26
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 September 30, 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 (I.R.S. Employer
Identification Number) Identification Number)
407 North Big Spring, Suite 300
Midland, Texas 79701
(Address of Principal Executive Offices) (Zip Code)
(915) 686-9927
Registrants' Telephone Number, Including Area Code:
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 September 30, 1999 for
Southwest Royalties, Inc 100.
Number of shares of common stock outstanding as of September 30, 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 September 30, 1999
(unaudited) and December 31, 1998 3
Consolidated Statements of Operations for the
three and nine months ended September 30, 1999
and 1998 (unaudited) 5
Consolidated Statements of Cash Flows for the three
and nine months ended September 30, 1999
and 1998 (unaudited) 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 22
PART II - OTHER INFORMATION
Item 6. Reports on Form 8-K and Exhibits 24
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
September 30,December 31,
ASSETS 1999 1998
- --------------------------------------------------------- ------------
- -----------
(unaudited)
Current assets
Cash and cash equivalents $ 19,638 $ 13,801
Accounts receivable, net of allowance of $234 and
$342, respectively 7,567 5,248
Receivables from related parties 365 1,594
Other current assets 716 1,624
------- -------
Total current assets 28,286 22,267
------- -------
Oil and gas properties, using the full cost
method of accounting
Proved 191,817 194,096
Unproved 2,369 3,230
------- -------
194,186 197,326
Less accumulated depletion, depreciation and
amortization 125,141 121,841
------- -------
Oil and gas properties, net 69,045 75,485
------- -------
Rental property, net 131,033 132,120
------- -------
Other property and equipment, net 4,915 5,888
------- -------
Other assets
Restricted cash 4,642 5,050
Equity investment in subsidiaries - 931
Real estate investments 3,685 4,019
Deferred debt costs, net of accumulated
amortization of $3,137 and $3,136, respectively 10,117
8,725
Noncompete covenants, net of accumulated
amortization of $490 and $269, respectively 1,114 1,335
Other, net 1,555 1,730
------- -------
Total other assets 21,113 21,790
------- -------
Total assets $254,392 $ 257,550
======= =======
(continued)
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(in thousands, except per share data)
September 30,December 31,
1999 1998
--------- -----------
(unaudited)
LIABILITIES, MINORITY INTEREST, REDEEMABLE
COMMON STOCK AND STOCKHOLDERS' DEFICIT
- ---------------------------------------------------------
Current liabilities
Current maturities of long-term debt $ 4,777 $ 12,716
Accounts payable 5,934 7,116
Accounts payable to related parties - 173
Accrued expenses 16,660 9,737
------- -------
Total current liabilities 27,371 29,742
------- -------
Long-term debt 339,887 322,368
------- -------
Other long-term liabilities 1,928 1,797
------- -------
Minority interest 9 206
------- -------
Redeemable common stock of subsidiary 3,090 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 September 30, 1999
and December 31, 1998 116 116
Additional paid-in capital 2,196 2,196
Accumulated deficit (123,749) (105,375)
Note receivable from an officer and
stockholder (1,656) (1,679)
Less: treasury stock - at cost; 214,215 shares at
September 30, 1999 and December 31, 1998 (3,090) (3,090)
------- -------
Total stockholders' deficit (126,183) (107,832)
------- -------
Total liabilities, minority interest, redeemable
common stock and stockholders' deficit $254,392 $ 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)
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
------ ------ ------ ------
Operating revenues
Oil and gas $ 8,115 $ 7,357 $21,169 $26,188
Real estate 7,985 6,965 23,936 17,759
Other 599 366 1,107 1,155
------ ------ ------ ------
Total operating revenues 16,699 14,688 46,212 45,102
------ ------ ------ ------
Operating expenses
Oil and gas production 2,871 4,234 8,502 14,896
Real estate 4,670 3,534 13,312 8,786
General and administrative, net of
related party management and
administrative fees of $934, $905,
$2,625 and $2,752, respectively 669 1,106 2,129
3,708
Depreciation, depletion and
amortization 1,837 1,707 7,123 11,195
Impairment of oil and gas
properties - - - 29,000
Other 120 325 579 1,052
------ ------ ------ ------
Total operating expenses 10,167 10,906 31,645 68,637
------ ------ ------ ------
Operating income (loss) 6,532 3,782 14,567 (23,535)
------ ------ ------ ------
Other income (expense)
Interest and dividend income 269 346 681 1,143
Interest expense (10,277) (9,584) (31,340) (26,502)
Other 233 26 247 306
------ ------ ------ ------
(9,775) (9,212) (30,412) (25,053)
------ ------ ------ ------
(continued)
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (continued)
(in thousands, except per share data)
(unaudited)
Three months ended Nine months ended
September 30, September 30,
----------------- -----------------
1999 1998 1999 1998
------ ----- ----- -----
Loss before income taxes, minority
interest, equity loss and
extraordinary item $ (3,243) $ (5,430) $(15,845) $(48,588)
Income tax benefit - - - 2,348
--------- --------- --------- ---------
Loss before minority interest, equity
loss and extraordinary item (3,243) (5,430) (15,845) (46,240)
Minority interest in subsidiaries,
net of tax (67) 290 - 489
Equity in loss of subsidiary,
net of tax - (1,028) (931) (2,109)
--------- --------- --------- ---------
Loss before extraordinary item (3,310) (6,168) (16,776) (47,860)
Extraordinary item, net of tax (5) - (1,598)
- -
--------- --------- --------- ---------
Net loss $ (3,315) $ (6,168) $(18,374) $(47,860)
========= ========= ========= =========
Loss per common share before
extraordinary item $ (3.08) $ (5.74) $ (15.60) $ (44.49)
Extraordinary loss from early
extinguishment of debt (.01) - (1.49) -
--------- --------- --------- ---------
Loss per common share $ (3.09) $ (5.74) $ (17.09) $ (44.49)
========= ========= ========= =========
Weighted average shares outstanding 1,075,868 1,075,868 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)
Three months ended Nine months ended
September 30, September 30,
----------------- -----------------
1999 1998 1999 1998
------ ----- ----- -----
Cash flows from operating activities
Net loss $(3,315) $(6,168) $(18,374) $(47,860)
Adjustments to reconcile net loss
to net cash provided by operating
activities:
Depreciation, depletion and
amortization 1,837 1,707 7,123 11,195
Impairment of oil and gas
properties - - - 29,000
Noncash interest expense 1,708 800 4,218 2,025
Extraordinary loss from early
extinguishment of debt 5 - 1,598 -
Gain on sale of assets (194) (23) (196) (284)
Equity loss of subsidiary
and partnerships - 1,028 187 2,109
Impairment of equity investment - - 744
- -
Other noncash items 77 97 839 174
Bad debt expense 127 32 226 187
Deferred income taxes - - - (2,348)
Minority interest in income (loss)
of subsidiary 67 (290) - (489)
Changes in operating assets
and liabilities:
Accounts receivable (498) 909 (1,432) 3,279
Other current assets 197 46 (123) (207)
Accounts payable and accrued
expenses 1,374 1,177 703 534
Accrued interest payable 5,386 5,430 5,133 5,408
------ ------ ------ ------
Net cash provided by operating
activities 6,771 4,745 646 2,723
------ ------ ------ ------
Cash flows from investing activities
Proceeds from sale of oil and
gas properties 328 738 5,533 3,796
Purchase of oil and gas properties (1,670) (2,323) (2,454)
(8,889)
Purchase of other property and
equipment and rental property (1,940) (3,211) (4,413)
(29,662)
Purchase of other assets (106) (1,095) (563) (3,242)
Purchase of noncompete covenants - - -
(1,602)
Proceeds from sale of real estate
investments 17 - 631 764
Proceeds from sale of other assets 24 77 366
1,137
Proceeds from sale of other property
equipment and rental property 2,268 27 3,336
51
Purchase of real estate investments - (328) (30)
(328)
(continued)
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(in thousands)
(unaudited)
Three months ended Nine months ended
September 30, September 30,
----------------- -----------------
1999 1998 1999 1998
------ ----- ----- -----
Change in restricted cash $ (500) $ 506 $ 408 $ 1,562
Other 7 7 23 15
------ ------ ------ ------
Net cash provided by (used in)
investing activities (1,572) (5,602) 2,837 (36,398)
------ ------ ------ ------
Cash flows from financing activities
Proceeds from borrowings 2,576 2,330 105,816 29,295
Payments on debt (2,315) (869) (98,393) (1,706)
Increase (decrease) in other
long-term liabilities 4 21 (28) (14)
Deferred debt cost (5) (61) (4,078) (841)
Dividends paid to minority interest
owners (30) (28) (91) (89)
Purchase of minority interest in
subsidiary - - - (305)
Prepayment penalty on early
extinguishment of debt - - (875) -
Other (1) - 3 (3)
------ ------ ------ ------
Net cash provided by financing
activities 229 1,393 2,354 26,337
------ ------ ------ ------
Net increase (decrease) in
unrestricted cash and cash
equivalents 5,428 536 5,837 (7,338)
Unrestricted cash and cash equivalents -
beginning of period 14,210 19,491 13,801 27,365
------ ------ ------ ------
Unrestricted cash and cash equivalents -
end of period $19,638 $20,027 $19,638 $20,027
====== ====== ====== ======
Supplemental disclosures of cash flow
information
Interest paid $ 3,185 $ 3,354 $21,989 $19,069
The accompanying notes are an 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. Southwest is 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 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 September 30, 1999 and 1998, the Company owned
approximately 81% of Red Oak, 29% and 39% of Sierra, as well as 99% of
Midland Southwest Software ("MSS"), 100% and 98% of Threading Products
International, LLC ("TPI"), both of which are subsidiaries of Southwest.
Effective November 11, 1999, TPI was liquidated. 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.
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies - continued
Restricted cash accounts, principally for Red Oak and its subsidiaries,
have been established for the following purposes (in thousands):
September 30,December 31,
1999 1998
---- ----
Certificate of Deposits $ 110 105
Tenant security deposits 503 412
Interest reserves - 707
Capital expenditures account 259 1,229
Tax and insurance reserve 2,766 1,009
Tenant bankruptcy reserve - 767
Lockbox 378 217
Customer service reserve 6 10
Escrow fund 620 594
----- -----
$ 4,642 5,050
===== =====
Interim Financial Statements
In the opinion of management, the unaudited consolidated financial
statements of the Company as of September 30, 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.
Reclassifications
Certain reclassifications have been made to the 1998 amounts to conform
to the 1999 presentation.
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 by April 15, 2000 on its 10.5% Senior Notes and
approximately $4.8 million of principal and approximately $13.0 million of
cash interest payments due by September 30, 2000 on its other obligations
(principally related to Red Oak). Due to severely depressed commodity
prices experienced by the oil and gas industry during the last quarter of
1997, throughout 1998 and continuing through the first quarter of 1999 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.
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Liquidity - continued
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.
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 September 30, 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.
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 30% of total current 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 could be extended to September 30, 1999, at the option of the
counter-party. The contract period was extended through September 30, 1999.
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Commodity Hedging and Derivative Financial Instruments - continued
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, approximately 30% of total current oil
production, 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. Subsequent to September 30, 1999, at the option of the counter-party
the contract has been extended to January 31, 2000.
On July 28, 1999, Southwest entered into a commodity swap agreement to
hedge a portion of its natural gas sales. The agreement is for a notional
amount of 2,250 MMBtu of gas a day, approximately 25% of total current gas
production, with a strike price of $2.78, based on Henry Hub - NYMEX. The
contract is for the period September 1, 1999 through November 30, 1999, but
can be extended to February 28, 2000, at the option of the counter-party.
On July 29, 1999, Southwest entered into a commodity swap agreement to
hedge a portion of its natural gas sales. The agreement is for a notional
amount of 2,250 MMBtu of gas a day, approximately 25% of total current gas
production, with a strike price of $2.64, based on Henry Hub - NYMEX. The
contract is for the period September 1, 1999 through November 30, 1999.
5. Long-term Debt
Long-term debt consists of the following (in thousands):
September 30,December 31,
1999 1998
----- -----
10.5% Senior Notes, interest payable semi-annually due
October 15, 2004, net of $1,909 and $2,116 discount,
respectively $198,091 $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 line of credit, variable interest, due February
1999. Collateralized by oil and gas properties 1
40
Capital lease obligations 274 418
Variable Rate Notes Payables:
Notes payable due July 2001. Variable interest of
7.4% and 7.1% at September 30, 1999 and December
31, 1998, respectively, due and payable monthly with
additional 1% payable in cash or additional notes.
Net of $1,111 and $1,611 discount 14,379 13,891
Note payable due December 2001. Variable interest of
7.4% and 7.1% at September 30, 1999 and December
31, 1998, respectively, due and payable monthly
with additional 1.5% payable in cash or additional
notes. Net of $2,889 and $3,889 discount 23,033 21,806
Note payable due July 2002. Variable interest of 9.0%
at September 30, 1999, due and payable monthly.
Net of $4,333 discount 98,042 -
Other 10,844 28,772
------- -------
344,664 335,084
Less current maturities 4,777 12,716
------- -------
$339,887 $322,368
======= =======
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Long-term Debt - continued
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.
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.
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Long-term Debt - continued
Revolving Line of Credit
Southwest Credit Facility. The Southwest Credit Facility was amended to
provide for a $75 million revolving line of credit due upon demand, subject
to semi-annual borrowing base redetermination. The initial borrowing base
of $40 million is subject to a $15 million available sub-limit for oil and
gas acquisitions, with the balance of the borrowing base available for
general corporate purposes. Borrowings accrue interest at LIBOR plus a
margin ranging from 1.75% to 2.50% and the facility incurs a quarterly
commitment fee of three-eighths of one percent (3/8%) per annum on the
daily average of the unadvanced amount of the borrowing base. The
Southwest Credit Facility is secured by substantially all of Southwest's
proved oil and gas properties. The facility contains a number of covenants
that limit loans and advances, investments, and dividends, as well as
setting a minimum interest coverage ratio for SRH. During the second
quarter, in response to the sustained low oil price environment, the lender
issued lower pricing parameters for the computation of the borrowing base
for all of its oil and gas customers. Using the new price parameters,
Southwest has no current availability under its line of credit. The lender
schedules quarterly reviews of its pricing policy and should oil prices
strengthen, the Company can request a redetermination at that time.
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 for capital improvements to
the rental property purchased and $2.0 million has not been utilized as of
September 30, 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 rental property. The $9.7 million note is for capital
improvements to the rental property purchased and $8.5 million has not been
utilized as of September 30, 1999. The notes are collateralized by the
property purchased.
In June 1999, MRO Southwest, Inc., a wholly owned subsidiary of Red Oak
negotiated two notes payable in the amount of $97.5 million, net of a $4.9
million discount, and $8.0 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 basis points per annum. Approximately $93.6 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 $6.9 million has not been utilized as of September 30,
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.
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Long-term Debt - continued
Extinguishment of Debt
In June 1999, the Company 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 $1,598
million 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.
Aggregate maturities of all long-term debt as of September 30, 1999,
including capital leases, are as follows (in thousands):
For the twelve
months ended
--------------
September 30, 2000 $ 4,777
September 30, 2001 15,411
September 30, 2002 123,488
September 30, 2003 417
September 30, 2004 80
Thereafter 200,491
-------
$344,664
=======
6. 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.
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
----- ----- ----- -----
(in thousands) (in thousands)
(unaudited) (unaudited)
Operating profit (loss)
Oil and gas $ 4,752 $ 1,685 $ 8,425 $(29,289)
Real estate 1,752 2,094 6,102 5,774
Other and eliminations 28 3 40 (20)
------- ------ ------ ------
$ 6,532 $ 3,782 $14,567 $(23,535)
======= ====== ====== ======
Interest Expense
Oil and gas $ 5,629 $ 5,719 $16,757 $16,846
Real Estate 4,663 3,882 14,702 9,628
Other and eliminations (15) (17) (119) 28
------- ------ ------ ------
$ 10,277 $ 9,584 $31,340 $26,502
======= ====== ====== ======
<PAGE>
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Lines of Business - continued
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
----- ----- ----- -----
(in thousands) (in thousands)
(unaudited) (unaudited)
Depreciation, depletion and
amortization
Oil and gas $ 697 $ 852 $ 3,676 $ 9,021
Real Estate 1,127 808 3,349 2,034
Other and eliminations 13 47 98 140
------- ------ ------ ------
$ 1,837 $ 1,707 $ 7,123 $11,195
======= ====== ====== ======
Capital expenditures
Oil and gas $ 1,609 $ 2,534 $ 2,392 $ 9,489
Real Estate 1,614 4,174 3,210 30,042
Other and eliminations - 106 - 300
------- ------ ------ ------
$ 3,223 $ 6,814 $ 5,602 $39,831
======= ====== ====== ======
September 30, December 31,
1999 1998
---------- ----------
Identifiable assets
Oil and gas $ 108,550 $ 111,876
Real estate 148,878 148,340
Other and eliminations (3,036) (2,666)
------- -------
$ 254,392 $ 257,550
======= =======
<PAGE>
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 and nine months ended September 30, 1999 compared to three
months and nine months September 30, 1998
The following table summarizes production volumes, average sales prices
(which include the results of hedging) 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 Nine months ended
September 30, September 30,
------------------- -------------------
1999 1998 1999 1998
----- ----- ----- -----
(in thousands) (in thousands)
(unaudited) (unaudited)
Production volumes:
Oil and condensate (MBbls) 325 412 1,013
1,341
Natural gas (MMcf) 1,056 1,325 3,195 4,336
Average sales prices:
Oil and condensate (per Bbl) $ 17.42 $ 12.04 $ 14.47
$ 13.16
Natural gas (per Mcf) $ 2.27 $ 1.66 $ 2.01 $ 1.85
Revenues. Revenues for the Company increased 14% to $16.7 million and 2%
to $46.2 million for the three and nine months ended September 30, 1999,
respectively, as compared to $14.7 million and $45.1 million for the same
periods in 1998.
Oil and gas revenue increased 10% to $8.1 million for the three months
ended September 30, 1999 and decreased 19% to $21.2 million for the nine
months ended September 30, 1999, as compared to $7.4 million and $26.2
million for the same periods in 1998. The increase in revenue for the
three months ended September 30, 1999 is due primarily to increases in oil
and gas prices which resulted in increased revenues of approximately $3.0
million. The increase in revenue due to the increase in oil and gas prices
was offset by declines in oil and gas production of approximately $2.2
million and a decline of other oil and gas partnership distributions of
approximately $100,000. The decrease in revenue for the nine months ended
September 30,1999 is due primarily to decreases in oil and gas production
which resulted in approximately $7.0 million in decreased revenues offset
by increased revenues of approximately $2.4 million from oil and gas price
increases experienced during the period. The remaining balance of the
decrease of approximately $400,000 was due to decreased oil and gas
partnership distributions.
<PAGE>
Oil and gas production decreased 21% or approximately 1,437 BOEPD, for
three months ended September 30, 1999 and 25%, or approximately 1,896 BOEPD
for the nine months ended September 30, 1999, as compared to the same
periods in 1998. 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 $7.4 million since October 1, 1998. The production decline
resulting from oil and gas property sales was approximately 836 BOEPD and
885 BOEPD, or 12% of the total production decline for the three month and
nine month periods, respectively, ended September 30, 1999. The remainder
of the production decline of approximately 9% and 13% for the three and
nine months periods ended September 30, 1999, respectively are mostly
results of natural decline.
Real estate revenues increased 15% to $8.0 million for the three months
ended September 30, 1999 and 35% to $23.9 million for the nine months ended
September 30, 1999, as compared to $7.0 million and $17.8 million for the
same periods in 1998. The increase in revenues is due primarily to several
acquisitions which were made late in the second quarter of 1998 and
subsequent.
Operating Expenses. Operating expenses, before general and
administrative expense, impairment of oil and gas properties and
depreciation, depletion and amortization, decreased 5% to $7.7 million and
9% to $22.4 million for the three and nine months ended September 30, 1999,
respectively, as compared to $8.1 million and $24.7 million for the same
periods in 1998.
Oil and gas operating expense decreased approximately 32% to $2.9
million for the three months ended September 30, 1999 and approximately 43%
to $8.5 million for the nine months ended September 30, 1999, due primarily
to management's 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 decreased 14% to
$5.73 per BOE for the three months ended September 30, 1999 and 24% to
$5.50 per BOE for the nine months ended September 30, 1999 from $6.69 and
$7.22 for the same periods in 1998.
Real estate operating expense increased 32% to $4.7 million for the
three months ended September 30, 1999 and 52% to $13.3 million for the nine
months ended September 30, 1999, as compared to $3.5 million and $8.8
million for the same periods in 1998. These increases were due primarily
to acquisitions, which were made late in the second quarter of 1998 and
subsequent.
General and Administrative ("G&A") Expense. G&A expense for the Company
decreased 40% to $669,000 for the three months ended September 30, 1999 and
decreased 43% to $2.1 million for the nine months ended September 30, 1999,
as compared to $1.1 million and $3.7 million for the same periods in 1998.
Oil and gas G&A expense per BOE decreased 34% to $.65 for the three months
ended September 30, 1999 from $.99 per BOE for the same period in 1998.
For the nine months ended September 30, 1999, G&A expense per BOE decreased
43% to $.73 from $1.29 per BOE for the same period in 1998. Real estate
G&A expense decreased 23% to $406,000 and 2% to $1.1 million for the three
and nine months ended September 30, 1999, respectively from $529,000 and
$1.2 million for the comparable periods of 1998. The decrease in real
estate G&A for the three months ended September 30, 1999 relates primarily
to charges incurred during the three months ended September 30, 1998 for
travel and other professional services associated with a non consummated
refinance.
Depreciation, Depletion and Amortization ("DD&A") Expense. DD&A expense
for the Company increased 8% to $1.8 million and decreased 36% to $7.1
million for the three and nine months ended September 30, 1999,
respectively, as compared to $1.7 million and $11.2 million for the same
periods in 1998. Oil and gas depletion expense on a BOE basis, increased
2% to $1.16 per BOE for the three months ended September 30, 1999 from
$1.14 per BOE for the same period in 1998. For the nine months ended
September 30, 1999, depletion expense per BOE decreased 48% to $2.14 from
$4.19 per BOE for 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 $64.0 million, which was recorded during the
third and forth quarters of 1998. Real estate DD&A expense increased 39%
to $1.1 million and 65% to $3.3 million for the three and nine months ended
September 30, 1999, respectively from $808,000 and $2.0 million for the
three and nine months ended September 30, 1998, respectively, due to the
impact of acquisitions.
<PAGE>
Interest Expense. Interest expense for the Company increased 7% to $10.3
million and 18% to $31.3 million for the three and nine months ended
September 30, 1999, respectively, as compared to $9.6 million and $26.5
million for the same periods in 1998. Oil and gas interest expense
remained relatively constant at $5.6 million and $16.8 million for the
three and nine months ended September 30, 1999. Real estate interest
expense increased 20% to $4.7 million for the three months ended September
30, 1999 and 53% to $14.7 million for the nine months ended September 30,
1999, as compared to $3.9 million and $9.6 million for the same periods in
1998. The increases were due to additional debt used to finance
acquisitions.
Equity in Loss of Subsidiary. Equity in Loss of Subsidiary resulted in
a charge of $931,000 of which, $744,000 was a non-cash charge for the
impairment of the equity investment in Sierra for the nine months ended
September 30, 1999. This amount relates to the Company's 29% investment in
Sierra.
Net Income (Loss). Due to the factors described above, net loss for the
Company decreased 46% and 62% to $3.3 million and $18.4 million for the
three and nine months ended September 30, 1999, respectively, as compared
to net losses of $6.2 million and $47.9 million for the same periods in
1998. Oil and gas net losses decreased 87% to $538,000 for the three
months ended September 30, 1999 and approximately 81% to $8.0 million for
the nine months ended September 30, 1999, as compared to $4.0 million and
$43.2 million for the same periods in 1998. Real estate net losses
increased 48% to $2.5 million for the three months ended September 30, 1999
and 177% to $9.6 million for the nine months ended September 30, 1999, as
compared to $1.7 million and $3.5 million for the same periods in 1998.
Liquidity and Capital Resources
Management is constantly monitoring its cash position and its ability to
meet 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 September 30, 1999, SRH's consolidated cash balance
was approximately $19.6 million, of which approximately $18.6 million was
available to Southwest. Southwest has a $10.5 million interest payment due
October 15, 1999, which after the payment is made, will leave approximately
$8.6 million for working capital. Southwest currently has no availability
under it's revolving line of credit.
The Company's 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 by April 15, 2000 on its 10.5% Senior Notes and
approximately $4.8 million of principal and approximately $13.0 million of
cash interest payments due by September 30, 2000 on its other obligations
(principally related to Red Oak). Due to severely depressed commodity
prices experienced by the oil and gas industry during the last quarter of
1997, throughout 1998 and continuing through the first quarter of 1999 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 currently in the process of renegotiating the
terms of the Company'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.
<PAGE>
There can be no assurance that the Company's debt restructuring efforts
will be successful or that the note holders 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 sales 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.
Net Cash Provided by Operating Activities
Net cash provided by operating activities was $6.8 million and $646,000
for the three and nine months ended September 30, 1999, respectively, as
compared to net cash provided by operating activities of $4.7 million and
$2.7 million for the same periods in 1998.
Net Cash Used in Investing Activities
Net cash provided by (used in) investing activities by the Company were
$(1.6) million and $2.8 million for the three and nine months ended
September 30, 1999, as compared to $(5.6) million and $(36.4) million for
the comparable periods in 1998. Capital expenditures for oil and gas
development activities and commercial real estate projects were the primary
uses of funds for both periods. The primary source of funds from investing
activities were from sales of oil and gas properties and commercial real
estate.
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 $3.4 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.
Net cash provided by the Company's financing activities was $229,000 and
$2.4 million for the three and nine months ended September 30, 1999 as
compared to $1.4 million and $26.3 million for the comparable periods in
1998. Net cash provided by financing activities was primarily used to fund
real estate acquisitions in 1998. Net cash provided by financing
activities, was from debt refinancing and primarily used to fund real
estate operations in 1999.
<PAGE>
Other Issues
Information Systems for the Year 2000. SRH has identified and assessed
its exposure to the potential Year 2000 software and imbedded chip
processing and date sensitivity issue. Through Red Oak and SRH's data
processing subsidiary, Midland Southwest Software, Inc., SRH proactively
initiated an internal plan to identify applicable hardware and software,
assess impact and effect, estimate costs, construct and implement
corrective actions, and prepare contingency plans.
Identification & Assessment. SRH currently believes it identified the
internal and external software and hardware that had the potential for date
sensitivity problems. Five critical systems and/or functions were
identified and addressed: (1) the proprietary software of Southwest (OGAS)
that is used for oil & gas property management and financial accounting
functions, (2) the proprietary software of Red Oak (Yardi) that is used for
real estate property management and financial accounting functions (3) the
DEC VAX/VMS hardware and operating system, (4) various third-party
application software including lease economic analysis, fixed asset
management, geological applications, and payroll/human resource programs,
and (5) External Agents.
The proprietary software of SRH has met compliance requirements. Since
this is an internally generated software package, SRH has incurred
approximately $25,000 in man-hours. Modifications were made by internal
staff and did not represent additional costs to SRH. SRH has not made
contingency plans at this time since the conversion is ahead of schedule
and being handled by Company controlled internal programmers. Given the
complexity of the systems that were modified, it is anticipated that some
problems may arise, but having met the early completion date, SRH feels
that adequate time remains available to overcome unforeseen delays.
DEC has released a fully compliant version of its operating system that
is used by Southwest on the DEC VAX system. It was installed, SRH believes
that this solved any potential problems on the system.
SRH has identified various third-party software that may have date
sensitivity problems and is continuing to work with the vendors to secure
solutions as well as prepare contingency plans. After review and
evaluation of the vendor plans and status, SRH believes that the problems
will be resolved prior to the year 2000 or the alternate contingency plan
will sufficiently and adequately remediate the problem so that there is no
material disruption to business functions.
The External Agents of SRH include suppliers, customers, owners,
vendors, banks, product purchasers including pipelines, and other oil and
gas property operators. SRH is in the process of identifying and
communicating with each critical External Agent about its plan and progress
thereof in addressing the Year 2000 issue. This process is on schedule and
SRH, at this time, believes that there should be no material interference
or disruption associated with any of the critical External Agent's
functions necessary to SRH's business. SRH estimates completion of this
audit by year-end 1999 and believes that alternate plans can be devised to
circumvent any material problems arising from critical External Agent
noncompliance.
Cost. To date, SRH has incurred only minimal internal man-hour costs
for identification, planning, and maintenance. SRH believes that the
necessary additional costs will also be minimal and most will fall under
normal and general maintenance procedures and updates. An accurate cost
cannot be determined at this time, but it is expected that the total cost
to remediate all systems to be less than $60,000.
<PAGE>
Risks/Contingency. The failure to correct critical systems of SRH, or
the failure of a material business partner or External Agent to resolve
critical Year 2000 issues could have a serious adverse impact on the
ability of SRH to continue operations and meet obligations. Based on SRH's
evaluation and assessment to date, it is believed that any interruption in
operation will be minor and short-lived and pose no material monetary loss,
safety, or environmental risk to SRH. However, due to the external nature
of the potential problems, it is impossible to accurately identify the
risks, quantify potential impacts or establish a final contingency plan.
SRH believes that its assessment and contingency planning will be complete
no later than year-end 1999.
Worst Case Scenario. The Securities and Exchange Commission requires
public companies to forecast the most reasonably likely worst case Year
2000 scenario, assuming that SRH's Year 2000 plan is not effective.
Analysis of the most reasonably likely worst case Year 2000 scenarios SRH
may face leads to contemplation of the following possibilities which,
though considered highly unlikely, must be included in any consideration of
worst cases: widespread failure of electrical, gas, and similar supplies by
utilities serving SRH; widespread disruption of the services of
communications common carriers; similar disruption to means and modes of
transportation for SRH and its employees, contractors, suppliers, and
customers; significant disruption to SRH's ability to gain access to, and
continue working in, office buildings and other facilities; and the
failure, of third-parties systems, the effects of which would have a
cumulative material adverse impact on SRH's critical systems. SRH could
experience an inability by customers, traders, and others to pay, on a
timely basis or at all, obligations owed to SRH. Under these
circumstances, the adverse effect on SRH, and the diminution of Company
revenues, could be material, although not quantifiable at this time.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The following quantitative and qualitative information is provided about
financial instruments to which the Company is a party as of September 30,
1999, and from which the Company may incur future earnings gains or losses
from changes in market interest rates or commodity prices.
Quantitative Disclosures
Interest rate sensitivity. The following table provides information
about the Company's debt obligations which are sensitive to changes in
interest rates. The table presents cash maturities by expected maturity
dates together with the weighted average interest rates expected to be paid
on the debt, given current contractual terms and market conditions. For
fixed rate debt, the weighted average interest rate represents the
contractual fixed rates that the Company is obligated to periodically pay
on the debt; for variable rate debt, the average interest rate represents
the average rates being paid on the debt at September 30, 1999.
As of September 30, 1999
2000 2001 2002 2003 2004ThereafterTotalFair
Value
---- ---- ---- ---- --------------------------
- ---
Total Debt
maturities $4,777 $15,411 $123,488 $ 417 $ 80$200,491$
344,664 $244,573
Fixed rate debt $3,202 $ 377 $ 29 $ 19 $ 16 $198,981 $
202,624 $ 102,533
Weighted average
interest rate 10.49% 10.49% 10.49% 10.49% 10.49%
10.50%
Variable rate debt $1,575 $15,034 $123,459 $ 398 $ 64 $ 1,510
142,040 142,040
Average interest rate 8.92% 8.97% 9.04% 9.00% 9.00% 9.00%
Commodity price sensitivity. See Note 4 of Notes to Consolidated
Financial Statements included in "Item 1. Consolidated Financial
Statements" for a description of the accounting procedures followed by SRH
relative to hedge derivative financial instruments and for specific
information regarding the terms of the Company's derivative financial
instrument which is sensitive to changes in natural gas and crude oil
commodity prices.
<PAGE>
Qualitative Disclosures
Non-derivative financial instruments. The Company is a borrower under
fixed rate and variable rate debt instruments that give rise to interest
rate risk. The Company's objective in borrowing under fixed or variable
rate debt is to satisfy capital requirements while minimizing the Company's
costs of capital. To realize its objectives, the Company borrows under
fixed and variable rate debt instruments, based on the availability of
capital and market conditions. See Note 5 of Notes to Consolidated
Financial Statement included in "Item 1. Consolidated Financial
Statements" for a discussion relative to the Company's debt instruments.
Derivative financial instruments. Revenues from the Company's
operations are highly dependent on the price of oil and gas. The markets
for oil and natural gas are volatile and prices for oil and gas are subject
to wide fluctuations in response to relatively minor changes in the supply
of and demand for oil and gas and a variety of additional factors that are
beyond SRH's control. These factors include the level of consumer demand,
weather conditions, domestic and foreign governmental regulations, market
uncertainty, the price and availability of alternative fuels, political
conditions in the Middle East, foreign imports and overall economic
conditions. It is impossible for SRH to predict future oil and gas prices
with any certainty. In order to reduce the Company's exposure to oil and
gas price risks, from time to time the Company enters into commodity price
derivative contracts to hedge commodity price risks. See Note 4 of
Consolidated Financial Statements included in "Item 1. Consolidated
Financial Statements."
As of September 30, 1999, the Company's primary risk exposures
associated with financial instruments to which it is a party include
natural gas and crude oil price volatility and interest rate volatility.
The Company's primary risk exposures associated with financial instruments
have not changed significantly since September 30, 1999.
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. REPORTS ON FORM 8K AND EXHIBITS
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,
Chief Executive Officer, and Director
Date: November 19, 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
---------------------------
H. H. Wommack, III Chairman/President/
Chief Executive Officer November 19, 1999
/s/ Bill E. Coggin
---------------------------
Bill E. Coggin Vice President/Chief
Financial Officer November 19, 1999
/s/ H. Allen Corey
---------------------------
H. Allen Corey Director/Secretary November 19, 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: /s/ H. H. Wommack, III
---------------------------------------
H.H. Wommack, III, Chairman, President,
Chief Executive Officer, and Director
Date: November 19, 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
---------------------------
H. H. Wommack, III Chairman/President/
Chief Executive Officer November 19, 1999
/s/ Bill E. Coggin
---------------------------
Bill E. Coggin Vice President/Chief
Financial Officer November 19, 1999
/s/ H. Allen Corey
---------------------------
H. Allen Corey Director/Secretary November 19, 1999
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Balance Sheet at September 30, 1999 (Unaudited) and the Statement of
Operations for the Nine Months Ended September 30, 1999 (Unaudited) and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 19,638,000
<SECURITIES> 0
<RECEIVABLES> 7,932,000
<ALLOWANCES> 234,000
<INVENTORY> 243,102
<CURRENT-ASSETS> 28,286,000
<PP&E> 340,845,000
<DEPRECIATION> 135,852,000
<TOTAL-ASSETS> 254,392,000
<CURRENT-LIABILITIES> 27,371,000
<BONDS> 339,887,000
11,380,000
0
<COMMON> 116,000
<OTHER-SE> (126,299,000)
<TOTAL-LIABILITY-AND-EQUITY> 254,392,000
<SALES> 21,169,000
<TOTAL-REVENUES> 46,212,000
<CGS> 8,502,000
<TOTAL-COSTS> 22,393,000
<OTHER-EXPENSES> 9,252,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,340,000
<INCOME-PRETAX> (15,845,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (15,845,000)
<DISCONTINUED> 0
<EXTRAORDINARY> (1,598,000)
<CHANGES> 0
<NET-INCOME> (18,374,000)
<EPS-BASIC> (17.09)
<EPS-DILUTED> (17.09)
</TABLE>
