27
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, 2000
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, 2000
for Southwest Royalties, Inc 100
Number of shares of common stock outstanding as of March 31, 2000
for Southwest Royalties Holdings, Inc. 1,075,868
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, 2000
(unaudited)
and December 31, 1999 3
Consolidated Statements of Operations for the three months
ended March 31, 2000 and 1999 (unaudited) 5
Consolidated Statements of Cash Flows for the three months
ended March 31, 2000 and 1999 (unaudited) 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition
and Results of Operations 19
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 24
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
25
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,
2000 1999
-------------------
(unaudited)
ASSETS
- ---------------------------------------------------
Current assets
Cash and cash equivalents $ 5,877 $16,983
Restricted cash 13,869 10,003
Accounts receivable, net of allowance
of $440 and $440, respectively 8,157 7,134
Receivables from related parties 640 836
Other current assets 1,079 1,179
------- -------
Total current assets 29,622 36,135
------- -------
Oil and gas properties, using the full cost
method of accounting
Proved 194,690 193,319
Unproved 1,521 2,059
------- -------
196,211 195,378
Less accumulated depletion, depreciation
and amortization 128,358 126,742
------- -------
Oil and gas properties, net 67,853 68,636
------- -------
Rental property, net 127,620 128,685
------- -------
Rental property - construction in progress 5,042
3,984
------- -------
Other property and equipment, net 4,766 4,841
------- -------
Other assets
Real estate investments 3,234 3,644
Deferred debt costs, net of accumulated
amortization of $8,341 and $5,681,
respectively 11,161 13,816
Noncompete covenants, net of accumulated ,
amortization of $637 and 563, respectively 967
1,041
Other, net 1,345 1,385
------- -------
Total other assets 16,707 19,886
------- -------
Total assets $251,610 $262,167
======= =======
(continued)
The accompanying notes are an integral part of these
consolidated financial statements
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(in thousands, except share data)
March 31,December 31,
2000 1999
-------------------
(unaudited)
LIABILITIES, MINORITY INTEREST, REDEEMABLE
COMMON STOCK AND STOCKHOLDERS' DEFICIT
- ---------------------------------------------------------
Current liabilities
Current maturities of long-term debt $55,274 $40,277
Accounts payable 5,035 6,011
Accounts payable to related parties 829 867
Accrued expenses 10,030 10,670
------- -------
Total current liabilities 71,168 57,825
------- -------
Long-term debt 271,524 306,806
------- -------
Other long-term liabilities 1,196 1,220
------- -------
Minority interest 6 8
------- -------
Redeemable common stock of subsidiary 839 1,228
------- -------
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, 2000
and December 31, 1999 116 116
Additional paid-in capital 2,196 2,196
Accumulated deficit (98,995) (110,784)
Note receivable from an officer and stockholder (1,640)
(1,648)
Less: treasury stock - at cost; 214,215 shares
at March 31, 2000 and December 31, 1999 (3,090)
(3,090)
------- -------
Total stockholders' deficit (101,413) (113,210)
------- -------
Total liabilities, minority interest, redeemable
common stock and stockholders' deficit $251,610 $262,167
======= =======
The accompanying notes are an integral part of these
consolidated financial statements
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
For the three months ended March 31,
- ------------------------------------
2000 1999
----- -----
Operating revenues
Oil and gas $ 11,319 $ 6,094
Real estate 8,014 8,209
Other 96 285
--------- ---------
Total operating revenues 19,429 14,588
--------- ---------
Operating expenses
Oil and gas production 3,418 2,868
Real estate 4,574 4,214
General and administrative, net of related
party management and administrative fees of
$848 and $870, respectively 705 787
Depreciation, depletion and amortization 2,910
2,744
Other 330 213
--------- ---------
Total operating expenses 11,937 10,826
--------- ---------
Operating income 7,492 3,762
--------- ---------
Other income (expense)
Interest and dividend income 249 154
Interest expense (10,570) (10,688)
Other 260 200
--------- ---------
(10,061) (10,334)
--------- ---------
Loss before income taxes, minority interest,
equity loss and extraordinary item (2,569) (6,572)
Income tax benefit (provision) - -
--------- ---------
Loss before minority interest, equity loss
and extraordinary item (2,569) (6,572)
Minority interest in subsidiaries, net of tax 362
154
Equity loss in subsidiary and partnerships,
net of tax - (188)
Impairment of equity investment, net of tax -
(744)
--------- ---------
Loss before extraordinary item (2,207) (7,350)
Extraordinary gain from early extinguishment
of debt 13,996 -
--------- ---------
Net income (loss) $ 11,789 $ (7,350)
========= =========
Income (loss) per common share
Income (loss) per common share before
extraordinary item $ (2.05) $
(6.83)
Extraordinary gain per common share from early
extinguishment of debt 13.00
- -
--------- ---------
Income (loss) per common share $ 10.95 $
(6.83)
========== ==========
Weighted average shares outstanding 1,075,868 1,075,868
========== ==========
The accompanying notes are an integral part of these
consolidated financial statements
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
For the three months ended March 31,
- ------------------------------------
2000 1999
----- -----
Cash flows from operating activities
Net income (loss) $11,789 $(7,350)
Adjustments to reconcile net income (loss) to
net cash provided by (used in)
operating activities:
Depreciation, depletion and amortization 2,910
2,744
Noncash interest expense 2,741 1,163
Extraordinary gain from early extinguishment
of debt (13,996) -
Gain on sale of assets (240) (189)
Equity loss of subsidiary and partnerships -
188
Impairment of equity investment - 744
Other noncash items 179 218
Amortization of lease commissions 51 131
Bad debt expense 105 87
Minority interest in loss of subsidiary (362) (154)
Changes in operating assets and liabilities-
Accounts receivable (925) 446
Other current assets (83) 50
Accounts payable and accrued expenses (3,962) (2,037)
Change in restricted cash (3,595) -
Accrued interest payable 2,308 4,857
-------- -------
Net cash (used in) provided by operating
activities (3,080) 898
-------- -------
Cash flows from investing activities
Proceeds from sale of oil and gas properties 154
318
Purchase of oil and gas properties (987) (271)
Purchase of other property and equipment and
rental property (81) (1,082)
Increase in construction in progress (1,058) -
Purchase of other assets (22) (221)
Proceeds from sale of other assets 17 184
Proceeds from sale of real estate investments 643
- -
Proceeds from sale of other property and
equipment 1 213
Change in restricted cash (271) (1,819)
Other 8 8
-------- -------
Net cash used in investing activities (1,596) (2,670)
-------- -------
(continued)
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (continued)
(in thousands)
(unaudited)
For the three months ended March 31,
- ------------------------------------
2000 1999
----- -----
Cash flows from financing activities
Proceeds from borrowings 16,914 4,030
Payments on debt (23,285) (1,259)
Payments on other long-term liabilities (24) (23)
Increase in other long-term liabilities - 39
Deferred debt cost (5) (89)
Dividends paid to minority interest owners (30)
(31)
-------- -------
Net cash (used in) provided by financing
activities (6,430) 2,667
-------- -------
Net increase (decrease) in unrestricted cash
and cash equivalents (11,106) 895
Unrestricted cash and cash equivalents-
beginning of period 16,983 13,801
-------- -------
Unrestricted cash and cash equivalents -
end of period $ 5,877 $14,696
======== =======
Supplemental disclosures of cash flow information
Interest paid $ 5,521 $ 4,669
The accompanying notes are an integral part of these
consolidated financial statements
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
Business
Southwest Royalties Holdings, Inc. ("SRH"), a Delaware corporation, was
formed in June 1997 to serve as a holding company for Southwest Royalties
Inc. ("Southwest"), Sierra Well Service Inc. ("Sierra") and Midland Red Oak
Realty, Inc. ("Red Oak") (collectively, the "Company"). Each shareholder of
Southwest was issued one share in SRH for each share of Southwest stock
held. Prior to the formation of SRH, Red Oak and Sierra were subsidiaries
of Southwest. Southwest paid a dividend of the shares it owned in Red Oak
and Sierra to SRH. After the formation of SRH, Southwest and Red Oak became
subsidiaries of SRH and, as of July 1, 1997, Sierra was deconsolidated.
Southwest is principally involved in the business of oil and gas
development and production, as well as organizing and serving as managing
general partner for various public and private limited partnerships engaged
in oil and gas acquisitions, exploration, development and production.
Southwest is also the general partner of Southwest Partners II and III,
which own common stock in Sierra. Southwest sells its oil and gas
production to a variety of purchasers, with the prices it receives being
dependent upon the oil and gas commodity prices. Red Oak is principally
involved in real estate investment and development. Sierra is principally
involved in the business of oil and gas well services.
Principles of Consolidation
The consolidated financial statements include the accounts of SRH and
its subsidiaries. As of March 31, 2000 and 1999, the Company owned
approximately 81% of Red Oak, 39% of Sierra, 100% of Blue Heel, 99% of MSS
and 100% and 99%, respectively, of TPI. Blue Heel, MSS and TPI are
subsidiaries of Southwest. Effective July 1, 1997, Sierra was
deconsolidated and is accounted for using the equity method. Effective
November 1999, TPI was liquidated. The consolidated financial statements
include the Company's proportionate share of the assets, liabilities,
income and expenses of oil and gas limited partnerships for which it serves
as managing general partner. The Company accounts for its investments in
Southwest Partners II and III using the equity method, as the Company
exercises significant influence over the operations of these partnerships.
All significant intercompany transactions have been eliminated.
Estimates and Uncertainties
Preparation of the accompanying consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with
a maturity of three months or less to be cash equivalents. In addition,
the Company maintains its excess cash in several interest bearing accounts
in various financial institutions.
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Restricted Cash
Restricted cash represents amounts required to be reserved in separate
accounts by financial lenders. The interest sinking fund is cash set aside
to pay interest on the 10.5% Senior Notes.
Restricted cash accounts have been established for the following
purposes (in thousands):
March 31, December 31,
2000 1999
---- ----
Cash bonds $ - $ 35
Certificate of Deposits 115 112
Tenant security deposits 518 512
Capital expenditures account 1,329 552
Tax and insurance reserve 1,953 2,465
Lockbox 472 439
Customer service reserve 9 10
Escrow fund 636 627
Interest sinking 8,837 5,251
------ ------
$ 13,869 $10,003
====== ======
Real Estate Revenue Recognition
The Company leases offices and retail shopping centers under
noncancelable operating leases. The Company reports base rental revenue
for financial statement purposes straight-line over the terms of the
respective leases. Accrued straight-line rents represent the amount that
straight-line rental revenue exceeds rents collected in accordance with the
lease agreements. Management, considering current information and events
regarding the tenants' ability to fulfill their lease obligations,
considers accrued straight-line rents to be impaired if it is probable that
the Company will be unable to collect all rents due according to the
contractual lease terms. If accrued straight-line rents associated with a
tenant are considered to be impaired, the amount of the impairment is
measured based on the present value of expected future cash flows.
Impairment losses, if any, are recorded through a loss on the write-off of
assets. Cash receipts on impaired accrued straight-line rents are applied
to reduce the remaining outstanding balance and as rental revenue,
thereafter.
Some leases provide for percentage rents based on the tenant's revenue.
Percentage rents are accrued monthly based on prior experience or current
tenant financial information. Some leases require tenants to reimburse the
Company for certain expenses of operating the property.
Concentrations of Credit Risk
The Company is subject to credit risk through oil and gas trade
receivables and real estate lease receivables. Although a substantial
portion of its customers' ability to pay is dependent upon conditions in
the oil and gas industry as well as general economic conditions, credit
risk is reduced due to a large customer base.
Commodity Hedging and Derivative Financial Instruments
The Company has only limited involvement with derivative financial
instruments and generally does not use them for trading purposes. They are
used to manage commodity price risks. The Company is exposed to credit
losses in the event of nonperformance by the counter-parties to its
commodity hedges. The Company anticipates, however, that such counter-
parties will be able to fully satisfy their obligations under the
contracts. The Company does not obtain collateral or other security to
support financial instruments subject to credit risk but monitors the
credit standing of the counter-parties.
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The derivative financial instruments that the Company accounts for as
hedging contracts must meet the following criteria: the underlying asset
must expose the Company to price risk that is not offset in another asset
or liability, the hedging contract must reduce that price risk, and the
instrument must be designated as a hedge at the inception of the contract
and throughout the contract period. In order to qualify as a hedge, there
must be clear correlation between changes in the fair value of the
financial instrument and the fair value of the underlying asset such that
changes in the market value of the financial instrument will be offset by
the effect of price changes on the exposed items.
Premiums paid for commodity option contracts which qualify as hedges
are amortized to oil and gas sales over the term of the agreements.
Unamortized premiums are included in other assets in the consolidated
balance sheet. Amounts receivable or payable under the commodity option
contracts are accrued as an increase or decrease in oil and gas sales for
the applicable periods.
Oil and Gas Properties
All of the Company's oil and gas properties are located in the United
States and are accounted for at cost under the full cost method. Under
this method, all productive and nonproductive costs incurred in connection
with the acquisition, exploration and development of oil and gas reserves
are capitalized. No gain or loss is recognized on the sale of oil and gas
properties unless nonrecognition would significantly alter the relationship
between capitalized costs and remaining proved reserves for the affected
amortization base. When gain or loss is not recognized, the amortization
base is reduced by the amount of sales proceeds.
Net capitalized costs of oil and gas properties, including the
estimated future costs to develop proved reserves, are amortized using the
units of revenue method, whereby the provision is computed on the basis of
current gross revenues from production in relation to future gross
revenues, based on current prices, from estimated production of proved oil
and gas reserves. Should the net capitalized costs net of related deferred
income taxes exceed the estimated present value of oil and gas reserves
discounted at 10% and adjusted for related income taxes, such excess costs
would be charged to expense in the Consolidated Statements of Operations.
As of March 31, 2000, no write down of the capitalized costs of oil and gas
properties was deemed necessary.
It is reasonably possible that the estimates of anticipated future
gross revenues, the remaining estimated economic life of the product, or
both could change significantly in the near term due to the fluctuation of
oil and gas prices or production. Depletion estimates would also be
affected by such changes.
Property and Equipment
Rental property and other property and equipment is stated at cost.
Repairs and maintenance are charged to expense as incurred, with additions
and improvements being capitalized. Upon sale or other retirement of
depreciable property, the cost and accumulated depreciation are removed
from the related accounts and any gain or loss is reflected in the
Consolidated Statements of Operations.
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Depreciation is provided on the straight-line method based on the
estimated useful lives of the depreciable assets as follows:
Building and improvements 20 to 30 years
Rental property and improvements 5 to 30 years
Leasehold improvements 2 to 10 years
Machinery and equipment 3 to 5 years
Furniture and fixtures 3 to 5 years
Equipment under capital lease 3 to 5 years
Rental Property - Construction in Progress
All costs associated with construction in progress are capitalized and
subject to depreciation when each project is completed. Interest is
capitalized for construction in progress. The capitalized interest is
recorded as part of the asset to which it relates and is amortized over the
assets useful life. In 2000 and 1999, no interest costs were capitalized.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
In accordance with the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of, the Company reviews its long-lived assets, excluding oil and gas
properties accounted for using the full cost method of accounting, and
certain identifiable intangibles for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. In this circumstance, the Company recognizes an impairment
loss for the amount by which the carrying amount of the asset exceeds the
estimated fair value of the asset.
Deferred Debt Costs
The Company capitalizes certain costs incurred in connection with
issuing debt. These costs are being amortized to interest expense on the
straight-line method over the term of the related debt.
Gas Balancing
The Company utilizes the sales method of accounting for over or under
deliveries of natural gas. Under this method, the Company recognizes sales
revenue on all natural gas sold. As of December 31, 1999, 1998 and 1997,
the Company was underproduced by approximately 587 MMcf, 620 MMcf and 697
MMcf, respectively.
Income Taxes
Deferred tax assets and liabilities are recognized for the estimated
future tax effects attributable to differences between the financial
statement carrying amount of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rate
is recognized in income in the period that includes the enactment date.
Deferred tax assets are reduced, if necessary, by a valuation allowance for
the amount of tax benefits that may not be realized.
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
SRH and its eligible subsidiaries file a consolidated U.S. federal
income tax return. Sierra (through June 30, 1997) and Red Oak are
consolidated for financial reporting purposes, but beginning January 1,
1996, were not eligible to be included in the consolidated U.S. federal
income tax return. Separate provisions for income taxes have been
determined for these entities.
Reclassifications
Certain reclassifications have been made to the 1999 amounts to conform
to the 2000 presentation.
Derivative Instruments and Hedging Activities
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133") which established standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement
of financial position and measure those instruments at fair value. It
establishes conditions under which a derivative may be designated as a
hedge, and establishes standards for reporting changes in the fair value of
a derivative. SFAS 133, as amended by SFAS 137, is required to be
implemented for all fiscal quarters of all fiscal years beginning after
June 15, 2000. Early adoption is permitted.
Income (loss) per share
Basic net income (loss) per share is computed by dividing income
available to common stockholders by the weighted average number of common
shares outstanding for the period. The computation of diluted net income
(loss) per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock
that would then share in the earnings of the entity. For 2000 and 1999,
the computation of diluted net loss per share was antidilutive; therefore,
the amounts reported for basic and diluted net income (loss) per share were
the same.
Noncompete covenants
Noncompete covenants are carried at cost less accumulated amortization.
The covenants are being amortized over their contractual lives, generally
three to five years.
Interim Financial Statements
In the opinion of management, the unaudited consolidated financial
statements of the Company as of March 31, 2000 and 1999 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 1999 Form 10-K of the Company.
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
2. Liquidity
The accompanying consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets and
the satisfaction of liabilities in the normal course of business. The
consolidated financial statements do not include any adjustments relating
to the recoverability and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern.
SRH has a highly leveraged capital structure with, approximately, $32.1
million of cash interest and $55.3 million of principal due in 2000.
Management is currently in the process of renegotiating the terms of SRH's
various obligations with its note holders and/or attempting to seek new
lenders or equity investors. Additionally, management would consider
disposing of certain assets in order to meet its obligations.
There can be no assurance that SRH's debt restructuring efforts will be
successful or that the note holders will agree to a course of action
consistent with SRH's requirements in restructuring the obligations. Even
if such agreement is reached, it may require approval of additional note
holders, or possibly, agreements of other creditors of SRH, none of which
is assured. Furthermore, there can be no assurance that the sales of
assets can be successfully accomplished on terms acceptable to SRH. Under
current circumstances, SRH's ability to continue as a going concern depends
upon its ability to (1) successfully restructure its Revolving Loan
Facility, the 10.5% Senior Notes and other obligations or obtain additional
financing as may be required, (2) maintain compliance with all debt
covenants, (3) generate sufficient cash flow to meet its obligations on a
timely basis, and (4) achieve satisfactory levels of future earnings. If
SRH is unsuccessful in its efforts, it may be unable to meet its
obligations on the Revolving Loan Facility, the 10.5% Senior Notes, as well
as other obligations, making it necessary to undertake such other actions
as may be appropriate to preserve asset values.
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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. Other long-term liabilities at March 31, 2000 includes
approximately $663,000 for estimated future remedial actions and cleanup
costs. As of March 31, 2000, the Company has not been fined, cited or
notified of any environmental violations which would have a material
adverse effect upon capital expenditures, earnings or the competitive
position in the oil and gas industry. However, management does recognize
that by the very nature of its business, significant costs could be
incurred to bring the Company into total compliance. The amount of such
future expenditures is not readily determinable due to several factors,
including the unknown magnitude of possible contaminations, the unknown
timing and extent of the corrective actions which may be required, the
determination of the Company's liability in proportion to other responsible
parties and the extent to which such expenditures are recoverable from
insurance or indemnifications from prior owners of the Company's
properties. It is reasonably possible this estimate could change
materially in the near term.
In the normal course of its business, the Company is subject to pending
or threatened legal actions; in the opinion of management, any such matters
will be resolved without material effect on the Company's operations, cash
flow or financial position.
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 December 30, 1999, Southwest entered into a basket revenue
protection agreement, which provides the Company with an oil and gas
revenue floor. The contract is for the period January 1, 2000 through
December 31, 2000. The agreement is to be calculated on a calendar year
quarter as disclosed in the following table based on NYMEX Natural Gas and
NYMEX Crude Oil:
Notional Volumes Strike Prices
------------------------- -----------------------------
Crude Natural Crude Natural Minimum
Oil (bbl) Gas (MMBtu) Oil Gas Boe Revenue
---------- ----------- ----- ------- ---- --------
Quarter 1 269,254 976,676 $ 21.12 $ 1.91 $ 28.76 $7,552,096
Quarter 2 263,058 910,325 $ 18.80 $ 1.92 $ 26.56 $6,714,359
Quarter 3 257,206 857,728 $ 18.00 $ 1.97 $ 25.88 $6,319,432
Quarter 4 251,914 813,400 $ 18.00 $ 2.20 $ 26.80 $6,323,932
Payments shall be made no later than five business days, after each
quarterly floating price is determinable by NYMEX. The cost of the floor
was approximately $638,000 and is amortized monthly as a reduction of oil
and gas revenues. The carrying value of the floor is approximately
$459,000 at March 31, 2000.
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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,
2000 1999
----- -----
(in thousands)
(unaudited)
Operating profit (loss)
Oil and gas $ 5,837 $ 1,109
Real estate 1,886 2,595
Other and eliminations (231) 58
------ ------
$ 7,492 $ 3,762
====== ======
Interest Expense
Oil and gas $ 5,583 $ 5,527
Real Estate 4,997 5,208
Other and eliminations (10) (47)
------ ------
$10,570 $10,688
====== ======
Depreciation, depletion and amortization
Oil and gas $ 1,731 $ 1,671
Real Estate 1,139 1,024
Other and eliminations 40 49
------ ------
$ 2,910 $ 2,744
====== ======
Capital expenditures
Oil and gas properties $ 987 $ 271
Oil and gas, other 19 56
Real estate 1,059 982
Other 61 44
------- -------
$ 2,126 $ 1,353
======= =======
Identifiable assets
Oil and gas $107,102 $109,619
Real estate 148,500 149,516
Other and eliminations (3,992) (2,915)
------- -------
$251,610 $256,220
======= =======
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
6. Long-term Debt
Long-term debt consists of the following (in thousands):
March 31,December 31,
--------------------
2000 1999
----- -----
10.5% Senior Notes, interest payable semi-annually due
October 15, 2004, net of discount of $1,091 and $1,487,
respectively $122,594 $160,598
Revolving Loan Facility with variable rate interest,
due December 2000. Collateralized by oil and
gas properties. 50,000 35,000
Variable Rate Notes Payables:
Notes payable due July 2001, accrued interest due and
payable monthly at 7.1%, per annum with additional
1% payable in cash or additional notes.
Net of discount of $778 and $944, respectively 16,645
15,883
Notes payable due December 2001, accrued interest due and
payable monthly at 7.1%, per annum with additional
1.5% payable in cash or additional notes.
Net of discount of $2,222 and $2,556, respectively 26,076
25,298
Notes payable due July 2002, interest at 8.5% minimum
per annum, accrued interest due and payable monthly.
Net of discount of $3,785 and $4,229, respectively 103,172
101,835
Other 8,311 8,469
------- -------
326,798 347,083
Less current maturities 55,274 40,277
------- -------
$271,524 $306,806
======= =======
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.
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Revolving Loan Facility
In December 1999, Southwest entered into a Revolving Loan Facility with
Bank One Texas, N.A., which provided a borrowing base of $50 million with a
maturity date of December 29, 2000. Funds from the Revolving Loan Facility
may be used for working capital and other general corporate purposes,
including the repurchase of a portion of Southwest's outstanding 10.5%
Senior Notes due 2004. Advances on the Revolving Loan Facility bear
interest at the option of Southwest, based on the prime rate of Bank One
Texas, N.A. (8.5% at December 31, 1999) plus one fourth of one percent
(.25%), when the borrowing base usage is equal to or greater than 80% or
zero percent (0%) when the borrowing base usage is less than 80% or, a
Eurodollar rate (substantially equal to the London InterBank Offered Rate
("LIBOR")) plus 1.25% up to 2.0% based on the borrowing base usage
percentage. The Revolving Loan Facility is secured by no less than 85% of
Southwest's oil and gas properties.
The Revolving Loan Facility imposes certain limitations on the ability
of Southwest to, among other things, incur additional indebtedness or issue
disqualified capital stock, make payments in respect to capital stock,
enter into transactions with affiliates, incur liens, sell assets, change
the nature of its business, merge or consolidate with any other person and
sell, lease, transfer or otherwise dispose of substantially all of its
properties or assets. The Revolving Loan Facility required Southwest to
establish a sinking fund account with an initial deposit of $3.5 million.
Southwest is to transfer monthly one-twelfth of the annual interest
payments on the 10.5% Senior Notes beginning December 31, 1999 into this
sinking fund account for the purpose of making interest payments on the
10.5% Senior Notes.
Variable Rate Notes Payable
In June 1998, MRO N Cross, Inc., a wholly owned subsidiary of Red Oak
negotiated two notes payable in the amount of $13.5 million, net of a $2
million discount, and $2.5 million. The $13.5 million note was used for the
acquisition of rental property in the amount of $12.9 million with the
remaining $600,000 to be used for capital improvements to the rental
property purchased. The $2.5 million note is reserved for capital
improvements to the rental property purchased of which $1.9 million has
been utilized as of March 31, 2000. The notes are collateralized by the
property purchased.
In December 1998, MRO Commercial, Inc., a wholly owned subsidiary of
Red Oak negotiated two notes payable in the amount of $21.7 million, net of
a $4 million discount, and $9.7 million. The $21.7 million note was used
for the acquisition of a retail shopping center and the funding of various
escrow balances. The $9.7 million note is for capital improvements to the
rental property purchased of which $2.2 million has been utilized as of
March 31, 2000. The notes are collateralized by the property purchased.
SOUTHWEST ROYALTIES HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
In June 1999, MRO Southwest, Inc., a wholly owned subsidiary of Red Oak
negotiated two notes payable in the amount of $97.5 million and $8.0
million, net of discounts of $5.3 million. Borrowings for both notes accrue
interest in arrears at a rate per annum equal to the greater of 8.6% or
LIBOR plus 360 basis points. The interest rate includes a servicing fee of
.10%. Approximately $91.4 million of the $97.5 million note was used to
retire existing debt on properties contributed to MRO Southwest by Red Oak,
$1.5 million was deposited into various restricted cash accounts and the
remaining proceeds were used for general corporate purposes. The $8.0
million note is for capital improvements to rental property and $4.2
million has been utilized as of March 31, 2000. The notes are
collateralized by the properties owned by MRO Southwest. The notes impose
certain restrictive covenants including restrictions on the incurrence of
additional indebtedness, dissolution, termination or liquidation of all or
substantially all of the assets, changes in the legal structure of the
assets, making any loans or advances to any third party and commingling its
assets with the assets of any of its affiliates or of any other person or
entity.
Extinguishment of Debt
In June 1999, MRO Southwest repaid certain notes payable with proceeds
from the aforementioned Variable Note Payable issued in June of 1999.
Prepayment penalties and the remaining unamortized deferred debt costs
associated with these notes resulted in an extraordinary charge of,
approximately, $1,598,000 or $(1.49) per share. Since there is no recorded
income tax benefits on continuing operations there is no income tax
benefits recorded on the extraordinary loss.
In December of 1999, Southwest purchased approximately 19%, or
approximately $37.9 million original face amount, of its 10.5% Senior Notes
with the proceeds from the aforementioned Revolving Loan facility.
Southwest paid approximately $22.0 million, including all fees, to purchase
the 10.5% Senior Notes and wrote off approximately $980,000 of deferred
loan issue costs and approximately $349,000 of the original issue discount
to recognize a $14.5 million extraordinary gain on the purchase of the
Notes. Southwest has not recorded any income tax benefits on continuing
operations and therefore there is no income tax expense recognized on the
extraordinary gain. The extraordinary gain per share is approximately
$13.48.
In January of 2000, Southwest purchased approximately 19%, or
approximately $38.4 million original face amount, of its 10.5% Senior Notes
with the proceeds from the aforementioned Revolving Loan facility.
Southwest paid approximately $23.0 million, including all fees, to purchase
the 10.5% Senior Notes and wrote off approximately $980,000 of deferred
loan issue costs and approximately $349,000 of the original issue discount
to recognize a $14.0 million extraordinary gain on the purchase of the
Notes. Southwest has not recorded any income tax benefits on continuing
operations and therefore there is no income tax expense recognized on the
extraordinary gain. The extraordinary gain per share is approximately
$13.01.
Aggregate maturities of all long-term debt as of March 31, 2000 are as
follows (in thousands):
For the twelve
months ended
--------------
March 31, 2001 $ 55,274
March 31, 2002 42,807
March 31, 2003 103,256
March 31, 2004 1,579
March 31, 2005 123,015
Thereafter 867
-------
$326,798
=======
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, 2000 compared to Three Months Ended March 31,
1999
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
2000 1999 (Decrease)(Decrease)
----- ----- -------------------
Production volumes:
Oil and condensate (MBbls) 306 356 (14%) $ (1,297)
Natural gas (MMcf) 1,195 1,152 4% $ 121
Average sales prices:
Oil and condensate (per Bbl) $26.01 $11.29 130% $ 5,234
Natural gas (per Mcf) $2.75 $ 1.83 50% $ 1,059
Revenues. Revenues for the Company increased 33% to $19.4 million for
the three months ended March 31, 2000 from 14.6 million for the same period
in 1999.
Oil and gas revenue increased 86% to $11.3 million for the three months
ended March 31, 2000 from $6.1 million for the same period in 1999. The
increase in oil and gas revenue is due primarily to increases in oil and
gas prices, which were partially offset by decreases in oil production.
Increases in oil and gas prices resulted in increased oil and gas revenues
of approximately $6.3 million. Decreases in production offset the increase
in prices by approximately $1.3 million.
Oil and gas production decreased 9% or approximately 550 BOEPD, to
5,550 BOEPD for the three months ended March 31, 2000 from approximately
6,100 BOEPD for the same period in 1999. 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 $5.6 and $5.7 million in 1999 and 1998,
respectively. The production decline resulting from oil and gas property
sales was approximately 450 BOEPD, or approximately 7% of the total
decline. The remainder of the production decline of approximately 2% is
mostly results of natural decline. The average sales price per barrel of
oil was $26.01 and the average sales price of natural gas was $2.75 per Mcf
for the three months ended March 31, 2000, representing a 130% and 50%
increase, respectively, compared to same period in 1999 sales price levels.
Real estate revenues decreased 2% to $8.0 million for the three months
ended March 31, 2000 from $8.2 million for the same period in 1999. Other
operating revenues decreased 66% to $96,000 for the three months ended
March 31, 2000 from $285,000 for the same period in 1999.
Operating Expenses. Operating expenses, before general and
administrative expense, impairment of oil and gas properties, depreciation,
depletion and amortization, increased 14% to $8.3 million for the three
months ended March 31, 2000 from $7.3 million for the same period in 1999.
Oil and gas operating expense increased approximately 19% to $3.4
million for the three months ended March 31, 2000 from $2.9 million for the
same period in 1999. Approximately 9% of the total increase is due
primarily to increased production taxes associated with the 86% increase in
oil and gas revenue as discussed above. The remaining 10% of the total
increase is due to increased workover expense and repairs associated with
bringing wells back on line which where deemed uneconomical due to the
severely depressed oil and gas prices experienced during the three months
ended March 31, 1999. The average operating expense increased 29% to $6.77
per BOE for the three months ended March 31,2000 from $5.24 per BOE during
the same period in 1999.
Real estate operating expense increased approximately 9% to $4.6
million for the three months ended March 31, 2000 from $4.2 million in
1999. The increase is due primarily to increase in property leasing
commissions. Other operating expenses increased 55% to $330,000 for the
three months ended March 31, 2000 from $213,000 for the same period in
1999.
General and Administrative ("G&A") Expense. G&A expense for the
Company decreased 10% to $705,000 for the three months ended March 31, 2000
from $787,000 for the same period in 1999. Oil and gas G&A expense
decreased 26% to $343,000 for the three months ended March 31, 2000 from
$463,000 for the same period in 1999. Oil and gas G&A expense averaged $.68
per BOE for the three months ended March 31, 2000, a 20% decrease compared
to $.85 per BOE for the same period in 1999. The decline in oil and gas
G&A is the result of a reduction in legal, accounting, professional fees
and travel incurred during the three months ended March 31, 2000 as
compared to the same period in 1999. The three months ended March 31, 1999
reflected larger expenditures in these areas due to management's evaluation
of corporate strategies and alternatives in dealing with it's highly
leveraged financial position and limited working capital during that
period. Real estate G&A expense increased 15% to $415,000 for the three
months ended March 31, 2000 from $360,000 for the same period in 1999. The
increase in real estate G&A relates primarily to bonuses.
Depreciation, Depletion and Amortization ("DD&A") Expense. DD&A
expense for the Company increased 6% to $2.9 million for the three months
ended March 31, 2000 from $2.7 million for the same period in 1999. Oil
and gas DD&A expense increased 4% to $1.7 million for the three months
ended March 31, 2000 from $1.7 million for the same period in 1999. Oil
and gas depletion expense on a BOE basis, increased 14% to $3.20 per BOE
for the three months ended March 31, 2000 from $2.81 per BOE for the same
period in 1999. Real estate DD&A expense increased 11% to $1.1 million for
the three months ended March 31, 2000 from $1.0 million for the same period
in 1999 due to the impact of Capitalized improvements.
Interest Expense. Interest expense for the Company decreased 1% to
$10.6 million for the three months ended March 31, 2000 from $10.7 million
for the same period in 1999. Oil and gas interest expense increased 1% to
$5.6 million for the three months ended March 31, 2000 from $5.5 million
for the same period in 1999. Real estate interest expense decreased 4% to
$5.0 million for the three months ended March 31, 2000 from $5.2 million
for the same period in 1999.
Equity in Loss of Subsidiary. The Company's direct and indirect
investment in Sierra upon recording its portion of Sierra's losses for the
three months ended March 31, 1999 was reduced to zero. Therefore,
according to General Accepted Accounting Principles, the equity method was
suspended. The Company did not record their ownership percentage of
Sierra's losses for the quarter ended March 31, 2000. If Sierra
subsequently begins to report net income, the Company will resume applying
the equity method only after its share of net income equals the share of
net losses not recognized during the period the equity method is suspended.
Equity in Loss of Subsidiary for the three months ended March 31, 1999
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. This amount relates
to SRH's 39% direct and indirect investment in Sierra.
Net Income (Loss). Due to the factors described above, net income for
the Company increased 260% to $11.8 million for the three months ended
March 31, 2000 from a net loss of $7.3 million for the same period in 1999.
Oil and gas net income was approximately $14.6 million for the three months
ended March 31, 2000 as compared to a net loss of $5.0 million for the same
period in 1999. Included in the oil and gas net income for the three months
ended March 31, 2000 is an extraordinary gain associated with the
repurchase of approximately 19% of the original issue, $200 million face
10.5% senior notes issued in October of 1997, of approximately $14.0
million. Real estate net losses increased 9% to $2.8 million for the three
months ended March 31, 2000 from $2.6 million for the same period in 1999.
Liquidity and Capital Resources
Management is constantly monitoring the Company's cash position and its
ability to meet its financial obligations as they become due, and in this
effort, is exploring various strategies for addressing its current and
future liquidity needs. During 1999 and 1998, for instance, Southwest sold
$5.6 million and $5.7 million, respectively, of oil and gas properties in
an ongoing effort to decrease its production costs and improve its cash
position. In December 31, 1999 the Company also negotiated a $50 million
revolving line of credit with BankOne Texas, N.A. the proceeds of which
were used to purchase in December 1999 and January 2000, approximately
$76.3 million of the 10.5% Senior Notes due 2004. As of March 31, 2000,
SRH's consolidated cash balance was approximately $19.7 million, of which
$14.7 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, approximately $32.1
million of cash interest payments and $55.3 million of principal due in
2000. Management is currently in the process of renegotiating the terms of
SRH's various obligations with its note holders and/or attempting to seek
new lenders or equity investors. Additionally, management would consider
disposing of certain assets in order to meet its obligations.
There can be no assurance that SRH's debt restructuring efforts will be
successful or that the note holders will agree to a course of action
consistent with SRH's requirements in restructuring the obligations. Even
if such agreement is reached, it may require approval of additional note
holders, or possibly, agreements of other creditors of SRH, none of which
is assured. Furthermore, there can be no assurance that the sales of
assets can be successfully accomplished on terms acceptable to SRH. Under
current circumstances, SRH's ability to continue as a going concern depends
upon its ability to (1) successfully restructure its Revolving Loan
Facility, the 10.5% Senior Notes and other obligations or obtain additional
financing as may be required, (2) maintain compliance with all debt
covenants, (3) generate sufficient cash flow to meet its obligations on a
timely basis, and (4) achieve satisfactory levels of future earnings. If
SRH is unsuccessful in its efforts, it may be unable to meet its
obligations on the Revolving Loan Facility, the 10.5% Senior Notes, as well
as other obligations, making it necessary to undertake such other actions
as may be appropriate to preserve asset values.
Net Cash Provided by Operating Activities
Cash flows used in operating activities by the Company were $3.1 million
for the three months ended March 31, 2000. Cash flows provided by
operating activities were $898,000 for the three months ended 1999.
Net cash flows used in operating activities, for oil and gas operations,
for the three months ended March 31, 2000, were approximately $1.4 million.
Increased oil and gas revenues provided approximately $2.2 million in
operating cash flows, but were offset by increases in restricted cash of
approximately $3.6 million to satisfy interest sinking fund requirements.
Net cash flows used in operating activities, for real estate operations,
were approximately $1.7 million. The primary uses of funds were to pay
down accounts payable and accrued expenses.
Net Cash Used in Investing Activities
Cash flows used in investing activities by the Company were $1.6 million
for the three months ended March 31, 2000 and $2.6 million for the
comparable period in 1999.
Net cash flows used in investing activities, for oil and gas operations,
for the three months ended March 31, 2000, were approximately $830,000.
Acquisitions of oil and gas properties and other plant, property and
equipment, of approximately $1.0 million, were the primary uses of funds.
Proceeds from the sale of oil and gas properties and other assets, of
approximately $174,000, were the primary source of funds.
Net cash flows used in investing activities, for real estate operations,
for the three months ended March 31, 2000, were approximately $679,000.
Increases in construction in progress of approximately $1.1 million and
increases in restricted cash of approximately $271,000 where the primary
uses of funds. Sale proceeds from the sale of real estate investments and
other assets of approximately $651,000 were the primary source of funds.
Net Cash Provided by Financing Activities.
Cash used by the Company's financing activities was approximately $6.4
million for the three months ended March 31, 2000. Cash provided by the
Company's financing activities was approximately $2.7 million for the three
months ended 1999.
Cash used by financing activities for oil and gas operations for the
three months ended March 31, 2000 were approximately $8.1 million.
Proceeds from borrowings were $15.0 million and were used to partially fund
the buy back of a portion of the 10.5% Senior Notes due 2004. Payments on
debt and other long-term liabilities of approximately $23.1 million were
the primary uses of funds.
Cash provided by financing activities for real estate operations for the
three months ended March 31, 2000 were approximately $1.6 million.
Proceeds from borrowings were $1.9 million and were used to finance
construction in progress. Payments on debt of $247,000 and dividends of
$30,000 were the primary uses of funds.
In January of 2000, Southwest drew down the remaining $15.0 million on
the Revolving Loan Facility and applied the proceeds towards the purchase
of an additional 19% or approximately $38.4 million original face amount of
its 10.5% Senior Notes. Southwest paid approximately $23.0 million,
including all fees, to purchase the 10.5% Senior Notes and wrote off an
additional $980,000 of deferred loan issue costs and an additional $349,000
of the original issue discount to recognize an additional $14.0 million
extraordinary gain on the purchase of the notes. Southwest has not
recorded any income tax benefits on the continuing operations and therefore
there is no income tax expense recognized on the extraordinary gain.
Other Issues
The information included in "Other Issues" in Item 7 of SHR's 1999 Form
10-K regarding Information Systems for the year 2000 is incorporated herein
by reference. As of March 31, 2000, 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 1999 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, 2000, there have been no
material changes in SRH's market risk exposure from that disclosed in the
1999 Form 10-K.
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.
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 15, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ------ -----
/s/ H.H. Wommack, III
---------------------- Chairman/President/ May 15, 2000
H. H. Wommack, III Chief Executive Officer
/s/ J Steven Person
---------------------- Vice President, Marketing/
J Steven Person Chief Financial Officer May 15, 2000
/s/ H. Allen Corey
----------------------
H. Allen Corey Director/Secretary May 15, 2000
SIGNATURES
SOUTHWEST ROYALTIES HOLDINGS, INC.
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereto duly authorized.
SOUTHWEST ROYALTIES HOLDINGS, INC.
By: /s/ H. H. Wommack, III
--------------------------------------
H.H. Wommack, III, Chairman, President,
and Chief Executive Officer
Date: May 15, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ------ -----
/s/ H.H. Wommack, III
---------------------- Chairman/President/ May 15, 2000
H. H. Wommack, III Chief Executive Officer
/s/ J Steven Person
---------------------- Vice President, Marketing/
J Steven Person Chief Financial Officer May 15, 2000
/s/ H. Allen Corey
----------------------
H. Allen Corey Director/Secretary May 15, 2000