 1,075,868 1,075,868
========== ==========
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)
(unaudited)
For the three months ended March 31,
- ------------------------------------
1999 1998
----- -----
Cash flows from operating activities
Net loss $(7,350) $(4,702)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation, depletion and amortization 2,744
4,265
Noncash interest expense 1,163 648
Equity loss of subsidiary and partnerships 188
322
Impairment of equity investment 744 -
Other noncash items 112 (65)
Bad debt expense 87 5
Deferred income taxes - (1,944)
Minority interest in loss of subsidiary (154) (106)
Changes in operating assets and liabilities-
Accounts receivable 446 2,297
Other current assets 50 10
Accounts payable and accrued expenses (2,037) (2,100)
Accrued interest payable 4,857 5,201
-------- -------
Net cash provided by operating activities 850 3,831
-------- -------
Cash flows from investing activities
Proceeds from sale of oil and gas properties 318
220
Purchase of oil and gas properties (271) (4,291)
Purchase of other property and equipment and
rental property (1,082) (1,036)
Purchase of other assets (221) (1,357)
Purchase of noncompete covenants - (1,602)
Proceeds from sale of other assets 232 20
Proceeds from sale of other property and
equipment 213 -
Change in restricted cash (1,819) 672
Other 8 22
-------- -------
Net cash used by investing activities (2,622) (7,352)
-------- -------
(continued)
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (continued)
(in thousands)
(unaudited)
For the three months ended March 31,
- ------------------------------------
1999 1998
----- -----
Cash flows from financing activities
Proceeds from borrowings 4,030 2,092
Payments on debt (1,259) (276)
Payments on other long-term liabilities (23) (49)
Increase in other long-term liabilities 39 -
Deferred debt cost (89) (143)
Dividends paid to minority interest owners (31)
(31)
Purchase of minority interest in subsidiary -
(197)
-------- -------
Net cash provided by financing activities 2,667 1,396
-------- -------
Net increase (decrease) in unrestricted cash
and cash equivalents 895 (2,125)
Unrestricted cash and cash equivalents-
beginning of period 13,801 27,365
-------- -------
Unrestricted cash and cash equivalents -
end of period $14,696 $25,240
======== =======
Supplemental disclosures of cash flow information
Interest paid $ 4,669 $ 2,504
The accompanying notes are an integral part of these
consolidated financial statements
<PAGE>
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 March 31, 1999 and 1998, the Company owned
approximately 81% of Red Oak, 39% of Sierra as well as 99% and 98%,
respectively of Midland Southwest Software ("MSS") and Threading Products
International, LLC ("TPI"), both of which are subsidiaries of Southwest.
Effective July 1, 1997, Sierra was deconsolidated and is accounted for
using the equity method. 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.
Restricted Cash
Restricted cash represents amounts required to be reserved in separate
accounts by financial lenders. These reserves are principally for real
estate activity and are held in the names of Red Oak and its various
subsidiaries, but withdrawals from such accounts require the signature or
authorization of the lender.
Restricted cash accounts, principally for Red Oak and its subsidiaries,
have been established for the following purposes (in thousands):
March 31, December 31,
1999 1998
---- ----
Certificate of Deposits $ 110 105
Tenant security deposits 415 412
Interest reserves 710 707
Capital expenditures account 3,104 1,229
Tax and insurance reserve 1,070 1,009
Tenant bankruptcy reserve 767 767
Lockbox 78 217
Customer service reserve 8 10
Escrow fund 607 594
----- -----
$ 6,869 5,050
===== =====
<PAGE>
Interim Financial Statements
In the opinion of management, the unaudited consolidated financial
statements of the Company as of March 31, 1999 and 1998 include all
adjustments and accruals, consisting only of normal recurring accrual
adjustments, which are necessary for a fair presentation of the results for
the interim periods. These interim results are not necessarily indicative
of results for a full year.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted in this Report
pursuant to the rules and regulations of the Securities and Exchange
Commission. These consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the 1998 Form 10-K of the Company.
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.
The Company has a highly leveraged capital structure with $21.0 million
of interest payments due in 1999 on its 10.5% Senior Notes and
approximately $6.0 million of principal and approximately $12.3 million of
cash interest payments due in 1999 on its other obligations (principally
related to Red Oak). Due to severely depressed commodity prices and
lagging rental property utilization, the Company is experiencing difficulty
in generating sufficient cash flow to meet its obligations and sustain its
operations. Management is attempting to renegotiate the terms of the
Company's various obligations with its note holders and lenders 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 the Company's debt restructuring efforts
will be successful or that the note holders or lenders will agree to a
course of action consistent with the Company'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 the Company, none of which is assured. Furthermore,
there can be no assurance that the sale of assets can be successfully
accomplished on terms acceptable to the Company. Under current
circumstances, the Company's ability to continue as a going concern depends
upon its ability to (1) successfully restructure its 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 the Company is unsuccessful in
its efforts, it may be unable to meet its obligations on 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.
<PAGE>
3. Commitments and Contingencies
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. As of March 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
flows or financial position.
4. 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. In August 1998, the Company purchased a put option on a
total of 15,000 MMBtu of natural gas per day with a strike price of $2.00
per MMBtu. The option is based on the El Paso Natural Gas Co. - Permian
Basin Index and is for the period from November 1, 1998 through March 31,
1999.
On March 15, 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, approximately 25% of total oil
production, with a strike price of $14.67, based on West Texas Intermediate
- - NYMEX. The contract is for the period April 1, 1999 through June 30,
1999, but can be extended to September 30, 1999, at the option of the
counter-party.
<PAGE>
5. Lines of Business
The Company operates in two 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) 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.
For the Three Months
Ended March 31,
1999 1998
----- -----
(in thousands)
(unaudited)
Operating profit (loss)
Oil and gas $ 1,109 $ (546)
Real estate 2,595 1,978
Other and eliminations 58 45
------ -----
$ 3,762 $ 1,477
====== =====
Interest Expense
Oil and gas $ 5,527 $ 5,558
Real Estate 5,208 2,781
Other and eliminations (47) 14
------ -----
$10,688 $ 8,353
====== =====
Depreciation, depletion and amortization
Oil and gas $ 1,671 $ 3,691
Real Estate 1,024 528
Other and eliminations 49 46
----- -----
$ 2,744 $ 4,265
===== =====
Capital expenditures
Oil and gas $ 271 $ 4,291
Real estate 594 528
----- -----
$ 865 $ 4,819
===== =====
<PAGE>
5. Lines of Business - continued
March 31,December 31,
1999 1998
--------------------
Identifiable assets
Oil and gas $109,619 $111,876
Real estate 149,516 148,340
Other and eliminations (2,915) (2,666)
------- -------
$256,220 $257,550
======= =======
6. Subsequent Events
On March 25, 1999, SRH entered into an agreement to sell various
interests in certain oil and gas properties to an unrelated third party for
approximately $4.2 million. The sale closed on April 5, 1999.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
General
Southwest Royalties Holdings, Inc., a Delaware corporation, was formed
in 1997 to serve as a holding company for Southwest Royalties, Inc., Sierra
Well Service, Inc. and Midland Red Oak Realty, Inc. SRH is an independent
oil and gas company engaged in the acquisition, development and production
of oil and gas properties, primarily in the Permian Basin of West Texas and
southeastern New Mexico, through its wholly-owned subsidiary, Southwest.
Since 1983, Southwest has grown primarily through selective acquisitions of
producing oil and gas properties, both directly and through the oil and gas
partnerships it manages. SRH also participates in the well servicing
industry through its affiliate, Sierra, and owns and manages real estate
properties through its subsidiary, Red Oak.
Results of Operations
Three Months Ended March 31, 1999 compared to Three Months Ended March 31,
1998
Revenues. Revenues for the Company decreased $472,000, or 3%, for the
three months ended March 31, 1999 as compared to the same period in 1998.
The following table summarizes production volumes, average sales prices
and period to period comparisons for the Company's oil and gas operations,
including the effect on revenues, for the periods indicated:
Three Months
Ended
March 31, PercentageRevenue
------------- IncreaseIncrease
1999 1998 (Decrease)(Decrease)
----- ----- -------------------
Production volumes:
Oil and condensate (MBbls) 356 469 (24%) $ (1,619)
Natural gas (MMcf) 1,152 1,522 (24%) (714)
Average sales prices:
Oil and condensate (per Bbl) $11.29 $14.33 (21)% $ (1,082)
Natural gas (per Mcf) 1.83 1.93 (5)% (115)
<PAGE>
Oil and gas revenues decreased $3.6 million, or 37%, for the three
months ended March 31, 1999 as compared to the same period in 1998, due to
decreases in oil and gas production and decreases in average price. Oil
and gas production decreased 24% or approximately 1,943 BOEPD for the
comparable period. In an ongoing effort to increase the Company's cash
position and reduce the number of high operating expense properties in its
oil and gas portfolio, management has sold oil and gas properties for
approximately $5.8 million since April 1, 1998. The oil and gas property
sales account for approximately 800 BOEPD or 10% decrease in production
with the remaining 14% being attributable to production being shut-in due
to the severe decline in oil and gas prices and natural decline. Decreases
in production contributed $2.3 million to decreased oil and gas revenues.
Lower oil and gas prices contributed approximately $1.2 million to
decreased oil and gas revenue.
Real estate revenues increased $3.3 million, or 67%, due primarily to
nine acquisitions completed subsequent to March 31, 1998 for a total
purchase price of approximately $39 million. Other operating revenues
decreased $153,000.
Operating Expenses. Operating expenses, before general and
administrative expense and depreciation, depletion and amortization,
decreased $671,000, or 8%, for the three months ended March 31, 1999 as
compared to the same period in 1998.
Oil and gas operating expense decreased approximately $2.6 million, or
47%, due primarily to management efforts to cut expenses through more
efficient operations, and by selectively eliminating high operating expense
properties from its oil and gas portfolio. The average operating expense
was $5.24 per Boe for the three months ended March 31, 1999, a decrease of
31% from $7.54 per Boe for the same period in 1998.
Real estate operating expense increased approximately $2.1 million, or
97%, for the three months ended March 31, 1999 as compared to the same
period in 1998, due primarily to acquisitions. Other operating expenses
decreased approximately $162,000.
General and Administrative ("G&A") Expense. Consolidated G&A expense
for SRH decreased $565,000, or 42%, for the three months ended March 31,
1999. Oil and gas G&A expense decreased approximately $691,000, or 60%, as
compared to the same period in 1998, and averaged $.85 per Boe in 1999, a
47% decrease compared to 1998, due primarily to reductions in oil and gas
technical and administrative staff in response to significant decreases in
oil and gas prices experienced in the last quarter of 1997 and throughout
1998. Real estate G&A expense increased approximately $93,000, or 35%, for
the three months ended March 31, 1999, due primarily to administrative
staff increases necessitated by Red Oak's growth during 1998.
Depreciation, Depletion and Amortization (''DD&A'') Expense. DD&A
expense for the Company decreased approximately $1.5 million, or 36%, for
the three months ended March 31, 1999. Oil and gas DD&A expense decreased
approximately $2 million, or 55%. Oil and gas depletion was $2.80 per Boe,
a decrease of 43% from the same period in 1998. The decrease in DD&A
expense on an overall basis and per Boe is due primarily to the reduction
in the carrying value of the Company's oil and gas properties because of
the impairment, of approximately $64 million which was recorded during
1998. Real estate DD&A expense increased approximately $496,000, or 94%,
attributable primarily to the impact of acquisitions.
Interest Expense. Interest expense for the Company increased $2.3
million, or 28%. Oil and gas interest expense decreased approximately
$31,000, or 1%. Real estate interest expense increased $2.4 million, or
87%, due to increased debt used to finance acquisitions throughout 1998.
Net Income. Due to the factors described above, net loss for the
Company increased approximately $2.6 million to a loss of $7.3 million for
the three months ended March 31, 1999.
<PAGE>
Liquidity and Capital Resources
Management is constantly monitoring its cash position and its ability to
meet its financial obligations as they become due, and as part of this
effort, is exploring various strategies for addressing its current and
future liquidity needs. As of March 31, 1999, SRH's consolidated cash
balance was approximately $14.7 million, of which approximately $13.6
million was available to Southwest.
SRH 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 SRH be
unable to continue as a going concern.
SRH has a highly leveraged capital structure with $21.0 million of
interest payments due in 1999 on its 10.5% Senior Notes and approximately
$6.0 million of principal and approximately $12.3 million of cash interest
payments due in 1999 on its other obligations (principally related to Red
Oak). Due to severely depressed commodity prices 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 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 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.
<PAGE>
Net Cash Provided by Operating Activities
Cash flows provided by operating activities from the Company's
operations were $850,000 and $3.8 million for the three months ended March
31, 1999 and 1998, respectively. The decrease is primarily attributable to
decreases in oil and gas production and commodity prices as well as
increased interest expense, offset by lower operating costs.
Net Cash Used in Investing Activities
Cash flows used in investing activities by the Company were $2.6 million
for the three months ended March 31, 1999 and $7.4 million for the
comparable period in 1998. Acquisitions and deposits to capital
improvement escrow accounts for real estate operations were the primary
uses of funds for 1999.
In response to the substantial decrease in oil prices during 1998, SRH
has initiated a short-term alternate business plan that delays certain
development and exploratory projects until oil and gas industry conditions
improve. Based on this plan, SRH has tentatively budgeted $8 million in
capital expenditures at Southwest for oil and gas development projects.
This budget is subject to change based on financial strategies currently
being developed, including hedging strategies, divestitures and debt
restructuring, as well as the level of oil and gas prices in the future.
Net Cash Provided by Financing Activities.
Cash provided by the Company's financing activities was approximately
$2.7 million and $1.4 million for the three months ended March 31, 1999 and
1998, respectively. Net cash provided by financing activities was mainly
used to fund real estate operations in 1999.
Other Issues
The information included in "Other Issues" in Item 7 of SHR's 1998 Form
10-K regarding Information Systems for the year 2000 is incorporated herein
by reference. As of March 31, 1999, there have been no material changes in
SRH's Year 2000 disclosure.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The information included in "Quantitative and Qualitative Disclosures
About Market Risk" in Item 7A of SRH's 1998 Form 10-K is incorporated
herein by reference. Such information includes a description of SHR's
potential exposure to market risks, including commodity price risk and
SHR's interest rate risk. As of March 31, 1999, there have been no
material changes in SRH's market risk exposure from that disclosed in the
1998 Form 10-K.
<PAGE>
PART II - OTHER INFORMATION
Item 6.
Reports on Form 8-K
None.
Exhibits
The following instruments and documents are included as Exhibits to this
Report. Exhibits incorporated by reference are so indicated by
parenthetical information.
Exhibit Number Description
-------------- -----------
27* Financial Data Schedule.
*Filed herewith.
<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 17, 1999
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 17, 1999
H. H. Wommack, III Chief Executive Officer
/s/ Bill E. Coggin
---------------------- Vice President/Chief May 17, 1999
Bill E. Coggin Financial Officer
/s/ H. Allen Corey
----------------------
H. Allen Corey Director/Secretary May 17, 1999
<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:
--------------------------------------
H.H. Wommack, III, Chairman, President,
and Chief Executive Officer
Date: May 17, 1999
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
--------- ------ -----
---------------------- Chairman/President/ May 17, 1999
H. H. Wommack, III Chief Executive Officer
---------------------- Vice President/Chief May 17, 1999
Bill E. Coggin Financial Officer
----------------------
H. Allen Corey Director/Secretary May 17, 1999
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Balance Sheet at March 31, 1999 (Unaudited) and the Statement of Operations
for the Three Months Ended March 31, 1999 (Unaudited) and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 14,696,000
<SECURITIES> 0
<RECEIVABLES> 6,584,000
<ALLOWANCES> (263,000)
<INVENTORY> 1,052,000
<CURRENT-ASSETS> 22,359,000
<PP&E> 344,449,000
<DEPRECIATION> (132,734,000)
<TOTAL-ASSETS> 256,220,000
<CURRENT-LIABILITIES> 25,837,000
<BONDS> 332,431,000
0
0
<COMMON> 116,000
<OTHER-SE> (115,290,000)
<TOTAL-LIABILITY-AND-EQUITY> 256,220,000
<SALES> 6,094,000
<TOTAL-REVENUES> 14,588,000
<CGS> 2,868,000
<TOTAL-COSTS> 7,295,000
<OTHER-EXPENSES> 3,531,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,688,000
<INCOME-PRETAX> (6,572,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,350,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,350,000)
<EPS-PRIMARY> (6.83)
<EPS-DILUTED> (6.83)
</TABLE>
