Securities and Exchange Commission
Washington, DC 20549
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FORM 10-Q
Quarterly Report
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE QUARTER ENDED JUNE 30, 1996
Commission File Number 0-10077
EVERGREEN RESOURCES, INC.
(Exact Name of Registrant as Specified in its Charter)
COLORADO 84-0834147
(State or Other Jurisdiction (I.R.S. Employer Identification
of Incorporation of Organization) Number)
1000 WRITER SQUARE
1512 LARIMER STREET
DENVER, COLORADO 80202
(Address of Principal Executive (Zip Code)
Offices)
(303) 534-0400
(Registrant's Telephone Number,
Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
X Yes No
------ ------
Indicate the number of shares outstanding of each of the Issuer's classes of
common stock, as of the latest date.
CLASS OUTSTANDING AT AUGUST 2, 1996
Common Stock, No Par Value 5,939,736
EVERGREEN RESOURCES, INC.
INDEX
Page
Number
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PART I. FINANCIAL INFORMATION
Consolidated Balance Sheets as of June 30, 1996
and March 31, 1996........................................... 3
Consolidated Statements of Operations for the Three Months
Ended June 30, 1996 and June 30, 1995........................ 4
Consolidated Statements of Cash Flows for the Three Months
Ended June 30, 1996 and June 30, 1995........................ 5
Notes to Consolidated Financial Statements........................ 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 7 - 11
PART II. OTHER INFORMATION...................................... 11
2
EVERGREEN RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS June 30, 1996 March 31, 1996
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CURRENT:
Cash and cash equivalents $ 1 440 449 $ 3 702 511
Accounts receivable:
Oil and gas sales 265 455 237 178
Joint interest billings and other 1 240 464 897 142
Other current assets 303 172 132 446
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TOTAL CURRENT ASSETS 3 249 540 4 969 277
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PROPERTY AND EQUIPMENT:
Proved oil and gas properties, based on full-cost accounting 37 357 042 36 378 828
Unevaluated properties not subject to amortization 7 946 873 7 792 739
Gas gathering equipment 5 310 184 4 415 439
Support equipment 622 838 595 656
Less accumulated depreciation, depletion and amortization (11 746 864) (11 558 516)
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NET PROPERTY AND EQUIPMENT 39 490 073 37 624 146
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DESIGNATED CASH 1 059 233 770 076
OTHER ASSETS 756 106 808 218
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$ 44 554 952 $ 44 171 717
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 769 154 1 204 378
Accrued expenses and other 287 936 162 127
Amounts payable to oil and gas property owners 1 176 194 1 123 465
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TOTAL CURRENT LIABILITIES 2 233 284 2 489 970
PRODUCTION TAXES PAYABLE 1 059 233 770 076
LONG TERM LIABILITIES 2 239 678 1 822 834
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TOTAL LIABILITIES 5 532 195 5 082 880
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REDEEMABLE PREFERRED STOCK 7 500 000 7 500 000
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COMMON STOCKHOLDERS' EQUITY:
Common stock, shares issued and outstanding,
5 899 736 58 998 58 998
Additional paid-in capital 41 822 026 41 822 026
Accumulated deficit (9 963 685) (9 873 715)
Foreign currency translation adjustment (394 582) (418 472)
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TOTAL STOCKHOLDERS' EQUITY 31 522 757 31 588 837
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$ 44 554 952 $ 44 171 717
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See accompanying notes to consolidated financial statements
3
EVERGREEN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended June 30
---------------------------
1996 1995
---- ----
REVENUE:
Oil and gas production $ 526 344 $ 283 739
Oil and gas services 190 909 185 890
Interest 51 599 23 190
Other income 10 028 15 210
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TOTAL REVENUES 778 880 508 029
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COSTS AND EXPENSES:
Cost of production and operations 131 953 248 213
Gas gathering costs 43 898 58 275
Cost of oil and gas services 184 841 195 095
Depreciation, depletion and amortization 201 840 167 150
General and administrative expenses 149 270 202 260
Interest expense 9 385 9 214
Other expense (2 337) (7 709)
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TOTAL COSTS AND EXPENSES 718 850 872 498
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NET INCOME (LOSS) 60 030 (364 469)
PREFERRED STOCK DIVIDENDS 150 000 75 000
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NET LOSS ATTRIBUTABLE
TO COMMON STOCK $ (89 970) (439 469)
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---------- ----------
LOSS PER SHARE OF COMMON STOCK $ (0.02) $ (0.08)
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 5 899 736 5 672 159
---------- ----------
---------- ----------
See accompanying notes to consolidated financial statements.
4
EVERGREEN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended June 30
--------------------------
1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 60 030 $ (364 469)
Adjustments to reconcile net income (loss) to
cash used by operating activities:
Depreciation, depletion and amortization 201 840 167 150
Other 13 792 10 280
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable (374 671) (126 204)
Decrease (increase) in current assets (169 264) (16 762)
Increase (decrease) in accounts payable (435 396) 219 571
Increase (decrease) in accrued expenses 161 694 (50 208)
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NET CASH USED BY OPERATING ACTIVITIES (541 975) (160 642)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property and equipment (1 882 324) (997 067)
Proceeds from sale of oil and gas assets 350 000 21 000
Designated cash (289 157) 207 562
Change in production taxes payable 289 157 (207 562)
Change in other assets 11 880 112 889
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NET CASH USED BY INVESTING ACTIVITIES (1 520 444) (863 178)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt issue costs -- (23 546)
Principal payments on capital lease obligations (16 033) (13 283)
Payment of preferred stock dividends (150 000) (75 000)
Change in cash held from operating oil
and gas properties (29 897) 535 567
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NET CASH PROVIDED /(USED) BY FINANCING ACTIVITIES (195 930) 423 738
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EFFECT OF EXCHANGE RATE CHANGES ON CASH (3 713) 10 425
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DECREASE IN CASH AND CASH EQUIVALENTS (2 262 062) (589 657)
CASH AND CASH EQUIVALENTS AT THE
BEGINNING OF THE PERIOD 3 702 511 2 038 742
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CASH AND CASH EQUIVALENTS AT THE
END OF THE PERIOD $ 1 440 449 $ 1 449 085
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See accompanying notes to consolidated financial statements.
5
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1996
1. In the opinion of Management, the accompanying unaudited financial
statements contain all adjustments necessary to present fairly the
Company's financial position as of June 30, 1996 and the results of its
operations and changes in financial position for the three months then
ended. All such adjustments are of a normal recurring nature.
2. Certain information at March 31, 1996 has been condensed from the audited
financial statements included in the Company's most recent filing on Form
10-K.
3. The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, Evergreen Operating Corporation ("EOC")
and Evergreen Resources (UK) Limited ("ERUK"). Primero Gas Gathering, Co.
(Primero), a 50% joint venture, is recorded on a pro-rata consolidation
basis. All significant intercompany balances and transactions have been
eliminated.
4. The Company follows the full-cost method of accounting for oil and gas
properties. Under this method, all productive and nonproductive costs
incurred in connection with the exploration for and development of oil and
gas reserves are capitalized. Such capitalized costs include lease
acquisition, geological and geophysical work, delay rentals, drilling,
completing and equipping oil and gas wells and other related costs. Normal
dispositions of oil and gas properties are accounted for as adjustments of
capitalized costs, with no gain or loss recognized.
5. Depreciation and depletion of proved oil and gas properties is computed on
the units-of-production method based upon estimates of proved reserves with
oil and gas being converted to a common unit of measure based on the
relative energy content. Unproved oil and gas properties, including any
related capitalized interest expense, are not amortized, but are assessed
for impairment either individually or on an aggregated basis.
6. Designated cash represents the cash withheld for payment of production
taxes from third party revenue interest owners for subsequent distribution
to county taxation authorities.
7. The functional currency for the Company's foreign operations is the
applicable local currency. The translation of the applicable foreign
currency into U.S. dollars is performed for balance sheet accounts using
current exchange rates in effect at the balance sheet date and for revenue
and expense accounts using a weighted average exchange rate during the
period. The gains or losses resulting from such translation are included
in stockholders' equity.
6
EVERGREEN RESOURCES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
RATON BASIN
Since December 1991, Evergreen has acquired oil and gas leases covering over
120,000 gross acres in the Raton Basin, Las Animas County in Southeastern
Colorado. This acreage position will support over 500 wells on 160 acre
spacing. Independent engineering estimates indicate reserve potential of
approximately 1.5 -2.0 billion cubic feet of gas per well.
In August 1993 Evergreen formed a joint venture with PBI Fuels LP ("PBI"). PBI
has the right to participate with a 25 - 50% working interest in development of
the Project. Evergreen has retained the remaining 50 - 75% working interest and
serves as Operator.
Since early 1994 Evergreen has drilled and completed thirty-two coalbed methane
gas wells in the Vermejo coals at depths of 1,000 to 2,100 feet. Evergreen has
a 50%-100% interest in these wells, thirty-one of which are in production - one
to be placed in production when gathering facilities are available.
Gas sales began in January 1995 and have improved as new wells have been drilled
to a present level of 8.8 million cubic feet per day gross, or approximately 5.0
million cubic feet per day net to Evergreen.
In March 1995, the Bureau of Land Management designated approximately 67,000
acres of Evergreen's Raton Basin oil and gas leases as a Federal Unit called the
Spanish Peaks Unit. Evergreen has been named Unit Operator. Formation of the
Unit allows Evergreen to base development decisions within the Unit on
technical, geologic and geophysical data rather than the fulfillment of term
lease obligations. Evergreen's remaining Unit commitment is to drill and
evaluate two new unit obligation wells by December 31, 1997.
Evergreen plans continual development of the Raton Basin acreage. Ten new wells
were drilled in July 1996 and are now being completed. Gathering and
compression systems will be upgraded and additional drilling is planned in Fall
1996.
SAN JUAN BASIN
Effective June 1, 1996, Evergreen sold, pending a favorable IRS ruling, its
working interests in six producing wells in the San Juan Basin, Rio Arriba
County, New Mexico. The wells qualify for the Section 29 tax credit.
The working interests were sold to a limited partnership owned and controlled by
Banque Paribas.
Evergreen will receive $53,000 cash and a volumetric production payment under
which Evergreen will receive 99% of the cash flow from the wells until
approximately 1.1 billion cubic feet of gas have been produced and sold net to
the well interests. At present production levels, the production payment will
end in 4 - 5 years.
In addition to the production payment, Evergreen will additional receive monthly
payments based on production from the wells through 2002.
7
Evergreen has the option to repurchase the interests at any time between
December 31, 2002, and January 1, 2008, and will automatically revert to 75%
ownership in the interests if and when approximately 1.8 BCF net have been
produced from the wells.
If no favorable IRS ruling is obtained by November 30, 1996, the transaction is
subject to cancellation at the option of the purchaser.
Evergreen owns varying interests in sixteen additional wells in the San Juan
Basin, the majority of which are shut-in at present because of low production
volumes and gas prices.
UNITED KINGDOM
In 1991 and 1992 the Company's wholly owned subsidiary, Evergreen Resources
(U.K.) Ltd.("ERUK"), was awarded seven onshore U.K. hydrocarbon Exploration
Licenses for the development of coalbed methane gas and conventional
hydrocarbons (the "Licenses"). The Licenses provide ERUK with the largest
onshore acreage position in the U.K., and cover substantially all of six
distinct onshore U.K. basins. Over 400,000 acres are considered prospective
specifically for coalbed methane.
Under a new onshore Licensing regime implemented by the UK Department of Trade
and Industry (DTI), Evergreen will convert its existing onshore Exploration
Licenses to new onshore Licenses, called Petroleum Exploration and Development
Licenses. These new Licenses will provide up to a 30 year term with periodic
relinquishment, approximately every 5 years, of up to 50% of the acreage subject
to future development plans. Work commitments on the existing Licenses have
been fulfilled through 1997 as a result of Evergreen's prior UK activity. There
are no royalties or burdens encumbering the Licenses.
Evergreen is continuing to hold discussions with various funding sources,
including potential industry partners, for the purpose of resuming evaluation
and development of the Licenses.
LIQUIDITY AND CAPITAL RESOURCES
Evergreen currently has a $7.5 million revolving line of credit with Hibernia
National Bank of New Orleans with interest at the Bank's prime rate. Advances
pursuant to this line of credit are limited to the borrowing base, which is
presently $7.5 million. There are no restrictions associated with advances
under the line. An annual fee of one half of one percent is paid quarterly for
any unused portion of the credit line. The borrowing base is redetermined semi-
annually by the bank based upon reserve evaluations of the Company's oil and gas
properties.
The Company anticipates drilling 40 wells and expanding and upgrading gas
gathering facilities during fiscal 1997. Capital requirements for the remainder
of fiscal 1997 are estimated to be approximately $10 million. In addition to
increased cash flow from operations and the availability of funds under its line
of credit, additional funds will be needed to fulfill the 1997 development
objectives. The Company is evaluating potential funding alternatives.
Leases expiring in fiscal 1997 are not material and do not require significant
drilling expenditures.
Cash flows used by operating activities were $542,000 for the three months ended
June 30, 1996 as compared to $160,600 in the prior year. The increase in cash
used by operating activities is due primarily to changes in operating assets and
liabilities which are the result of the significant increase in drilling
activities in the first quarter of fiscal 1997 compared to the same period in
fiscal 1996. The increase in cash used by operating assets and liabilities was
8
offset by the significant increase in net income of $60,000 in first quarter
1996 as compared to a loss of $364,500 in first quarter 1995.
Cash flows used by investing activities were $1,520,400 during the three months
ended June 30, 1996 versus $863,200 during the same period in 1995. The
increase was primarily due to the continued development of the Raton Basin.
During the three month period ended June 30, 1996 the Company completed and
placed into production an additional ten wells.
Cash flows used by financing activities were $195,900 in the first quarter of
1996 as compared to cash flows provided by financing activities of $423,700 in
the prior period. The decrease was primarily due to the net change in cash held
for future distribution to third party interest owners of $565,000.
Under the terms of certain gas gathering and tie-in agreements, EOC is committed
to meeting certain minimum volume levels during the term of the agreements.
Through June 30, 1996, volume levels have been below the required minimums and
EOC has accrued approximately $1,831,000 for this shortfall, which is included
with long-term liabilities. Such amount is refundable if future volumes exceed
the minimums. EOC is currently in discussions with the owner of the system
concerning obtaining additional volumes or other possible alternatives which
include the purchase of a portion of the system.
The Financial Accounting Standards Board has recently issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets" and SFAS No. 123, "Accounting for the Stock Based
Compensation". SFAS No. 121 provides standards for accounting for the
impairment of various long-lived assets. The Company uses the full cost method
which requires an impairment to be recorded when total capitalized costs exceed
the present value, discounted at 10%, of estimated future net cash flows from
proved oil and gas reserves. Therefore, the adoption of SFAS No. 121 is not
expected to have a material effect on the financial position or results of
operations of the Company.
SFAS No. 123 encourages the accounting for stock-based employee compensation
programs to be reported within the financial statements on a fair value based
method. If the fair value based method is not adopted, then the statement
requires pro-forma disclosure of net income and earnings per share as if the
fair value based method had been adopted. The Company has not yet determined
how SFAS No. 123 will be adopted nor its impact on the financial statements.
Both statements are effective for fiscal years beginning after December 15,
1995.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1996
During the three months ended June 30, 1996, Evergreen recorded net income of
$60,000 on revenues of $779,000 versus a net loss of $364,500 on revenues of
$508,000 for the same period in 1995. After preferred stock dividends, the
Company reported a net loss of $90,000 or two cents per common share in the
current quarter versus a net loss of $440,000 or eight cents per common share in
the prior quarter.
The improved performance in the current quarter is a result of increased
production and revenue from the Raton Basin, reduced production (lifting) costs
due to the sale of marginal and/or non-strategic properties and reduced overhead
costs.
Production revenues during the three months ended June 30, 1996 were $526,300
versus $283,700 for the same period in 1995, an increase of $242,600 or 86%.
9
Natural gas production increased to 394.3 million cubic feet in the quarter
ended June 30, 1996, compared to 207.7 million cubic feet during the same period
in the prior year. This increase is attributable to substantial growth in Raton
Basin production.
During the current quarter, Raton Basin gas production represented over 80% of
the Company's total gas production, compared to 30% in the prior year period.
At June 30, 1996, there were 31 producing Raton Basin wells compared to 9
producing wells at June 30, 1995.
Natural gas prices averaged $1.33 per Mcf during the three months ended June 30,
1996 versus $1.18 per Mcf in the prior year quarter. The Company currently
enters into contracts with various purchasers for periods ranging from one to
six months.
The Company has no significant oil reserves, production or revenues.
Production costs and taxes for the three months ended June 30, 1996 were
$131,900 compared to $248,200 for the same period in 1995. This 47% reduction
is due to the sale or shutting-in of marginal, non-strategic properties with
high lifting costs. Shut-in wells will be returned to production if
economically justifiable or plugged.
During the Company's last four fiscal years, production (lifting) costs have
declined:
1993 1994 1995 1996
---- ---- ---- ----
Equivalent Mcf lifting cost $1.91 $1.21 $1.10 $0.77
During the quarter ended June 30, 1996, average lifing cost was $0.33 per
equivalent Mcf versus $0.93 per equivalent Mcf during the same period in 1995.
The Company anticipates Raton Basin lifting costs to decline further as
additional wells are brought into production. During the three months ended
June 30, 1996, the Company re-classified gas gathering and marketing costs.
Three Months Ended June 30
--------------------------
1996 1995
Gas
---
Revenues $523,100 $245,400
Production (Mcf) 394,300 207,700
Avg. Price per Mcf $1.33 $1.18
Oil
---
Revenues $3,300 $38,400
Production (Barrels) 141 2,000
Avg. Price per Barrel $23.06 $19.62
Production Cost
Per Equivalent Mcf $0.33 $0.93
Oil and gas service revenues and cost of oil and gas services are attributable
to the Company's wholly owned subsidiary Evergreen Operating Corporation (EOC),
which is primarily responsible for drilling, evaluation and production
activities associated with various properties and for negotiating the sales of
oil and gas production from the properties. As of August 2, 1996, EOC was
serving as Operator for approximately 150 producing wells owned by the Company
and also by other unaffiliated third parties.
During the three months ended June 30, 1996 oil and gas service revenues and
expenses were basically unchanged from the prior year's levels.
10
Interest income was $51,600 during the three months ended June 30, 1996 as
compared to $23,200 during the three months ended June 30, 1995. The increase
in interest is due to an increase in cash from the proceeds of the preferred
stock and sales of properties.
Depreciation, depletion and amortization was $201,800 during 1996 as compared to
$167,200 in 1995. The increase is due to the increase in gas production and
added gas gathering equipment in the Raton Basin.
General and administrative expenses were $149,300 during the three months ended
June 30, 1996 versus $202,300 during the same period in 1995. The decrease of
$53,000 was due to a reduction in personnel and the related salary expense, the
consolidation of the corporate offices to Denver and general overhead
reductions.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is not engaged in any material pending legal proceedings to which
the Company or its subsidiary is a party or to which any of its property is
subject.
ITEM 2. CHANGES IN SECURITIES.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the quarter for which this report is
filed.
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly
caused this Report to be signed on its behalf by the undersigned thereunto duly
authorized.
EVERGREEN RESOURCES, INC.
(Registrant)
DATE: August 2, 1996 By: /s/ James S. Williams
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James S. Williams
Chairman of the Board
12