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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2000
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File No. 0-19279
EVERFLOW EASTERN PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
Delaware 34-1659910
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
585 West Main Street
P.O. Box 629
Canfield, Ohio 44406
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 330-533-2692
Securities registered pursuant to Section 12(b) of the Act.
Name of each exchange
Title of each class on which registered
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None
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
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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. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K 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.
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There were 4,627,222 Units of limited partnership interest held by
non-affiliates of the Registrant as of March 20, 2001. The Units generally do
not have any voting rights, but, in certain circumstances, the Units are
entitled to one vote per Unit.
Except as otherwise indicated, the information contained in this Report
is as of December 31, 2000.
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PART I
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ITEM 1. BUSINESS
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INTRODUCTION
Everflow Eastern Partners, L.P. (the "Company"), a Delaware
limited partnership, engages in the business of oil and gas exploration and
development. The Company was formed for the purpose of consolidating the
business and oil and gas properties of Everflow Eastern, Inc., an Ohio
corporation ("EEI"), and the oil and gas properties owned by certain limited
partnerships and working interest programs managed or operated by EEI (the
"Programs"). Everflow Management Limited, LLC (the "General Partner"), an Ohio
limited liability company, is the general partner of the Company.
EXCHANGE OFFER. The Company made an offer (the "Exchange
Offer") to acquire the common shares of EEI (the "EEI Shares") and the interests
of investors in the Programs (collectively the "Interests") in exchange for
units of limited partnership interest (the "Units"). The Exchange Offer was made
pursuant to a Registration Statement on Form S-1 declared effective by the
Securities and Exchange Commission on December 19, 1990 (the "Registration
Statement") and the Prospectus dated December 19, 1990 as filed with the
Commission pursuant to Rule 424(b).
The Exchange Offer terminated on February 15, 1991 and holders
of Interests with an aggregate value (as determined by the Company for purposes
of the Exchange Offer) of $66,996,249 accepted the Exchange Offer and tendered
their Interests. Effective on such date, the Company acquired such Interests,
which included partnership interests and working interests in the Programs, and
all of the outstanding EEI Shares. Of the Interests tendered in the Exchange
Offer, $28,565,244 was represented by the EEI Shares and $38,431,005 by the
remaining Interests.
The parties who accepted the Exchange Offer and tendered their
Interests received an aggregate of 6,632,464 Units. Everflow Management Company,
a predecessor of the General Partner of the Company, contributed Interests with
an aggregate Exchange Value of $670,980 in exchange for a 1% interest in the
Company.
THE COMPANY. The Company was organized in September, 1990. The
principal executive offices of the Company, the General Partner and EEI are
located at 585 West Main Street, Canfield, Ohio 44406 (telephone number
330-533-2692).
GENERAL
This Annual Report on Form 10-K contains forward-looking
statements which involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward-looking
statements. All statements that address operating
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performance, events or developments that the Company anticipates will occur in
the future, including statements related to future revenue, profits, expenses,
and income or statements expressing general optimism about future results, are
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934 ("Exchange Act"). In addition, words such as "expects,"
"anticipates," "intends," "plans," "believes," "estimates," variations of such
words, and similar expressions are intended to identify forward-looking
statements. Forward-looking statements are subject to the safe harbors created
in the Exchange Act.
Factors that may cause such a difference include, but are not
limited to, the competition with the oil and gas industry, the price of oil and
gas in the Appalachian Basin area, the number of Units tendered pursuant to the
Repurchase Right and the ability to locate productive oil and gas prospects for
development by the Company. The Company undertakes no obligation to update
publicly any forward-looking statements, whether as a result of new information,
future events or otherwise.
DESCRIPTION OF THE BUSINESS
GENERAL. The Company has participated on an on-going basis in
the acquisition and development of undeveloped oil and gas properties and has
pursued the acquisition of producing oil and gas properties.
SUBSIDIARIES. The Company has two subsidiaries. EEI was
organized as an Ohio corporation in February 1979 and, since the consummation of
the Exchange Offer, has been a wholly-owned subsidiary of the Company. EEI is
engaged in the business of drilling, developing and operating oil and gas
properties and maintains a leasehold inventory from which the Company selects
prospects for development.
A-1 Storage of Canfield, Ltd. ("A-1 Storage") was organized as
an Ohio limited liability company in late 1995 and is 99% owned by the Company
and 1% owned by EEI. A-1 Storage's business includes leasing of office space to
the Company as well as rental of storage units to non-affiliated parties.
CURRENT OPERATIONS. The properties of the Company consist in
large part of fractional undivided working interests in properties containing
Proved Reserves of oil and gas located in the Appalachian Basin region of Ohio
and Pennsylvania. Approximately 91% of the estimated total future cash inflows
related to the Company's oil and gas reserves as of December 31, 2000 are
attributable to natural gas reserves. The substantial majority of such
properties are located in Ohio and consist primarily of proved producing
properties with established production histories.
The Company's operations since February 1991 primarily involve
the production and sale of oil and gas and the drilling and development of 244
(net) wells. The Company serves as the operator of approximately 77% of the
gross wells and 87% of the net wells which comprise the Company's properties.
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The Company expects to hold its producing properties until the
oil and gas reserves underlying such properties are substantially depleted.
However, the Company may from time to time sell any of its producing or other
properties or leasehold interests if the Company believes that such sale would
be in its best interest.
BUSINESS PLAN. The Company continually evaluates whether the
Company can develop oil and gas properties at historical levels given the
current costs of drilling and development activities, the current prices of oil
and gas, and the Company's experience with regard to finding oil and gas in
commercially productive quantities. The Company has decreased its level of
activity in the development of oil and gas properties compared with historical
levels. Management of the Company has from time to time explored and evaluated
the possible sale of the Company. The Company intends to continue to evaluate
this and other alternatives to maximize Unitholder's value. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
ACQUISITION OF PROSPECTS. The Company, through its
wholly-owned subsidiary EEI, maintains a leasehold inventory from which the
General Partner will select oil and gas prospects for development by the
Company. EEI makes additions to such leasehold inventory on an on-going basis.
The Company may also acquire leases from third parties. Historically, EEI
generated approximately 90% of the prospects which were drilled. EEI's current
leasehold inventory consists of approximately 52 prospects in various stages of
maturity representing approximately 780 net acres under lease.
In choosing oil and gas prospects for the Company, the General
Partner does not attempt to manage the risks of drilling through a policy of
selecting diverse prospects in various geographic areas or with the potential of
oil and gas production from different geological formations. Rather,
substantially all prospects are expected to be located in the Appalachian Basin
of Ohio (and, to a lesser extent, Pennsylvania) and to be drilled primarily to
the Clinton/Medina Sands geological formation or closely related oil and gas
formations in such area.
ACQUISITION OF PRODUCING PROPERTIES. As a potential means of
increasing its reserve base, the Company expects to evaluate opportunities which
it may be presented with to acquire oil and gas producing properties from third
parties in addition to its ongoing leasehold acquisition and development
activities. The Company has acquired a limited amount of producing oil and gas
properties.
The Company will continue to evaluate properties for
acquisition. Such properties may include, in addition to working interests,
royalty interests, net profit interests and production payments, other forms of
direct or indirect ownership interests in oil and gas production, and properties
associated with the production of oil and gas. The Company also may acquire
general or limited partner interests in general or limited partnerships and
interests in joint ventures, corporations or other entities that have, or are
formed to acquire, explore for or develop, oil and gas or conduct other
activities associated with the ownership of oil and gas production.
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FUNDING FOR ACTIVITIES. The Company finances its current
operations, including undeveloped leasehold acquisition activities, through cash
generated from operations and the proceeds of borrowings. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -
Results of Operations."
The Company is permitted to incur indebtedness for any
partnership purpose. It is currently anticipated that any such indebtedness will
consist primarily of borrowings from commercial banks. The Company and EEI have
a revolving credit facility with Bank One, N.A., pursuant to which it had no
borrowings in 2001 and no principal indebtedness was outstanding as of March 20,
2001. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Liquidity and Capital Resources."
Although the Partnership Agreement does not contain any
specific restrictions on borrowings, the Company has no specific plans to borrow
for the acquisition of producing oil and gas properties. The Company expects
that borrowings may be made for the acquisition of undeveloped acreage for
future drilling and development and to fund the Company's costs of drilling and
completing wells. In addition, the Company could borrow funds to enable it to
repurchase any Units tendered in connection with the Repurchase Right. See
"Management's Discussion and Analysis of Financial Condition and results of
operations - Liquidity and Capital Resources."
The Company has a substantial amount of oil and gas reserves
which have not been pledged as collateral for its existing loans. The Company
generally would not expect to borrow funds, from whatever source, in excess of
40% of its total Proved Reserves (as determined using the Company's Standardized
Measure of Discounted Future Net Cash Flows), although there can be no assurance
that circumstances would not lead to the necessity of borrowings in excess of
this amount. Based upon its current business plan, management has no present
intention to have the Company borrow in excess of this amount. The Company has
estimated Proved and Proved Developed Reserves, determined as of December 31,
2000, which aggregate $81,974,000 (Standardized Measure of Discounted Future Net
Cash Flows) with no bank debt outstanding under the revolving credit facility as
of December 31, 2000.
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MARKETING
The ability of the Company to market oil and gas found in and
produced on its properties will depend on many factors beyond its control, the
effect of which cannot be accurately anticipated or predicted. These factors
include, among others, the amount of domestic oil and gas production and foreign
imports available from other sources, the capacity and proximity of pipelines,
governmental regulations, and general market demand.
OIL. Any oil produced from the properties can be sold at the
prevailing field price to one or more of a number of unaffiliated purchasers in
the area. Generally, purchase contracts for the sale of oil are cancelable on 30
days' notice. The price paid by these purchasers is generally an established or
"posted" price which is offered to all producers. All posted prices in the areas
where the Company's properties are located are generally somewhat lower than the
spot market prices, although there have been substantial fluctuations in crude
oil prices in recent years.
The price of oil in the Appalachian Basin has ranged from a
low of $8.50 per barrel in December 1998 to a high of $33.25 in September 2000.
As of March 20, 2001, the posted field price in the Appalachian Basin area, the
Company's principal area of operation, was $22.25 per barrel of oil. There can
be no assurance that prices will not be subject to continual fluctuations.
Future oil prices are difficult to predict because of the impact of worldwide
economic trends, supply and demand variables, and such non-economic factors as
the political impact on pricing policies by the Organization of Petroleum
Exporting Countries ("OPEC") and the possibility of supply interruptions. To the
extent the prices that the Company receives for its crude oil production decline
or remain at current levels, the Company's revenues from oil production will be
reduced accordingly.
Since January 1993, the Company has sold substantially all of
its crude oil production to Ergon Oil Purchasing, Inc.
NATURAL GAS. The deliverability and price of natural gas is
subject to various factors affecting the supply and demand of natural gas as
well as the effect of federal regulations. Prior to 2000, there had been a
surplus of natural gas available for delivery to pipelines and other purchasers.
During 2000, decreases in worldwide energy production capability and increases
in energy consumption have brought about a shortage in natural gas supplies.
This resulted in increases in natural gas prices throughout the United States,
including the Appalachian Basin. From time to time, especially in summer months,
seasonal restrictions on natural gas production have occurred as a result of
distribution system restrictions. Certain of the Company's wells have been
subject to these limited, seasonal shut-ins and restrictions.
Prior to the execution of the East Ohio Contracts (discussed
below), EEI's historical practice had been to generally sell natural gas
pursuant to various purchase contracts with a number of natural gas brokerage
firms, pipeline companies or end-user customers. The provisions of these
contracts, both as to term and price, varied significantly. The term of these
contracts varied from short term, month-to-month arrangements up to the life of
a particular well.
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Most of these natural gas purchase contracts were for a term of one year,
expiring each October, and enabled the purchaser to renew the contracts for
additional one-year terms during the fourth quarter of the year. Pricing
provisions varied materially among the contracts.
The Company has one remaining Intermediate Term Adjustable
Price Gas Purchase Agreement (the "East Ohio Contract") with The East Ohio Gas
Company and its affiliates ("East Ohio"). Pursuant to the East Ohio Contract and
subject to certain restrictions and adjustments, including termination clauses,
East Ohio is obligated to purchase, and the Company is obligated to sell, all
natural gas production from a specified list of wells (the "Contract Wells"). A
summary of the Company's principal East Ohio Contract at December 31, 2000
follows:
Contract Period Number Required Shut-In Limitation
Date Covered of Wells Purchases Provisions Provisions
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9/3/91 11/91-10/01 423 275 days/year Maximum of May-Oct. - 50%
60 days (Nov.- of production
April) from prior 6
month period
Net Price per MCF
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Contract Date Adjusted Prices
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11/98-4/99 5/99-10/99 11/99-4/00 5/00-10/00 11/00-4/01 5/01-10/01
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9/3/91 $ 3.71 $ 3.08 $ 3.35 $ 2.72 $ 4.83 $ 4.20
As detailed above, the price paid for natural gas purchased
under the East Ohio Contract varies with the production period. Pricing under
the East Ohio Contract is adjusted annually, up or down, by an amount equal to
80% of the increase or decrease in East Ohio's average Gas Cost Recovery ("GCR")
rates. Additionally, the contract provides for a price cap equal to the
quarterly GCR, which amounted to $7.18, $3.93 and $3.84 in November 2000, 1999
and 1998, respectively. Price caps related to this contract are not included in
the table above. The net price per MCF includes $.20 per MCF for transportation
less a $.02 per MCF metering charge.
The East Ohio Contract terminates in 2001 and will be replaced
by short-term contracts with primary terms of one year. These new short-term
contracts will provide fixed pricing of $4.56 to $4.73 per MCF for gas
production of 100,000 MCF per month. Gas production in excess of 100,000 MCF per
month (estimated to average between 50,000 and 100,000 MCF per month) that was
under the principal East Ohio Contract is expected to be sold at prices in
effect at the time of production. There will be no significant production
restrictions under these new contracts.
In addition to the East Ohio Contract described above, the
Company has various short-term contracts (covering production from 170 gross
wells at December 31, 2000), which obligate the purchasers to purchase and the
Company to sell and deliver certain quantities of
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natural gas production on a monthly basis throughout the contract periods which
have primary terms of one year. All of the wells are covered by fixed price
contracts that provide for the sale of the Company's gas at $3.02 to $5.35 per
MCF. There are no significant production restrictions under the Company's
short-term contracts as they relate to the Company's existing wells. Future
wells can be added to certain of the contracts subject to gross production
restrictions under the contracts. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Inflation and Changes in
Prices."
For the year ended December 31, 2000, with the exception of
East Ohio and Interstate Gas Supply, Inc. ("IGS"), which accounted for
approximately 63% and 13%, respectively, of the Company's natural gas sales, no
one natural gas purchaser has accounted for more than 10% of the Company's gas
sales. The Company expects that East Ohio and IGS will be the only material
natural gas customers for 2001.
SEASONALITY
The East Ohio Contract (i) provides that certain wells can be
shut-in for a period of time and (ii) limits the obligation of East Ohio to
purchase natural gas during the May to October production period. These
production restrictions, and the nature of the Company's business, result in
seasonal fluctuations in the Company's revenue, with the Company receiving more
income in the first and fourth quarters of its fiscal year.
TITLE TO PROPERTIES
As is customary in the oil and gas industry, the Company
performs a limited investigation as to ownership of leasehold acreage at the
time of acquisition and conducts a title examination and necessary curative work
prior to the commencement of drilling operations on a tract. Title examinations
have been performed for substantially all of the producing oil and gas
properties owned by the Company with regard to (i) substantial tracts of land
forming a portion of such oil and gas properties and (ii) the wellhead location
of such properties. The Company believes that title to its properties is
acceptable although such properties may be subject to royalty, overriding
royalty, carried and other similar interests in contractual arrangements
customary in the oil and gas industry. Also, such properties may be subject to
liens incident to operating agreements and liens for current taxes not yet due,
as well as other comparatively minor encumbrances.
COMPETITION
The oil and gas industry is highly competitive in all its
phases. The Company will encounter strong competition from major and independent
oil companies in acquiring economically desirable prospects as well as in
marketing production therefrom and obtaining external financing. Major oil and
gas companies, independent concerns, drilling and production purchase programs
and individual producers and operators are active bidders for desirable oil and
gas properties, as well as the equipment and labor required to operate those
properties. Many of
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the Company's competitors have financial resources, personnel and facilities
substantially greater than those of the Company.
The availability of a ready market for the oil and gas
production of the Company depends in part on the cost and availability of
alternative fuels, the level of consumer demand, the extent of other domestic
production of oil and gas, the extent of importation of foreign oil and gas, the
cost of and proximity to pipelines and other transportation facilities,
regulations by state and federal authorities and the cost of complying with
applicable environmental regulations. The volatility of prices for oil and gas
and the continued oversupply of domestic natural gas have, at times, resulted in
a curtailment in exploration for and development of oil and gas properties.
There is also extensive competition in the market for gas
produced by the Company. Decreases in worldwide energy production capability and
increases in energy consumption have brought about a shortage in energy supplies
recently. This, in turn, has resulted in substantial competition for markets
historically served by domestic natural gas resources both with alternate
sources of energy, such as residual fuel oil, and among domestic gas suppliers.
As a result, at times there has been volatility in oil and gas prices,
widespread curtailment of gas production and delays in producing and marketing
gas after it is discovered. Changes in government regulations relating to the
production, transportation and marketing of natural gas have also resulted in
significant changes in the historical marketing patterns of the industry.
Generally, these changes have resulted in the abandonment by many pipelines of
long-term contracts for the purchase of natural gas, the development by gas
producers of their own marketing programs to take advantage of new regulations
requiring pipelines to transport gas for regulated fees, and an increasing
tendency to rely on short-term sales contracts priced at spot market prices. See
"Marketing" above.
Gas prices, which were once effectively determined by
government regulations, are now influenced largely by the effects of
competition. Competitors in this market include other producers, gas pipelines
and their affiliated marketing companies, independent marketers, and providers
of alternate energy supplies.
REGULATION OF OIL AND GAS INDUSTRY
The exploration, production and sale of oil and natural gas
are subject to numerous state and federal laws and regulations. Such laws and
regulations govern a wide variety of matters, including the drilling and spacing
of wells, allowable rates of production, marketing, pricing and protection of
the environment. Such regulations may restrict the rate at which the Company's
wells produce oil and natural gas below the rate at which such wells could
produce in the absence of such regulations. In addition, legislation and
regulations concerning the oil and gas industry are constantly being reviewed
and proposed. Ohio and Pennsylvania, the states in which the Company owns
properties and operates, have statutes and regulations governing a number of the
matters enumerated above. Compliance with the laws and regulations affecting the
oil and gas industry generally increases the Company's costs of doing business
and consequently affects its profitability. Inasmuch as such laws and
regulations are frequently
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amended or reinterpreted, the Company is unable to predict the future cost or
impact of complying with such regulations.
The interstate transportation and sale for resale of natural
gas is regulated by the Federal Energy Regulatory Commission (the "FERC") under
the Natural Gas Act of 1938 ("NGA"). The wellhead price of natural gas is also
regulated by FERC under the authority of the Natural Gas Policy Act of 1978
("NGPA"). Subsequently, the Natural Gas Wellhead Decontrol Act of 1989 (the
"Decontrol Act") was enacted on July 26, 1989. The Decontrol Act provided for
the phasing out of price regulation under the NGPA commencing on the date of
enactment and completely eliminated all such gas price regulation on January 1,
1993. In addition, FERC recently has adopted and proposed several rules or
orders concerning transportation and marketing of natural gas. The impact of
these rules and other regulatory developments on the Company cannot be
predicted. It is expected that the Company will sell natural gas produced by its
oil and gas properties to a number of purchasers, including various industrial
customers, pipeline companies and local public utilities, although the majority
will be sold to East Ohio as discussed earlier.
As a result of the NGPA and the Decontrol Act, the Company's
gas production is no longer subject to price regulation. Gas which has been
removed from price regulation is subject only to that price contractually agreed
upon between the producer and purchaser. Under current market conditions,
deregulated gas prices under new contracts tend to be substantially lower than
most regulated price ceilings originally prescribed by the NGPA. FERC recently
has proposed and enacted several rules or orders concerning transportation and
marketing of natural gas. In 1992, the FERC finalized Order 636, a rule
pertaining to the restructuring of interstate pipeline services. This rule
requires interstate pipelines to unbundle transportation and sales services by
separately pricing the various components of their services, such as supply,
gathering, transportation and sales. These pipeline companies are required to
provide customers only the specific service desired without regard to the source
for the purchase of the gas. Although the Partnership is not an interstate
pipeline, it is likely that this regulation may indirectly impact the
Partnership by increasing competition in the marketing of natural gas, possibly
resulting in an erosion of the premium price historically available for
Appalachian natural gas. The impact of these rules and other regulatory
developments on the Company cannot be predicted.
Regulation of the production, transportation and sale of oil
and gas by federal and state agencies has a significant effect on the Company
and its operating results. Certain states, including Ohio and Pennsylvania, have
established rules and regulations requiring permits for drilling operations,
drilling bonds and reports concerning the spacing of wells.
ENVIRONMENTAL REGULATION
The activities of the Company are subject to various federal,
state and local laws and regulations designed to protect the environment. The
Company does not conduct activities offshore. Operations of the Company on
onshore oil properties may generally be liable for clean-up costs to the federal
government under the Federal Clean Water Act for up to
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$50,000,000 for each incident of oil or hazardous pollution substance and for up
to $50,000,000 plus response costs under the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980 (Superfund) for hazardous
substance contamination. Liability is unlimited in cases of willful negligence
or misconduct, and there is no limit on liability for environmental clean-up
costs or damages with respect to claims by the state or private persons or
entities. In addition, the Company is required by the Environmental Protection
Agency to prepare and implement spill prevention control and countermeasure
plans relating to the possible discharge of oil into navigable waters; and the
Environmental Protection Agency will further require permits to authorize the
discharge of pollutants into navigable waters. State and local permits or
approvals may also be needed with respect to waste-water discharges and air
pollutant emissions. Violations of environment-related lease conditions or
environmental permits can result in substantial civil and criminal penalties as
well as potential court injunctions curtailing operations. Such enforcement
liabilities can result from prosecution by public or private entities.
Various state and governmental agencies are considering, and
some have adopted, other laws and regulations regarding environmental protection
which could adversely affect the proposed business activities of the Company.
The Company cannot predict what effect, if any, current and future regulations
may have on the operations of the Company.
In addition, from time to time, prices for either oil or
natural gas have been regulated by the federal government, and such price
regulation could be reimposed at any time in the future.
OPERATING HAZARDS AND UNINSURED RISKS
The Company's oil and gas operations are subject to all
operating hazards and risks normally incident to drilling for and producing oil
and gas, such as encountering unusual formations and pressures, blow-outs,
environmental pollution and personal injury. The Company maintains such
insurance coverage as it believes to be appropriate taking into account the size
of the Company and its operations. Losses can occur from an uninsurable risk or
in amounts in excess of existing insurance coverage. The occurrence of an event
which is not insured or not fully insured could have an adverse impact on the
Company's revenues and earnings.
In certain instances, the Company may continue to engage in
exploration and development operations through drilling programs formed with
non-industry investors. In addition, the Company also will conduct a significant
portion of its operations with other parties in connection with the drilling
operations conducted on properties in which it has an interest. In these
arrangements, all joint interest parties, including the Company, may be fully
liable for their proportionate share of all costs of such operations. Further,
if any joint interest party defaults on its obligations to pay its share of
costs, the other joint interest parties may be required to fund the deficiency
until, if ever, it can be collected from the defaulting party. As a result of
the foregoing or similar oilfield circumstances, the Company could become liable
for amounts significantly in excess of amounts originally anticipated to be
expended in connection with such operations. In addition, financial difficulty
for an operator of oil and gas properties could result in the
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Company's and other joint interest owners' interests in properties and the wells
and equipment located thereon becoming subject to liens and claims of creditors,
notwithstanding the fact that non-defaulting joint interest owners and the
Company may have previously paid to the operator the amounts necessary to pay
their share of such costs and expenses.
CONFLICTS OF INTEREST
The Partnership Agreement grants the General Partner broad
discretionary authority to make decisions on matters such as the Company's
acquisition of or participation in a drilling prospect or a producing property.
To limit the General Partner's management discretion might prevent it from
managing the Company properly. However, because the business activities of the
affiliates of the General Partner on the one hand and the Company on the other
hand are the same, potential conflicts of interest are likely to exist, and it
is not possible to completely mitigate such conflicts.
The Partnership Agreement contains certain restrictions
designed to mitigate, to the extent practicable, these conflicts of interest.
The agreement restricts, among other things, (i) the cost at which the General
Partner or its affiliates may acquire properties from or sell properties to the
Company; (ii) loans between the General Partner, its affiliates and the Company,
and interest and other charges incurred in connection therewith; and (iii) the
use and handling of the Company's funds by the General Partner.
EMPLOYEES
As of March 20, 2001, the Company (either directly or
indirectly through EEI) had 17 full-time and two part-time employees. These
employees primarily are engaged in the following areas of business operations:
two in land and lease acquisition, five in field operations, five in accounting,
and seven in administration.
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ITEM 2. PROPERTIES.
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Set forth below is certain information regarding the oil and
gas properties of the Company.
In the following discussion, "gross" refers to the total acres
or wells in which the Company has a working interest and "net" refers to gross
acres or wells multiplied by the Company's percentage of working interests
therein. Because royalty interests held by the Company will not affect the
Company's working interests in its properties, neither gross nor net acres or
wells reflect such royalty interests.
PROVED RESERVES.(1) The following table reflects the estimates
of the Company's Proved Reserves which are based on the Company's report as of
December 31, 2000.
Oil (BBLS) Gas (MCF)
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Proved Developed 914,000 48,534,000
Proved Undeveloped - -
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Total 914,000 48,534,000
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(1) The Company has not determined proved reserves
associated with its proved undeveloped acreage. A
reconciliation of the Company's proved reserves is
included in the Notes to the Financial Statements.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS.(1)
The following table summarizes, as of December 31, 2000, the oil and gas
reserves attributable to the oil and gas properties owned by the Company. The
determination of the standardized measure of discounted future net cash flows as
set forth herein is based on criteria promulgated by the Securities and Exchange
Commission, using calculations based solely on Proved Reserves, current
unescalated cost and price factors, and discounted to present value at 10%.
(Thousands)
---------
Future cash inflows from sales of oil and gas $ 248,711
Future production and development costs 81,641
Future income tax expense 3,971
----------
Future net cash flows 163,099
Effect of discounting future net cash flows
at 10% per annum 81,125
----------
Standardized measure of discounted future
net cash flows $ 81,974
==========
---------------------
(1) See the Notes to the Financial Statements for additional
information.
-12-
14
PRODUCTION. The following table summarizes the net oil and gas
production, average sales prices and average production (lifting) costs per
equivalent unit of production for the periods indicated.
Average
Production Sales Price
------------------------------- --------------------------- Average Lifting Cost
Oil (BBLS) Gas (MCF) Per BBL Per MCF Per Equivalent MCF(1)
---------- --------- ------- ------- ------------------
2000 92,000 4,196,000 $ 27.82 $ 3.32 $ .47
1999 97,000 4,245,000 16.08 3.08 .55
1998 94,000 4,575,000 12.20 3.26 .50
-----------
(1) Oil production is converted to MCF equivalents at the rate of
6 MCF per BBL (barrel).
PRODUCTIVE WELLS. The following table sets forth the gross and
net oil and gas wells of the Company as of December 31, 2000.
GROSS WELLS NET WELLS
----------------------------------------------------------------------------
(1) (1) (1) (1)
OIL GAS TOTAL OIL GAS TOTAL
---------------------------------------------------------------------------
77 921 998 56 656 712
--------------
(1) Oil wells are those wells which generate the majority
of their revenues from oil production; gas wells are
those wells which generate the majority of their
revenues from gas production.
ACREAGE. The Company had 43,900 gross developed acres and
31,700 net developed acres as of December 31, 2000. Developed acreage is that
acreage assignable to productive wells. The Company had approximately 780 gross
and net undeveloped acres as of December 31, 2000.
-13-
15
DRILLING ACTIVITY. The following table sets forth the results
of drilling activities on properties owned by the Company. Such information and
the results of prior drilling activities should not be considered as necessarily
indicative of future performance.
Development Wells(1)
-------------------------------------------
Productive Dry
------------------- ----------------
Gross Net Gross Net
-------- ------ ------- -------
2000 27 11.42 - -
1999 22 12.40 2 .20
1998 30 19.09 1 .91
-----------------
(1) All wells are located in the United States. All wells
are development wells; no exploratory wells were
drilled.
PRESENT ACTIVITIES. The Company has drilled 2 gross and 0.7
net development wells since December 31, 2000. As of March 20, 2001, the Company
had no wells in the process of being drilled.
DELIVERY COMMITMENTS. The Company entered into various East
Ohio contracts with East Ohio which, subject to certain restrictions and
adjustments, obligate East Ohio to purchase and the Company to sell all natural
gas production from certain contract wells. The contract wells comprise more
than 60% of the Company's natural gas sales. In addition, the Company has
entered into various short-term contracts which obligate the purchasers to
purchase and the Company to sell and deliver certain quantities of natural gas
production on a monthly basis throughout the term of the contracts.
ITEM 3. LEGAL PROCEEDINGS
- -------------------------
There are no material pending legal proceedings to which the
Company is a party or to which any of its property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
During the fourth quarter of the fiscal year ended December
31, 2000, there were no matters submitted to a vote of security holders through
the solicitation of proxies or otherwise.
-14-
16
PART II
-------
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
- -------------------------------------------------------------------------
MATTERS
- -------
MARKET
There is currently no established public trading market for
the Company's Units. At the present time, the Company does not intend to list
any of the Units for trading on any exchange or otherwise take any action to
establish any market for the Units. As of March 20, 2001, there were 5,888,662
Units held by 1,499 holders of record.
DISTRIBUTION HISTORY.
The Company commenced operations with the consummation of the
Exchange Offer in February 1991. Management's stated intention was to make
quarterly cash distributions equal to $0.125 per Unit (or $0.50 per Unit on an
annualized basis) for the first eight quarters following the closing date of the
Exchange Offer. The Company has paid a quarterly distribution every quarter
since July 1991. Based upon the current number of Units outstanding, each
quarterly distribution of $0.125 per Unit would be approximately $744,000. The
Company made a quarterly distribution of $0.25 per Unit in January 2001 and
currently intends to make a quarterly distribution of $0.375 per Unit in April
2001 and quarterly distributions of at least $0.125 per Unit in July and October
2001.
REPURCHASE RIGHT.
The Partnership Agreement provides, that beginning in 1992 and
annually thereafter, the Company will repurchase for cash up to 10% of the then
outstanding Units, to the extent Unitholders offer Units to the Company for
repurchase (the "Repurchase Right"). The Repurchase Right entitles any
Unitholder, between May 1 and June 30 of each year, to notify the Company that
he elects to exercise the Repurchase Right and have the Company acquire certain
or all of his Units. The price to be paid for any such Units is calculated based
on the method provided for in the Partnership Agreement. The Company accepted an
aggregate of 35,114, 77,344 and 206,531 of its Units of limited partnership
interest at a price of $4.99, $5.79 and $6.11 per Unit pursuant to the terms of
the Company's Offers to Purchase dated April 30, 1998, 1999 and 2000,
respectively. See Note 4 in the Company's financial statement for additional
information on the Repurchase Right.
-15-
17
ITEM 6. SELECTED FINANCIAL DATA
- -------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
2000 1999 1998 1997 1996
----------------------------------------------------------------------------
Revenue ............................ $16,921,139 $15,063,170 $16,558,366 $15,932,197 $14,557,405
Net Income ......................... 8,590,757 5,445,941 6,897,089 5,696,407 4,227,854
Net Income Per Unit ................ 1.42 .88 1.10 .90 .65
Total Assets ...................... 55,043,294 55,422,986 56,612,953 54,760,106 53,188,337
Debt(1) ............................ 637,822 692,289 2,255,898 4,589,143 4,405,834
Cash Distributions Per Unit ........ 1.25 .625 .50 .50 .50
- ---------------------
(1) Debt includes the Company's long-term debt and borrowings under the
Company's revolving credit facility.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- -------------------------------------------------------------------------------
OF OPERATIONS
- -------------
GENERAL
The Company was organized in September 1990 as a limited
partnership under the laws of the State of Delaware. Everflow Management
Limited, LLC, an Ohio limited liability company, is the general partner of the
Company. The Company was formed to engage in the business of oil and gas
exploration and development through a proposed consolidation of the business and
oil and gas properties of EEI, and the oil and gas properties owned by certain
limited partnerships and working interest programs managed or operated by the
Programs.
Effective February 15, 1991, pursuant to the Exchange Offer to
acquire the EEI shares and the Interests in exchange for Units of the Company's
limited partnership interest, the Company acquired the Interests and the EEI
Shares and EEI became a wholly-owned subsidiary of the Company.
The General Partner of the Company, is a limited liability
company. The members of the General Partner are EMC, two individuals who are
currently directors and/or officers of EEI, Thomas L. Korner and William A.
Siskovic, and Sykes Associates, a limited partnership controlled by Robert F.
Sykes, the Chairman of the Board of EEI.
LIQUIDITY AND CAPITAL RESOURCES
FINANCIAL POSITION
Working capital surplus of $7.9 million as of December 31,
2000 represented a $2.0 million increase from December 31, 1999 due primarily to
a $2.1 million increase in short-term investments and a $1.0 million increase in
accounts receivable from oil and gas production
-16-
18
during 2000. In September 2000, the Company entered into an agreement that
modified its prior credit agreement. The agreement provides for a revolving line
of credit in the amount of $4,000,000, all of which is available. The revolving
line of credit provides for interest payable quarterly at LIBOR plus 150 basis
points with the principal due at maturity, May 31, 2002. The Company anticipates
renewing the facility on an every other year basis to minimize debt origination,
carrying and interest costs associated with long-term bank commitments. The
Company made no borrowings under the revolving credit facilities during 2000.
Cash flows were used to pay for the funding of the Company's investment in and
the continued development of oil and gas properties and to repurchase Units
pursuant to the Repurchase Right. The Company repurchased 206,531 Units at a
price of $6.11 per Unit, or $1,261,904, on June 30, 2000. The Company also used
cash flows to make quarterly Cash Distributions, which totaled $7.6 million.
The following table summarizes the Company's financial
position at December 31, 2000 and December 31, 1999:
(Amounts in Thousands) December 31, 2000 December 31, 1999
--------------------------- ----------------------
Amount % Amount %
--------------------------- ----------------------
Working capital $ 7,931 15% $ 5,881 11%
Property and equipment (net) 45,639 85 48,015 89
Other 103 - 81 -
------- -- --- -
Total $ 53,673 100% $ 53,977 100%
====== === ====== ===
Long-term debt $ 579 1% $ 638 1%
Deferred income taxes 50 - 50 -
Partners' equity 53,044 99 53,289 99
------- --- ------ ---
Total $ 53,673 100% $ 53,977 100%
====== === ====== ===
CASH FLOWS FROM OPERATING, INVESTING AND FINANCING ACTIVITIES
The Company generated almost all of its cash sources from operating
activities. During the years ended 2000 and 1999, cash provided by operations
was used to fund the development of additional oil and gas properties,
repurchase of Units pursuant to the Repurchase Right and distributions to
partners.
-17-
19
The following table summarizes the Company's Statements of
Cash Flows for the years ended December 31, 2000 and 1999:
(Amounts in Thousands) 2000 1999
--------------------------------------------------------
DOLLARS % DOLLARS %
---------------------------------------------------------
Operating Activities:
Net income before adjustments $ 8,591 60% $ 5,446 48%
Adjustments 4,968 35 5,369 48
-------- -------- -------- --------
Cash flow from operations
before working capital
changes 13,559 95 10,815 96
Changes in working capital (2,818) (20) 468 4
-------- -------- -------- --------
Net cash provided by
operating activities 10,741 75 11,283 100
Investing Activities:
Proceeds received on receivables
from officers and employees 249 2 379 3
Advances disbursed to officers
and employees (130) (1) (165) (1)
Purchase of property and
equipment (2,594) (18) (3,415) (30)
Purchase of other assets (64) -- -- --
Proceeds on sale of other assets
and equipment 1 -- 200 2
-------- -------- -------- --------
Net cash (used) by investing
activities (2,538) (18) (3,001) (27)
Financing Activities:
Distributions (7,574) (53) (3,880) (34)
Repurchase of Units (1,262) (9) (448) (4)
Debt proceeds -- -- 2,175 19
Debt repayments (54) -- (3,739) (33)
-------- -------- -------- --------
Net cash (used) by financing
activities (8,890) (62) (5,892) (52)
-------- -------- -------- --------
Increase (decrease) in cash
and equivalents (687) (5) 2,390 21
Note: All items in the previous table are calculated as a percentage of total
cash sources. Total cash sources include the following items, if
positive: cash flow from operations before working capital changes,
changes in working capital, net cash provided by investing activities
and net cash provided by financing activities, plus any decrease in
cash and cash equivalents.
-18-
20
As the above table indicates, the Company's cash flow from
operations before working capital changes during the twelve months of 2000 and
1999 represented 95% and 96% of total cash sources, respectively. Changes in
working capital other than cash and equivalents decreased cash by $2,818
thousand and increased cash by $468 thousand during 2000 and 1999, respectively.
The increase in accounts receivable at December 31, 2000 compared to December
31, 1999 is the result of higher natural gas prices and timing of production
revenues. Total production revenues receivable as of December 31, 2000 amounted
to $3.1 million compared to $2.0 million at December 31, 1999. Additionally, the
Company had $3.6 and $1.5 million of cash invested in short-term marketable
corporate debt securities at December 31, 2000 and 1999, respectively.
The Company's cash flows used by investing activities
decreased $464 thousand, or 15%, during 2000 as compared with 1999. The
Company's cash flows used by investing activities decreased $1,317 thousand, or
30%, during 1999 as compared with 1998. The primary reason for the decrease in
cash flows used by investing activities in 2000 and 1999 was the decrease in the
purchase of property and equipment. The purchase of property and equipment
decreased $821 thousand, or 24%, during 2000 as compared with 1999. The purchase
of property and equipment decreased $2,490 thousand, or 42%, during 1999 as
compared with 1998.
The Company's cash flows used by financing activities
increased $2,998 thousand, or 51%, during 2000 as compared with 1999. The
primary reason for this increase was that distributions to Unitholders increased
$3,693 thousand. Proceeds from the issuance of debt decreased $2,175 thousand
and payments on debt decreased $3,684 thousand to $54 thousand during 2000.
Additionally, payments on the repurchase of Units increased $814 thousand, or
182%, during 2000 as compared with 1999. The Company's cash flows used by
financing activities increased $255 thousand, or 5%, during 1999 as compared
with 1998. The primary reason for this increase was that proceeds from the
issuance of debt decreased $725 thousand during 1999 and payments on debt
decreased $1,494 thousand to $3,739 thousand during 1999. Distributions to
Unitholders also increased $752 thousand during 1999.
The Company's ending cash and equivalents balance of $2.0
million and short-term investments balance of $3.6 million at December 31, 2000,
as well as on-going monthly operating cash flows, should be adequate to meet
short-term cash requirements. The Company has established a quarterly
distribution and management believes the payment of such distributions will
continue at least through 2001. The Company has paid a quarterly distribution
every quarter since July 1991. Minimum cash distributions are estimated to be
$744 thousand per quarter ($.125 per Unit). The Company intends to distribute
$2.2 million ($.375 per Unit) in April 2001 using the proceeds from its
investments in marketable corporate debt securities.
Capital expenditures for the development of oil and gas
properties in the Company and the acquisition of undeveloped leasehold acreage
have decreased compared with historical levels. The Company drilled or
participated in the drilling of an additional 27 drillsites in 2000. The
Company's share of these drillsites amounts to 11.4 net developed properties.
The Company's share of proved gas reserves decreased by 3.0 million MCF's, or
6%, between
-19-
21
December 31, 1999 and 2000, while proved oil reserves increased by 39 thousand
barrels, or 4%, between December 31, 1999 and 2000. The Company continues to
develop primarily natural gas fields, as represented by the discovery and
addition of 1.2 million MCF's of natural gas versus 3 thousand barrels of crude
oil during 2000. The Standardized Measure of Discounted Future Net Cash Flows of
the Company's reserves increased by $28.3 million between December 31, 1999 and
2000. The primary reason for this increase was due to increases in natural gas
prices between December 31, 1999 and 2000. Management believes the Company
should be able to drill or participate in the drilling of 7 to 15 net wells each
year for the next few years.
The Partnership Agreement provides that the Company annually
offers to repurchase for cash up to 10% of the then outstanding Units, to the
extent Unitholders offer Units to the Company for repurchase pursuant to the
Repurchase Right. The Repurchase Right entitles any Unitholder, between May 1
and June 30 of each year, to notify the Company of his or her election to
exercise the Repurchase Right and have the Company acquire such Units. The price
to be paid for any such Units will be calculated based upon the audited
financial statements of the Company as of December 31 of the year prior to the
year in which the Repurchase Right is to be effective and independently prepared
reserve reports. The price per Unit will be equal to 66% of the adjusted book
value of the Company allocable to the Units, divided by the number of Units
outstanding at the beginning of the year in which the applicable Repurchase
Right is to be effective less all Interim Cash Distributions received by a
Unitholder. The adjusted book value is calculated by adding partner's equity,
the Standardized Measure of Discounted Future Net Cash Flows and the tax effect
included in the Standardized Measure and subtracting from that sum the carrying
value of oil and gas properties (net of undeveloped lease costs). If more than
10% of the then outstanding Units are tendered during any period during which
the Repurchase Right is to be effective, the Investor's Units so tendered shall
be prorated for purposes of calculating the actual number of Units to be
acquired during any such period. The Company repurchased 206,531, 77,344 and
35,114 Units during 2000, 1999 and 1998 pursuant to the Repurchase Right at a
price of $6.11, $5.79 and $4.99 per Unit, respectively. The Company has, in the
past, borrowed against its credit facility to meet such obligations and would
expect to do so again in 2001, although current cash flows would reduce
borrowing requirements. The Repurchase Right to be conducted in 2001 will result
in Unitholders being offered a price of $9.73 per Unit. The Company estimates it
would need to borrow up to $5.7 million in the event the 2001 offering pursuant
to the Repurchase Right is fully subscribed.
In the fall of 2000, there was a $1.48 per MCF increase in the
price received for natural gas pursuant to the pricing adjustment contained in
the East Ohio Contract. This pricing adjustment should increase the Company's
cash flows from operations during 2001, assuming similar production levels.
RESULTS OF OPERATIONS
The following table and discussion is a review of the results
of operations of the Company for the twelve months ended December 31, 2000, 1999
and 1998. All items in the table are calculated as a percentage of total
revenues. This table should be read in conjunction with the discussions of each
item below:
-20-
22
Year Ended December 31,
---------------------------
2000 1999 1998
---------------------------
Revenues:
Oil and gas sales 97% 97% 97%
Well management and operating 3 3 3
---- ---- ----
Total Revenues 100 100 100
Expenses:
Production costs 13 18 15
Well management and operating 1 1 -
Depreciation, depletion and amortization 27 32 30
Abandonment and write down
of oil and gas properties 2 4 6
General and administrative 8 11 13
Other expense (income) (2) (1) (6)
Income taxes - (1) -
---- ---- ----
Total Expenses 49 64 58
---- ---- ----
Net income 51% 36% 42%
==== ==== ====
Revenues for the year ended December 31, 2000 increased $1,858
thousand, or 12%, compared to the same period in 1999. Revenues for the year
ended December 31, 1999 decreased $1,495 thousand, or 9%, compared to the same
period in 1998. These changes were due primarily to changes in oil and gas sales
between the periods involved.
Oil and gas sales increased $1.9 million, or 13%, from 1999 to
2000. The primary reason for this increase was the result of higher natural gas
and oil prices. The East Ohio contractual increase in gas prices received during
November 2000 of $1.48 per MCF was partly responsible for increasing natural gas
sales. The Company's gas production decreased by 49 thousand MCF, and the
average price received per MCF increased from $3.08 to $3.32 from 1999 to 2000.
In addition, oil sales were higher due primarily to an increase in the average
sales price of oil from $16.08 to $27.82 per barrel from 1999 to 2000. Gas sales
accounted for 84%, 89% and 93% of total oil and gas sales in 2000, 1999 and
1998, respectively. Oil and gas sales decreased $1.4 million, or 9%, from 1998
to 1999. The primary reason for this decrease in oil and gas sales between 1998
and 1999 was a decrease in gas production volumes and natural gas prices. The
Company's gas production decreased by 330 thousand MCF, and the average price
received per MCF decreased from $3.26 to $3.08. In the fall of 2000, there was a
$1.48 per MCF increase in the price received for natural gas pursuant to the
pricing adjustment contained in the East Ohio Contract. This pricing adjustment
should increase the Company's cash flows from operations during 2001, assuming
similar production levels and stable oil prices.
Production costs decreased $393 thousand, or 15%, and
increased $88 thousand, or 3%, during 2000 and 1999, respectively. The primary
reason for the decrease in 2000 was lower operating costs relating to older
settled wells. Depreciation, depletion and amortization
-21-
23
decreased $252 thousand, or 5%, between 1999 and 2000. Depreciation, depletion
and amortization decreased $142 thousand, or 3%, between 1998 and 1999.
Well management and operating revenues increased $7 thousand,
or 2%, from 1999 to 2000. Well management and operating costs increased $16
thousand, or 15%, from 1999 to 2000. The reason for these increases in well
management and operating revenues and costs was due to the increase in Company
operated oil and gas interests. Well management and operating revenues decreased
$76 thousand, or 15%, from 1998 to 1999. Well management and operating costs
increased $5 thousand, or 5%, from 1998 to 1999.
Abandonments and write downs of oil and gas properties
decreased $249 thousand between 1999 and 2000 and decreased $315 thousand
between 1998 and 1999. These decreases were attributable to a reduction in the
write down of oil and gas properties and abandonments of oil and gas properties.
During 2000, the Company had no impairment on its oil and gas properties. During
1999 and 1998, the Company wrote down oil and gas properties by approximately
$601 thousand and $426 thousand, respectively, to provide for impairment on
certain of its oil and gas properties.
General and administrative expenses decreased $294 thousand,
or 18%, between 1999 and 2000, and decreased $498 thousand, or 24%, between 1998
and 1999. The primary reason for these decreases was a reduction in personnel
and related costs resulting from the Company's decision to decrease its level of
activity in the development of oil and gas properties. In addition, the decrease
in general and administrative expenses between 1998 and 1999 is the result of
fluctuations in professional fees associated with the Company's efforts in
evaluating the feasibility of the sale of the Company during 1998 and costs
associated with discussions with prospective purchasers.
Net other income amounted to $271 thousand, $77 thousand, and
$1,044 thousand in 2000, 1999 and 1998, respectively. The change between 1998
and 1999 was primarily attributable to a nonrecurring gain on sale of other
assets associated with the Company's operations during 1998. Interest income has
increased and interest expense has decreased as a result of the Company
decreasing borrowings under its credit facility and increased level of cash
available for investing resulting from reduced development activities.
The Company is not a tax paying entity, and the net taxable
income or loss, other than the taxable income or loss attributable to EEI, is
allocated directly to its respective partners.
Net income increased $3.1 million, or 58%, between 1999 and
2000. The increase was primarily the result of an increase in oil and gas sales
and decreases in direct costs and general and administrative expenses. Net
income decreased $1.5 million, or 21%, between 1998 and 1999. The decrease
resulted from decreased oil and gas sales and the decrease of a nonrecurring
gain on sale of other assets. Net income represented 51%, 36% and 42% of total
revenues during the years ended December 31, 2000, 1999 and 1998, respectively.
-22-
24
NEW ACCOUNTING STANDARDS
In June 1998, SFAS 133, "Accounting for Derivative Instruments
and Hedging Activities," was issued. SFAS 133 establishes accounting and
reporting standards for derivative instruments and hedging activities. SFAS 133,
as amended by SFAS 137, is effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. The effect of adoption of the standard had no
material effect on the Company's financial statements.
INFLATION AND CHANGES IN PRICES
While the cost of operations is affected by inflation, oil and
gas prices have fluctuated in recent years and generally have not matched
inflation. The price of oil in the Appalachian Basin has ranged from a low of
$8.50 per barrel in December 1998 to a high of $33.25 in September 2000. As of
March 20, 2001, the posted field price in the Appalachian Basin area, the
Company's principal area of operation, was $22.25 per barrel of oil. Although
the Company's sales are affected by this type of price instability, the impact
on the Company is not as dramatic as might be expected since less than 9% of the
Company's total future cash inflows related to oil and gas reserves as of
December 31, 2000 are comprised of oil reserves.
The various gas purchase agreements with East Ohio negotiated
since 1991 have had a significant effect on the Company's natural gas sales.
Under the purchase agreements, adjustments to the price of gas paid to the
Company by The East Ohio Gas Company are based on 80% of the increase or
decrease in East Ohio's GCRs as specified in the contracts. The average price of
gas during 1997 amounted to $3.07 per MCF, a $.29 increase compared to 1996. The
November 1997 annual price adjustment was an increase of $.59 per MCF. The
average price of gas during 1998 amounted to $3.26 per MCF, a $.19 increase
compared to 1997. The November 1998 annual price adjustment was a decrease of
$.19 per MCF. The average price of gas during 1999 amounted to $3.08 per MCF, an
$.18 decrease compared to 1998. The November 1999 annual price adjustment was a
decrease of $.36 per MCF. The average price of gas during 2000 amounted to $3.32
per MCF, a $.24 increase compared to 1999. The November 2000 annual price
adjustment was an increase of $1.48 per MCF. Natural gas prices have increased
significantly during 2000. The current price of gas in the Appalachian Basin is
above $5.00 per MCF. The Company's sales will be significantly higher should
prices remain at these levels assuming similar production levels. The result of
these higher gas prices is evident in the Company's future cash inflows related
to its oil and gas reserves as of December 31, 2000.
The Company's Standardized Measure of Discounted Future Net
Cash Flows increased by $28.3 million from December 31, 1999 to December 31,
2000 and increased by $2.2 million from December 31, 1998 to December 31, 1999.
A reconciliation of the Changes in the Standardized Measures of Discounted
Future Net Cash Flows is included in the Company's consolidated financial
statements.
-23-
25
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
The Company is exposed to market risk from changes in interest
rates since it, at times, funds its operations through long-term and short-term
borrowings. The Company's primary interest rate risk exposure results from
floating rate debt with respect to the Company's revolving credit. At December
31, 2000, none of the Company's total long-term debt consisted of floating rate
debt.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
- ---------------------------------------------------
See attached pages F-1 to F-23.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
- --------------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE
- -----------------------------------
Not applicable.
-24-
26
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -----------------------------------------------------------
The Company, as a limited partnership, does not have any
directors or executive officers. The General Partner of the Company is Everflow
Management Limited, LLC, an Ohio limited liability company formed in March 1999,
as the successor to the Company's original general partner. The members of the
General Partner as of March 20, 2001 are Everflow Management Corporation, an
Ohio corporation ("EMC"), Thomas L. Korner and William A. Siskovic, all of whom
are directors and/or officers of EEI, and Sykes Associates, a limited
partnership controlled by Robert F. Sykes, Chairman of the Board of EEI.
EMC is the Managing Member of the General Partner. EMC was
formed in September 1990 to act as the Managing General Partner of Everflow
Management Company, the predecessor of the General Partner. EMC is owned by the
other members of the General Partner and EMC currently has no employees, but as
Managing Member of the General Partner, makes all management and business
decisions on behalf of the General Partner and thus on behalf of the Company.
EEI has continued its separate existence and provides general,
administrative, management and leasehold functions for the Company. Personnel
previously employed by EEI to conduct its operation, drilling and field
supervisory functions have become employed directly by the Company and discharge
the same functions on behalf of the Company. All of EEI's outstanding shares are
owned by the Company.
DIRECTORS AND OFFICERS OF EEI AND EMC. The executive officers
and directors of EEI and EMC as of March 20, 2001 are as follows:
Positions and Positions and
Name Age Offices With EEI Offices With EMC
- --------------------------- --- ----------------------------- -----------------------
Robert F. Sykes 77 Chairman of the Board Chairman of the Board
and Director
Thomas L. Korner 47 President and Director President and Director
David A. Kidder 62 Treasurer None
William A. Siskovic 45 Vice President, Secretary, Vice President, Secretary-
Principal Financial and Treasurer, Principal
Accounting Officer and Financial and Accounting
Director Officer and Director
-25-
27
All directors of EEI are elected to serve by the Company, which is EEI's sole
shareholder. All officers of EEI serve at the pleasure of the Board of
Directors. Directors and officers of EEI receive no compensation or fees for
their services to EEI or their services on behalf of the Company.
All directors and officers of EMC hold their positions with
EMC pursuant to a shareholders' agreement among EMC and such directors and
officers. The shareholders agreement controls the operation of EMC, provides for
changes in share ownership of EMC, and determines the identity of the directors
and officers of EMC as well as their replacement.
ROBERT F. SYKES has been a Director of EEI since March 1987 and Chairman of the
Board since May 1988. Mr. Sykes is the Chairman of the Board and a Director of
EMC and has served in such capacities since its formation in September 1990. He
was the Chairman of the Board of Sykes Datatronics, Inc., Rochester, New York,
from its organization in 1986 until his resignation in January 1989. Sykes
Datatronics, Inc. is a manufacturer of telephone switching equipment. Mr. Sykes
also served as President and Chief Executive Officer of Sykes Datatronics, Inc.
from 1968 until October 1983 and from January 1985 until October 1985. Mr. Sykes
also has been a Director of Voplex, Inc., Rochester, New York, a manufacturer of
plastic products, and a Director of ACC Corp., a long distance telephone
company.
THOMAS L. KORNER has been President of EEI and EMC since November 1995 and the
President and Treasurer of Everflow Nominee. Mr. Korner is also a Director of
EMC and has served in such capacity since its formation in September 1990. He
served as Vice President and Secretary of EEI from April 1985 to November 1995
and as Vice President and Secretary of EMC from September 1990 to November 1995.
He served as the Treasurer of EEI from June 1982 to June 1986. Mr. Korner
supervises and oversees all aspects of EEI's business, including oil and gas
property acquisition, development, operation and marketing. Prior to joining EEI
in June 1982, Mr. Korner was a practicing certified public accountant with Hill,
Barth and King, certified public accountants, and prior to that with Arthur
Andersen & Co., certified public accountants. He has a Business Administration
Degree from Mt. Union College.
DAVID A. KIDDER has been the Treasurer of EEI since June 1986 and has been
employed by EEI since April 1985. From 1983 to 1985, he was Treasurer of LGM
Corporation, Columbus, Ohio, an oil and gas service company; from 1982 to 1983,
he was Treasurer of OPEX, Inc., Columbus, Ohio, a producer of oil and gas; and
from 1980 to 1981, he was Treasurer of United Petroleum, Inc., Columbus, Ohio, a
producer of oil and gas. From 1973 to 1980, Mr. Kidder was involved in the oil
and gas industry in various financial and accounting capacities. Prior to that
time, Mr. Kidder practiced as a certified public accountant with Coopers &
Lybrand, certified public accountants. Mr. Kidder has a Bachelor of Arts Degree
in Accounting from the University of Cincinnati.
WILLIAM A. SISKOVIC has been a Vice President of EEI since January 1989. Mr.
Siskovic is a Vice President, Secretary-Treasurer, Principal Financial and
Accounting Officer and a Director of EMC. He has served as Principal Financial
Officer and Secretary of EMC since November 1995 and in all other capacities
since the formation of EMC in September 1990. He is
-26-
28
responsible for the financial operations of the Company and EEI. From August
1980 to July 1984, Mr. Siskovic served in various financial and accounting
capacities including Assistant Controller of Towner Petroleum Company, a public
independent oil and gas operator, producer and drilling fund sponsor company.
From August 1984 to September 1985, Mr. Siskovic was a Senior Consultant for
Arthur Young & Company, certified public accountants, where he was primarily
responsible for the firm's oil and gas consulting practice in the Cleveland,
Ohio office. From October 1985 until joining EEI in April 1988, Mr. Siskovic
served as Controller and Principal Accounting Officer of Lomak Petroleum, Inc.,
a public independent oil and gas operator and producer. He has a Business
Administration Degree in Accounting from Cleveland State University.
COMPLIANCE TO SECTION 16(a) OF THE EXCHANGE ACT. Section 16(a)
of the Securities Exchange Act of 1934 requires the Company's officers and
directors, and persons who own more than 10% of the Units to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Officers, directors and greater than 10% Unitholders are required by SEC
regulation to furnish the Company with copies of all Section 16(a) forms they
file.
Based solely on review of the copies of such forms furnished
to the Company, the Company believes that for all of 2000, all Section 16(a)
filing requirements applicable to its officers, directors and greater than 10%
beneficial owners were complied with.
ITEM 11. EXECUTIVE COMPENSATION
- -------------------------------
As a limited partnership the Company has no executive officers
or directors, but is managed by the General Partner. The executive officers of
EMC and EEI are compensated either directly by the Company or indirectly through
EEI. The compensation described below represents all compensation from either
the Company or EEI.
The following table sets forth information concerning the
annual and long-term compensation for services in all capacities to the Company
for the fiscal years ended December 31, 2000, 1999 and 1998, of those persons
who were, at December 31, 2000: (i) the chief executive officer; and (ii) the
other highly compensated executive officer of the Company. The Chief Executive
Officer and such other executive officer are hereinafter referred to
collectively as the "Named Executive Officers."
-27-
29
SUMMARY COMPENSATION TABLE
Annual Compensation
----------------------------------------------
Other
Annual All Other
Name and Compen- Compen-
Principal Position Year Salary Bonus Sation Sation (1)
------------------ ---- ------ ----- --------- -----------
Thomas L. Korner 2000 $ 80,000 $ 40,000 $ 2,008 $ 47,425(2)
President 1999 80,000 60,000 1,954 36,710(2)
1998 80,000 39,000 2,067 40,302(2)
William A. Siskovic 2000 80,000 40,000 1,749 40,201(3)
Vice President and 1999 80,000 60,000 1,326 28,420(3)
Principal Financial and 1998 80,000 39,000 1,489 31,087(3)
Accounting Officer
- -----------------
No Named Executive Officer received personal benefits or perquisites during
2000, 1999 and 1998 in excess of the lesser of $50,000 or 10% of his aggregate
salary and bonus.
(1) Includes amounts received from participation in certain overriding
royalty interest arrangements organized by EEI. Also includes amounts
contributed under the Company's 401(K) Retirement Savings Plan. The
Company made a profit sharing contribution in 1998 and matched
employees' contributions to the 401(K) Retirement Savings Plan to the
extent of 50% of the first 6% of a participant's salary reduction in
1998 and 1999. Beginning in 2000, the Company matched employees'
contributions to the 401(K) Retirement Savings Plan to the extent of
100% of the first 6% of a participant's salary reduction. The amounts
attributable to the Company's matching contribution vest immediately.
(2) Includes amounts received by Thomas L. Korner from participation in
certain overriding royalty interest arrangements organized by EEI of
$40,225, $28,310 and $33,031 in 2000, 1999 and 1998, respectively.
(3) Includes amounts received by William A. Siskovic from participation in
certain overriding royalty interest arrangements organized by EEI of
$33,001, $20,020 and $23,816 in 2000, 1999 and 1998, respectively.
The General Partner, EMC and the members do not receive any separate
compensation or reimbursement for their management efforts on behalf of the
Company. All direct and indirect costs incurred by the Company are borne by the
General Partner of the Company and the Unitholders as Limited Partners of the
Company in proportion to their respective interest in the Company. The members
are not entitled to any fees or other compensation as a result of the
acquisition or operation of oil and gas properties by the Company. The members,
in their individual capacities, are not entitled to share in distributions from
or income of the Company on an ongoing basis, upon liquidation or otherwise. The
members only share in the revenues, income and distributions of the Company
indirectly through their ownership of the General Partner of the Company. The
General Partner is entitled to share in the income and expense of the Company on
the basis of its interests in the Company. The General Partner through it
predecessor, Everflow Management Company, contributed Interests (as defined and
described in "Item 1. Business" above) with an Exchange value of $670,980 for
its interest as a general partner in the Company.
None of the officers of the Company has an employment
agreement.
-28-
30
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -----------------------------------------------------------------------
The General Partner is a limited liability company of which
EMC, an Ohio corporation is the Managing Member. The members of the General
Partner are Thomas L. Korner and William A. Siskovic, both of whom are directors
and officers of EEI, and Sykes Associates, a limited partnership controlled by
Robert F. Sykes, Chairman of the Board of EEI and EMC. The General Partner of
the Company, owns a 1.1266% interest in the Company. The members and their
affiliates currently hold (in addition to the General Partner's interest in the
Company) 1,261,440 Units, representing approximately 21.42% of the outstanding
Units.
The following table sets forth certain information with
respect to the number of Units beneficially owned as of March 20, 2001 by each
person known to the management of the Company to own beneficially more than 5%
of the outstanding Units; by each director and officer of EMC; and by all
directors and officers as a group. The table also sets forth (i) the ownership
interests of the General Partner, and (ii) the ownership of EMC.
BENEFICIAL OWNERSHIP OF UNITS IN THE COMPANY,
EVERFLOW MANAGEMENT LIMITED, LLC AND EMC
Percentage
Interest in
Percentage Everflow Percentage
Name Units of Units Management Interest in
of Holder in Company in Company(1) Limited, Llc(2) EMC
- --------------------------------- ---------- ------------- --------------- -------
Robert F. Sykes(3) 1,056,464 17.94 66.6666 66.6666
Thomas L. Korner 135,910 2.31 16.6667 16.6667
William A. Siskovic 69,066 1.17 16.6667 16.6667
All officers and directors as
a group (3 persons in EMC) 1,261,440 21.42 100.0000 100.0000
- --------------------------
(1) Does not include the interest in the Company owned indirectly by such
individuals as a result of their ownership in (i) the General Partner
(based on its 1.13% interest in the Company) or (ii) EMC (based on EMC's 1%
managing member's interest in the General Partner).
(2) Includes the interest in the General Partner owned indirectly by such
individuals as a result of their share ownership in EMC resulting from
EMC's 1% managing member's interest in the General Partner.
(3) Includes 732,855 Units held by Sykes Associates, a New York limited
partnership comprised of Mr. Sykes and his wife as general partners and
four adult children as limited partners, 162,462 Units of the Company held
by the Robert F. Sykes Annuity Trust and 161,147 Units held by the
Catherine Sykes Annuity Trust.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
In the past, certain officers, directors and more than 10%
Unitholders of the Company have invested, and may in the future invest, in oil
and gas programs sponsored by EEI on the same terms as unrelated investors. In
the past, certain officers, directors and/or more than 10% Unitholders of the
Company have frequently participated and will likely participate in the future
as working interest owners in wells in which the Company has an interest. The
Company
-29-
31
anticipates that any such participation by individual members of the Company's
management would enable such individuals to participate in the drilling and
development of undeveloped drillsites on an equal basis with the Company or the
particular drilling program acquiring such drillsites, which participation would
be on a uniform basis with respect to all drilling conducted during a specified
time frame, as opposed to selective participation. Frequently, such
participation has been on more favorable terms than the terms which were
available to unrelated investors. Frequently, EEI loaned the officers of the
Company the funds necessary to participate in the drilling and development of
such wells. Such loans currently accrue interest at the rate of LIBOR plus 150
basis points per annum. As of December 31, 2000, the aggregate outstanding
balance of such indebtedness was approximately $91,000 owing from William A.
Siskovic.
Certain officers and directors of EMC own oil and gas
properties and, as such, contract with the Company to provide field operations
on such properties. These ownership interests are charged per well fees for such
services on the same basis as all other working interest owners.
-30-
32
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- ------------------------------------------------------------------------
(a) (1) FINANCIAL STATEMENTS
The following Consolidated Financial Statements of the
Registrant and its subsidiaries are included in Part II, Item 8:
PAGE(S)
Auditors' Report on Audited Financial Statements F-3
Balance Sheets F-4 - F-5
Statements of Income F-6
Statements of Partners' Equity F-7
Statements of Cash Flows F-8
Notes to Financial Statements F-9 - F-23
(a) (2) FINANCIAL STATEMENTS SCHEDULES
All schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.
(a) (3) EXHIBITS
See the Exhibit Index at page E-1 of this Annual Report on
Form 10-K.
-31-
33
Exhibit Index
-------------
Exhibit No. Description
----------- -----------
4.1 Certificate of Limited Partnership of the Registrant (1)
dated September 13, 1990, as filed with the Delaware
Secretary of State on September 14, 1990
4.2 Form of Agreement of Limited Partnership of the (1)
Registrant
4.3 General Partnership Agreement of Everflow (1)
Management Company
4.4 Articles of Incorporation of Everflow Management (1)
Corporation
4.5 Code of Regulations of Everflow Management (1)
Corporation
4.6 Shareholders Agreement for Everflow Management (1)
Corporation
4.7 Third Amended and Restated Loan Agreement, (2)
dated as of May 1, 1991 between Everflow
Eastern, Inc., the Registrant and the banks listed
therein, with National Bank of Detroit as Agent
4.8 First Amendment to Third Amended and Restated (5)
Loan and Security Agreements dated July 1, 1993,
between Everflow Eastern, Inc. and Everflow Eastern
Partners, L.P. and the banks listed therein, with
National Bank of Detroit as Agent
4.9 Revolving Credit Note to First Amendment to Third (5)
Amended and Restated Loan and Security Agreement
dated as of July 1, 1993
4.10 Credit Agreement dated January 19, 1995 between (8)
Everflow Eastern, Inc. and Everflow Eastern Partners, L.P.
and Bank One, Texas, National Association
E-1
34
Exhibit Index
-------------
Exhibit No. Description
----------- -----------
4.11 Amendment to Credit Agreement dated February 23, 1996 (13)
between Everflow Eastern, Inc. and Everflow Eastern
Partners, L.P. and Bank One, Texas, National Association
4.12 Second Amendment to Credit Agreement dated December 30, (13)
1996 between Everflow Eastern, Inc. and Everflow Partners,
L.P. and Bank One, Texas, National Association
4.13 Loan Modification Agreement dated June 16, 1997 between (14)
Bank One, N.A., Bank One, Texas, N.A. and Everflow
Eastern, Inc. and Everflow Eastern Partners, L.P.
4.14 Loan Modification Agreement dated May 29, 1998 between (15)
Bank One, N.A., Successor to Bank One, Texas, N.A., and
Everflow Eastern, Inc. and Everflow Eastern Partners L.P.
4.15 Articles of Organization of Everflow Management (17)
Limited, LLC
4.16 Operating Agreement of Everflow Management Limited, (17)
LLC dated March 8, 1999
4.17 Loan Modification Agreement dated May 25, 1999 between (18)
Bank One, N.A., and Everflow Eastern, Inc. and Everflow
Eastern Partners, L.P.
4.18 Loan Modification Agreement dated September 19, 2000, (19)
between Bank One, N.A., and Everflow Eastern, Inc.
and Everflow Eastern Partners, L.P.
10.1 Lease Agreement dated June 30, 1984 by and (1)
between Village Green Associates, Inc. and
Everflow Eastern, Inc.
10.2 Gas Purchase Agreement dated September 3, 1991 (3)
by and between the Registrant and The East Ohio
Gas Company
E-2
35
Exhibit Index
-------------
Exhibit No. Description
----------- -----------
10.3 Intermediate Term Adjustable Price Gas Purchase (4)
Agreement, contract #10342, dated October 9, 1992,
between The East Ohio Gas Company and Everflow
Eastern Partners, L.P.
10.4 Quaker State Full Load Crude Oil Purchase Agreement (4)
dated January 13, 1993, between Quaker State Oil
Refining Corporation and Everflow Eastern Partners, L.P.
10.5 Intermediate Term Adjustable Gas Purchase Agreement, (6)
Contract #10461, dated March 10, 1994, between The
East Ohio Gas Company and Everflow Eastern Partners, L.P.
10.6 Intermediate Term Adjustable Gas Purchase Agreement, (7)
Contract #10515, dated August 10, 1994, between The
East Ohio Gas Company and Everflow Eastern Partners, L.P.
10.7 Operating facility lease dated October 3, 1995 between (9)
Everflow Eastern Partners, L.P. and A-1 Storage of
Canfield, Ltd.
10.8 Intermediate Term Adjustable Gas Purchase Agreement, (11)
Contract #11245, dated May 29, 1996, between The
East Ohio Gas Company and Everflow Eastern Partners, L.P.
10.9 Intermediate Term Adjustable Gas Purchase Agreement, (11)
Contract #11285, dated May 29, 1996, between The
East Ohio Gas Company and Everflow Eastern Partners, L.P.
10.10 One Year Term Gas Purchase Agreement dated August 1, (12)
1996, between Everflow Eastern Partners, L.P. and
JDS Energy Corporation
10.11 One Year Term Gas Purchase Agreement dated January 20, (13)
1997, between Everflow Eastern Partners, L.P. and
JDS Energy Corporation
10.12 Gas Purchase Agreement, Contract #11467, dated (16)
November 1, 1997, between Everflow Eastern Partners, L.P.
and CNG Energy Services Corporation.
E-3
36
Exhibit Index
-------------
Exhibit No. Description
----------- -----------
10.13 One Year Term Gas Purchase Agreement dated November 1, (16)
1998, between Everflow Eastern Partners, L.P. and JDS
Energy Systems, Inc.
22.1 Subsidiaries of the Registrant (10)
- -----------------------
(1) Incorporated herein by reference to the appropriate exhibit to
Registrant's Registration Statement on Form S-1 (Reg. No. 33-36919).
(2) Incorporated herein by reference to the appropriate exhibit to the
Registrant's Quarterly Report on Form 10-Q for the second quarter ended
June 30, 1991.
(3) Incorporated herein by reference to the appropriate exhibit to
Registrant's Annual Report on Form 10-K for the year ended December 31,
1991 (File No. 0-19279).
(4) Incorporated herein by reference to the appropriate exhibit to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1992 (File No. 0-19279).
(5) Incorporated herein by reference to the appropriate exhibit to the
Registrant's Quarterly Report on Form 10-Q for the second quarter ended
June 30, 1993.
(6) Incorporated herein by reference to the appropriate exhibit to the
Registrant's Quarterly Report on Form 10-Q for the second quarter ended
June 30, 1994.
(7) Incorporated herein by reference to the appropriate exhibit to the
Registrant's Quarterly Report on Form 10-Q for the third quarter ended
September 30, 1994.
(8) Incorporated herein by reference to the appropriate exhibit to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1994 (File No. 0-19279).
(9) Incorporated herein by reference to the appropriate exhibit to the
Registrant's Quarterly Report on Form 10-Q for the third quarter ended
September 30, 1995.
(10) Incorporated herein by reference to the appropriate exhibit to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1995 (File No. 0-19279).
(11) Incorporated herein by reference to the appropriate exhibit to the
Registrant's Quarterly Report on Form 10-Q for the second quarter ended
June 30, 1996.
(12) Incorporated herein by reference to the appropriate exhibit to the
Registrant's Quarterly Report on Form 10-Q for the third quarter ended
September 30, 1996.
(13) Incorporated herein by reference to the appropriate exhibit to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1996 (File No. 0-19279).
(14) Incorporated herein by reference to the appropriate exhibit to the
Registrant's Quarterly Report on Form 10-Q for the second quarter ended
June 30, 1997.
(15) Incorporated herein by reference to the appropriate exhibit to the
Registrant's Quarterly Report on Form 10-Q for the second quarter ended
June 30, 1998.
(16) Incorporated herein by reference to the appropriate exhibit to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1998 (File No. 0-19279).
(17) Incorporated herein by reference to the appropriate exhibit to the
Registrant's Quarterly Report on Form 10-Q for the first quarter ended
March 31, 1999.
(18) Incorporated herein by reference to the appropriate exhibit to the
Registrant's Quarterly Report on Form 10-Q for the second quarter ended
June 30, 1999.
(19) Incorporated herein by reference to the appropriate exhibit to the
Registrant's Quarterly Report on Form 10-Q for the third quarter ended
September 30, 2000.
E-4
37
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
EVERFLOW EASTERN PARTNERS, L.P.
By: EVERFLOW MANAGEMENT LIMITED, LLC
General Partner
By: EVERFLOW MANAGEMENT CORPORATION
Managing Member
By: /s/ Robert F. Sykes Director March 28, 2001
-------------------------
Robert F. Sykes
By: /s/ Thomas L. Korner President and Director March 28, 2001
-------------------------
Thomas L. Korner
By: /s/ William A. Siskovic Vice President, March 28, 2001
-------------------------
William A. Siskovic Secretary-Treasurer
and Director (principal
financial and accounting
officer)
38
EVERFLOW EASTERN PARTNERS, L. P.
2000 CONSOLIDATED FINANCIAL REPORT
F-1
39
EVERFLOW EASTERN PARTNERS, L. P.
CONTENTS
- ------------------------------------------------------------------------------
Page
----
AUDITORS' REPORT ON THE FINANCIAL STATEMENTS F-3
FINANCIAL STATEMENTS
Consolidated balance sheets F-4 - F-5
Consolidated statements of income F-6
Consolidated statements of partners' equity F-7
Consolidated statements of cash flows F-8
Notes to consolidated financial statements F-9 - F-23
F-2
40
Independent Auditors' Report
----------------------------
To the Partners
Everflow Eastern Partners, L. P.
Canfield, Ohio
We have audited the accompanying consolidated balance sheets of Everflow
Eastern Partners, L. P. and subsidiaries as of December 31, 2000 and 1999, and
the related consolidated statements of income, partners' equity, and cash flows
for each of the three years in the period ended December 31, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 consolidated financial position of
Everflow Eastern Partners, L. P. and subsidiaries as of December 31, 2000 and
1999, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 2000, in conformity
with accounting principles generally accepted in the United States.
HAUSSER + TAYLOR LLP
Cleveland, Ohio
March 16, 2001
F-3
41
EVERFLOW EASTERN PARTNERS, L. P.
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 1999
- -------------------------------------------------------------------------------
2000 1999
---- ----
ASSETS
------
CURRENT ASSETS
Cash and equivalents $ 1,997,978 $ 2,684,605
Accounts receivable:
Production 3,078,235 2,040,298
Officers and employees 406,842 526,030
Joint venture partners 114,708 474,355
Short-term investments 3,623,374 1,513,273
Other 79,729 88,991
------------ ------------
Total current assets 9,300,866 7,327,552
PROPERTY AND EQUIPMENT
Proved properties (successful efforts
accounting method) 112,341,851 110,483,039
Pipeline and support equipment 504,222 507,472
Corporate and other 1,539,824 1,545,233
------------ ------------
114,385,897 112,535,744
Less accumulated depreciation, depletion,
amortization and write down 68,746,486 64,521,335
------------ ------------
45,639,411 48,014,409
OTHER ASSETS 103,017 81,025
------------ ------------
$ 55,043,294 $ 55,422,986
============ ============
The accompanying notes are an integral part of these financial statements.
F-4
42
EVERFLOW EASTERN PARTNERS, L. P.
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 1999
- --------------------------------------------------------------------------------
2000 1999
---- ----
LIABILITIES AND PARTNERS' EQUITY
--------------------------------
CURRENT LIABILITIES
Current portion of long-term debt $ 58,595 $ 54,493
Accounts payable 1,018,959 1,202,605
Accrued expenses 292,684 189,333
----------- -----------
Total current liabilities 1,370,238 1,446,431
LONG-TERM DEBT, NET OF CURRENT PORTION 579,227 637,796
DEFERRED INCOME TAXES 50,000 50,000
COMMITMENTS AND CONTINGENCIES
LIMITED PARTNERS' EQUITY, SUBJECT TO REPURCHASE
RIGHT
Authorized - 8,000,000 units
Issued and outstanding - 5,888,662 and 6,095,193
units, respectively 52,446,234 52,708,525
GENERAL PARTNER'S EQUITY 597,595 580,234
----------- -----------
Total partners' equity 53,043,829 53,288,759
----------- -----------
$55,043,294 $55,422,986
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-5
43
EVERFLOW EASTERN PARTNERS, L. P.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2000, 1999 and 1998
- --------------------------------------------------------------------------------
2000 1999 1998
---- ---- ----
REVENUES
Oil and gas sales $ 16,490,904 $ 14,639,109 $ 16,058,164
Well management and operating 428,497 421,799 497,483
Other 1,738 2,262 2,719
------------ ------------ ------------
16,921,139 15,063,170 16,558,366
DIRECT COST OF REVENUES
Production costs 2,244,926 2,638,217 2,550,686
Well management and operating 123,265 106,965 102,176
Depreciation, depletion and amortization 4,510,787 4,762,466 4,904,221
Abandonment and write down of oil and gas
properties 400,000 648,742 964,226
------------ ------------ ------------
Total direct cost of revenues 7,278,978 8,156,390 8,521,309
GENERAL AND ADMINISTRATIVE EXPENSE 1,322,260 1,615,932 2,113,492
------------ ------------ ------------
Total cost of revenues 8,601,238 9,772,322 10,634,801
------------ ------------ ------------
INCOME FROM OPERATIONS 8,319,901 5,290,848 5,923,565
OTHER INCOME (EXPENSE)
Interest income 316,091 157,348 90,564
Interest expense (46,239) (101,759) (170,611)
Gain (loss) on sale of property and equipment -- 21,504 (5,613)
Gain on sale of other assets 1,004 -- 1,129,184
------------ ------------ ------------
270,856 77,093 1,043,524
------------ ------------ ------------
INCOME BEFORE INCOME TAXES 8,590,757 5,367,941 6,967,089
PROVISION (CREDIT) FOR INCOME TAXES
Current -- -- 70,000
Deferred -- (78,000) --
------------ ------------ ------------
NET INCOME $ 8,590,757 $ 5,445,941 $ 6,897,089
============ ============ ============
Allocation of Partnership Net Income
Limited Partners $ 8,495,622 $ 5,387,013 $ 6,822,921
General Partner 95,135 58,928 74,168
------------ ------------ ------------
$ 8,590,757 $ 5,445,941 $ 6,897,089
============ ============ ============
Net income per unit $ 1.42 $ 0.88 $ 1.10
============ ============ ============
The accompanying notes are an integral part of these financial statements.
F-6
44
EVERFLOW EASTERN PARTNERS, L. P.
CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY
Years Ended December 31, 2000, 1999 and 1998
- --------------------------------------------------------------------------------
2000 1999 1998
---- ---- ----
PARTNERS' EQUITY - JANUARY 1 $ 53,288,759 $ 52,171,076 $ 48,577,802
Net income 8,590,757 5,445,941 6,897,089
Cash distributions ($1.25 per unit in 2000, $.625 per
unit in 1999 and $.50 per unit in 1998) (7,573,783) (3,880,436) (3,128,596)
Purchase and retirement of Units (1,261,904) (447,822) (175,219)
------------ ------------ ------------
PARTNERS' EQUITY - DECEMBER 31 $ 53,043,829 $ 53,288,759 $ 52,171,076
============ ============ ============
The accompanying notes are an integral part of these financial statements.
F-7
45
EVERFLOW EASTERN PARTNERS, L. P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 8,590,757 $ 5,445,941 $ 6,897,089
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization 4,569,114 4,819,592 4,929,023
Abandonment and write down of oil and gas
properties 400,000 648,742 964,226
(Gain) loss on sale of property and equipment -- (21,504) 5,613
Gain on sale of other assets (1,004) -- (1,129,184)
Deferred income taxes -- (78,000) --
Changes in assets and liabilities:
Accounts receivable (678,290) 450,714 (426,624)
Short-term investments (2,110,101) 707,783 (2,221,056)
Other current assets 9,262 3,364 (28,937)
Other assets 41,629 (27,304) (12,255)
Accounts payable (183,646) (464,187) 459,524
Accrued expenses 103,351 (201,854) 133,294
------------ ------------ ------------
Total adjustments 2,150,315 5,837,346 2,673,624
------------ ------------ ------------
Net cash provided by operating activities 10,741,072 11,283,287 9,570,713
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds received on receivables from officers and
employees 248,692 379,191 540,914
Advances disbursed to officers and employees (129,504) (165,499) (545,169)
Purchase of property and equipment (2,594,116) (3,414,843) (5,905,286)
Purchase of other assets (64,050) -- (271,125)
Proceeds on sale of property and equipment and
other assets 1,433 199,818 1,862,000
------------ ------------ ------------
Net cash used by investing activities (2,537,545) (3,001,333) (4,318,666)
CASH FLOWS FROM FINANCING ACTIVITIES
Distributions (7,573,783) (3,880,436) (3,128,596)
Repurchase of Units (1,261,904) (447,822) (175,219)
Proceeds from issuance of debt including revolver -- 2,175,000 2,900,000
Payments on debt including revolver (54,467) (3,738,609) (5,233,245)
------------ ------------ ------------
Net cash used by financing activities (8,890,154) (5,891,867) (5,637,060)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
EQUIVALENTS (686,627) 2,390,087 (385,013)
CASH AND EQUIVALENTS - JANUARY 1 2,684,605 294,518 679,531
------------ ------------ ------------
CASH AND EQUIVALENTS - DECEMBER 31 $ 1,997,978 $ 2,684,605 $ 294,518
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 46,239 $ 112,648 $ 178,119
Income taxes -- -- 70,000
The accompanying notes are an integral part of these financial statements.
F-8
46
EVERFLOW EASTERN PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Organization - Everflow Eastern Partners, L. P. ("Everflow")
is a Delaware limited partnership which was organized in
September 1990 to engage in the business of oil and gas
exploration and development. Everflow was formed to
consolidate the business and oil and gas properties of
Everflow Eastern, Inc. ("EEI") and subsidiaries and the oil
and gas properties owned by certain limited partnership and
working interest programs managed or sponsored by EEI ("EEI
Programs" or "the Programs").
Everflow Management Limited, LLC, an Ohio limited liability
company, is the general partner of Everflow and, as such, is
authorized to perform all acts necessary or desirable to carry
out the purposes and conduct of the business of Everflow. The
members of Everflow Management Limited, LLC are Everflow
Management Corporation ("EMC"), two individuals who are
Officers and Directors of EEI and Sykes Associates, a limited
partnership controlled by Robert F. Sykes, the Chairman of the
Board of EEI. EMC is an Ohio corporation formed in September
1990 and is the managing member of Everflow Management
Limited, LLC.
B. Principles of Consolidation - The consolidated financial
statements include the accounts of Everflow, its wholly-owned
subsidiaries, including EEI and EEI's wholly-owned
subsidiaries, and investments in oil and gas drilling and
income partnerships (collectively, the "Company") which are
accounted for under the proportional consolidation method. All
significant accounts and transactions between the consolidated
entities have been eliminated.
C. Use of Estimates - The preparation of financial statements in
conformity with accounting principles generally accepted in
the United States 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.
D. Fair Value of Financial Instruments - The fair values of cash,
accounts receivable, short-term investments (based on quoted
market values), accounts payable and other short-term
obligations approximate their carrying values because of the
short maturity of these financial instruments. The carrying
values of the Company's long-term obligations approximate
their fair value. In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 107, "Disclosure About Fair
Value of Financial Instruments," rates available at balance
sheet dates to the Company are used to estimate the fair value
of existing debt.
E. Cash Equivalents - For purposes of the statement of cash
flows, the Company considers all highly liquid debt
instruments purchased with a maturity of three months or less
to be cash equivalents. The Company maintains at various
financial institutions cash and cash equivalents which may
exceed federally insured amounts and which may, at times,
significantly exceed balance sheet amounts due to float.
F-9
47
EVERFLOW EASTERN PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
F. Property and Equipment - The Company uses the successful
efforts method of accounting for oil and gas exploration and
production activities. Under successful efforts, costs to
acquire mineral interests in oil and gas properties and to
drill and equip development wells are initially capitalized.
Costs of development wells (on properties the Company has no
further interest in) that do not find proved reserves and
geological and geophysical costs are expensed. The Company has
not participated in exploratory drilling and owns no interest
in unproved properties.
Capitalized costs of proved properties, after considering
estimated dismantlement and abandonment costs and estimated
salvage values, are amortized by the unit-of-production method
based upon estimated proved developed reserves. Depletion,
depreciation and amortization on proved properties amounted to
$4,477,379, $4,728,480 and $4,876,838 for the years ended
December 31, 2000, 1999 and 1998, respectively.
On sale or retirement of a unit of a proved property (which
generally constitutes the amortization base), the cost and
related accumulated depreciation, depletion, amortization and
write down are eliminated from the property accounts, and the
resultant gain or loss is recognized.
SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," requires
that long-lived assets (including oil and gas properties) and
certain identifiable intangibles be reviewed for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Everflow
utilizes a field by field basis for assessing impairment of
its oil and gas properties. The Company wrote down oil and gas
properties by approximately $400,000, $601,000 and $426,000
during 2000, 1999 and 1998, respectively, to provide for
impairment on certain of its oil and gas properties.
Pipeline and support equipment and other corporate property
and equipment are depreciated principally on the straight-line
method over their estimated useful lives (pipeline and support
equipment - 10 years, other corporate equipment - 3 to 7
years, other corporate property - building and improvements
with a cost of $1,007,107 - 39 years). Depreciation on
pipeline and support equipment and other corporate property
and equipment amounted to $91,735, $91,112 and $52,185 for the
years ended December 31, 2000, 1999 and 1998, respectively.
Maintenance and repairs of property and equipment are expensed
as incurred. Major renewals and improvements are capitalized,
and the assets replaced are retired.
G. Revenue Recognition - The Company recognizes revenue from oil
and gas production as it is extracted and sold from the
properties. Other revenue is recognized at the time it is
earned and the Company has a contractual right to such
revenue.
F-10
48
EVERFLOW EASTERN PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
G. Revenue Recognition (Continued)
The Company participates (and may act as drilling
contractor) with unaffiliated joint venture partners in
the drilling, development and operation of jointly owned
oil and gas properties. Each owner, including the Company,
has an undivided interest in the jointly owned
property(ies). Generally, the joint venture partners
participate on the same drilling/development cost basis as
the Company and, therefore, no revenue, expense or income
is recognized on the drilling and development of the
properties. Accounts receivable from joint venture
partners consist principally of drilling and development
costs the Company has advanced or incurred on behalf of
joint venture partners. The Company earns and receives
monthly management and operating fees from certain joint
venture partners after the properties are completed and
placed into production.
H. Income Taxes - Everflow is not a tax-paying entity and the
net taxable income or loss, other than the taxable income
or loss allocable to EEI, which is a C corporation owned
by Everflow, will be allocated directly to its respective
partners. The Company is not able to determine the net
difference between the tax bases and the reported amounts
of Everflow's assets and liabilities due to separate tax
elections that were made by owners of the working
interests and limited partnership interests that comprised
Programs.
EEI and its subsidiaries account for income taxes under
Statement of Financial Accounting Standards No. 109 (SFAS
109), "Accounting for Income Taxes." Income taxes are
provided for all items (as they relate to EEI and its
subsidiaries) in the Consolidated Statement of Income
regardless of the period when such items are reported for
income tax purposes. SFAS 109 provides that deferred tax
assets and liabilities be recognized for temporary
differences between the financial reporting basis and tax
basis of certain of EEI's and its subsidiaries' assets and
liabilities. In addition, SFAS 109 requires that deferred
tax assets and liabilities be measured using enacted tax
rates expected to apply to taxable income in the years in
which the temporary differences are expected to be
recovered or settled. The impact on deferred taxes of
changes in tax rates and laws, if any, is reflected in the
financial statements in the period of enactment. In some
situations, SFAS 109 permits the recognition of expected
benefits of utilizing net operating loss and tax credit
carryforwards.
I. Allocation of Income and Per Unit Data - Under the terms
of the limited partnership agreement, initially, 99% of
revenues and costs were allocated to the unitholders (the
limited partners) and 1% of revenues and costs were
allocated to the general partner. The allocation changes
as unitholders elect to exercise the repurchase right (see
Note 4).
Earnings and distributions per limited partner Unit have
been computed based on the weighted average number of
Units outstanding during the year for each year presented.
Average outstanding Units for earnings and distributions
per Unit calculations amount to 5,991,928, 6,133,865 and
6,190,094 in 2000, 1999 and 1998, respectively.
F-11
49
EVERFLOW EASTERN PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
J. New Accounting Standards - In June 1998, SFAS 133,
"Accounting for Derivative Instruments and Hedging
Activities," was issued. SFAS 133 establishes accounting
and reporting standards for derivative instruments and
hedging activities. SFAS 133, as amended by SFAS 137, is
effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. The effect of adoption of
the standard on January 1, 2000 had no material effect on
the Company's financial statements.
NOTE 2. SHORT-TERM INVESTMENTS
Short-term investments consist principally of marketable
corporate debt securities which are classified as trading. The
fair values of the investments approximate cost.
NOTE 3. CREDIT FACILITIES AND LONG-TERM DEBT
In September 2000, the Company entered into an agreement that
modified its prior credit agreement. The agreement provides for a
revolving line of credit in the amount of $4,000,000, all of
which is available. The revolving line of credit provides for
interest payable quarterly at LIBOR plus 150 basis points with
the principal due at maturity, May 31, 2002. The Company
anticipates renewing the facility every other year to minimize
debt origination, carrying and interest costs associated with
long-term bank commitments. Borrowings under the facility are
unsecured; however, the Company has agreed, if requested by the
bank, to execute any supplements to the agreement including
security and mortgage agreements on the Company's assets. The
agreement contains restrictive covenants requiring the Company to
maintain the following: (i) loan balance not to exceed the
borrowing base of $4,000,000; (ii) tangible net worth of at least
$40,000,000; and (iii) a total debt to tangible net worth ratio
of not more than 0.5 to 1.0. In addition, there are restrictions
on mergers, sales and acquisitions, the incurrence of additional
debt and the pledge or mortgage of the Company's assets.
There were no borrowings outstanding on revolving credit
facilities at December 31, 2000 and 1999. The following schedule
reflects activity under the Company's revolving credit facilities
for the years ended December 31, 2000, 1999 and 1998. The average
amount outstanding under the facility was calculated using daily
balances and a 365 day period. The weighted average interest
rates were calculated by dividing the interest expense for the
year for such borrowings by the average amounts outstanding
during the period.
Weighted
Maximum Average Average
Amount Amount Interest
Outstanding Outstanding Rate
----------- ----------- ---------
Year Ended December 31:
2000 $ -- $ -- --
1999 $2,700,000 $ 757,808 6.8%
1998 $4,100,000 $1,743,014 7.5%
F-12
50
EVERFLOW EASTERN PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. CREDIT FACILITIES AND LONG-TERM DEBT (CONTINUED)
The Company purchased a building and funded its cost, including
improvements, in part, through mortgage notes. The notes have an
aggregate balance of $637,822 and $692,289 at December 31, 2000
and 1999, respectively, and at December 31, 2000 bear interest at
fixed (converting in certain subsequent years to variable) rates
ranging from 6.51% - 8.65% and a weighted average rate of 7.27%.
The notes at December 31, 2000 require aggregate payments of
principal and interest of $8,647 per month. Maturities on the
notes are expected to be as follows: 2001 - $58,595; 2002 -
$63,100; 2003 - $68,000; 2004 - $73,200; 2005 - $78,900;
thereafter - $296,027.
The Company is exposed to market risk from changes in interest
rates since it, at times, funds its operations through long-term
and short-term borrowings. The Company's primary interest rate
risk exposure results from floating rate debt with respect to the
Company's revolving credit. At December 31, 2000, none of the
Company's total long-term debt consisted of floating rate debt.
NOTE 4. PARTNERS' EQUITY
Units represent limited partnership interests in Everflow. The
Units are transferable subject only to the approval of any
transfer by Everflow Management Limited, LLC and to the laws
governing the transfer of securities. The Units are not listed
for trading on any securities exchange nor are they quoted in the
automated quotation system of a registered securities
association. However, unitholders have an opportunity to require
Everflow to repurchase their Units pursuant to the repurchase
right.
Under the terms of the limited partnership agreement, initially,
99% of revenues and costs are allocated to the unitholders (the
limited partners) and 1% of revenues and costs are allocated to
the general partner. Such allocation has changed and will change
in the future due to unitholders electing to exercise the
repurchase right.
The partnership agreement provides that Everflow will repurchase
for cash up to 10% of the then outstanding Units, to the extent
unitholders offer Units to Everflow for repurchase pursuant to
the repurchase right. The repurchase right entitles any
unitholder, between May 1 and June 30 of each year, to notify
Everflow that he elects to exercise the repurchase right and have
Everflow acquire certain or all of his Units. The price to be
paid for any such Units is calculated based upon the audited
financial statements of the Company as of December 31 of the year
prior to the year in which the repurchase right is to be
effective and independently prepared reserve reports. The price
per Unit equals 66% of the adjusted book value of the Company
allocable to the Units, divided by the number of Units
outstanding at the beginning of the year in which the applicable
repurchase right is to be effective less all interim cash
distributions received by a unitholder. The adjusted book value
is calculated by adding partners' equity, the standardized
measure of discounted future net cash flows and the tax effect
included in the standardized measure and subtracting from that
sum the carrying value of oil and gas properties (net of
undeveloped lease costs). If more than 10% of the then
outstanding Units are tendered during any period during which the
repurchase right is to be effective, the investors' Units
tendered shall be prorated for purposes of calculating the actual
number of Units to be acquired during any such period. The price
associated with the repurchase right, based upon the December 31,
2000 calculation, is estimated to be $9.73 per Unit, net of the
distributions ($.625 per Unit in total) expected to be made in
January and April 2001.
F-13
51
EVERFLOW EASTERN PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. PARTNERS' EQUITY (CONTINUED)
Units repurchased pursuant to the repurchase right, for each of
the four years in the period ended December 31, 2000, are as
follows:
Per Unit
------------------------------------------------------------
Calculated Units
Price for Less Outstanding
Repurchase Premium Interim Net # of Units Following
Year Right Offered Distributions Price Paid Repurchased Repurchase
---- ----- ------- ------------- ---------- ----------- ----------
1997 $ 5.46 $ - $ .25 $ 5.21 172,290 6,207,651
1998 $ 5.24 $ - $ .25 $ 4.99 35,114 6,172,537
1999 $ 6.16 $ - $ .375 $ 5.79 77,344 6,095,193
2000 $ 6.73 $ - $ .625 $ 6.11 206,531 5,888,662
NOTE 5. PROVISION FOR INCOME TAXES
As referred to in Note 1, EEI and its subsidiaries account for
current and deferred income taxes under the provisions of SFAS
No. 109. The deferred taxes are the result of temporary
differences arising from differences in financial reporting and
tax reporting methods for EEI's proved properties.
A reconciliation between taxes computed at the Federal statutory
rate and the effective tax rate in the statements of income
follows:
Year Ended December 31,
-----------------------------------------------------------------------------
2000 1999 1998
----------------------- ---------------------- ----------------------
Amount % Amount % Amount %
----------- ----- ----------- ---- ----------- ----
Provision based on the
statutory rate (for taxable
income up to $10,000,000) $ 2,921,000 34.0 $ 1,825,000 34.0 $ 2,369,000 34.0
Tax effect of:
Non-taxable status of the
Programs and Everflow (2,965,000) (34.5) (1,866,000) (34.8) (2,097,000) (30.1)
Excess statutory depletion (83,000) (1.0) (72,000) (1.3) (95,000) (1.4)
Graduated tax rates, state
income tax and other - net 127,000 1.5 35,000 0.6 (107,000) (1.5)
----------- ----- ----------- ---- ----------- ----
Total $ -- $ -- $ (78,000) (1.5) $ 70,000 1.0
=========== ===== =========== ==== =========== ====
F-14
52
EVERFLOW EASTERN PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. PROVISION FOR INCOME TAXES (CONTINUED)
EEI has percentage depletion deduction carryforwards for tax
purposes of approximately $2,200,000. These carryforwards can be
carried forward indefinitely. For financial reporting purposes,
the deferred tax liability at December 31, 2000 and 1999 has been
reduced by approximately $730,000 and $780,000, respectively, for
the tax effect of carryforwards.
NOTE 6. RETIREMENT PLAN
The Company has a defined contribution plan pursuant to Section
401(k) of the Internal Revenue Code for all employees who have
reached the age of 21 and completed one year of service. Certain
contributions to the plan are at the discretion of EMC's Board of
Directors. The Company made a profit sharing contribution in 1998
and matched employees' contributions to the 401(K) Retirement
Savings Plan to the extent of 50% of the first 6% of a
participant's salary reduction in 1998 and 1999. Beginning in
2000, the Company matched employees' contributions to the 401(K)
Retirement Savings Plan to the extent of 100% of the first 6% of
a participant's salary reduction. The amounts attributable to the
Company's matching contribution vest immediately. The Company
made contributions of $52,683, $38,879 and $83,295 for the years
ended December 31, 2000, 1999 and 1998, respectively.
NOTE 7. RELATED PARTY TRANSACTIONS
Since 1989, EEI provided certain employees with an opportunity to
receive assignments of certain overriding royalty interests which
were created at the time EEI generated certain oil and gas
leases. Certain employees of the Company have been given the
option of having a portion of their compensation in the form of
an assignment in certain of such overriding royalty interests.
Those employees who elect to receive a portion of their
compensation in this form receive an assignment of a pro rata
portion of each of the overriding royalty interests selected.
During the calendar years ended December 31, 2000, 1999 and 1998,
approximately $140,000, $117,000 and $180,000, respectively, was
distributed to such employees from such overriding royalty
interests.
The Company's Officers, Directors, Affiliates and certain
employees have frequently participated, and will likely
participate in the future, as working interest owners in wells in
which the Company has an interest. Frequently, the Company has
loaned the funds necessary to participate in the drilling and
development of such wells. Such loans currently accrue interest
at LIBOR plus 150 basis points. Such receivables are expected to
be paid from production revenues attributable to such interests
or through joint interest assessments.
NOTE 8. BUSINESS SEGMENTS, RISKS AND MAJOR CUSTOMERS
The Company operates exclusively in the United States, almost
entirely in Ohio and Pennsylvania, in the exploration,
development and production of oil and gas.
F-15
53
EVERFLOW EASTERN PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. BUSINESS SEGMENTS, RISKS AND MAJOR CUSTOMERS (CONTINUED)
The Company operates in an environment with many financial risks,
including, but not limited to, the ability to acquire additional
economically recoverable oil and gas reserves, the inherent risks
of the search for, development of and production of oil and gas,
the ability to sell oil and gas at prices which will provide
attractive rates of return, the volatility and seasonality of oil
and gas production and prices, and the highly competitive and, at
times, seasonal nature of the industry and worldwide economic
conditions. The Company's ability to expand its reserve base and
diversify its operations is also dependent upon the Company's
ability to obtain the necessary capital through operating cash
flow, additional borrowings or additional equity funds. Various
federal, state and governmental agencies are considering, and
some have adopted, laws and regulations regarding environmental
protection which could adversely affect the proposed business
activities of the Company. The Company cannot predict what
effect, if any, current and future regulations may have on the
operations of the Company.
Management of the Company continually evaluates whether the
Company can develop oil and gas properties at historical levels
given current industry and market conditions. If the Company is
unable to do so, it could be determined that it is in the best
interests of the Company and its unitholders to reorganize,
liquidate or sell the Company. Additionally, because of the
number of recent transactions involving the purchase and sale of
Appalachian Basin oil and gas companies and properties,
management of the Company and the Company's investment bankers
continue to evaluate the sale of the Company and other
alternatives to maximize unitholder value. However, management
cannot predict whether any sale transaction will be a viable
alternative for the Company in the immediate future.
Gas sales accounted for 84%, 89% and 93% of total oil and gas
sales in 2000, 1999 and 1998, respectively. Approximate
percentages of oil and gas sales from significant purchasers for
the years ended December 31, 2000, 1999 and 1998, respectively,
were as follows:
Customer 2000 1999 1998
-------- ---- ---- ----
The East Ohio Gas Company and its affiliates
("East Ohio") 53% 67% 74%
Ergon Oil Purchasing, Inc. ("Ergon Oil") 16 11 7
Interstate Gas Supply, Inc. ("Interstate") 11 - -
- -- -- --
80% 78% 81%
== == ==
The Company expects that East Ohio, Ergon Oil and Interstate will
be the only major customers in 2001.
F-16
54
EVERFLOW EASTERN PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. BUSINESS SEGMENTS, RISKS AND MAJOR CUSTOMERS (CONTINUED)
The Company has various gas purchase agreements with East Ohio.
Pursuant to the agreements and subject to certain restrictions
and adjustments, including termination clauses, East Ohio is
obligated to purchase, and the Company is obligated to sell, all
natural gas production from a specified list of wells. A summary
of Everflow's principal East Ohio Gas contract at December 31,
2000 follows:
Contract Period Number Required Shut-In Limitation
Date Covered of Wells Purchases Provisions Provisions
----------- ----------- ----------- ----------- ----------- ---------------
9/3/91 11/91-10/01 423 275 days/year Maximum of May-Oct. - 50% of
60 days (Nov.- production from
April) prior 6 month period
Net Price per MCF
--------------------------------------------------------------------------------------
Adjusted Prices
Contract --------------------------------------------------------------------------------------
Date 11/98-4/99 5/99-10/99 11/99-4/00 5/00-10/00 11/00-4/01 5/01-10/01
----------- ----------- ----------- ----------- ----------- ------------ ----------
9/3/91 $ 3.71 $ 3.08 $ 3.35 $ 2.72 $ 4.83 $ 4.20
As detailed in the table, the price paid for natural gas
purchased under the contract varies with the production period.
Pricing under the contract is adjusted annually, up or down, by
an amount equal to 80% of the increase or decrease in East Ohio's
average Gas Cost Recovery ("GCR") rates. Additionally, the
contract provides for a price cap equal to the quarterly GCR,
which amounted to $7.18, $3.93 and $3.84 in November 2000, 1999
and 1998, respectively. Price caps related to this contract are
not included in the table. The net price per MCF includes $.20
per MCF for transportation less a $.02 per MCF metering charge.
The contract, which terminates in 2001, will be replaced by
short-term contracts with primary terms of one year. These new
short-term contracts will provide fixed pricing of $4.56 to $4.73
per MCF for production of 100,000 MCF per month. Gas production
in excess of 100,000 MCF per month (estimated to average between
50,000 and 100,000 MCF per month) that was under the principal
East Ohio Gas contract is expected to be sold at prices in effect
at the time of production. There will be no significant
production restrictions under these new contracts.
At December 31, 2000, in addition to the principal East Ohio
contract described above, the Company has various short-term
contracts (covering production from 170 gross wells at December
31, 2000) which obligate the purchasers to purchase and the
Company to sell and deliver certain quantities of natural gas
production on a monthly basis throughout the contract periods
which have primary terms of one year. All of the wells are
covered by fixed price contracts that provide for the sale of the
Company's gas at $3.02 to $5.35 per MCF. There are no significant
production restrictions under the Company's short-term contracts
as they relate to the Company's existing wells. Future wells can
be added to certain of the contracts subject to gross production
restrictions under the contracts.
F-17
55
EVERFLOW EASTERN PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. COMMITMENTS AND CONTINGENCIES
Everflow paid a dividend in January 2001 of $.25 per Unit. The
distribution amounted to approximately $1,489,000.
The Company is the general partner in certain oil and gas
partnerships. As general partner, the Company shares in unlimited
liability to third parties with respect to the operations of the
partnerships and may be liable to limited partners for losses
attributable to breach of fiduciary obligations.
NOTE 10. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of selected quarterly financial data
for the years ended December 31, 2000 and 1999:
Quarters Ended
--------------------------------------------------
March 31 June 30 September 30 December 31
---------- ---------- ------------ -----------
2000
----
Revenues $4,584,831 $3,328,253 $3,313,751 $5,694,304
Income from operations 1,782,528 1,403,796 1,241,006 3,892,571
Net income 1,826,116 1,474,780 1,301,405 3,988,456
Net income per unit .30 .24 .22 .67
Quarters Ended
--------------------------------------------------
March 31 June 30 September 30 December 31
---------- ---------- ------------ -----------
1999
----
Revenues $4,220,169 $2,714,639 $2,605,532 $5,522,830
Income from operations 1,453,780 811,510 891,562 2,133,996
Net income 1,443,628 815,625 898,595 2,288,093
Net income per unit .23 .13 .15 .37
Quarterly operating results are not necessarily representative of
operations for a full year for various reasons, including the
volatility and seasonality of oil and gas production and prices,
the highly competitive and, at times, seasonal nature of the oil
and gas industry and worldwide economic conditions.
NOTE 11. SUPPLEMENTAL INFORMATION RELATING TO OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED)
The following supplemental unaudited oil and gas information is
required by Statement of Financial Accounting Standards (SFAS)
No. 69, "Disclosures About Oil and Gas Producing Activities."
F-18
56
EVERFLOW EASTERN PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. SUPPLEMENTAL INFORMATION RELATING TO OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED) (CONTINUED)
The tables on the following pages set forth pertinent data with
respect to the Company's oil and gas properties, all of which are
located within the continental United States.
CAPITALIZED COSTS RELATING TO OIL AND GAS
PRODUCING ACTIVITIES
December 31,
------------------------------------------
2000 1999 1998
---- ---- ----
Proved oil and gas properties $112,341,851 $110,483,039 $110,178,841
Pipeline and support equipment 504,222 507,472 506,153
------------ ------------ ------------
112,846,073 110,990,511 110,684,994
Accumulated depreciation, depletion,
amortization and write down 68,469,693 64,241,134 61,379,736
------------ ------------ ------------
Net capitalized costs $ 44,376,380 $ 46,749,377 $ 49,305,258
============ ============ ============
COSTS INCURRED IN OIL AND GAS PRODUCING ACTIVITIES
December 31,
------------------------------------------
2000 1999 1998
---- ---- ----
Property acquisition costs $ 175,875 $ 292,852 $ 629,603
Development costs, including
prepayments 2,333,387 2,614,116 5,105,622
In 2000, 1999 and 1998, development costs include the purchase of
approximately $-0-, $1,452,000 and $348,000, respectively, of
producing oil and gas properties.
F-19
57
EVERFLOW EASTERN PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. SUPPLEMENTAL INFORMATION RELATING TO OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED) (CONTINUED)
RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES
December 31,
--------------------------------------------
2000 1999 1998
------------ ------------ ------------
Oil and gas sales $ 16,490,904 $ 14,639,109 $ 16,058,164
Production costs (2,244,926) (2,638,217) (2,550,686)
Depreciation, depletion and
amortization (4,510,787) (4,762,466) (4,904,221)
Abandonment and write down of
oil and gas properties (400,000) (648,742) (964,226)
------------ ------------ ------------
9,335,191 6,589,684 7,639,031
Income tax expense 100,000 115,000 150,000
------------ ------------ ------------
Results of operations for oil and gas
producing activities (excluding
corporate overhead and financing
costs) $ 9,235,191 $ 6,474,684 $ 7,489,031
============ ============ ============
Income tax expense was computed using statutory tax rates and
reflects permanent differences that are reflected in the
Company's consolidated income tax expense for the year.
F-20
58
EVERFLOW EASTERN PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. SUPPLEMENTAL INFORMATION RELATING TO OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED) (CONTINUED)
ESTIMATED QUANTITIES OF PROVED OIL AND GAS RESERVES
Oil Gas
(BBLS) (MCF)
----------- -----------
Balance, January 1, 1998 822,000 40,657,000
Extensions, discoveries and other
additions 67,000 4,844,000
Production (94,000) (4,575,000)
Revision of previous estimates 140,000 11,977,000
----------- -----------
Balance, December 31, 1998 935,000 52,903,000
Extensions, discoveries and other
additions 38,000 4,018,000
Production (97,000) (4,245,000)
Revision of previous estimates (1,000) (1,170,000)
----------- -----------
Balance, December 31, 1999 875,000 51,506,000
Extensions, discoveries and other
additions 3,000 1,195,000
Production (92,000) (4,196,000)
Revision of previous estimates 128,000 29,000
----------- -----------
Balance, December 31, 2000 914,000 48,534,000
=========== ===========
PROVED DEVELOPED RESERVES:
December 31, 1997 822,000 40,657,000
December 31, 1998 935,000 52,903,000
December 31, 1999 875,000 51,506,000
December 31, 2000 914,000 48,534,000
The Company has not determined proved reserves associated with
its proved undeveloped acreage. At December 31, 2000 and 1999,
the Company had 780 and 1,300 net proved undeveloped acres,
respectively. The carrying cost of the proved undeveloped acreage
that is included in proved properties amounted to $682,206 and
$1,227,979 at December 31, 2000 and 1999, respectively.
F-21
59
EVERFLOW EASTERN PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. SUPPLEMENTAL INFORMATION RELATING TO OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED) (CONTINUED)
STANDARDIZED MEASURE OF DISCOUNTED FUTURE
NET CASH FLOWS
December 31,
-----------------------------------
2000 1999 1998
---- ---- ----
(Thousands of Dollars)
Future cash inflows from sales of oil
and gas $ 248,711 $ 166,772 $ 153,538
Future production and development
costs 81,641 64,142 57,255
Future income tax expense 3,971 2,405 2,253
--------- --------- ---------
Future net cash flows 163,099 100,225 94,030
Effect of discounting future net cash
flows at 10% per annum 81,125 46,532 42,551
--------- --------- ---------
Standardized measure of discounted
future net cash flows $ 81,974 $ 53,693 $ 51,479
========= ========= =========
CHANGES IN THE STANDARDIZED MEASURE OF
DISCOUNTED FUTURE NET CASH FLOWS
Year Ended December 31,
------------------------------------
2000 1999 1998
---- ---- ----
(Thousands of Dollars)
Balance, beginning of year $ 53,693 $ 51,479 $ 46,094
Extensions, discoveries and other
additions 2,141 4,486 6,004
Development costs incurred 245 298 801
Revision of previous estimates 1,133 (2,240) 11,926
Sales of oil and gas, net of production
costs (14,246) (12,001) (13,507)
Net change in income taxes (708) (55) (60)
Net changes in prices and production
costs 28,769 3,304 (1,193)
Accretion of discount 5,369 5,148 4,609
Other 5,578 3,274 (3,195)
--------- --------- ---------
Balance, end of year $ 81,974 $ 53,693 $ 51,479
========= ========= =========
F-22
60
EVERFLOW EASTERN PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. SUPPLEMENTAL INFORMATION RELATING TO OIL AND GAS PRODUCING
ACTIVITIES (UNAUDITED) (CONTINUED)
The estimated future cash flows are determined based on year-end
prices for crude oil, current allowable prices (reduced for
periods beyond the contract period to year-end market prices)
applicable to expected natural gas production, estimated
production of proved crude oil and natural gas reserves,
estimated future production and development costs of reserves,
based on current economic conditions, and the estimated future
income tax expense, based on year-end statutory tax rates (with
consideration of future tax rates already legislated) to be
incurred on pretax net cash flows less the tax basis of the
properties involved. Such cash flows are then discounted using a
10% rate.
The methodology and assumptions used in calculating the
standardized measure are those required by SFAS No. 69. It is not
intended to be representative of the fair market value of the
Company's proved reserves. The valuation of revenues and costs
does not necessarily reflect the amounts to be received or
expended by the Company. In addition to the valuations used,
numerous other factors are considered in evaluating known and
prospective oil and gas reserves.
F-23