Back to GetFilings.com
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[x] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [Fee Required]
For the fiscal year ended December 31, 1998
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
For the transition period from to
Commission File Number 0-15411
Southwest Royalties, Inc. Income Fund VI
(Exact name of registrant as specified in
its limited partnership agreement)
Tennessee 75-2127812
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
407 N. Big Spring, Suite 300, Midland, Texas 79701
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area (915) 686-9927
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
limited partnership interests
Indicate by check mark whether registrant (1) has filed reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days: Yes x No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. [x]
The registrant's outstanding securities consist of Units of limited
partnership interests for which there exists no established public market
from which to base a calculation of aggregate market value.
The total number of pages contained in this report is ____. The exhibit
index is found on page ____.
Table of Contents
Item Page
Part I
1. Business 3
2. Properties 7
3. Legal Proceedings 9
4. Submission of Matters to a Vote of Security Holders 9
Part II
5. Market for the Registrant's Common Equity and Related
Stockholder Matters 10
6. Selected Financial Data 11
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
8. Financial Statements and Supplementary Data 21
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 38
Part III
10. Directors and Executive Officers of the Registrant 39
11. Executive Compensation 42
12. Security Ownership of Certain Beneficial Owners
and Management 42
13. Certain Relationships and Related Transactions 44
Part IV
14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 45
Signatures 49
Part I
Item 1. Business
General
Southwest Royalties, Inc. Income Fund VI (the "Partnership" or
"Registrant") was organized as a Tennessee limited partnership on December
4, 1986. The offering of limited partnership interests began August 25,
1986, reached minimum capital requirements on October 3, 1986 and concluded
January 29, 1987. The Partnership has no subsidiaries.
The Partnership has expended its capital and acquired interests in
producing oil and gas properties. After such acquisitions, the Partnership
has produced and marketed the crude oil and natural gas produced from such
properties. In most cases, the Partnership purchased royalty or overriding
royalty interests and working interests in oil and gas properties that were
converted into net profits interests or other nonoperating interests. The
Partnership purchased either all or part of the rights and obligations
under various oil and gas leases.
The principal executive offices of the Partnership are located at 407 N.
Big Spring, Suite 300, Midland, Texas, 79701. The Managing General Partner
of the Partnership, Southwest Royalties, Inc. (the "Managing General
Partner") and its staff of 98 individuals, together with certain
independent consultants used on an "as-needed" basis, perform various
services on behalf of the Partnership, including the selection of oil and
gas properties and the marketing of production from such properties. H. H.
Wommack, III, a stockholder, director, President and Treasurer of the
Managing General Partner, is also a general partner. The Partnership has
no employees.
Principal Products, Marketing and Distribution
The Partnership has acquired and holds royalty interests and net profit
interests in oil and gas properties located in Texas, New Mexico, Wyoming,
Illinois, Colorado and Oklahoma. All activities of the Partnership are
confined to the continental United States. All oil and gas produced from
these properties is sold to unrelated third parties in the oil and gas
business.
The revenues generated from the Partnership's oil and gas activities are
dependent upon the current market for oil and gas. The prices received by
the Partnership for its oil production depend upon numerous factors beyond
the Partnership's control, including competition, economic, political and
regulatory developments and competitive energy sources, and make it
particularly difficult to estimate future prices of oil and natural gas.
During 1998 oil prices fell to their lowest daily levels since 1986 and to
their lowest annual average since 1976. In two years, oil prices have been
sliced by more than half. The factors that started the decline in oil
prices in 1997 are the same ones that have kept them down in 1998. It was
believed that there would be continued heavy consumption coming from the
Asian region, but the collapse of their markets late in 1997 carried over
to this year bringing demand down with it. Asian consumption had all but
disappeared in 1998, creating an oversupply of crude oil on the market.
That drop in demand has lasted longer than anyone had anticipated, but
hopes of a recovery abound. Another reason for the continued drop in
prices has been OPEC's unwillingness to completely comply with production
cuts established in March and again in June. Although they have been near
90% compliance at times, they have also been below 70% on a monthly basis.
Even a four-day bombing in December of Iraqi military sites could create
only a one-day rally in oil prices. Crude oil closed December 31, 1998 at
$12.05 per barrel on the NYMEX and posted prices closed at $9.50 per
barrel.
In a year of fairly optimistic expectations for gas prices, the average
price of natural gas wound up declining in 1998 to its lowest level since
1995. Although the nationwide average did remain above $2.00 per MMBTU,
1998's prices were approximately 17% lower than those seen in 1997. The
combination of mild weather throughout the year and a gas storage surplus
both contributed to the low prices. Analysts' predictions for 1999 prices
vary, ranging from a low of $1.87 per MMBTU to a high of $2.40 per MMBTU.
Reduced production throughout the U.S. industry, along with large gas
storage withdrawals during the first weeks of January 1999, are both key
factors in our belief that the 1999 average gas price will remain around
$1.80 per MMBTU level.
Following is a table of the ratios of revenues received from oil and gas
production for the last three years:
Oil Gas
1998 37% 63%
1997 45% 55%
1996 49% 51%
As the table indicates, the Partnership's revenue is almost evenly divided
between its oil and gas production, the Partnership revenues will be highly
dependent upon the future prices and demands for oil and gas.
Seasonality of Business
Although the demand for natural gas is highly seasonal, with higher demand
in the colder winter months and in very hot summer months, the Partnership
has been able to sell all of its natural gas, either through contracts in
place or on the spot market at the then prevailing spot market price. As a
result, the volumes sold by the Partnership have not fluctuated materially
with the change of season.
Customer Dependence
No material portion of the Partnership's business is dependent on a single
purchaser, or a very few purchasers, where the loss of one would have a
material adverse impact on the Partnership. Two purchasers accounted for
49% of the Partnership's total oil and gas production during 1998: Nustar
Joint Venture for 38% and Scurlock Permian LLC for 11%. Five purchasers
accounted for 67% of the Partnership's total oil and gas production during
1997: Nustar Joint Venture 17%, Torch Operating Company 16%, Scurlock
Permian Corporation 13%, Aquila Southwest Pipeline Corporation 11% and
Enron Oil and Transportation Incorporated 10%. Four purchasers accounted
for 63% of the Partnership's total oil and gas production during 1996:
Torch Operating Company 28%, Scurlock Permian Corporation 14%, Aquila
Southwest Pipeline Corporation 11% and Enron Oil and Transportation Inc
10%. All purchasers of the Partnership's oil and gas production are
unrelated third parties. In the event any of these purchasers were to
discontinue purchasing the Partnership's production, the Managing General
Partner believes that a substitute purchaser or purchasers could be located
without undue delay. No other purchaser accounted for an amount equal to
or greater than 10% of the Partnership's sales of oil and gas production.
Competition
Because the Partnership has utilized all of its funds available for the
acquisition of net profits or royalty interests in producing oil and gas
properties, it is not subject to competition from other oil and gas
property purchasers. See Item 2, Properties.
Factors that may adversely affect the Partnership include delays in
completing arrangements for the sale of production, availability of a
market for production, rising operating costs of producing oil and gas and
complying with applicable water and air pollution control statutes,
increasing costs and difficulties of transportation, and marketing of
competitive fuels. Moreover, domestic oil and gas must compete with
imported oil and gas and with coal, atomic energy, hydroelectric power and
other forms of energy.
Regulation
Oil and Gas Production - The production and sale of oil and gas is subject
to federal and state governmental regulation in several respects, such as
existing price controls on natural gas and possible price controls on crude
oil, regulation of oil and gas production by state and local governmental
agencies, pollution and environmental controls and various other direct and
indirect regulation. Many jurisdictions have periodically imposed
limitations on oil and gas production by restricting the rate of flow for
oil and gas wells below their actual capacity to produce and by imposing
acreage limitations for the drilling of wells. The federal government has
the power to permit increases in the amount of oil imported from other
countries and to impose pollution control measures.
Various aspects of the Partnership's oil and gas activities are regulated
by administrative agencies under statutory provisions of the states where
such activities are conducted and by certain agencies of the federal
government for operations on Federal leases. Moreover, certain prices at
which the Partnership may sell its natural gas production are controlled by
the Natural Gas Policy Act of 1978, the Natural Gas Wellhead Decontrol Act
of 1989 and the regulations promulgated by the Federal Energy Regulatory
Commission.
Environmental- The Partnership's oil and gas activities are subject to
extensive federal, state and local laws and regulations governing the
generation, storage, handling, emission, transportation and discharge of
materials into the environment. Governmental authorities have the power to
enforce compliance with their regulations, and violations carry substantial
penalties. This regulatory burden on the oil and gas industry increases
its cost of doing business and consequently affects its profitability. The
Managing General Partner is unable to predict what, if any, effect
compliance will have on the Partnership.
Industry Regulations and Guidelines - Certain industry regulations and
guidelines apply to the registration, qualification and operation of oil
and gas programs in the form of limited partnerships. The Partnership is
subject to these guidelines which regulate and restrict transactions
between the Managing General Partner and the Partnership. The Partnership
complies with these guidelines and the Managing General Partner does not
anticipate that continued compliance will have a material adverse effect on
Partnership operations.
Partnership Employees
The Partnership has no employees; however, the Managing General Partner has
a staff of geologists, engineers, accountants, landmen and clerical staff
who engage in Partnership activities and operations and perform additional
services for the Partnership as needed. In addition to the Managing
General Partner's staff, the Partnership engages independent consultants
such as petroleum engineers and geologists as needed. As of December 31,
1998, there were 98 individuals directly employed by the Managing General
Partner in various capacities.
Item 2. Properties
In determining whether an interest in a particular producing property was
to be acquired, the Managing General Partner considered such criteria as
estimated oil and gas reserves, estimated cash flow from the sale of
production, present and future prices of oil and gas, the extent of
undeveloped and unproved reserves, the potential for secondary, tertiary
and other enhanced recovery projects and the availability of markets.
As of December 31, 1998, the Partnership possessed an interest in oil and
gas properties located in Jackson and Weld Counties of Colorado; Clinton,
Lawrence and Marion Counties of Illinois; Alfalfa, Beaver, Ellis, Garvin,
Haskell, Latimer, Leflore, Logan, McClain, Noble, Pottawatomie, Roger
Mills, Seminole and Woods Counties of Oklahoma; Brazos, Burleson, Coke,
Crane, Eastland, Ector, Fayette, Gaines, Glasscock, Jim Wells, Lee,
Lipscomb, Mitchell, Nolan, Pecos, Reeves, Robertson, Runnels, Sterling,
Upton, Ward and Winkler Counties of Texas; Freemont County of Wyoming.
These properties consist of various interests in approximately 158 wells
and units.
Due to the Partnership's objective of maintaining current operations
without engaging in the drilling of any developmental or exploratory wells,
or additional acquisitions of producing properties, there has not been any
significant changes in properties during 1998, 1997 and 1996.
During 1998, 78 leases were sold for approximately $61,000. During 1997,
one lease was sold for approximately $20,000. During 1996, nine leases
were sold for approximately $16,400.
Significant Properties
The following table reflects the significant properties in which the
Partnership has an interest:
Date
Purchased No. of Proved Reserves*
Name and Location and Interest Wells Oil (bbls) Gas (mcf)
- ----------------- ------------ ------ ---------- ---------
Mary Shirk 12/86 at 3% 7 22,000 194,000
Upton County, to 50% net
Texas profits
interests
Mobil Amacker 7/87 at 23% 10 41,000 4,158,000
Tippet to 100% net
Upton County, profits
Texas interests
Enron/Rhoda 4/87 at 2% 40 181,000 688,000
Walker to 100% net
Ward County, profits
Texas interests
* Ryder Scott Company Petroleum Engineers prepared the reserve and present
value data for 96.4% of the Partnership's existing properties as of January
1, 1999. Another independent petroleum engineer prepared the remaining
3.6% of the Partnership's properties. The reserve estimates were made in
accordance with guidelines established by the Securities and Exchange
Commission pursuant to Rule 4-10(a) of Regulation S-X. Such guidelines
require oil and gas reserve reports be prepared under existing economic and
operating conditions with no provisions for price and cost escalation
except by contractual arrangements.
The New York Mercantile Exchange price at December 31, 1998 of $12.05 was
used as the beginning basis for the oil price. Oil price adjustments from
$12.05 per barrel were made in the individual evaluations to reflect oil
quality, gathering and transportation costs. The results are an average
price received at the lease of $10.37 per barrel in the preparation of the
reserve report as of January 1, 1999.
In the determination of the gas price, the New York Mercantile Exchange
price at December 31, 1998 of $1.95 was used as the beginning basis. Gas
price adjustments from $1.95 per Mcf were made in the individual
evaluations to reflect BTU content, gathering and transportation costs and
gas processing and shrinkage. The results are an average price received at
the lease of $1.65 per Mcf in the preparation of the reserve report as of
January 1, 1999.
As also discussed in Part II, Item 7, Management's Discussion and Analysis
of Financial Condition and Results of Operations, oil and gas prices were
subject to frequent changes in 1998.
The evaluation of oil and gas properties is not an exact science and
inevitably involves a significant degree of uncertainty, particularly with
respect to the quantity of oil or gas that any given property is capable of
producing. Estimates of oil and gas reserves are based on available
geological and engineering data, the extent and quality of which may vary
in each case and, in certain instances, may prove to be inaccurate.
Consequently, properties may be depleted more rapidly than the geological
and engineering data have indicated.
Unanticipated depletion, if it occurs, will result in lower reserves than
previously estimated; thus an ultimately lower return for the Partnership.
Basic changes in past reserve estimates occur annually. As new data is
gathered during the subsequent year, the engineer must revise his earlier
estimates. A year of new information, which is pertinent to the estimation
of future recoverable volumes, is available during the subsequent year
evaluation. In applying industry standards and procedures, the new data
may cause the previous estimates to be revised. This revision may increase
or decrease the earlier estimated volumes. Pertinent information gathered
during the year may include actual production and decline rates, production
from offset wells drilled to the same geologic formation, increased or
decreased water production, workovers, and changes in lifting costs, among
others. Accordingly, reserve estimates are often different from the
quantities of oil and gas that are ultimately recovered.
The Partnership has reserves which are classified as proved developed
producing, proved developed non-producing and proved undeveloped. All of
the proved reserves are included in the engineering reports which evaluate
the Partnership's present reserves.
Because the Partnership does not engage in drilling activities, the
development of proved undeveloped reserves is conducted pursuant to farmout
arrangements with the Managing General Partner or unrelated third parties.
Generally, the Partnership retains a carried interest such as an overriding
royalty interest under the terms of a farmout, or receives cash.
The Partnership or the owners of properties in which the Partnership owns
an interest can engage in workover projects or supplementary recovery
projects, for example, to extract behind the pipe reserves which qualify as
proved developed non-producing reserves. See Part II, Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Legal Proceedings
There are no material pending legal proceedings to which the Partnership is
a party.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during the fourth
quarter of 1998 through the solicitation of proxies or otherwise.
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Market Information
Limited partnership interests, or units, in the Partnership were initially
offered and sold for a price of $500. Limited partner units are not traded
on any exchange and there is no public or organized trading market for
them. The Managing General Partner has become aware of certain limited and
sporadic transfers of units between limited partners and third parties, but
has no verifiable information regarding the prices at which such units have
been transferred. Further, a transferee may not become a substitute
limited partner without the consent of the Managing General Partner.
After completion of the Partnership's first full fiscal year of operations
and each year thereafter, the Managing General Partner has offered and will
continue to offer to purchase each limited partner's interest in the
Partnership, at a price based on tangible assets of the Partnership, plus
the present value of the future net revenues of proved oil and gas
properties, minus liabilities with a risk factor discount of up to one-
third which may be implemented at the sole discretion of the Managing
General Partner. However, the Managing General Partner's obligation to
purchase limited partner units is limited to an expenditure of an amount
not in excess of 10% of the total limited partner units initially
subscribed for by limited partners. In 1998, 490 limited partner units
were tendered to and purchased by the Managing General Partner at an
average base price of $161.40 per unit. In 1997, 940 limited partner units
were tendered to and purchased by the Managing General Partner at an
average base price of $285.09 per unit. In 1996, 386 limited partner units
were tendered to and purchased by the Managing General Partner at an
average base price of $183.01 per unit.
Number of Limited Partner Interest Holders
As of December 31, 1998 there were 848 holders of limited partner units in
the Partnership.
Distributions
Pursuant to Article IV, Section 4.01 of the Partnership's Certificate and
Agreement of Limited Partnership "Net Cash Flow" is distributed to the
partners on a monthly basis. "Net Cash Flow" is defined as "the cash
generated by the Partnership's investments in producing oil and gas
properties, less (i) General and Administrative Costs, (ii) Operating
Costs, and (iii) any reserves necessary to meet current and anticipated
needs of the Partnership, as determined at the sole discretion of the
Managing General Partner."
During 1998, distributions were made totaling $439,961, with $398,261
distributed to the limited partners and $41,700 to the general partners.
For the year ended December 31, 1998, distributions of $19.91 per limited
partner unit were made, based upon 20,000 limited partner units
outstanding. The decline in distributions experienced in 1998 will be
expected to continue into 1999 based on the continued low oil price
economy. During 1997, twelve monthly distributions were made totaling
$929,000, with $836,100 distributed to the limited partners and $92,900 to
the general partners. For the year ended December 31, 1997, distributions
of $41.81 per limited partner unit were made, based upon 20,000 limited
partner units outstanding. During 1996, twelve monthly distributions were
made totaling $1,138,887, with $1,025,487 distributed to the limited
partners and $113,400 to the general partners. For the year ended December
31, 1996, distributions of $51.27 per limited partner unit were made, based
upon 20,000 limited partner units outstanding.
Item 6. Selected Financial Data
The following selected financial data for the years ended December 31,
1998, 1997, 1996, 1995 and 1994 should be read in conjunction with the
financial statements included in Item 8:
Years ended December 31,
------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Revenues $ 367,745 964,866 1,317,978 1,030,181 1,125,877
Net income (loss) (49,492) 526,063 934,674 610,015 592,353
Partners' share
of net income (loss):
General partners (4,949) 52,607 93,468 61,001 59,235
Limited partners (44,543) 473,456 841,206 549,014 533,118
Limited partners'
net income (loss)
per unit (2.23) 23.67 42.06 27.45
26.66
Limited partners'
cash distributions
per unit 19.91 41.81 51.27 45.51
36.68
Total assets $2,152,173 2,641,528 3,044,532 3,249,010 3,648,821
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The Partnership was formed to acquire nonoperating interests in producing
oil and gas properties, to produce and market crude oil and natural gas
produced from such properties and to distribute any net proceeds from
operations to the general and limited partners. Net revenues from
producing oil and gas properties are not reinvested in other revenue
producing assets except to the extent that producing facilities and wells
are reworked or where methods are employed to improve or enable more
efficient recovery of oil and gas reserves. The economic life of the
Partnership thus depends on the period over which the Partnership's oil and
gas reserves are economically recoverable.
Increases or decreases in Partnership revenues and, therefore,
distributions to partners will depend primarily on changes in the prices
received for production, changes in volumes of production sold, lease
operating expenses, enhanced recovery projects, offset drilling activities
pursuant to farmout arrangements and on the depletion of wells. Since
wells deplete over time, production can generally be expected to decline
from year to year.
Well operating costs and general and administrative costs usually decrease
with production declines; however, these costs may not decrease
proportionately. Net income available for distribution to the limited
partners has fluctuated over the past few years and is expected to
fluctuate in later years based on these factors.
Based on current conditions, management anticipates performing no workovers
during 1999 to enhance production. With expected price improvement,
significant workovers may be performed in the year 2000 and 2001. The
partnership may have an increase in the years 2000 and 2001, but
thereafter, the Partnership could possibly experience it's historical
decline of approximately 9% per year.
Results of Operations
A. General Comparison of the Years Ended December 31, 1998 and 1997
The following table provides certain information regarding performance
factors for the years ended December 31, 1998 and 1997:
Year Ended Percentage
December 31, Increase
1998 1997 (Decrease)
---- ---- ---------
Average price per barrel of oil $ 12.38 18.81 (34%)
Average price per mcf of gas $ 1.89 2.44 (23%)
Oil production in barrels 40,600 50,100 (19%)
Gas production in mcf 453,300 471,100 (4%)
Income from net profits interests $ 362,778 955,069 (62%)
Partnership distributions $ 417,803 929,000 (55%)
Limited partner distributions $ 398,261 836,100 (52%)
Per unit distribution to limited partners $ 19.91 41.81
(52%)
Number of limited partner units 20,000 20,000
Revenues
The Partnership's income from net profits interests decreased to $362,778
from $955,069 for the years ended December 31, 1998 and 1997, respectively,
a decrease of 62%. The principal factors affecting the comparison of the
years ended December 31, 1998 and 1997 are as follows:
1. The average price for a barrel of oil received by the Partnership
decreased during the year ended December 31, 1998 as compared to the
year ended December 31, 1997 by 34%, or $6.43 per barrel, resulting in
a decrease of approximately $322,100 in income from net profits
interests. Oil sales represented 37% of total oil and gas sales during
the year ended December 31, 1998 as compared to 45% during the year
ended December 31, 1997.
The average price for an mcf of gas received by the Partnership
decreased during the same period by 23%, or $.55 per mcf, resulting in
a decrease of approximately $259,100 in income from net profits
interests.
The total decrease in income from net profits interests due to the
change in prices received from oil and gas production is approximately
$581,200. The market price for oil and gas has been extremely volatile
over the past decade and management expects a certain amount of
volatility to continue in the foreseeable future.
2. Oil production decreased approximately 9,500 barrels or 19% during the
year ended December 31, 1998 as compared to the year ended December 31,
1997, resulting in a decrease of approximately $117,600 in income from
net profits interests.
Gas production decreased approximately 17,800 mcf or 4% during the same
period, resulting in a decrease of approximately $33,600 in income from
net profits interests.
The total decrease in income from net profits interests due to the
change in production is approximately $151,200. The decrease in
production is in relation to downtime due to mechanical problems
uneconomical to repair at current oil prices and the sale of
properties.
3. Lease operating costs and production taxes were 12% lower, or
approximately $142,200 less during the year ended December 31, 1998 as
compared to the year ended December 31, 1997.
Costs and Expenses
Total costs and expenses decreased to $417,237 from $438,803 for the years
ended December 31, 1998 and 1997, respectively, a decrease of 5%. The
decrease is primarily the result of lower depletion expense, partially
offset by an increase in general and administrative costs.
1. General and administrative costs consists of independent accounting and
engineering fees, computer services, postage, and Managing General
Partner personnel costs. General and administrative costs increased 8%
or approximately $12,400 during the year ended December 31, 1998 as
compared to the year ended December 31, 1997.
2. Depletion expense decreased to $247,000 for the year ended December 31,
1998 from $281,000 for the same period in 1997. This represents a
decrease of 12%. Depletion is calculated using the units of revenue
method of amortization based on a percentage of current period gross
revenues to total future gross oil and gas revenues, as estimated by
the Partnership's independent petroleum consultants.
A contributing factor to the decrease in depletion expense between the
comparative periods was the decrease in the price of oil and gas used
to determine the Partnership's reserves for January 1, 1999 as compared
to 1998. Another contributing factor was due to the impact of
revisions of previous estimates on reserves. Revisions of previous
estimates can be attributed to the changes in production performance,
oil and gas price and production costs. The impact of the revision
would have decreased depletion expense approximately $29,000 as of
December 31, 1997.
Results of Operations
B. General Comparison of the Years Ended December 31, 1997 and 1996
The following table provides certain information regarding performance
factors for the years ended December 31, 1997 and 1996:
Year Ended Percentage
December 31, Increase
1997 1996 (Decrease)
---- ---- ---------
Average price per barrel of oil $ 18.81 21.12 (11%)
Average price per mcf of gas $ 2.44 2.43 -
Oil production in barrels 50,100 56,200 (11%)
Gas production in mcf 471,100 503,600 (6%)
Income from net profits interests $ 955,069 1,312,524 (27%)
Partnership distributions $ 929,000 1,138,887 (18%)
Limited partner distributions $ 836,100 1,025,487 (18%)
Per unit distribution to limited partners $ 41.81 51.27
(18%)
Number of limited partner units 20,000 20,000
Revenues
The Partnership's income from net profits interests decreased to $955,069
from $1,312,524 for the years ended December 31, 1997 and 1996,
respectively, a decrease of 27%. The principal factors affecting the
comparison of the years ended December 31, 1997 and 1996 are as follows:
1. The average price for a barrel of oil received by the Partnership
decreased during the year ended December 31, 1997 as compared to the
year ended December 31, 1996 by 11%, or $2.31 per barrel, resulting in
a decrease of approximately $130,000 in income from net profits
interests. Oil sales represented 45% of total oil and gas sales during
the year ended December 31, 1997 as compared to 49% during the year
ended December 31, 1996.
The average price for an mcf of gas received by the Partnership
increased during the same period by less than one percent, or $.01 per
mcf, resulting in an increase of approximately $5,000 in income from
net profits interests.
The net total decrease in income from net profits interests due to the
change in prices received from oil and gas production is approximately
$125,000. The market price for oil and gas has been extremely volatile
over the past decade and management expects a certain amount of
volatility to continue in the foreseeable future.
2. Oil production decreased approximately 6,100 barrels or 11% during the
year ended December 31, 1997 as compared to the year ended December 31,
1996, resulting in a decrease of approximately $115,000 in income from
net profits interests.
Gas production decreased approximately 32,500 mcf or 6% during the same
period, resulting in a decrease of approximately $79,000 in income from
net profits interests.
The total decrease in income from net profits interests due to the
change in production is approximately $194,000. Decrease is in part
due to normal decline and scaling and downtime.
3. Lease operating costs and production taxes were 4% higher, or
approximately $39,000 more during the year ended December 31, 1997 as
compared to the year ended December 31, 1996.
Costs and Expenses
Total costs and expenses increased to $438,803 from $383,304 for the years
ended December 31, 1997 and 1996, respectively, an increase of 14%. The
increase is primarily the result of higher depletion expense.
1. General and administrative costs consists of independent accounting and
engineering fees, computer services, postage, and Managing General
Partner personnel costs. General and administrative costs decreased
less than one percent or approximately $500 during the year ended
December 31, 1997 as compared to the year ended December 31, 1996.
Depletion expense increased to $281,000 for the year ended December 31,
1997 from $225,000 for the same period in 1996. This represents an
increase of 25%. Depletion is calculated using the units of revenue
method of amortization based on a percentage of current period gross
revenues to total future gross oil and gas revenues, as estimated by
the Partnership's independent petroleum consultants.
A contributing factor to the increase in depletion expense between the
comparative periods was the decrease in the price of oil and gas used
to determine the Partnership's reserves for January 1, 1998 as compared
to 1997. Another contributing factor was due to the impact of
revisions of previous estimates on reserves. Revisions of previous
estimates can be attributed to the changes in production performance,
oil and gas price and production costs. The impact of the revision
would have increased depletion expense approximately $52,000 as of
December 31, 1996.
C. Revenue and Distribution Comparison
Partnership net income (loss) for the years ended December 31, 1998, 1997
and 1996 was $(49,492) in 1998, $526,063 in 1997 and $934,674 in 1996.
Excluding the effects of depreciation, depletion and amortization, net
income for the years ended December 31, 1998, 1997 and 1996 would have been
$197,508, $807,063 and $1,159,674, respectively. Correspondingly,
Partnership distributions for the years ended December 31, 1998, 1997 and
1996 were $439,961, $929,000 and $1,138,887, respectively. These
differences are indicative of the changes in oil and gas prices, production
and properties during 1998, 1997 and 1996.
The sources for the 1998 distributions of $439,961 were oil and gas
operations of approximately $339,200 and the change in oil and gas
properties of approximately $98,400, with the balance from available cash
on hand at the beginning of the period. The sources for the 1997
distributions of $929,000 were oil and gas operations of approximately
$893,500 and the change in oil and gas properties of approximately $10,800,
with the balance from available cash on hand at the beginning of the
period. The sources for the 1996 distributions of $1,138,887 were oil and
gas operations of approximately $1,061,300 and property sales of
approximately $16,400, with the balance from available cash on hand at the
beginning of the period.
Total distributions during the year ended December 31, 1998 were $439,961
of which $398,261 was distributed to the limited partners and $41,700 to
the general partners. The per unit distribution to limited partners during
the same period was $19.91. Total distributions during the year ended
December 31, 1997 were $929,000 of which $836,100 was distributed to the
limited partners and $92,900 to the general partners. The per unit
distribution to limited partners during the same period was $41.81. Total
distributions during the year ended December 31, 1996 were $1,138,887 of
which $1,025,487 was distributed to the limited partners and $113,400 to
the general partners. The per unit distribution to limited partners during
the same period was $51.27.
Since inception of the Partnership, cumulative monthly cash distributions
of $14,676,459 have been made to the partners. As of December 31, 1998,
$13,224,282 or $661.21 per limited partner unit, has been distributed to
the limited partners, representing a 132% return of the capital
contributed.
Liquidity and Capital Resources
The primary source of cash is from operations, the receipt of income from
net profits interests in oil and gas properties. The Partnership knows of
no material change, nor does it anticipate any such change.
Cash flows provided by operating activities were approximately $339,200 in
1998 compared to approximately $893,500 in 1997 and approximately
$1,061,300 in 1996. The primary source of the 1998 cash flow from
operating activities was profitable operations.
Cash flows provided by investing activities were approximately $98,400 in
1998 compared to $10,800 in 1997 and approximately $16,400 in 1996. The
primary source of the 1998 cash flow from investing activities was the sale
of oil and gas properties.
Cash flows used in financing activities were approximately $439,900 in 1998
compared to $929,000 in 1997 and approximately $1,139,200 in 1996. The
only use in financing activities was the distributions to partners.
As of December 31, 1998, the Partnership had approximately $148,200 in
working capital. The Managing General Partner knows of no unusual
contractual commitments and believes the revenue generated from operations
are adequate to meet the needs of the Partnership.
Liquidity - Managing General Partner
The Managing General Partner has a highly leveraged capital structure with
over $21.0 million of interest payments due in 1999 on its debt
obligations. Due to severely depressed commodity prices, the Managing
General Partner is experiencing difficulty in generating sufficient cash
flow to meet its obligations and sustain its operations. The Managing
General Partner is currently in the process of renegotiating the terms of
its various obligations with its creditors and/or attempting to seek new
lenders or equity investors. Additionally, the Managing General Partner
would consider disposing of certain assets in order to meet its
obligations.
There can be no assurance that the Managing General Partner's debt
restructuring efforts will be successful or that the lenders will agree to
a course of action consistent with the Managing General Partners
requirements in restructuring the obligations. Even if such agreement is
reached, it may require approval of additional lenders, which is not
assured. Furthermore, there can be no assurance that the sales of assets
can be successfully accomplished on terms acceptable to the Managing
General Partner. Under current circumstances, the Managing General
Partner's ability to continue as a going concern depends upon its ability
to (1) successfully restructure its 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 Managing General Partner is unsuccessful in its efforts, it may be
unable to meet its obligations making it necessary to undertake such other
actions as may be appropriate to preserve asset values.
Information Systems for the Year 2000
The Managing General Partner is continuing in its effort to identify and
assess its exposure to the potential Year 2000 software and imbedded chip
processing and date sensitivity issue. Through the Managing General
Partners data processing subsidiary, Midland Southwest Software, Inc., the
Managing General Partner proactively initiated a plan to identify
applicable hardware and software, assess impact and effect, estimate costs,
construct and implement corrective actions, and prepare contingency plans.
Identification & Assessment
The Managing General Partner currently believes it has identified the
internal and external software and hardware that may have date sensitivity
problems. Four critical systems and/or functions were identified: (1) the
proprietary software of the Partnership (OGAS) that is used for oil & gas
property management and financial accounting functions, (2) the DEC VAX/VMS
hardware and operating system, (3) various third-party application software
including lease economic analysis, fixed asset management, geological
applications, and payroll/human resource programs, and (4) External Agents.
The proprietary software of the Partnership is currently in process of
meeting compliance requirements with an estimated completion date of mid-
year 1999. Since this is an internally generated software package, the
Managing General Partner has estimated the cost to be approximately $25,000
by estimating the necessary man-hours. These modifications are being made
by internal staff and do not represent additional costs to the Partnership.
The Managing General Partner has not made contingency plans at this time
since the conversion is ahead of schedule and being handled by Managing
General Partner controlled internal programmers. Given the complexity of
the systems being modified, it is anticipated that some problems may arise,
but with an expected early completion date, the Managing General Partner
feels that adequate time is available to overcome unforeseen delays.
DEC has released a fully compliant version of its operating system that is
used by the Partnership on the DEC VAX system. It will be installed in
August 1999, the Managing General Partner believes that this will solve any
potential problems on the system.
The Managing General Partner has identified various third-party software
that may have date sensitivity problems and is working with the vendors to
secure solutions as well as prepare contingency plans. After review and
evaluation of the vendor plans and status, the Managing General Partner
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 the Partnership include suppliers, customers,
owners, vendors, banks, product purchasers including pipelines, and other
oil and gas property operators. The Managing General Partner 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 the Managing General Partner, 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
the Partnership's business. The Managing General Partner estimates
completion of this audit by mid-year 1999 and believes that alternate plans
can be devised to circumvent any material problems arising from critical
External Agent noncompliance.
Cost
To date, the Managing General Partner has incurred only minimal internal
man-hour costs for identification, planning, and maintenance. The Managing
General Partner 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
$50,000.
Risks/Contingency
The failure to correct critical systems of the Partnership, 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 the
Partnership to continue operations and meet obligations. Based on the
Managing General Partner'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 the
Partnership. However, until all assessment is complete, it is impossible
to accurately identify the risks, quantify potential impacts or establish a
final contingency plan. The Managing General Partner believes that its
assessment and contingency planning will be complete no later than mid-year
1999.
Worst Case Scenario
The Securities and Exchange Commission requires that public companies must
forecast the most reasonably likely worst case Year 2000 scenario, assuming
that the Managing General Partner's Year 2000 plan is not effective.
Analysis of the most reasonably likely worst case Year 2000 scenarios the
Partnership 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 the Partnership; widespread
disruption of the services of communications common carriers; similar
disruption to means and modes of transportation for the Partnership and its
employees, contractors, suppliers, and customers; significant disruption to
the Partnership'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 the Partnership's critical systems. The Partnership could
experience an inability by customers, traders, and others to pay, on a
timely basis or at all, obligations owed to the Partnership. Under these
circumstances, the adverse effect on the Partnership, and the diminution of
Partnership revenues, could be material, although not quantifiable at this
time.
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements
Page
Independent Auditors Reports 22
Balance Sheets 24
Statements of Operations 25
Statement of Changes in Partners' Equity 26
Statements of Cash Flows 27
Notes to Financial Statements 29
INDEPENDENT AUDITORS REPORT
The Partners
Southwest Royalties, Inc. Income Fund VI
(A Tennessee Limited Partnership):
We have audited the accompanying balance sheets of Southwest Royalties,
Inc. Income Fund VI (the "Partnership") as of December 31, 1998 and 1997,
and the related statements of operations, changes in partners' equity and
cash flows for the years then ended. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Southwest Royalties,
Inc. Income Fund VI as of December 31, 1998 and 1997 and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
KPMG LLP
Midland, Texas
March 18, 1999
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners
Southwest Royalties, Inc.
Income Fund VI
Midland, Texas
We have audited the accompanying statements of operations, changes in
partners' equity and cash flows of Southwest Royalties, Inc. Income Fund VI
for the year ended December 31, 1996. These financial statements are the
responsibility of the partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statements of operations,
changes in partners equity and cash flows are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statements of operations,
changes in partners equity and cash flows. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the
statements of operations, changes in partners equity and cash flows. We
believe that our audit of the statements of operations, changes in partners
equity and cash flows provides a reasonable basis for our opinion.
In our opinion, the statements of operations, changes in partners equity
and cash flows referred to above present fairly, in all material respects,
the results of operations and cash flows of Southwest Royalties, Inc.
Income Fund VI for the year ended December 31, 1996, in conformity with
generally accepted accounting principles.
JOSEPH DECOSIMO AND COMPANY
A Tennessee Registered Limited Liability
Partnership
Chattanooga, Tennessee
March 14, 1997
Southwest Royalties, Inc. Income Fund VI
(a Tennessee limited partnership)
Balance Sheets
December 31, 1998 and 1997
1998 1997
---- ----
Assets
Current assets:
Cash and cash equivalents $ 38,539 40,719
Receivable from Managing General Partner 110,000 251,738
Other receivable - 20,000
- --------- ---------
Total current assets
148,539 312,457
- --------- ---------
Oil and gas properties - using the full-
cost method of accounting 8,426,634 8,505,071
Less accumulated depreciation,
depletion and amortization
6,423,000 6,176,000
- --------- ---------
Net oil and gas properties
2,003,634 2,329,071
- --------- ---------
$
2,152,173 2,641,528
========= =========
Liabilities and Partners' Equity
Current liability - Distribution payable $ 301 203
- --------- ---------
Partners' equity:
General partners (639,382) (592,733)
Limited partners 2,791,254 3,234,058
- --------- ---------
Total partners' equity
2,151,872 2,641,325
- --------- ---------
$
2,152,173 2,641,528
========= =========
The accompanying notes are an integral
part of these financial statements.
Southwest Royalties, Inc. Income Fund VI
(a Tennessee limited partnership)
Statements of Operations
Years ended December 31, 1998, 1997 and 1996
1998 1997
1996
---- ----
- ----
Revenues
Income from net profits interests $ 362,778 955,0691,312,524
Interest 4,967 9,797 5,454
-------
- --------- ---------
367,745
964,866 1,317,978
-------
- --------- ---------
Expenses
General and administrative 170,237 157,803 158,304
Depreciation, depletion and amortization 247,000 281,000 225,000
-------
- --------- ---------
417,237
438,803 383,304
-------
- --------- ---------
Net income (loss) $ (49,492) 526,063 934,674
=======
========= =========
Net income (loss) allocated to:
Managing General Partner $ (4,454) 47,346 84,121
=======
========= =========
General partner $ (495) 5,261 9,347
=======
========= =========
Limited partners $ (44,543) 473,456 841,206
=======
========= =========
Per limited partner unit $ (2.23) 23.67 42.06
=======
========= =========
The accompanying notes are an integral
part of these financial statements.
Southwest Royalties, Inc. Income Fund VI
(a Tennessee limited partnership)
Statement of Changes in Partners' Equity
Years ended December 31, 1998, 1997 and 1996
General Limited
Partners Partners Total
-------- -------- -----
Balance at December 31, 1995 $ (532,508) 3,780,983 3,248,475
Net income 93,468 841,206 934,674
Distributions (113,400) (1,025,487)(1,138,887)
--------
- ---------- ----------
Balance at December 31, 1996 (552,440) 3,596,702 3,044,262
Net income 52,607 473,456 526,063
Distributions (92,900) (836,100) (929,000)
--------
- ---------- ----------
Balance at December 31, 1997 (592,733) 3,234,058 2,641,325
Net income (loss) (4,949) (44,543) (49,492)
Distributions (41,700) (398,261) (439,961)
--------
- ---------- ----------
Balance at December 31, 1998 $ (639,382) 2,791,254 2,151,872
========
========== ==========
The accompanying notes are an integral
part of these financial statements.
Southwest Royalties, Inc. Income Fund VI
(a Tennessee limited partnership)
Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
1998 1997
1996
---- ----
- ----
Cash flows from operating activities:
Cash received from net profits interests $ 489,768 1,041,5211,213,980
Cash paid to Managing General Partner
for administrative fees and general
and administrative overhead
(155,489) (157,803)(158,182)
Interest received 4,967 9,797 5,454
--------
- --------- ---------
Net cash provided by operating activities 339,246 893,515
1,061,252
--------
- --------- ---------
Cash provided by investing activities:
Sale of oil and gas properties 98,437 10,833 16,397
--------
- --------- ---------
Cash used in financing activities:
Distributions to partners (439,863) (929,067)(1,139,152)
--------
- --------- ---------
Net decrease in cash and cash equivalents (2,180) (24,719) (61,503)
Beginning of year 40,719 65,438 126,941
--------
- --------- ---------
End of year $ 38,539 40,719 65,438
========
========= =========
(continued)
The accompanying notes are an integral
part of these financial statements.
Southwest Royalties, Inc. Income Fund VI
(a Tennessee limited partnership)
Statements of Cash Flows, continued
Years ended December 31, 1998, 1997 and 1996
1998 1997
1996
---- ----
- ----
Reconciliation of net income (loss) to net
cash provided by operating activities:
Net income (loss) $ (49,492) 526,063 934,674
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation, depletion and amortization 247,000 281,000
225,000
(Increase) decrease in receivables 126,990 86,452 (98,422)
Increase in payables 14,748 - -
-------
- --------- -------
Net cash provided by operating activities $ 339,246 893,5151,061,252
=======
========= =======
Supplemental schedule of noncash investing
and financing activities:
Sale of oil and gas property included in
receivable from Managing General Partner $ - 20,000
- -
================
=======
The accompanying notes are an integral
part of these financial statements.
Southwest Royalties, Inc. Income Fund VI
(a Tennessee limited partnership)
Notes to Financial Statements
1. Organization
Southwest Royalties, Inc. Income Fund VI was organized under the
laws of the state of Tennessee on December 4, 1986, for the purpose of
acquiring producing oil and gas properties and to produce and market
crude oil and natural gas produced from such properties for a term of
50 years, unless terminated at an earlier date as provided for in the
Partnership Agreement. The Partnership sells its oil and gas
production to a variety of purchasers with the prices it receives being
dependent upon the oil and gas economy. Southwest Royalties, Inc.
serves as the Managing General Partner and H. H. Wommack, III, as the
individual general partner. Revenues, costs and expenses are allocated
as follows:
Limited General
Partners Partners
-------- --------
Interest income on capital contributions 100% -
Oil and gas sales 90% 10%
All other revenues 90% 10%
Organization and offering costs (1) 100% -
Amortization of organization costs 100% -
Property acquisition costs 100% -
Gain/loss on property disposition 90% 10%
Operating and administrative costs (2) 90% 10%
Depreciation, depletion and amortization
of oil and gas properties 90% 10%
All other costs 90% 10%
(1)All organization costs in excess of 3% of initial capital
contributions will be paid by the Managing General Partner and
will be treated as a capital contribution. The Partnership paid
the Managing General Partner an amount equal to 3% of initial
capital contributions for such organization costs.
(2)Administrative costs in any year which exceed 2% of capital
contributions shall be paid by the Managing General Partner and
will be treated as a capital contribution.
Southwest Royalties, Inc. Income Fund VI
(a Tennessee limited partnership)
Notes to Financial Statements
2. Summary of Significant Accounting Policies
Oil and Gas Properties
Oil and gas properties 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. Gain or loss on
the sale of oil and gas properties is not recognized unless significant
oil and gas reserves are involved.
The Partnership's policy for depreciation, depletion and amortization
of oil and gas properties is computed under the units of revenue
method. Under the units of revenue method, depreciation, depletion and
amortization 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.
Under the units of revenue method, the Partnership computes the
provision by multiplying the total unamortized cost of oil and gas
properties by an overall rate determined by dividing (a) oil and gas
revenues during the period by (b) the total future gross oil and gas
revenues as estimated by the Partnership's independent petroleum
consultants. It is reasonably possible that those estimates of
anticipated future gross revenues, the remaining estimated economic
life of the product, or both could be changed significantly in the near
term due to the potential fluctuation of oil and gas prices or
production. The depletion estimate would also be affected by this
change.
Should the net capitalized costs exceed the estimated present value of
oil and gas reserves, discounted at 10%, such excess costs would be
charged to current expense. As of December 31, 1998, 1997 and 1996,
the net capitalized costs did not exceed the estimated present value of
oil and gas reserves.
The Partnership's interest in oil and gas properties consists of net
profits interests in proved properties located within the continental
United States. A net profits interest is created when the owner of a
working interest in a property enters into an arrangement providing
that the net profits interest owner will receive a stated percentage of
the net profit from the property. The net profits interest owner will
not otherwise participate in additional costs and expenses of the
property.
Southwest Royalties, Inc. Income Fund VI
(a Tennessee limited partnership)
Notes to Financial Statements
2. Summary of Significant Accounting Policies - continued
Estimates and Uncertainties
The preparation of 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 disclosure 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.
Syndication Costs
Syndication costs are accounted for as a reduction of partnership
equity.
Environmental Costs
The Partnership 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 Partnership 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. Costs which
improve a property as compared with the condition of the property when
originally constructed or acquired and costs which prevent future
environmental contamination are capitalized. 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 non-capital nature are recorded when environmental assessment and/or
remediation is probable, and the costs can be reasonably estimated.
Gas Balancing
The Partnership utilizes the sales method of accounting for gas-
balancing arrangements. Under this method the Partnership recognizes
sales revenue on all gas sold. As of December 31, 1998, the
Partnership was, over produced by 1,596. As of December 31, 1997 and
1996, the Partnership was under produced by 16,527 and 16,728 mcf of
gas, respectively.
Income Taxes
No provision for income taxes is reflected in these financial
statements, since the tax effects of the Partnership's income or loss
are passed through to the individual partners.
In accordance with the requirements of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes", the
Partnership's tax basis in its net oil and gas properties at December
31, 1998 and 1997 is $892,768 and $938,887, respectively, less than
that shown on the accompanying Balance Sheets in accordance with
generally accepted accounting principles.
Southwest Royalties, Inc. Income Fund VI
(a Tennessee limited partnership)
Notes to Financial Statements
2. Summary of Significant Accounting Policies - continued
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Partnership considers
all highly liquid debt instruments purchased with a maturity of three
months or less to be cash equivalents. The Partnership maintains its
cash at one financial institution.
Number of Limited Partner Units
As of December 31, 1998, 1997 and 1996, there were 20,000 limited
partner units outstanding held by 848, 876 and 909 partners.
Concentrations of Credit Risk
The Partnership is subject to credit risk through trade receivables.
Although a substantial portion of its debtors' ability to pay is
dependent upon the oil and gas industry, credit risk is minimized due
to a large customer base. All partnership revenues are received by the
Managing General Partner and subsequently remitted to the partnership
and all expenses are paid by the Managing General Partner and
subsequently reimbursed by the partnership.
Fair Value of Financial Instruments
The carrying amount of cash and accounts receivable approximates fair
value due to the short maturity of these instruments.
Net Income (loss) per limited partnership unit
The net income (loss) per limited partnership unit is calculated by
using the number of outstanding limited partnership units.
3. Liquidity - Managing General Partner
The Managing General Partner has a highly leveraged capital structure
with over $21.0 million of interest payments due in 1999 on its debt
obligations. Due to severely depressed commodity prices, the Managing
General Partner is experiencing difficulty in generating sufficient
cash flow to meet its obligations and sustain its operations. The
Managing General Partner is currently in the process of renegotiating
the terms of its various obligations with its creditors and/or
attempting to seek new lenders or equity investors. Additionally, the
Managing General Partner would consider disposing of certain assets in
order to meet its obligations.
There can be no assurance that the Managing General Partner's debt
restructuring efforts will be successful or that the lenders will agree
to a course of action consistent with the Managing General Partners
requirements in restructuring the obligations. Even if such agreement
is reached, it may require approval of additional lenders, which is not
assured. Furthermore, there can be no assurance that the sales of
assets can be successfully accomplished on terms acceptable to the
Managing General Partner. Under current circumstances, the Managing
General Partner's ability to continue as a going concern depends upon
its ability to (1) successfully restructure its 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 Managing General Partner is unsuccessful in
its efforts, it may be unable to meet its obligations making it
necessary to undertake such other actions as may be appropriate to
preserve asset values.
Southwest Royalties, Inc. Income Fund VI
(a Tennessee limited partnership)
Notes to Financial Statements
4. Commitments and Contingent Liabilities
After completion of the Partnership's first full fiscal year of
operations and each year thereafter, the Managing General Partner has
offered and will continue to offer to purchase each limited partner's
interest in the Partnership, at a price based on tangible assets of the
Partnership, plus the present value of the future net revenues of
proved oil and gas properties, minus liabilities with a risk factor
discount of up to one-third which may be implemented at the sole
discretion of the Managing General Partner. However, the Managing
General Partner's obligation to purchase limited partner units is
limited to an expenditure of an amount not in excess of 10% of the
total limited partner units initially subscribed for by limited
partners.
The Partnership is subject to various federal, state and local
environmental laws and regulations which establish standards and
requirements for protection of the environment. The Partnership cannot
predict the future impact of such standards and requirements, which are
subject to change and can have retroactive effectiveness. The
Partnership continues to monitor the status of these laws and
regulations.
As of December 31, 1998, the Partnership has not been fined, cited or
notified of any environmental violations and management is not aware of
any unasserted violations which would have a material adverse effect
upon capital expenditures, earnings or the competitive position in the
oil and gas industry. However, the Managing General Partner does
recognize by the very nature of its business, material costs could be
incurred in the near term to bring the Partnership into total
compliance. The amount of such future expenditures is not 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 Partnership'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 Partnership's properties.
Southwest Royalties, Inc. Income Fund VI
(a Tennessee limited partnership)
Notes to Financial Statements
5. Related Party Transactions
A significant portion of the oil and gas properties in which the
Partnership has an interest are operated by and purchased from the
Managing General Partner. As is usual in the industry and as provided
for in the operating agreement for each respective oil and gas property
in which the Partnership has an interest, the operator is paid an
amount for administrative overhead attributable to operating such
properties, with such amounts to Southwest Royalties, Inc. as operator
approximating $128,200, $125,000 and $132,000, for the years ended
December 31, 1998, 1997 and 1996, respectively. In addition, the
Managing General Partner and certain officers and employees may have an
interest in some of the properties in which the Partnership also
participates.
Certain subsidiaries or affiliates of the Managing General Partner
perform various oilfield services for properties in which the
Partnership owns an interest. Such services aggregated approximately
$16,200, $4,000 and $18,000, for the years ended December 31, 1998,
1997 and 1996, respectively, and the Managing General Partner believes
that these costs are comparable to similar charges paid by the
Partnership to unrelated third parties.
Southwest Royalties, Inc., the Managing General Partner, was paid
$144,000 during 1998, 1997 and 1996, as an administrative fee for
indirect general and administrative overhead expenses.
Receivables from Southwest Royalties, Inc., the Managing General
Partner, of approximately $110,000 and $251,738 are from oil and gas
production, net of lease operating costs and production taxes, as of
December 31, 1998 and 1997, respectively.
In addition, a director and officer of the Managing General Partner is
a partner in a law firm, with such firm providing legal services to the
Partnership approximating $900, $1,300 and 1,300, for the years ended
December 31, 1998, 1997 and 1996, respectively.
6. Major Customers
No material portion of the Partnership's business is dependent on a
single purchaser, or a very few purchasers, where the loss of one would
have a material adverse impact on the Partnership. Two purchasers
accounted for 49% of the Partnership's total oil and gas production
during 1998: Nustar Joint Venture 38% and Scurlock Permian LLC 11%.
Five purchasers accounted for 67% of the Partnership's total oil and
gas production during 1997: Nustar Joint Venture 17%, Torch Operating
Company 16%, Scurlock Permian Corporation 13%, Aquila Southwest
Pipeline Corporation 11% and Enron Oil and Transportation Incorporated
10%. Four purchasers accounted for 63% of the Partnership's total oil
and gas production during 1996: Torch Operating Company 28%, Scurlock
Permian Corporation 14%, Aquila Southwest Pipeline Corporation 11% and
Enron Oil and Transportation Inc 10%. All purchasers of the
Partnership's oil and gas production are unrelated third parties. In
the event any of these purchasers were to discontinue purchasing the
Partnership's production, the Managing General Partner believes that a
substitute purchaser or purchasers could be located without undue
delay. No other purchaser accounted for an amount equal to or greater
than 10% of the Partnership's sales of oil and gas production.
Southwest Royalties, Inc. Income Fund VI
(a Tennessee limited partnership)
Notes to Financial Statements
7. Estimated Oil and Gas Reserves (unaudited)
The Partnership's interest in proved oil and gas reserves is as
follows:
Oil (bbls)
Gas (mcf)
----------
- ---------
Proved developed and undeveloped reserves -
January 1, 1996 646,000 5,401,000
Revisions of previous estimates 87,000 933,000
Production (56,000) (504,000)
Sale of minerals in place - (55,000)
------- ---------
December 31, 1996 677,000 5,775,000
Revisions of previous estimates (106,000) (1,452,000)
Production (50,000) (471,000)
Sale of minerals in place (11,000) -
------- ---------
December 31, 1997 510,000 3,852,000
Revisions of previous estimates (204,000) 1,802,000
Production (41,000) (453,000)
Sale of minerals in place (9,000) (118,000)
------- ---------
December 31, 1998 256,000 5,083,000
======= =========
Proved developed reserves -
December 31, 1996 590,000 5,516,000
======= =========
December 31, 1997 428,000 3,544,000
======= =========
December 31, 1998 216,000 4,891,000
======= =========
All of the Partnership's reserves are located within the continental
United States.
*Ryder Scott Company Petroleum Engineers prepared the reserve and
present value data for 96.4% of the Partnership's existing properties
as of January 1, 1999. Another independent petroleum engineer prepared
the remaining 3.6% of the Partnership's properties. The reserve
estimates were made in accordance with guidelines established by the
Securities and Exchange Commission pursuant to Rule 4-10(a) of
Regulation S-X. Such guidelines require oil and gas reserve reports be
prepared under existing economic and operating conditions with no
provisions for price and cost escalation except by contractual
arrangements.
The New York Mercantile Exchange price at December 31, 1998 of $12.05
was used as the beginning basis for the oil price. Oil price
adjustments from $12.05 per barrel were made in the individual
evaluations to reflect oil quality, gathering and transportation costs.
The results are an average price received at the lease of $10.37 per
barrel in the preparation of the reserve report as of January 1, 1999.
Southwest Royalties, Inc. Income Fund VI
(a Tennessee limited partnership)
Notes to Financial Statements
7. Estimated Oil and Gas Reserves (unaudited) - continued
In the determination of the gas price, the New York Mercantile Exchange
price at December 31, 1998 of $1.95 was used as the beginning basis.
Gas price adjustments from $1.95 per Mcf were made in the individual
evaluations to reflect BTU content, gathering and transportation costs
and gas processing and shrinkage. The results are an average price
received at the lease of $1.65 per Mcf in the preparation of the
reserve report as of January 1, 1999.
The evaluation of oil and gas properties is not an exact science and
inevitably involves a significant degree of uncertainty, particularly
with respect to the quantity of oil or gas that any given property is
capable of producing. Estimates of oil and gas reserves are based on
available geological and engineering data, the extent and quality of
which may vary in each case and, in certain instances, may prove to be
inaccurate. Consequently, properties may be depleted more rapidly than
the geological and engineering data have indicated.
Unanticipated depletion, if it occurs, will result in lower reserves
than previously estimated; thus an ultimately lower return for the
Partnership. Basic changes in past reserve estimates occur annually.
As new data is gathered during the subsequent year, the engineer must
revise his earlier estimates. A year of new information, which is
pertinent to the estimation of future recoverable volumes, is available
during the subsequent year evaluation. In applying industry standards
and procedures, the new data may cause the previous estimates to be
revised. This revision may increase or decrease the earlier estimated
volumes. Pertinent information gathered during the year may include
actual production and decline rates, production from offset wells
drilled to the same geologic formation, increased or decreased water
production, workovers, and changes in lifting costs, among others.
Accordingly, reserve estimates are often different from the quantities
of oil and gas that are ultimately recovered.
The Partnership has reserves which are classified as proved developed
producing, proved developed non-producing and proved undeveloped. All
of the proved reserves are included in the engineering reports which
evaluate the Partnership's present reserves.
Because the Partnership does not engage in drilling activities, the
development of proved undeveloped reserves is conducted pursuant to
farmout arrangements with the Managing General Partner or unrelated
third parties. Generally, the Partnership retains a carried interest
such as an overriding royalty interest under the terms of a farmout, or
receives cash.
Southwest Royalties, Inc. Income Fund VI
(a Tennessee limited partnership)
Notes to Financial Statements
7. Estimated Oil & Gas Reserves (unaudited) - continued
The standardized measure of discounted future net cash flows relating
to proved oil and gas reserves at December 31, 1998, 1997 and 1996 is
presented below:
1998 1997 1996
---- ---- ----
Future cash inflows, net of
production and development
costs $ 7,278,000 9,969,000 24,773,000
10% annual discount for
estimated timing of cash
flows 3,397,000 3,406,000 10,585,000
--------- ---------- ----------
Standardized measure of
discounted future net cash
flows $ 3,881,000 6,563,000 14,188,000
========= ========== ==========
The principal sources of change in the standardized measure of
discounted future net cash flows for the years ended December 31,
1998, 1997 and 1996 are as follows:
1998 1997 1996
---- ---- ----
Sales of oil and gas produced,
net of production costs $ (362,000)
(955,000) (2,279,000)
Changes in prices and production
costs (1,423,000) (7,159,000) 6,157,000
Changes in estimated future development
cost (29,000) -
- -
Changes of production rates
(timing) and others (1,736,000) 1,053,000 432,000
Sales of minerals in place (131,000) (15,000) (31,000)
Revisions of previous
quantities estimates 343,000
(1,968,000) (220,000)
Accretion of discount 656,000 1,419,000 1,251,000
Discounted future net
cash flows -
Beginning of year 6,563,000 14,188,000 8,878,000
---------- ---------- ----------
End of year $ 3,881,000 6,563,000 14,188,000
========== ========== ==========
Future net cash flows were computed using year-end prices and costs
that related to existing proved oil and gas reserves in which the
Partnership has mineral interests.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
On June 9, 1997 Southwest Royalties, Inc. the Partnership's Managing
General Partner (Southwest Royalties, Inc.) dismissed Joseph Decosimo and
Company as the Partnership's independent accountants. The Managing General
Partner's Board of Directors approved the decision to change the
Partnership's independent accountants.
The report of Joseph Decosimo and Company on the financial statements for
the fiscal year ended December 31, 1996 contained no adverse opinion or
disclaimer of opinion and was not qualified or modified as to uncertainty,
audit scope or accounting principle.
In connection with its audit for the fiscal year ended December 31, 1996
and through June 9, 1997, there have been no disagreements with Joseph
Decosimo and Company on any matter of accounting principles or practices,
financial statements disclosure, or auditing scope or procedure, which
disagreements if not resolved to the satisfaction of Joseph Decosimo and
Company would have caused them to make reference thereto in their report on
the financial statements for such year.
The Registrant has requested that Joseph Decosimo and Company furnish it
with a letter addressed to the SEC stating whether or not is agrees with
the above statements. A copy of that letter is included as Exhibit 16 and
has been filed with the Securities and Exchange Commission.
Part III
Item 10. Directors and Executive Officers of the Registrant
Management of the Partnership is provided by Southwest Royalties, Inc., as
Managing General Partner. The names, ages, offices, positions and length
of service of the directors and executive officers of Southwest Royalties,
Inc. are set forth below. Each director and executive officer serves for a
term of one year. The present directors of the Managing General Partner
have served in their capacity since the Company's formation in 1983.
Name Age Position
- -------------------- --- -----------------------------------
- -------
H. H. Wommack, III 43 Chairman of the Board,
President,
Chief Executive Officer, Treasurer
and Director
H. Allen Corey 43 Secretary and Director
Bill E. Coggin 44 Vice President and Chief
Financial Officer
Jon P. Tate 41 Vice President, Land and
Assistant Secretary
R. Douglas Keathley 43 Vice President, Operations
J. Steven Person 40 Vice President, Marketing
Paul L. Morris 57 Director
H. H. Wommack, III, is Chairman of the Board, President, Chief Executive
Officer, Treasurer, principal stockholder and a director of the Managing
General Partner, and has served as its President since the Company's
organization in August, 1983. Prior to the formation of the Company, Mr.
Wommack was a self-employed independent oil producer engaged in the
purchase and sale of royalty and working interests in oil and gas leases,
and the drilling of exploratory and developmental oil and gas wells. Mr.
Wommack holds a J.D. degree from the University of Texas from which he
graduated in 1980, and a B.A. from the University of North Carolina in
1977.
H. Allen Corey, a founder of the Managing General Partner, has served as
the Managing General Partner's secretary and a director since its
inception. Mr. Corey is President of Trolley Barn Brewery, Inc., a brew
pub restaurant chain based in the Southeast. Prior to his involvement with
Trolley Barn, Mr. Corey was a partner at the law firm of Miller & Martin in
Chattanooga, Tennessee. He is currently of counsel to the law firm of
Baker, Donelson, Bearman & Caldwell, with the offices in Chattanooga,
Tennessee. Mr. Corey received a J.D. degree from the Vanderbilt University
Law School and B.A. degree from the University of North Carolina at Chapel
Hill.
Bill E. Coggin, Vice President and Chief Financial Officer, has been with
the Managing General Partner since 1985. Mr. Coggin was Controller for Rod
Ric Corporation of Midland, Texas, an oil and gas drilling company, during
the latter part of 1984. He was Controller for C.F. Lawrence & Associates,
Inc., an independent oil and gas operator also of Midland, Texas during the
early part of 1984. Mr. Coggin taught public school for four years prior
to his business experience. Mr. Coggin received a B.S. in Education and a
B.B.A. in Accounting from Angelo State University.
Jon P. Tate, Vice President, Land and Assistant Secretary, assumed his
responsibilities with the Managing General Partner in 1989. Prior to
joining the Managing General Partner, Mr. Tate was employed by C.F.
Lawrence & Associates, Inc., an independent oil and gas company, as Land
Manager from 1981 through 1989. Mr. Tate is a member of the Permian Basin
Landman's Association and received his B.B.S. degree from Hardin-Simmons
University.
R. Douglas Keathley, Vice President, Operations, assumed his
responsibilities with the Managing General Partner as a Production Engineer
in October, 1992. Prior to joining the Managing General Partner, Mr.
Keathley was employed for four (4) years by ARCO Oil & Gas Company as
senior drilling engineer working in all phases of well production (1988-
1992), eight (8) years by Reading & Bates Petroleum Company as senior
petroleum engineer responsible for drilling (1980-1988) and two (2) years
by Tenneco Oil Company as drilling engineer responsible for all phases of
drilling (1978-1980). Mr. Keathley received his B.S. in Petroleum
Engineering in 1977 from the University of Oklahoma.
J. Steven Person, Vice President, Marketing, assumed his responsibilities
with the Managing General Partner as National Marketing Director in 1989.
Prior to joining the Managing General Partner, Mr. Person served as Vice
President of Marketing for CRI, Inc., and was associated with Capital
Financial Group and Dean Witter (1983). He received a B.B.A. from Baylor
University in 1982 and an M.D.A. from Houston Baptist University in 1987.
Paul L. Morris has served as a Director of Southwest Royalties Holdings,
Inc. since August 1998 and Southwest Royalties, Inc. since September 1998.
Mr. Morris is President and CEO of Wagner & Brown, Ltd., one of the largest
independently owned oil and gas companies in the United States. Prior to
his position with Wagner & Brown, Mr. Morris served as President of Banner
Energy and in various managerial positions with Columbia Gas System, Inc.
Key Employees
Accounting and Administrative Officer - Debbie A. Brock, age 46, assumed
her position with the Managing General Partner in 1991. Prior to joining
the Managing General Partner, Ms. Brock was employed with Western Container
Corporation as Accounting Manager (1982-1990), Synthetic Industries
(Texas), Inc. as Accounting Manager (1976-1982) and held various accounting
positions in the manufacturing industry (1971-1975). Ms. Brock received a
B.B.A. from the University of Houston.
Controller - Robert A. Langford, age 49, assumed his responsibilities with
the Managing General Partner in 1992. Mr. Langford received his B.B.A.
degree in Accounting in 1975 from the University of Central Arkansas.
Prior to joining the Managing General Partner, Mr. Langford was employed
with Forest Oil Corporation as Corporate Coordinator, Regional Coordinator,
Accounting Manager. He held various other positions from 1982-1992 and
1976-1980 and was Assistant Controller of National Oil Company from 1980-
1982.
Financial Reporting Manager - Bryan Dixon, C.P.A., age 32, assumed his
responsibilities with the Managing General Partner in 1992. Mr. Dixon
received his B.B.A. degree in Accounting in 1988 from Texas Tech University
in Lubbock, Texas. Prior to joining the Managing General Partner, Mr.
Dixon was employed as a Senior Auditor with Johnson, Miller & Company from
1991-1992 and Audit Supervisor for Texas Tech University and the Texas Tech
University Health Sciences Center from 1988-1991.
Production Superintendent - Steve C. Garner, age 57, assumed his
responsibilities with the Managing General Partner as Production
Superintendent in July, 1989. Prior to joining the Managing General
Partner, Mr. Garner was employed 16 years by Shell Oil Company working in
all phases of oil field production as operations foreman, one and one-half
years with Petroleum Corporation of Delaware as Production Superintendent,
six years as an independent engineering consultant, and one year with
Citation Oil & Gas Corp. as a workover, completion and production foreman.
Mr. Garner has worked extensively in the Permian Basin oil field for the
last 25 years.
Tax Manager - Carolyn Cookson, age 42, assumed her position with the
Managing General Partner in April 1989. Prior to joining the Managing
General Partner, Ms. Cookson was employed as Director of Taxes at C.F.
Lawrence & Associates, Inc. from 1983 to 1989, and worked in public
accounting at McCleskey, Cook & Green, P.C. from 1981 to 1983 and Deanna
Brady, C.P.A. from 1980 to 1981. She is a member of the Permian Basin
Chapter of the Petroleum Accountants' Society, and serves on its Board of
Directors and is liaison to the Tax Committee. Ms. Cookson received a
B.B.A. in accounting from New Mexico State University.
Investor Relations Manager - Sandra K. Flournoy, age 52, came to Southwest
Royalties, Inc. in 1988 from Parker & Parsley Petroleum, where she was
Assistant Manager of Investor Services and Broker/Dealer Relations for two
years. Prior to that, Ms. Flournoy was Administrative Assistant to the
Superintendent at Greenwood ISD for four years.
In certain instances, the Managing General Partner will engage professional
petroleum consultants and other independent contractors, including
engineers and geologists in connection with property acquisitions,
geological and geophysical analysis, and reservoir engineering. The
Managing General Partner believes that, in addition to its own "in-house"
staff, the utilization of such consultants and independent contractors in
specific instances and on an "as-needed" basis allows for greater
flexibility and greater opportunity to perform its oil and gas activities
more economically and effectively.
Item 11. Executive Compensation
The Partnership does not have any directors or executive officers. The
executive officers of the Managing General Partner do not receive any cash
compensation, bonuses, deferred compensation or compensation pursuant to
any type of plan, from the Partnership. The Managing General Partner
received $144,000 during 1998, 1997 and 1996 as an annual administrative
fee.
Item 12. Security Ownership of Certain Beneficial Owners and Management
There are no limited partners who own of record, or are known by the
Managing General Partner to beneficially own, more than five percent of the
Partnership's limited partnership interests.
The Managing General Partner owns a nine percent interest as a general
partner. Through repurchase offers to the limited partners, the Managing
General Partner also owns 3,912 limited partner units, a 19.6% limited
partner interest. The Managing General Partners total percentage interest
ownership in the Partnership is 26.53%.
No officer or director of the Managing General Partner owns Units in the
Partnership. H. H. Wommack, III, as the individual general partner of the
Partnership owns a one percent interest in the Partnership as a general
partner. The officers and directors of the Managing General Partner are
considered beneficial owners of the limited partner units acquired by the
Managing General Partner by virtue of their status as such. A list of
beneficial owners of limited partner units, acquired by the Managing
General Partner, is as follows:
Amount and
Nature of Percent
Name and Address of Beneficial of
Title of Class Beneficial Owner Ownership Class
- ------------------- --------------------------- --------------- -------
Limited Partnership Southwest Royalties, Inc. Directly Owns 19.6%
Interest Managing General Partner
3,912 Units
407 N. Big Spring Street
Midland, TX 79701
Limited Partnership H. H. Wommack, III Indirectly Owns 19.6%
Interest Chairman of the Board,
3,912 Units
President, CEO, Treasurer
and Director of Southwest
Royalties, Inc., the
Managing General Partner
407 N. Big Spring Street
Midland, TX 79701
Limited Partnership H. Allen Corey Indirectly Owns 19.6%
Interest Secretary and Director of
3,912 Units
Southwest Royalties, Inc.,
the Managing General
Partner
633 Chestnut Street
Chattanooga, TN 37450-1800
Limited Partnership Bill E. Coggin Indirectly Owns 19.6%
Interest Vice President and CFO of
3,912 Units
Southwest Royalties, Inc.,
the Managing General
Partner
407 N. Big Spring Street
Midland, TX 79701
Limited Partnership Jon P. Tate Indirectly Owns 19.6%
Interest Vice President, Land and
3,912 Units
Assistant Secretary of
Southwest Royalties, Inc.,
the Managing General
Partner
407 N. Big Spring Street
Midland, TX 79701
Limited Partnership J. Steven Person Indirectly Owns 19.6%
Interest Vice President, Marketing
3,912 Units
Southwest Royalties, Inc.,
the Managing General
Partner
407 N. Big Spring Street
Midland, TX 79701
Limited Partnership R. Douglas Keathley Indirectly Owns 19.6%
Interest Vice President,3,912
Units
Operations of Southwest
Royalties, Inc., the
Managing General
Partner
407 N. Big Spring Street
Midland, TX 79701
Amount and
Nature of Percent
Name and Address of Beneficial of
Title of Class Beneficial Owner Ownership Class
- ------------------- --------------------------- --------------- -------
Limited Partnership Paul L. Morris Indirectly Owns 19.6%
Interest Director of Southwest
3,912 Units
Royalties, Inc., the
Managing General
Partner
407 N. Big Spring Street
Midland, TX 79701
There are no arrangements known to the Managing General Partner which may
at a subsequent date result in a change of control of the Partnership.
Item 13. Certain Relationships and Related Transactions
In 1998, the Managing General Partner received $144,000 as an
administrative fee. This amount is part of the general and administrative
expenses incurred by the Partnership.
In some instances the Managing General Partner and certain officers and
employees may be working interest owners in an oil and gas property in
which the Partnership also has a net profits interest. Certain properties
in which the Partnership has an interest are operated by the Managing
General Partner, who was paid approximately $128,200 for administrative
overhead attributable to operating such properties during 1998.
Certain subsidiaries or affiliates of the Managing General Partner perform
various oilfield services for properties in which the Partnership owns an
interest. Such services aggregated approximately $16,200 for the year
ended December 31, 1998.
The law firm of Baker, Donelson, Bearman & Caldwell of which H. Allen
Corey, an officer and director of the Managing General Partner, is a
partner, is counsel to the Partnership. Legal services rendered by Baker,
Donelson, Bearman & Caldwell to the Partnership during 1998 were
approximately $900, which constitutes an immaterial portion of that firm's
business.
In the opinion of management, the terms of the above transactions are
similar to ones with unaffiliated third parties.
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) Financial Statements:
Included in Part II of this report --
Reports of Independent Accountants
Balance Sheets
Statements of Operations
Statement of Changes in Partners' Equity
Statements of Cash Flows
Notes to Financial Statements
(2) Schedules required by Article 12 of Regulation S-
X are either omitted because they are not applicable or
because the required information is shown in the
financial statements or the notes thereto.
(3) Exhibits:
4 (a) Certificate and Agreement of
Limited Partnership of Southwest Royalties, Inc.
Income Fund VI, dated December 4, 1986.
(Incorporated by reference from Partnership's
Form 10-K for the fiscal year ended December 31,
1986.)
(b) First Amendment to
Certificate and Agreement of Limited Partnership
of Southwest Royalties, Inc. Income Fund VI,
dated January 16,1987. (Incorporated by
reference from Partnership's Form 10-K for the
fiscal year ended December 31, 1987.)
(c) Corrected Second Amendment to
Certificate and Agreement of Limited Partnership
of Southwest Royalties, Inc. Income Fund VI,
dated May 6, 1987. (Incorporated by reference
from Partnership's Form 10-K for the fiscal year
ended December 31, 1987.)
(d) Third Amendment to
Certificate and Agreement of Limited Partnership
of Southwest Royalties, Inc. Income Fund VI,
dated February 3, 1988 (Incorporated by reference
from Partnership's Form 10-K for the fiscal year
ended December 31, 1988.)
(e) Fourth Amendment to
Certificate and Agreement of Limited Partnership
of Southwest Royalties, Inc. Income Fund VI,
dated June 30, 1988 (Incorporated by reference
from Partnership's Form 10-K for the fiscal year
ended December 31, 1988.)
(f) Fifth Amendment to
Certificate and Agreement of Limited Partnership
of Southwest Royalties, Inc. Income Fund VI,
dated December 30, 1988 (Incorporated by
reference from the Partnership's Form 10-K for
the fiscal year ended December 31, 1988.)
(g) Sixth Amendment to
Certificate and Agreement of Limited Partnership
of Southwest Royalties, Inc. Income Fund VI,
dated as of March 19, 1990. (Incorporated by
reference from the Partnership's Form 10-K for
the fiscal year ended December 31, 1990.)
(h) Seventh Amendment to
Certificate and Agreement of Limited Partnership
of Southwest Royalties, Inc. Income Fund VI,
dated as of December 31, 1990. (Incorporated by
reference from the Partnership's Form 10-K for
the fiscal year ended December 31, 1990.)
(i) Eighth Amendment to
Certificate and Agreement of Limited Partnership
of Southwest Royalties, Inc. Income Fund VI,
dated as of September 30, 1991. (Incorporated by
reference from the Partnership's Form 10-K for
the fiscal year ended December 31, 1991.)
(j) Ninth Amendment to
Certificate and Agreement of Limited Partnership
of Southwest Royalties, Inc. Income Fund VI,
dated as of December 31, 1991. (Incorporated by
reference from the Partnership's Form 10-K for
the fiscal year ended December 31, 1992.)
(k) Tenth Amendment to
Certificate and Agreement of Limited Partnership
of Southwest Royalties, Inc. Income Fund VI,
dated as of March 31, 1992. (Incorporated by
reference from the Partnership's Form 10-K for
the fiscal year ended December 31, 1992.)
(l) Eleventh Amendment to
Certificate and Agreement of Limited Partnership
of Southwest Royalties, Inc. Income Fund VI,
dated as of June 30, 1992. (Incorporated by
reference from the Partnership's Form 10-K for
the fiscal year ended December 31, 1992.)
(m) Twelfth Amendment to
Certificate and Agreement of Limited Partnership
of Southwest Royalties, Inc. Income Fund VI,
dated as of November 23, 1992. (Incorporated by
reference from the Partnership's Form 10-K for
the fiscal year ended December 31, 1992.)
(n) Thirteenth Amendment to
Certificate and Agreement of Limited Partnership
of Southwest Royalties, Inc. Income Fund VI,
dated as of April 22, 1993. (Incorporated by
reference from the Partnership's Form 10-K for
the fiscal year ended December 31, 1993.)
(o) Fourteenth Amendment to
Certificate and Agreement of Limited Partnership
of Southwest Royalties, Inc. Income Fund VI,
dated as of September 30, 1993. (Incorporated by
reference from the Partnership's Form 10-K for
the fiscal year ended December 31, 1993.)
(p) Fifteenth Amendment to
Certificate and Agreement of Limited Partnership
of Southwest Royalties, Inc. Income Fund VI,
dated as of December 31, 1993. (Incorporated by
reference from the Partnership's Form 10-K for
the fiscal year ended December 31, 1993.)
(q) Sixteenth Amendment to
Certificate and Agreement of Limited Partnership
of Southwest Royalties, Inc. Income Fund VI,
dated as of July 26, 1994. (Incorporated by
reference from the Partnership's Form 10-K for
the fiscal year ended December 31, 1994.)
(r) Seventeenth Amendment to
Certificate and Agreement of Limited Partnership
of Southwest Royalties, Inc. Income Fund VI,
dated as of January 18, 1995. (Incorporated by
reference from the Partnership's Form 10-K for
the fiscal year ended December 31, 1994.)
(s) Eighteenth Amendment to
Certificate and Agreement of Limited Partnership
of Southwest Royalties, Inc. Income Fund VI,
dated as of July 26, 1995.
(t) Nineteenth Amendment to
Certificate and Agreement of Limited Partnership
of Southwest Royalties, Inc. Income Fund VI,
dated as of January 29, 1996.
(u) Twentieth Amendment to
Certificate and Agreement of Limited Partnership
of Southwest Royalties, Inc. Income Fund VI,
dated as of April 30, 1996.
(v) Twenty First Amendment to Certificate and Agreement of
Limited
Partnership of Southwest Royalties, Inc. Income Fund
VI, dated as of
September 30, 1996.
(w) Twenty Second Amendment to Certificate and Agreement
of Limited
Partnership of Southwest Royalties, Inc. Income Fund
VI, dated as of
January 15, 1997.
(x) Twenty Third Amendment to
Certificate and Agreement of Limited Partnership
of Southwest Royalties, Inc. Income Fund VI,
dated as of May 10, 1997.
(y) Twenty Fourth Amendment to Certificate and
Agreement of Limited Partnership of Southwest
Royalties, Inc. Income Fund VI, dated as of
January 30, 1998.
(z) Twenty Fifth Amendment to Certificate and
Agreement of
Limited Partnership of Southwest Royalties, Inc.
Income Fund VI, dated as of July 27, 1998.
(aa) Twenty Sixth Amendment to
Certificate and Agreement of Limited Partnership
of Southwest Royalties, Inc. Income Fund VI,
dated as of December 22, 1998.
27 Financial Data Schedule
99 Limited Partners as of January 30, 1998
Limited Partners as of July 27, 1998
Limited Partners as of December 22, 1998
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during the
quarter ended December 31, 1998.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Partnership has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Southwest Royalties, Inc. Income Fund VI, a
Tennessee limited partnership
By: Southwest Royalties, Inc., Managing
General Partner
By: /s/ H. H. Wommack, III
-----------------------------
H. H. Wommack, III, President
Date: March 31, 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
Partnership and in the capacities and on the dates indicated.
By: /s/ H. H. Wommack, III
-----------------------------------
H. H. Wommack, III, Chairman of the
Board, President, Chief Executive
Officer, Treasurer and Director
Date: March 31, 1999
By: /s/ H. Allen Corey
-----------------------------
H. Allen Corey, Secretary and
Director
Date: March 31, 1999
Exhibit Index
Item No. Description Page No.
14(a)(3) Exhibit 4(y): Twenty Fourth Amendment to Certificate __
and Agreement of Limited Partnership of Southwest
Royalties, Inc. Income Fund VI, dated as of
January 30, 1998.
Exhibit 4 (z): Twenty Fifth Amendment to Certificate __
and Agreement of Limited Partnership of Southwest
Royalties, Inc. Income Fund VI, dated as of
July 27, 1998.
Exhibit 4 (aa): Twenty Sixth Amendment to Certificate __
and Agreement of Limited Partnership of Southwest
Royalties, Inc. Income Fund VI, dated as of
December 22, 1998.
This Instrument Prepared By:
J. Porter Durham, Jr.
Baker, Donelson, Bearman & Caldwell
1800 Republic Centre
633 Chestnut Street
Chattanooga, Tennessee 37450-1800
TWENTY-FOURTH AMENDMENT TO CERTIFICATE AND AGREEMENT OF
LIMITED PARTNERSHIP OF SOUTHWEST ROYALTIES, INC.
INCOME FUND VI, A TENNESSEE LIMITED PARTNERSHIP
Pursuant to the Tennessee Revised Uniform Limited Partnership Act, 62-2-
1204 of the Tennessee Code Annotated, and the provisions of the Tennessee
Uniform Limited Partnership Act, being formerly 61-2-101, et seq. of the
Tennessee Code Annotated, this Twenty-fourth Amendment (the "Amendment") to
the Certificate and Agreement of Limited Partnership of Southwest
Royalties, Inc. Income Fund VI is executed to be effective as of the 8th
day of January, 1998, by and between H. H. WOMMACK, III, an individual
("General Partner"), SOUTHWEST ROYALTIES, INC. ("Managing General Partner")
(the Managing General Partner and the General Partner, are hereinafter
collectively referred to as "General Partners"), and the General Partners
as attorney-in-fact for those persons and entities listed on Schedule 1
attached to this Amendment, whether existing or additional limited partners
(collectively the "Limited Partners") and as attorney-in-fact for the
Withdrawing Limited Partners, as defined hereinafter.
WHEREAS, Southwest Royalties, Inc. Income Fund VI was organized as a
Tennessee limited partnership pursuant to an Agreement of Limited
Partnership, as amended from time to time, dated December 4, 1986 and
recorded in Book 3280, Page 726 in the Register's Office of Hamilton
County, Tennessee (the "Agreement"); and
WHEREAS, the General Partners, Limited Partners and Withdrawing Limited
Partners desire to amend the Agreement in the manner set forth herein;
NOW, THEREFORE, for and in consideration of the mutual rights and
obligations herein and other good and valuable consideration the receipt
and legal sufficiency of which are acknowledged, the parties hereto agree
as follows:
1. Schedule 1 to the Agreement is hereby deleted in its entirety and
replaced by the Schedule 1 attached hereto. Those persons and
entities which were formerly listed on Schedule 1 to the Agreement but
which are not listed on the revised Schedule 1 attached hereto shall
be defined collectively as the "Withdrawing Limited Partners."
2. Except as provided herein, the Agreement is hereby constituted and
acknowledged as the controlling Agreement of Southwest Royalties, Inc.
Income Fund VI.
IN WITNESS WHEREOF, the parties hereto acknowledge that they have executed
this Amendment to the Agreement to be effective as of the date first above
written.
GENERAL PARTNERS:
By: /s/ H. H. Wommack, III
-----------------------------------
H. H. Wommack, III, General Partner
By: SOUTHWEST ROYALTIES, INC.
Managing General Partner
By: /s/ H. H. Wommack, III
-----------------------------------
H. H. Wommack, III, President
LIMITED PARTNERS:
By: General Partners, as attorneys-in-fact
for the Limited Partners listed on Schedule 1 attached
hereto and those Withdrawing Limited Partners removed
from Schedule 1 under Powers of Attorney previously
granted
By: /s/ H. H. Wommack, III
-----------------------------------
H. H. Wommack, III
By: SOUTHWEST ROYALTIES, INC.
Managing General Partner
By: /s/ H. H. Wommack, III
-----------------------------------
STATE OF TENNESSEE )
COUNTY OF HAMILTON )
Before me, /s/ Suetta M. Morgan, a Notary Public in and for the State and
County aforesaid, personally appeared H.H. Wommack, III, with whom I am
personally acquainted (or proved to me on the basis of satisfactory
evidence), and who, upon oath, acknowledged himself to be the attorney-in-
fact for the admitted and withdrawing Limited Partners and as president of
Southwest Royalties, Inc. for itself and as attorney-in-fact for the
admitted and withdrawing Limited Partners, and who further acknowledged
that he is authorized by Southwest Royalties, Inc., the Limited Partners
and the Withdrawing Limited Partners to execute this document on its and
their behalf.
Witness my hand and seal at office, on this the 30th day of January, 1998.
/s/ Suetta M. Morgan
-----------------------------------
Notary Public
This Instrument Prepared By:
J. Porter Durham, Jr.
Baker, Donelson, Bearman & Caldwell
1800 Republic Centre
633 Chestnut Street
Chattanooga, Tennessee 37450-1800
TWENTY-FIFTH AMENDMENT TO CERTIFICATE AND AGREEMENT OF
LIMITED PARTNERSHIP OF SOUTHWEST ROYALTIES, INC.
INCOME FUND VI, A TENNESSEE LIMITED PARTNERSHIP
Pursuant to the Tennessee Revised Uniform Limited Partnership Act, 62-2-
1204 of the Tennessee Code Annotated, and the provisions of the Tennessee
Uniform Limited Partnership Act, being formerly 61-2-101, et seq. of the
Tennessee Code Annotated, this Twenty-fifth Amendment (the "Amendment") to
the Certificate and Agreement of Limited Partnership of Southwest
Royalties, Inc. Income Fund VI is executed to be effective as of the 10th
day of July, 1998, by and between H. H. WOMMACK, III, an individual
("General Partner"), SOUTHWEST ROYALTIES, INC. ("Managing General Partner")
(the Managing General Partner and the General Partner, are hereinafter
collectively referred to as "General Partners"), and the General Partners
as attorney-in-fact for those persons and entities listed on Schedule 1
attached to this Amendment, whether existing or additional limited partners
(collectively the "Limited Partners") and as attorney-in-fact for the
Withdrawing Limited Partners, as defined hereinafter.
WHEREAS, Southwest Royalties, Inc. Income Fund VI was organized as a
Tennessee limited partnership pursuant to an Agreement of Limited
Partnership, as amended from time to time, dated December 4, 1986 and
recorded in Book 3280, Page 726 in the Register's Office of Hamilton
County, Tennessee (the "Agreement"); and
WHEREAS, the General Partners, Limited Partners and Withdrawing Limited
Partners desire to amend the Agreement in the manner set forth herein;
NOW, THEREFORE, for and in consideration of the mutual rights and
obligations herein and other good and valuable consideration the receipt
and legal sufficiency of which are acknowledged, the parties hereto agree
as follows:
1. Schedule 1 to the Agreement is hereby deleted in its entirety and
replaced by the Schedule 1 attached hereto. Those persons and
entities which were formerly listed on Schedule 1 to the Agreement but
which are not listed on the revised Schedule 1 attached hereto shall
be defined collectively as the "Withdrawing Limited Partners."
2. Except as provided herein, the Agreement is hereby constituted and
acknowledged as the controlling Agreement of Southwest Royalties, Inc.
Income Fund VI.
IN WITNESS WHEREOF, the parties hereto acknowledge that they have executed
this Amendment to the Agreement to be effective as of the date first above
written.
GENERAL PARTNERS:
By: /s/ H. H. Wommack, III
-----------------------------------
H. H. Wommack, III, General Partner
By: SOUTHWEST ROYALTIES, INC.
Managing General Partner
By: /s/ H. H. Wommack, III
-----------------------------------
H. H. Wommack, III, President
LIMITED PARTNERS:
By: General Partners, as attorneys-in-fact
for the Limited Partners listed on Schedule 1 attached
hereto and those Withdrawing Limited Partners removed
from Schedule 1 under Powers of Attorney previously
granted
By: /s/ H. H. Wommack, III
-----------------------------------
H. H. Wommack, III
By: SOUTHWEST ROYALTIES, INC.
Managing General Partner
By: /s/ H. H. Wommack, III
-----------------------------------
STATE OF TENNESSEE )
COUNTY OF HAMILTON )
Before me, /s/ Suetta M. Morgan, a Notary Public in and for the State and
County aforesaid, personally appeared H.H. Wommack, III, with whom I am
personally acquainted (or proved to me on the basis of satisfactory
evidence), and who, upon oath, acknowledged himself to be the attorney-in-
fact for the admitted and withdrawing Limited Partners, and as president of
Southwest Royalties, Inc. for itself and as attorney-in-fact for the
admitted and withdrawing Limited Partners, who further acknowledged that he
is authorized by Southwest Royalties, Inc., the Limited Partners and the
Withdrawing Limited Partners to execute this document on its and their
behalf.
Witness my hand and seal at office, on this the 27th day of July, 1998.
/s/ Suetta M. Morgan
-----------------------------------
Notary Public
This Instrument Prepared By:
J. Porter Durham, Jr.
Baker, Donelson, Bearman & Caldwell
1800 Republic Centre
633 Chestnut Street
Chattanooga, Tennessee 37450-1800
TWENTY-SIXTH AMENDMENT TO CERTIFICATE AND AGREEMENT OF
LIMITED PARTNERSHIP OF SOUTHWEST ROYALTIES, INC.
INCOME FUND VI, A TENNESSEE LIMITED PARTNERSHIP
Pursuant to the Tennessee Revised Uniform Limited Partnership Act, 62-2-
1204 of the Tennessee Code Annotated, and the provisions of the Tennessee
Uniform Limited Partnership Act, being formerly 61-2-101, et seq. of the
Tennessee Code Annotated, this Twenty Sixth Amendment (the "Amendment") to
the Certificate and Agreement of Limited Partnership of Southwest
Royalties, Inc. Income Fund VI is executed to be effective as of the 30th
day of September, 1998, by and between H. H. WOMMACK, III, an individual
("General Partner"), SOUTHWEST ROYALTIES, INC. ("Managing General Partner")
(the Managing General Partner and the General Partner, are hereinafter
collectively referred to as "General Partners"), and the General Partners
as attorney-in-fact for those persons and entities listed on Schedule 1
attached to this Amendment, whether existing or additional limited partners
(collectively the "Limited Partners") and as attorney-in-fact for the
Withdrawing Limited Partners, as defined hereinafter.
WHEREAS, Southwest Royalties, Inc. Income Fund VI was organized as a
Tennessee limited partnership pursuant to an Agreement of Limited
Partnership, as amended from time to time, dated December 4, 1986 and
recorded in Book 3280, Page 726 in the Register's Office of Hamilton
County, Tennessee (the "Agreement"); and
WHEREAS, the General Partners, Limited Partners and Withdrawing Limited
Partners desire to amend the Agreement in the manner set forth herein;
NOW, THEREFORE, for and in consideration of the mutual rights and
obligations herein and other good and valuable consideration the receipt
and legal sufficiency of which are acknowledged, the parties hereto agree
as follows:
1. Schedule 1 to the Agreement is hereby deleted in its entirety and
replaced by the Schedule 1 attached hereto. Those persons and
entities which were formerly listed on Schedule 1 to the Agreement but
which are not listed on the revised Schedule 1 attached hereto shall
be defined collectively as the "Withdrawing Limited Partners."
2. Except as provided herein, the Agreement is hereby constituted and
acknowledged as the controlling Agreement of Southwest Royalties, Inc.
Income Fund VI.
IN WITNESS WHEREOF, the parties hereto acknowledge that they have executed
this Amendment to the Agreement to be effective as of the date first above
written.
GENERAL PARTNERS:
By: /s/ H. H. Wommack, III
-----------------------------------
H. H. Wommack, III, General Partner
By: SOUTHWEST ROYALTIES, INC.
Managing General Partner
By: /s/ H. H. Wommack, III
-----------------------------------
H. H. Wommack, III, President
LIMITED PARTNERS:
By: General Partners, as attorneys-in-fact
for the Limited Partners listed on Schedule 1 attached
hereto and those Withdrawing Limited Partners removed
from Schedule 1 under Powers of Attorney previously
granted
By: /s/ H. H. Wommack, III
-----------------------------------
H. H. Wommack, III
By: SOUTHWEST ROYALTIES, INC.
Managing General Partner
By: /s/ H. H. Wommack, III
-----------------------------------
STATE OF TENNESSEE )
COUNTY OF HAMILTON )
Before me, /s/ Suetta M. Morgan, a Notary Public in and for the State and
County aforesaid, personally appeared H.H. Wommack, III, with whom I am
personally acquainted (or proved to me on the basis of satisfactory
evidence), and who, upon oath, acknowledged himself to be the attorney-in-
fact for the admitted and withdrawing Limited Partners, and as president of
Southwest Royalties, Inc. for itself and as attorney-in-fact for the
admitted and withdrawing Limited Partners, and who further acknowledged
that he is authorized by Southwest Royalties, Inc., the Limited Partners
and the Withdrawing Limited Partners to execute this document on its and
their behalf.
Witness my hand and seal at office, on this the 22nd day of December, 1998.
/s/ Suetta M. Morgan
-----------------------------------
Notary Public
AMENDMENTS FOLLOW AS EX-99