UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1999
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 001-13171
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 or Organization) Number)
1401 17TH STREET SUITE 1200
DENVER, COLORADO 80202
- --------------------------------- ------------------------------------
(Address of Principal Executive (Zip Code)
Offices)
Registrant's Telephone Number, Including Area Code (303) 298-8100
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
--- ---
As of November 5, 1999, 14,667,151 shares of the Registrant's Common Stock,
no par value, were outstanding.
EVERGREEN RESOURCES, INC.
INDEX
Page
Number
--------
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheets as of September 30, 1999
and December 31, 1998................................................. 3
Consolidated Statements of Income for the Three and Nine
Months Ended September 30, 1999 and 1998.............................. 4-5
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1999 and 1998..................................... 6
Consolidated Statements of Comprehensive Income for the
Three and Nine Months Ended September 30, 1999 and 1998............... 7
Notes to Consolidated Financial Statements............................... 8-18
Management's Discussion and Analysis of Financial
Condition and Results of Operations................................... 19-23
Quantitative and Qualitative Disclosure
About Market Risk..................................................... 24
PART II. OTHER INFORMATION................................................... 25-26
2
EVERGREEN RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
September 30, 1999 December 31, 1998
------------------ -----------------
CURRENT:
Cash and cash equivalents $ 1,695,270 $ 1,333,733
Accounts receivable 3,699,276 4,728,722
Other current assets 1,007,840 295,011
----------------- ----------------
TOTAL CURRENT ASSETS 6,402,386 6,357,466
----------------- ----------------
PROPERTY AND EQUIPMENT, AT COST, BASED ON FULL-COST ACCOUNTING FOR OIL AND
GAS PROPERTIES 186,653,724 147,176,068
Less accumulated depreciation, depletion and amortization 23,285,523 19,400,469
----------------- ----------------
NET PROPERTY AND EQUIPMENT 163,368,201 127,775,599
----------------- ----------------
DESIGNATED CASH 2,115,842 2,781,716
OTHER ASSETS 1,606,240 2,711,536
----------------- ----------------
$ 173,492,669 $ 139,626,317
----------------- ----------------
----------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,554,526 $ 1,240,110
Amounts payable to oil and gas property owners 1,417,139 2,947,345
Accrued expenses and other 3,695,142 1,515,427
Current portion - capital leases -- 1,122,499
----------------- ----------------
TOTAL CURRENT LIABILITIES 6,666,807 6,825,381
PRODUCTION TAXES PAYABLE 2,115,842 2,781,716
NOTES PAYABLE 7,000,000 44,138,700
OBLIGATIONS UNDER CAPITAL LEASES -- 2,906,374
DEFERRED INCOME TAX LIABILITY 5,390,486 3,295,000
----------------- ----------------
TOTAL LIABILITIES 21,173,135 59,947,171
----------------- ----------------
STOCKHOLDERS' EQUITY:
Common stock, $.01 stated value; shares authorized,
50,000,000; shares issued and outstanding 14,455,777 and 11,142,613 144,558 111,426
Stock to be issued, 120,000 shares 2,500,000 --
Additional paid-in capital 145,338,451 78,379,816
Retained earnings 4,370,278 1,077,582
Other comprehensive income (loss) (33,753) 110,322
----------------- ----------------
TOTAL STOCKHOLDERS' EQUITY 152,319,534 79,679,146
----------------- ----------------
$ 173,492,669 $ 139,626,317
----------------- ----------------
----------------- ----------------
See accompanying notes to consolidated financial statements
3
EVERGREEN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended September 30,
---------------------------------
1999 1998
------------- ----------------
REVENUES:
Natural gas revenues $ 5,806,911 $ 5,409,288
Interest 48,609 50,920
------------- ----------------
TOTAL REVENUES 5,855,520 5,460,208
------------- ----------------
EXPENSES:
Lease operating expenses 1,384,385 1,031,972
Depreciation, depletion and amortization 1,171,060 1,093,623
General and administrative expenses 859,419 525,457
Interest expense 82,989 546,477
Other expense -- 114,290
------------- ----------------
TOTAL EXPENSES 3,497,853 3,311,819
------------- ----------------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 2,357,667 2,148,389
Income tax provision - deferred 919,490 826,000
------------- ----------------
INCOME FROM CONTINUING OPERATIONS 1,438,177 1,322,389
DISCONTINUED OPERATIONS
Gain from disposal of discontinued operations, net -- --
Equity in earnings of discontinued operations, net -- 126,760
------------- ----------------
NET INCOME $ 1,438,177 $ 1,449,149
------------- ----------------
------------- ----------------
BASIC INCOME PER COMMON SHARE:
From continuing operations $ 0.10 $ 0.13
From discontinued operations -- 0.01
------------- ----------------
Basic income per common share $ 0.10 $ 0.14
------------- ----------------
DILUTED INCOME PER COMMON SHARE:
From continuing operations $ 0.09 $ 0.12
From discontinued operations -- 0.01
------------- ----------------
Diluted income per common share $ 0.09 $ 0.13
------------- ----------------
See accompanying notes to consolidated financial statements.
4
EVERGREEN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Nine Months Ended September 30,
----------------------------------
1999 1998
-------------- ----------------
REVENUES:
Natural gas revenues $ 15,518,488 $ 14,189,007
Interest 162,757 132,525
-------------- ----------------
TOTAL REVENUES 15,681,245 14,321,532
-------------- ----------------
EXPENSES:
Lease operating expenses 3,747,770 2,265,412
Depreciation, depletion and amortization 3,469,242 2,847,244
General and administrative expenses 2,192,986 1,373,385
Interest expense 1,624,307 1,307,051
Other expense -- 153,840
-------------- ----------------
TOTAL EXPENSES 11,034,305 7,946,932
-------------- ----------------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 4,646,940 6,374,600
Income tax provision - deferred 1,806,402 2,455,000
-------------- ----------------
INCOME FROM CONTINUING OPERATIONS 2,840,538 3,919,600
DISCONTINUED OPERATIONS
Gain from disposal of discontinued operations, net 452,157 --
Equity in earnings of discontinued operations, net -- 261,474
-------------- ----------------
NET INCOME $ 3,292,695 $ 4,181,074
-------------- ----------------
-------------- ----------------
BASIC INCOME PER COMMON SHARE:
From continuing operations $ 0.23 $ 0.37
From discontinued operations 0.04 0.03
-------------- ----------------
Basic income per common share $ 0.27 $ 0.40
-------------- ----------------
DILUTED INCOME PER COMMON SHARE:
From continuing operations $ 0.22 $ 0.35
From discontinued operations 0.03 0.03
-------------- ----------------
Diluted income per common share $ 0.25 $ 0.38
-------------- ----------------
See accompanying notes to consolidated financial statements.
5
EVERGREEN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended September 30,
-----------------------------------
1999 1998
--------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,292,695 $ 4,181,074
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation, depletion and amortization 3,599,220 2,918,417
Deferred income taxes 1,806,402 2,455,000
Gain on disposal of discontinued operations, net (452,157) --
Equity in earnings of discontinued operations, net -- (261,474)
Other 414,427 238,494
Changes in operating assets and liabilities:
Accounts receivable 1,029,055 (945,034)
Other current assets (846,431) 55,858
Accounts payable 314,588 281,438
Accrued expenses 323,495 37,340
--------------- ----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 9,481,294 8,961,113
--------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property and equipment (33,840,238) (36,913,304)
Proceeds from the sale of investment 2,258,500 --
Designated cash 665,874 (267,490)
Change in production taxes payable (665,874) 267,490
Increase in other assets (282,604) (159,459)
--------------- ----------------
NET CASH USED BY INVESTING ACTIVITIES (31,864,342) (37,072,763)
--------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (payments on) notes payable (37,138,700) 27,770,000
Proceeds from sale of common stock, net 65,508,922 1,303,074
Principal payments on capital lease obligations (4,028,873) (787,333)
Debt issue costs (73,669) (106,527)
Decrease in cash held from operating oil and gas properties (1,530,206) (18,488)
--------------- ----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 22,737,474 28,160,726
--------------- ----------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 7,111 7,971
--------------- ----------------
INCREASE IN CASH AND CASH EQUIVALENTS 361,537 57,047
CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD 1,333,733 2,103,168
--------------- ----------------
CASH AND CASH EQUIVALENTS, END OF THE PERIOD $ 1,695,270 $ 2,160,215
--------------- ----------------
--------------- ----------------
See accompanying notes to consolidated financial statements.
6
EVERGREEN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------ ----------------------------------
1999 1998 1999 1998
---- ---- ---- ----
Net income $ 1,438,177 $ 1,449,149 $ 3,292,695 $ 4,181,074
Foreign currency translation
adjustments 346,612 88,593 (144,076) 61,924
--------------- -------------- -------------- --------------
Comprehensive income $ 1,784,789 $ 1,537,742 $ 3,148,619 $ 4,242,998
--------------- -------------- -------------- --------------
--------------- -------------- -------------- --------------
See accompanying notes to consolidated financial statements.
7
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1999
(UNAUDITED)
1. Basis of Presentation
Evergreen Resources, Inc. ("Evergreen" or the "Company") is an independent
energy company engaged in the exploration, development, production,
operation and acquisition of oil and gas properties. Evergreen's primary
focus is on developing and expanding its coal bed methane properties
located on approximately 200,000 gross acres in the Raton Basin in
southern Colorado. The Company also holds exploration licenses on
approximately 513,000 acres onshore in the United Kingdom, and an oil and
gas exploration contract on approximately 2.4 million acres in northern
Chile. Evergreen operates all of its own producing properties.
The financial statements include the accounts of Evergreen and its
wholly-owned subsidiaries: Evergreen Operating Corporation ("EOC"),
Evergreen Resources (UK) Ltd., Powerbridge, Inc., Evergreen Well Service
Company ("EWS"), Primero Gas Marketing Company ("Primero") and EnviroSeis,
LLC ("EnviroSeis"). All significant intercompany balances and transactions
have been eliminated in consolidation.
The Company has a 40% ownership in Argos Evergreen Limited ("AEL"), a
Falkland Islands Company which holds a 5% interest in Tranche A in the
Falkland Islands Basin. This investment is accounted for by the equity
method of accounting. Effective February 1999, the Company sold its 49%
interest in Maverick Stimulation Company, LLC ("Maverick") which had
previously been accounted for using the equity method of accounting.
See Note 5 for further discussion.
The accompanying financial statements should be read in conjunction with
the Company's audited consolidated financial statements for the year ended
December 31, 1998. In the opinion of management, the accompanying
unaudited financial statements contain all adjustments necessary to
present fairly the Company's financial position as of September 30, 1999
and the results of its operations and cash flows for the three and nine
months then ended. Management believes all such adjustments are of a
normal recurring nature. The results of operations for interim periods are
not necessarily indicative of results to be expected for a full year.
2. Oil and Gas Properties
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 including salaries, benefits
and other internal costs directly attributable to the activities. Costs
associated with production and general corporate activities are expensed
in the period incurred. Interest costs related to unproved properties and
properties under development are also capitalized to oil and gas
properties. Normal dispositions of oil and gas properties are accounted
for as adjustments of capitalized costs, with no gain or loss recognized.
8
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.
3. Earnings per Share
The following table sets forth the computation of basic and diluted
earnings per share:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- --------------------------------
1999 1998 1999 1998
------------- ------------- -------------- --------------
Numerator:
Income from continuing operations $ 1,438,177 $ 1,322,389 $ 2,840,538 $ 3,919,600
Gain on disposal of discontinued
operations, net -- -- 452,157 --
Equity in earnings of discontinued
operations, net -- 126,760 -- 261,474
------------- ------------- -------------- --------------
Net income $ 1,438,177 $ 1,449,149 $ 3,292,695 $ 4,181,074
------------- ------------- -------------- --------------
Denominator:
Denominator for basic earnings per
share - weighted average shares 14,441,277 10,540,545 12,390,013 10,476,437
Effect of dilutive securities:
Stock warrants 827,621 638,381 725,470 669,417
------------- ------------- -------------- --------------
Denominator for diluted earnings per
share - adjusted weighted average
shares and assumed conversions 15,268,898 11,178,926 13,115,483 11,145,854
------------- ------------- -------------- --------------
------------- ------------- -------------- --------------
Basic income per common share:
From continuing operations $ 0.10 $ 0.13 $ 0.23 $ 0.37
From discontinued operations -- 0.01 0.04 0.03
------------- ------------- -------------- --------------
Basic income per common share $ 0.10 $ 0.14 $ 0.27 $ 0.40
------------- ------------- -------------- --------------
Diluted income per common share:
From continuing operations $ 0.09 $ 0.12 $ 0.22 $ 0.35
From discontinued operations -- 0.01 0.03 0.03
------------- ------------- -------------- --------------
Diluted income per common share $ 0.09 $ 0.13 $ 0.25 $ 0.38
------------- ------------- -------------- --------------
4. Public Offering
On June 22, 1999, the Company completed a public offering of its common
shares, whereby it sold 3,162,500 shares at $22.00 per share. Proceeds,
net of underwriters' commissions and estimated expenses of approximately
$4.4 million, were $65.5 million, of which $58 million and $3.6 million
were used to pay off the balances on the Company's line of credit and
capital lease obligations. The remainder of the proceeds were used for
general corporate purposes.
9
5. Discontinued Operations
Effective February 18, 1999, Evergreen sold its 49% interest in Maverick
to the managing members of Maverick for $2.26 million. The sale resulted
in a gain net of tax of approximately $452,200 or $0.03 per diluted
share. This transaction has been accounted for as a discontinued
operation and the results of operations have been excluded from
continuing operations in the consolidated statements of income for all
periods presented.
6. Mineral Interests Acquisition
Effective September 30, 1999, Evergreen acquired coal bed methane mineral
interests and certain other assets for $5 million. The purchase price
consisted of $2.5 million in cash, which was paid on October 8, 1999, plus
120,000 shares of Evergreen stock valued at $2.5 million. Subject to
certain terms and conditions, Evergreen has provided the seller of the
mineral interests with protection of the value of such stock, for a period
of six months from the effective date of the registration statement
relating to the resale of the shares, which was November 5, 1999. If the
sales price received by the seller upon the sale of the Evergreen stock is
less than the issuance price of $20.83 per share, Evergreen will be
required to reimburse the seller for the price differential. The coal bed
methane interests consist of a 17.5% royalty interest in more than 20,000
acres in the southern Colorado portion of the Raton Basin, on acreage
Evergreen currently operates. Evergreen holds a 75% working interest on
this same acreage, which the Company acquired in late 1998. The purchase
price allocation for the acquisition is preliminary and will be finalized
after a review of the property components and the settlement of potential
contingencies.
7. Subsidiary Guarantors
In May 1999, the Company filed a Shelf Registration Statement with the
Securities and Exchange Commission with an aggregate offering amount of up
to $150 million. The Shelf Registration Statement provided for the
offering to the public from time to time of (a) debt securities of the
Company, which may be wholly and unconditionally guaranteed by certain
wholly-owned subsidiaries of the Company (the "Subsidiary Guarantors"),
(b) common stock of the Company, (c) preferred stock of the Company, (d)
depositary shares representing fractional interests in shares of the
Company's preferred stock, (e) warrants to purchase the Company's debt
securities, preferred stock or common stock and/or (f) subscription rights
to purchase any of the foregoing securities. The Company has not issued
any debt securities under the Shelf Registration Statement. However,
because of the potential for a guarantee of debt securities by the
Subsidiary Guarantors, the Company has presented the following condensed
consolidating financial data with respect to (i) the Company on a
stand-alone basis, (ii) the Subsidiary Guarantors as a group, (iii) the
non-guarantor subsidiaries of the Company as a group, (iv) elimination
entries for purposes of consolidation and (v) the Company and all of its
subsidiaries combined. The Company has not presented separate financial
statements for each of the Subsidiary Guarantors because it believes that
such information statements is not material to potential investors. All
significant intercompany balances and transactions have been eliminated in
consolidation. The Subsidiary Guarantors are not subject to any
restrictions on their ability to pay dividends to the Company.
10
CONSOLIDATING BALANCE SHEETS
SEPTEMBER 30, 1999
(IN 000'S)
(UNAUDITED)
COMBINED COMBINED
ASSETS PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------ ------------- ------------ ------------
CURRENT:
Cash and cash equivalents $ 1,619 $ (41) $ 117 $ -- $ 1,695
Accounts receivable 532 3,126 41 -- 3,699
Other current assets 684 309 15 -- 1,008
---------- --------- ----------- ----------- -----------
TOTAL CURRENT ASSETS 2,835 3,394 173 -- 6,402
---------- --------- ----------- ----------- -----------
PROPERTY AND EQUIPMENT 118,096 57,549 11,009 -- 186,654
Less accumulated depreciation, depletion and
amortization 19,055 4,231 -- -- 23,286
---------- --------- ----------- ----------- -----------
NET PROPERTY AND EQUIPMENT 99,041 53,318 11,009 -- 163,368
---------- --------- ----------- ----------- -----------
DESIGNATED CASH -- 2,116 -- -- 2,116
INVESTMENT IN SUBSIDIARIES 13,577 5,094 -- (18,671) --
OTHER ASSETS 1,506 27 73 -- 1,606
DUE TO (FROM) PARENT AND AFFILIATES 49,721 (38,230) (11,491) -- --
---------- --------- ----------- ----------- -----------
$ 166,680 $ 25,719 $ (236) $ (18,671) $ 173,492
---------- --------- ----------- ----------- -----------
---------- --------- ----------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 420 $ 1,043 $ 92 $ -- $ 1,555
Amounts payable to oil and gas property owners -- 1,417 -- -- 1,417
Accrued expenses and other 3,517 178 -- -- 3,695
Current portion - capital leases -- -- -- -- --
---------- --------- ----------- ----------- -----------
TOTAL CURRENT LIABILITIES 3,937 2,638 92 -- 6,677
PRODUCTION TAXES PAYABLE -- 2,116 -- -- 2,116
NOTES PAYABLE 5,000 2,000 -- -- 7,000
OBLIGATIONS UNDER CAPITAL LEASES -- -- -- -- --
OTHER -- -- -- -- --
DEFERRED INCOME TAX LIABILITY 5,390 -- -- -- 5,390
---------- --------- ----------- ----------- -----------
TOTAL LIABILITIES 14,327 6,754 92 -- 21,173
---------- --------- ----------- ----------- -----------
STOCKHOLDERS' EQUITY:
Common stock 146 100 -- (100) 146
Stock to be issued 2,500 -- -- -- 2,500
Partnership capital -- 10,190 -- (10,190) --
Additional paid-in capital 145,337 -- -- -- 145,337
Retained earnings 4,370 8,675 (294) (8,381) 4,370
Other comprehensive loss -- -- (34) -- (34)
---------- --------- ----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY 152,353 18,965 (328) (18,671) 152,319
---------- --------- ----------- ----------- -----------
$ 166,680 $ 25,719 $ (236) $ (18,671) $ 173,492
---------- --------- ----------- ----------- -----------
---------- --------- ----------- ----------- -----------
11
CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 1998
(IN 000'S)
(UNAUDITED)
COMBINED COMBINED
ASSETS PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------ ----------- ------------ ------------
CURRENT:
Cash and cash equivalents $ 1,200 $ 124 $ 10 $ -- $ 1,334
Accounts receivable 392 4,287 49 -- 4,728
Other current assets 290 3 2 -- 295
--------- --------- ------------ ----------- ----------
TOTAL CURRENT ASSETS 1,882 4,414 61 -- 6,357
--------- --------- ------------ ----------- ----------
PROPERTY AND EQUIPMENT 96,239 40,426 10,511 -- 147,176
Less accumulated depreciation, depletion and
amortization 16,724 2,676 -- -- 19,400
--------- --------- ------------ ----------- ----------
NET PROPERTY AND EQUIPMENT 79,515 37,750 10,511 -- 127,776
--------- --------- ------------ ----------- ----------
DESIGNATED CASH -- 2,782 -- -- 2,782
INVESTMENT IN SUBSIDIARIES 11,555 5,094 -- (16,649) --
OTHER ASSETS 2,437 274 -- -- 2,711
DUE TO (FROM) PARENT AND AFFILIATES 31,429 (20,737) (10,692) -- --
--------- --------- ------------ ----------- ----------
$ 126,818 $ 29,577 $ (120) $ (16,649) $ 139,626
--------- --------- ------------ ----------- ----------
--------- --------- ------------ ----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 190 $ 1,028 $ 22 $ -- $ 1,240
Amounts payable to oil and gas property owners -- 2,947 -- -- 2,947
Accrued expenses and other 1,364 151 -- -- 1,515
Current portion - capital leases -- 1,123 -- -- 1,123
--------- --------- ------------ ----------- ----------
TOTAL CURRENT LIABILITIES 1,554 5,249 22 -- 6,825
PRODUCTION TAXES PAYABLE -- 2,782 -- -- 2,782
NOTES PAYABLE 42,400 1,739 -- -- 44,139
OBLIGATIONS UNDER CAPITAL LEASES -- 2,906 -- -- 2,906
OTHER -- -- -- -- --
DEFERRED INCOME TAX LIABILITY 3,295 -- -- -- 3,295
--------- --------- ------------ ----------- ----------
TOTAL LIABILITIES 47,249 12,676 22 -- 59,947
--------- --------- ------------ ----------- ----------
STOCKHOLDERS' EQUITY:
Common stock 111 100 -- (100) 111
Partnership capital -- 10,190 -- (10,190) --
Additional paid-in capital 78,380 -- -- -- 78,380
Retained earnings 1,078 6,611 (252) (6,359) 1,078
Other comprehensive income -- -- 110 -- 110
--------- --------- ------------ ----------- ----------
TOTAL STOCKHOLDERS' EQUITY 79,569 16,901 (142) (16,629) 79,679
--------- --------- ------------ ----------- ----------
$ 126,818 $ 29,577 $ (120) $ (16,629) $ 139,626
--------- --------- ------------ ----------- ----------
--------- --------- ------------ ----------- ----------
12
CONSOLIDATING STATEMENTS OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 1999
(IN 000'S)
(UNAUDITED)
COMBINED COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------ ------------ ------------
REVENUES:
Natural gas revenues $ 4,531 $1,182 $ 94 $ -- $ 5,807
Oil and gas services -- 1,466 120 (1,586) --
Interest 25 23 -- -- 48
------- ------ ------- ------- -------
TOTAL REVENUES 4,556 2,671 214 (1,586) 5,855
------- ------ ------- ------- -------
EXPENSES:
Lease operating expenses 1,097 310 27 (49) 1,385
Cost of oil and gas services -- 322 126 (448) --
Depreciation, depletion and amortization 830 465 -- (124) 1,171
General and administrative expenses 845 267 65 (318) 859
Interest expense 83 -- -- -- 83
------- ------ ------- ------- -------
TOTAL EXPENSES 2,855 1,364 218 (939) 3,498
------- ------ ------- ------- -------
INCOME FROM CONTINUING OPERATIONS 1,701 1,307 (4) (647) 2,357
BEFORE INCOME TAXES
Income tax provision - deferred 919 -- -- -- 919
------- ------ ------- ------- -------
INCOME FROM CONTINUING OPERATIONS 782 1,307 (4) (647) 1,438
DISCONTINUED OPERATIONS
Gain from disposal of discontinued operations, -- -- -- -- --
net
Equity in earnings of discontinued operations, -- -- -- -- --
net
EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES 657 -- -- (657) --
------- ------ ------- ------- -------
NET INCOME $ 1,439 $1,307 $ (4) $(1,304) $ 1,438
------- ------ ------- ------- -------
------- ------ ------- ------- -------
13
CONSOLIDATING STATEMENTS OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 1998
(IN 000'S)
(UNAUDITED)
COMBINED COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------ ------------ ------------
REVENUES:
Natural gas revenues $4,421 $ 988 $ -- $ -- $5,409
Oil and gas services -- 271 -- (271) --
Interest 23 30 -- (2) 51
------ ----- ------ ------ ------
TOTAL REVENUES 4,444 1,289 -- (273) 5,460
------ ----- ------ ------ ------
EXPENSES:
Lease operating expenses 815 217 -- -- 1,032
Cost of oil and gas services -- 85 -- (85) --
Depreciation, depletion and amortization 824 269 -- -- 1,093
General and administrative expenses 795 14 3 (286) 526
Interest expense 461 85 -- -- 546
Other expense 110 5 -- -- 115
------ ----- ------ ------ ------
TOTAL EXPENSES 3,005 675 3 (371) 3,312
------ ----- ------ ------ ------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 1,439 614 (3) 98 2,148
Income tax provision - deferred 826 -- -- -- 826
------ ----- ------ ------ ------
INCOME FROM CONTINUING OPERATIONS 613 614 (3) 98 1,322
DISCONTINUED OPERATIONS
Gain from disposal of discontinued operations, net -- -- -- -- --
Equity in earnings of discontinued operations, net 127 -- -- -- 127
EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES 709 -- -- (709) --
------ ----- ------ ------ ------
NET INCOME $1,449 $ 614 $ (3) $ (611) $1,449
------ ----- ------ ------ ------
------ ----- ------ ------ ------
14
CONSOLIDATING STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1999
(IN 000'S)
(UNAUDITED)
COMBINED COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------ ------------ ------------
REVENUES:
Natural gas revenues $ 11,945 $ 3,341 $ 233 $ -- $ 15,519
Oil and gas services -- 2,426 120 (2,546) --
Interest 90 72 -- -- 162
--------- ---------- ----------- ----------- -----------
TOTAL REVENUES 12,035 5,839 353 (2,546) 15,681
--------- ---------- ----------- ----------- -----------
EXPENSES:
Lease operating expenses 2,700 979 118 (49) 3,748
Cost of oil and gas services -- 593 126 (719) --
Depreciation, depletion and amortization 2,331 1,303 -- (165) 3,469
General and administrative expenses 2,299 720 151 (977) 2,193
Interest expense 1,444 180 -- -- 1,624
--------- ---------- ----------- ----------- -----------
TOTAL EXPENSES 8,774 3,775 395 (1,910) 11,034
--------- ---------- ----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS 3,261 2,064 (42) (636) 4,647
BEFORE INCOME TAXES
Income tax provision - deferred 1,806 -- -- -- 1,806
--------- ---------- ----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS 1,455 2,064 (42) (636) 2,841
DISCONTINUED OPERATIONS
Gain from disposal of discontinued operations, 452 -- -- -- 452
net
Equity in earnings of discontinued operations, -- -- -- -- --
net
EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES 1,387 -- -- (1,387) --
--------- ---------- ----------- ----------- -----------
NET INCOME $ 3,294 $ 2,064 $ (42) $ (2,023) $ 3,293
--------- ---------- ----------- ----------- -----------
--------- ---------- ----------- ----------- -----------
15
CONSOLIDATING STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN 000'S)
(UNAUDITED)
COMBINED COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------ ------------ ------------
REVENUES:
Natural gas revenues $11,694 $2,495 $ -- $ -- $14,189
Oil and gas services -- 736 -- (736) --
Interest 48 83 -- 2 133
------- ------ ------- ------- -------
TOTAL REVENUES 11,742 3,314 -- (734) 14,322
------- ------ ------- ------- -------
EXPENSES:
Lease operating expenses 1,801 465 -- -- 2,266
Cost of oil and gas services -- 258 -- (258) --
Depreciation, depletion and amortization 2,036 811 -- -- 2,847
General and administrative expenses 1,902 39 23 (591) 1,373
Interest expense 1,036 271 -- -- 1,307
Other expense 149 5 -- -- 154
------- ------ ------- ------- -------
TOTAL EXPENSES 6,924 1,849 23 (849) 7,947
------- ------ ------- ------- -------
INCOME FROM CONTINUING OPERATIONS 4,818 1,465 (23) 115 6,375
BEFORE INCOME TAXES
Income tax provision - deferred 2,455 -- -- -- 2,455
------- ------ ------- ------- -------
INCOME FROM CONTINUING OPERATIONS 2,363 1,465 (23) 115 3,920
DISCONTINUED OPERATIONS
Gain from disposal of discontinued operations, -- -- -- -- --
net
Equity in earnings of discontinued operations, 261 -- -- -- 261
net
EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES 1,557 -- -- (1,557) --
------- ------ ------- ------- -------
NET INCOME $ 4,181 $1,465 $ (23) $(1,442) $ 4,181
------- ------ ------- ------- -------
------- ------ ------- ------- -------
16
CONSOLIDATING STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999
(IN 000'S)
(UNAUDITED)
COMBINED COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,293 $ 2,064 $ (42) $ (2,022) $ 3,293
Adjustments to reconcile net income to cash
provided by operating activities:
Equity in undistributed income of subsidiaries (2,022) -- -- (2,022) --
Depreciation, depletion and amortization 2,387 1,212 -- -- 3,599
Deferred income taxes 1,806 -- -- -- 1,806
Gain on disposal of discontinued operations, net (452) -- -- -- (452)
Other 414 -- -- -- 414
Changes in operating assets and liabilities:
Accounts receivable (139) 1,161 7 -- 1,029
Other current assets (528) (305) (13) -- (846)
Accounts payable 230 14 70 -- 314
Accrued expenses 297 27 -- -- 324
-------- -------- -------- ----- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,286 4,173 22 -- 9,481
-------- -------- -------- ----- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Intercompany (advances) proceeds (18,289) 17,496 793 -- --
Investment in property and equipment (16,530) (16,661) (649) -- (33,840)
Proceeds from the sale of investment 2,259 -- -- -- 2,259
Designated cash -- 666 -- -- 666
Change in production taxes payable -- (666) -- -- (666)
Increase in other assets (348) 131 (66) -- (283)
-------- -------- -------- ----- --------
NET CASH USED BY INVESTING ACTIVITIES (32,908) 966 78 -- (31,864)
-------- -------- -------- ----- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (payments on) notes payable (37,400) 261 -- -- (37,139)
Proceeds from sale of common stock, net 65,509 -- -- -- 65,509
Principal payments on capital lease obligations -- (4,029) -- -- (4,029)
Debt issue costs (71) (3) -- -- (74)
Cash held from operating oil and gas properties -- (1,530) -- -- (1,530)
-------- -------- -------- ----- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 28,038 (5,301) -- -- 22,737
-------- -------- -------- ----- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH -- -- 7 -- 7
-------- -------- -------- ----- --------
INCREASE IN CASH AND CASH EQUIVALENTS 416 (162) 107 -- 361
CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD 1,200 124 10 -- 1,334
-------- -------- -------- ----- --------
CASH AND CASH EQUIVALENTS, END OF THE PERIOD $ 1,616 $ (38) $ 117 $ -- $ 1,695
-------- -------- -------- ----- --------
-------- -------- -------- ----- --------
17
CONSOLIDATING STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN 000'S)
(UNAUDITED)
COMBINED COMBINED
PARENT GUARANTOR NON-GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,181 $ 1,465 $ (23) $ (1,442) $ 4,181
Adjustments to reconcile net income to cash
provided by operating activities:
Equity in undistributed income of subsidiaries (1,442) -- -- (1,442) --
Depreciation, depletion and amortization 2,107 811 -- -- 2,918
Deferred income taxes 2,455 -- -- -- 2,455
Equity in earnings of discontinued operations, net (261) -- -- -- (261)
Other 238 -- -- -- 238
Changes in operating assets and liabilities:
Accounts receivable (1,198) 261 (8) -- (945)
Other current assets 27 25 3 -- 55
Accounts payable 21 260 -- -- 281
Accrued expenses 50 (13) -- -- 37
-------- -------- -------- ------------ --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,180 2,809 (28) -- 8,961
-------- -------- -------- ------------ --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Intercompany (advances) proceeds (8,359) 7,419 940 -- --
Investment in property and equipment (23,934) (12,074) (906) -- (36,914)
Designated cash -- (267) -- -- (267)
Change in production taxes payable -- 267 -- -- 267
Increase in other assets (181) 22 -- -- (159)
-------- -------- -------- ------------ --------
NET CASH USED BY INVESTING ACTIVITIES (32,474) (4,633) 34 -- (37,073)
-------- -------- -------- ------------ --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (payments on) notes payable 26,688 1,082 -- -- 27,770
Proceeds from sale of common stock, net 1,303 -- -- -- 1,303
Principal payments on capital lease obligations -- (787) -- -- (787)
Debt issue costs (107) -- -- -- (107)
Cash held from operating oil and gas properties -- (18) -- -- (18)
-------- -------- -------- ------------ --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 27,884 277 -- -- 28,161
-------- -------- -------- ------------ --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH -- -- 8 -- 8
-------- -------- -------- ------------ --------
INCREASE IN CASH AND CASH EQUIVALENTS 1,590 (1,547) 14 -- 57
CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD 419 1,680 4 -- 2,103
-------- -------- -------- ------------ --------
CASH AND CASH EQUIVALENTS, END OF THE PERIOD $ 2,009 $ 133 $ 18 $ -- $ 2,160
-------- -------- -------- ------------ --------
-------- -------- -------- ------------ --------
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), including statements regarding, among other
items, (i) the Company's growth strategies, (ii) anticipated trends in the
Company's business and its future results of operations, and (iii) market
conditions in the oil and gas industry. These forward-looking statements are
based largely on the Company's expectations and are subject to a number of
risks and uncertainties, many of which are beyond the Company's control. Such
risks and uncertanties include, among other things, a decline in natural gas
production, a decline in natural gas prices, incorrect estimations of
required capital expenditures, increases in the cost of drilling, completion
and gas gathering, an increase in the cost of production and operations, an
inability to meet growth projections, and/or changes in general economic
conditions. These and other risks and uncertanties, which are described in
more detail in the Company's Annual Report on Form 10-K and the Company's
Prospectus Supplement dated June 16, 1999, included in its Registration
Statement on Form S-3 (Registrations No. 333-78203) filed with the Securities
and Exchange Commission, could cause actual results and developments to be
materially different from those expressed or implied by any of these
forward-looking statements.
RECENT DEVELOPMENTS
GENERAL
Evergreen is an independent energy company engaged in the exploration,
development, production, operation and acquisition of oil and gas properties.
Evergreen's primary focus is on developing and expanding its coal bed methane
properties located on approximately 200,000 gross acres in the Raton Basin in
southern Colorado. The Company also holds exploration licenses on
approximately 513,000 acres onshore in the United Kingdom, a net 2% interest
in a consortium exploring offshore in the Falkland Islands, and an oil and
gas exploration contract on approximately 2.4 million acres in northern
Chile. Evergreen operates all of its producing properties.
RATON BASIN
As of November 2, 1999, Evergreen owns 227 net producing gas wells. Gas
production has continued to improve since sales began in January 1995 to a
current level of over 51 million cubic feet ("MMcf") per day gross.
The Company enters into contractual obligations that require future physical
delivery in an attempt to manage price risk with regard to a portion of its
natural gas production. For the period November 1, 1999, through October 31,
2000, the Company has entered into contracts to sell approximately 34 MMcf
per day, net at $1.95.
Effective September 30, 1999, Evergreen acquired coal bed methane mineral
interests and certain other assets for $5 million. The purchase price
consisted of $2.5 million in cash, which was paid on October 8, 1999, plus
120,000 shares of Evergreen stock valued at $2.5 million. Subject to certain
terms and conditions, Evergreen has provided the seller of the mineral
interests with protection of the value of such stock, for a period of six
months from the effective date of the registration statement, relating to the
resale of the shares, which was November 5, 1999. If the sales price received
by seller upon the sale of the Evergreen stock is less than the issuance
price of $20.83 per share, Evergreen will be required to reimburse the seller
for the price differential. The coal bed methane interests consist of a 17.5%
royalty interest in more than 20,000 acres in the southern Colorado portion
of the Raton Basin, on acreage
19
Evergreen currently operates. Evergreen holds a 75% working interest on this
same acreage, which the Company acquired in late 1998. The purchase price
allocation for the acquisition is preliminary and will be finalized after a
review of the property components and the settlement of potential
contingencies.
RESULTS OF OPERATIONS
The following table sets forth certain operating data of the Company for the
periods presented: "Mcf" means thousand cubic feet and "Mcfe" means thousand
cubic feet equivalent.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ --------------------------
1999 1998 1999 1998
---- ---- ---- ----
Natural gas production (Mcf) 3,549,000 2,731,000 9,910,000 7,103,000
Average realized sales price per Mcf $ 1.64 $ 1.98 $ 1.57 $ 2.00
Cost per Mcfe:
Lease operating expense $ 0.39 $ 0.38 $ 0.38 $ 0.32
Depreciation, depletion and
amortization $ 0.33 $ 0.40 $ 0.35 $ 0.40
General and administrative $ 0.24 $ 0.19 $ 0.22 $ 0.19
RESULTS OF OPERATIONS - THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999
The Company reported net income of $1,438,000 or $0.09 per diluted share for
the three months ended September 30, 1999, compared to net income of
$1,449,100 or $0.13 per diluted share for the same period in 1998. Although
sales volume increased by 30% in the third quarter of 1999, net income
decreased in 1999 as compared to 1998. The decrease was primarily due to a
decrease in gas prices of 17% to $1.64 per Mcf in 1999 from $1.98 in 1998 and
increases in lease operating expenses and general and administrative
expenses. For the nine months ended September 30, 1999, the Company reported
net income of $3,293,000 or $0.25 per diluted share compared to net income of
$4,181,000 or $0.38 per diluted share in 1998. The nine months earnings
included a one-time, after tax gain of $452,000 or $0.03 per diluted share,
resulting from the sale of Evergreen's 49% interest in Maverick. The decrease
in net income during the nine months ended September 30, 1999 as compared to
the prior year was attributable to a decrease in gas prices and increases in
lease operating expense, general and administrative and interest expense.
Natural gas revenues increased to $5,807,000 during the three months ended
September 30, 1999, from $5,409,000 for the same period in the prior year.
During the nine months ended September 30, 1999, natural gas revenues
increased to $15,518,000 from $14,189,000 for the same period in the prior
year. The increase in natural gas revenues for both the three and nine month
periods is due to a 30% and 40% increase in sales volumes, which was
significantly offset by a 17% and 22% decrease in natural gas prices for the
three and nine month periods. At September 30, 1999, the number of producing
Raton Basin wells increased to 220 net from 147 net producing wells at
September 30, 1998. The increase in the number of producing wells in 1999 as
compared to 1998 is due to the drilling of 59 new wells and the acquisition
of 14 net producing wells in Long Canyon in December of 1998.
Lease operating expenses for the three months ended September 30, 1999, were
$1,384,000 or $0.39 per Mcf compared to $1,032,000 or $0.38 per Mcf for the
same period in 1998. During the nine months ended September 30, 1999, lease
operating expenses were $3,748,000 or $0.38 per Mcf as compared to $2,265,000
or $0.32 per Mcf for the same period in the prior year. The increase in lease
operating
20
expense for the three and nine months in 1999 as compared to 1998 is
primarily due to increased water management costs and road maintenance. The
Company is continuing its efforts to reduce water management costs through
the drilling of disposal wells, purchase of water trucks and the continued
approval of discharge permits. One disposal well has been drilled and is
awaiting completion and a second disposal well is scheduled to be drilled
within the next month.
Depreciation, depletion and amortization expense for the three months ended
September 30, 1999, was $1,171,000 compared to $1,094,000 for the same period
in 1998. During the nine months ended September 30, 1999, depreciation,
depletion and amortization expense was $3,469,000 as compared to $2,847,000
for the same period in the prior year. On an equivalent Mcf basis,
depreciation, depletion and amortization expense declined to $0.33 per Mcf in
the three months ended September 30, 1999, as compared to $0.40 per Mcf for
the same period in the prior year. For the nine months ended September 30,
1999 depreciation, depletion and amortization expenses were $0.35 per Mcf as
compared to $0.40 per Mcf for the same period in 1998. The decrease in cost
per Mcf in 1999 as compared to 1998 is due to the significant increase in the
estimated units of proved reserves as a result of the number of new wells
that have been drilled in 1999.
General and administrative expenses were $859,000 during the three months
ended September 30, 1999, as compared to $525,000 during the same period in
1998, and $2,193,000 for the nine months ended September 30, 1999, as
compared to $1,373,000 for the same period in the prior year. The increase in
general and administrative expenses of $334,000 for the three months ended
September 30, 1999 as compared to 1998 and the increase of $820,000 for the
nine month period ended September 30, 1999 as compared to 1998 is due to an
increase in administrative staff and other corporate expenses as a result of
the significant growth of the Company. Through March 1999, EOC, a wholly
owned subsidiary of the Company, operated properties for various third party
working interest owners. In January 1999, the working interest owners sold
those properties. As a result, EOC did not receive overhead charges, which
reduced expenses, for the operation of those properties in the three and nine
months ended September 30, 1999. Accordingly, the Company's general and
administrative expenses increased by $149,000 and $257,000, respectively.
Interest expense for the three months ended September 30, 1999, was $83,000
compared to $546,000 for the same period in 1998. During the nine months
ended September 30, 1999, interest expense was $1,624,000 compared to
$1,307,000 for the same period in the prior year. The decrease of $463,000
for the three months ended September 30, 1999, over the same period in 1998,
was the result of the pay-off of the line of credit, as explained below. The
$317,000 increase for the nine months ended September 30, 1999, over the same
period in 1998, was due to increased borrowings incurred to fund the
development of the Raton Basin. On June 22, 1999, the Company paid off the
outstanding balance of $58 million under its line of credit and on June 30,
1999, paid off $3.6 million under its capital lease obligation, with the
proceeds received from the public offering of its common shares.
LIQUIDITY AND CAPITAL RESOURCES
On June 22, 1999, the Company completed a public offering of its common
shares, whereby it sold 3,162,500 shares at $22.00 per share. Proceeds, net
of underwriters' commissions and estimated expenses of approximately $4.4
million, were $65.5 million, of which $58 million and $3.6 million were used
to pay off balances on the Company's line of credit and capital lease
obligation. The remainder of the proceeds were used for general corporate
purposes.
As of September 30, 1999, the Company had a $75 million revolving line of
credit with a bank group consisting of Hibernia National Bank, as agent,
Chase Bank of Texas and Paribas ("the Banks"). The line is available through
June 2001. Advances pursuant to this line of credit are limited to a
borrowing base, which is presently $75 million. At the Company's election, it
may use either the London interbank
21
offered rate plus a margin of 1.38% to 1.75% or the prime rate plus a margin
of 0% to 0.25%, with margins on both rates determined on the average
outstanding borrowings under the credit facility. The borrowing base is
redetermined semi-annually by the Banks based upon reserve evaluations of the
Company's oil and gas properties. An average annual facility fee of 0.375% is
charged quarterly for any unused portion of the credit line. The agreement is
collateralized by oil and gas properties and also contains certain net worth
and ratio requirements. At September 30, 1999, $7 million was outstanding
under the line of credit.
In February 1999, the Company sold its 49% interest in Maverick for
approximately $2.3 million and formed a new well service company, EWS. The
well service company is currently providing fracture stimulation services,
cement work, drilling and workovers. Evergreen anticipates an increase in
quality control and cost savings from the services performed by EWS.
In light of the September 30, 1999 Raton Basin acquisition of mineral
interests, the Company has increased its projected 1999 capital spending to
approximately $50 million. The Company will spend approximately $45 million
on its total exploration and development budget and $5 million on the recent
mineral interest acquisition. Approximately $35 million of the $45 million is
scheduled to be spent on drilling and gas collection systems, $5 million on
well service equipment and $5 million on its international and other
projects. During the nine months ended September 30, 1999, the Company spent
approximately $33 million on drilling and recompletion and gas collection
systems while $6 million was spent on well service equipment and other items.
Cash flows provided by operating activities were $9,481,000 for the nine
months ended September 30, 1999 as compared to cash flows provided by
operating activities of $8,961,000 for the same period in 1998. The increase
in cash flows provided by operating activities was due primarily to the
changes in operating assets and liabilities in 1999 as compared to 1998, and
was offset by lower gas prices and an overall increase in operating and
interest expense in 1999 as compared to 1998.
Cash flows used by investing activities were $31,864,000 for the nine months
ended September 30, 1999 versus $37,073,000 during the same period in 1998.
The decrease in cash flows used by investing activities was due to the
acquisition of the Cottontail Pass Unit in 1998 for approximately
$13,100,000. Excluding the acquisition, the total spending in 1998 for
property and equipment was approximately $23,813,000 as compared to the
33,840,000 in 1999. The increase in 1999 over 1998 is due primarily to the
drilling of 66 wells in 1999 as compared to 39 wells in 1998, the completion
of the Tamburelli Ranch compressor station in 1999, and the purchase of well
service equipment. These costs were offset by the $2,258,000 received from
the sale of Maverick.
Cash flows provided by financing activities were $22,737,000 during the nine
months ended September 30, 1999 as compared to cash flows provided by
financing activities of $28,161,000 for the same period in 1998. The decrease
is primarily due to the completion of the equity offering described above and
was offset by the repayment of all outstanding debt that had been incurred to
fund the development of the drilling and gas collection system in the Raton
Basin.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. SFAS No.
133 is effective for all fiscal quarters of fiscal years beginning after June
15, 2000. Management believes the adoption of this statement will not have a
material impact on the Company's financial statements.
22
YEAR 2000
The Company has conducted a review of its computer systems to identify the
systems that could be affected by the "Year 2000" issue. The Year 2000
problem is the result of computer programs being written using two digits
rather than four to define the applicable year. Any of the Company's programs
that have time-sensitive software may recognize a date using `00' as the year
1900 rather than the year 2000. This could result in a major system failure
or miscalculations.
The Company believes that the Year 2000 problem will not pose material
operational problems for the Company and that it is adequately prepared for
the Year 2000. The Company's computer software provider has assured the
Company that all of the Company's software is Year 2000 compliant (i.e. will
function properly in the year 2000 and beyond). The Company's software
provider provides written assurance that its products are Year 2000 compliant
on its web site. To the Company's knowledge, after investigation, no
"imbedded technology" (such as microchips in an electronic control system) of
the Company poses a material Year 2000 problem.
Because the Company believes that it has no material internal Year 2000
problems, the Company has not expended and does not expect to expend a
significant amount of funds to address Year 2000 issues. It is Company policy
to continue to review its suppliers' Year 2000 compliance and require
assurance of Year 2000 compliance from new suppliers; however, such
monitoring does not involve a significant cost to the Company.
In addition to the foregoing, the Company has contacted its major vendors and
received either oral or written assurances from its major vendors or viewed
assurances contained on vendors' web sites that they have no material Year
2000 problems. The Company believes that its vendors are largely fungible;
therefore, in the event a vendor's representations regarding its Year 2000
compliance were untrue for any reason, the Company believes that it could
find adequate Year 2000 compliant vendors as substitutes.
The Company is materially dependent on CIG for the delivery of the Company's
gas. CIG has provided the Company with written assurances that a CIG internal
task force has examined CIG's Year 2000 compliance and that CIG has no
material Year 2000 problem.
In the event that one or more of the Company's vendors were to have a
material Year 2000 problem, the Company believes that the foreseeable
consequences would be a temporary delay in revenue collection caused by an
interruption in computerized billing (and not an interruption in the actual
flow of the Company's coal bed methane), which would not have a substantial
long-term impact on the Company's ability to conduct operations. The Company
does not believe that any contingency planning is necessary to address this
possibility.
SUBSIDIARY GUARANTORS
In May 1999, the Company filed a Shelf Registration Statement with the
Securities and Exchange Commission with an aggregate offering amount of up to
$150 million. The Shelf Registration Statement provided for the offering to
the public from time to time of (a) debt securities of the Company, which may
be wholly and unconditionally guaranteed by certain wholly-owned subsidiaries
of the Company (the "Subsidiary Guarantors"), (b) common stock of the
Company, (c) preferred stock of the Company, (d) depositary shares
representing fractional interests in shares of the Company's preferred stock,
(e) warrants to purchase the Company's debt securities, preferred stock or
common stock and/or (f) subscription rights to purchase any of the foregoing
securities. The Company has not issued any debt securities under the Shelf
Registration Statement. However, because of the potential for a guarantee of
debt securities by the Subsidiary Guarantors, the Company has presented the
following condensed consolidating financial data with respect to (i) the
Company on a stand-alone basis, (ii) the Subsidiary Guarantors as a group,
(iii) the non-guarantor subsidiaries of the Company as a group, (iv)
elimination entries for purposes of consolidation and (v) the Company and all
of its subsidiaries combined. The
23
Company has not presented separate financial statements for each of the
Subsidiary Guarantors because it believes that such information statements is
not material to potential investors. All significant intercompany balances
and transactions have been eliminated in consolidation. The Subsidiary
Guarantors are not subject to any restrictions on their ability to pay
dividends to the Company.
ITEM 3. QUANTATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company measures its exposure to market risk at any point in time by
comparing its open positions to a market risk of fair value. The market
prices the Company uses to determine fair value are based on management's
best estimates, which consider various factors including closing exchange
prices, volatility factors and the time value of money. At September 30,
1999, the Company was exposed to some market risk on its long-term debt,
foreign currency and natural gas prices; however, management does not believe
that such risk is material.
24
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Except as provided below, the Company is not engaged in any material pending
legal proceedings to which the Company or its subsidiaries is a party or to
which any of its property is subject.
On July 13, 1998, Southern Colorado C.U.R.E. filed a lawsuit under the
citizen suit provision of the Clean Water Act in the U.S. District Court for
the District of Colorado against EOC, related to its coal bed methane
drilling operations in the Raton Basin near Trinidad, Colorado. The Company's
gas production produces naturally occurring groundwater as a by-product of
its coal bed methane gas production operations. The storage, use and disposal
of the produced groundwater in evaporative ponds and natural collection
features located on the surface at or near the wellsite, and the legal and
regulatory treatment of this practice, underlie the lawsuit. The Company
believes the lawsuit to be without merit and responded by filing a Motion to
Dismiss all of Southern Colorado C.U.R.E.'s alleged claims. The Motion to
Dismiss is currently pending before the court, although a magistrate to whom
the judge presiding over the matter referred the Motion to Dismiss has
indicated that she will recommend to the judge that the motion be denied with
respect to certain of the allegations. EOC is also subject to federal, state
and local environmental laws and regulations, and is currently participating
with the EPA and the State of Colorado in the investigation of certain
practices in connection with these operations. An evaluation of costs of
potential liabilities associated with this investigation cannot be reasonably
determined at this time. The Company does not expect that the lawsuit or the
investigation, or the environmental costs or contingent liabilities of
either, if any, will have a material adverse effect on its consolidated
financial position or its results of operations.
25
ITEM 2. CHANGES IN SECURITIES.
In July and August 1999, the Company issued 15,000 and 25,806, respectively,
shares of Common Stock to certain companies and individuals in connection
with various property acquisitions. The Company issued these shares of Common
Stock in each case in reliance on the exemption from registration provided by
Section 4 (2) of the Securities Act.
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.
(a) Exhibits.
Exhibit 27 - Financial Data Schedule.
(b) Reports on Form 8-K.
Not applicable
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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: November 10, 1999 By: /s/ Kevin R. Collins
---------------------------------------
Kevin R. Collins
VP - Finance, Chief Financial Officer
(Principal Financial and Accounting Officer)
27