1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE TRANSITION PERIOD FROM ______ TO ______.
Commission File Number 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
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
--- ---
There were 6,095,193 Units of limited partnership interest of the
Registrant as of August 12, 1999. 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 June 30, 1999.
2
EVERFLOW EASTERN PARTNERS, L.P.
INDEX
DESCRIPTION PAGE NO.
----------- --------
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 1999 and December 31, 1998 F-1
Consolidated Statements of Income
Three and Six Months Ended June 30, 1999 and 1998 F-3
Consolidated Statements of Partners' Equity
Six Months Ended June 30, 1999 and 1998 F-4
Consolidated Statements of Cash Flows
Six Months Ended June 30, 1999 and 1998 F-5
Notes to Unaudited Consolidated Financial Statements F-6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 3
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 7
Signature 8
2
3
EVERFLOW EASTERN PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
June 30, 1999 and December 31, 1998
-----------------------------------
June 30, December 31,
1999 1998
(Unaudited) (Audited)
----------- ---------
ASSETS
------
CURRENT ASSETS
Cash and equivalents $ 1,641,258 $ 294,518
Accounts receivable:
Production 1,163,759 2,323,510
Officers and employees 603,227 1,015,458
Joint venture partners 290,949 366,121
Short-term investments - 2,221,056
Other 122,393 92,355
------------- -------------
Total current assets 3,821,586 6,313,018
PROPERTY AND EQUIPMENT
Proved properties (successful efforts
accounting method) 112,190,010 110,178,841
Pipeline and support equipment 507,472 506,153
Corporate and other 1,277,284 1,212,857
------------- -------------
113,974,766 111,897,851
Less accumulated depreciation, depletion,
amortization and write down (64,046,324) (61,651,637)
------------- -------------
49,928,442 50,246,214
OTHER ASSETS 72,373 53,721
------------- -------------
$ 53,822,401 $ 56,612,953
============= =============
See notes to unaudited consolidated financial statements.
F-1
4
EVERFLOW EASTERN PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
June 30, 1999 and December 31, 1998
-----------------------------------
June 30, December 31,
1999 1998
(Unaudited) (Audited)
----------- ---------
LIABILITIES AND PARTNERS' EQUITY
- --------------------------------
CURRENT LIABILITIES
Current portion of long-term debt $ 41,105 $ 30,805
Revolving credit facility - 1,800,000
Accounts payable 1,417,510 1,666,792
Accrued expenses 95,837 391,187
----------- -----------
Total current liabilities 1,554,452 3,888,784
LONG-TERM DEBT, NET OF CURRENT PORTION 497,305 425,093
DEFERRED INCOME TAXES 128,000 128,000
COMMITMENTS AND CONTINGENCIES - -
LIMITED PARTNERS' EQUITY, SUBJECT TO
REPURCHASE RIGHT
Authorized - 8,000,000 Units
Issued and outstanding - 6,095,193 and
6,172,537 Units, respectively 51,080,333 51,610,054
GENERAL PARTNER'S EQUITY 562,311 561,022
----------- -----------
Total partners' equity 51,642,644 52,171,076
----------- -----------
$53,822,401 $56,612,953
=========== ===========
See notes to unaudited consolidated financial statements.
F-2
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EVERFLOW EASTERN PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF INCOME
Three and Six Months Ended June 30, 1999 and 1998
-------------------------------------------------
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ ---------------------------------
1999 1998 1999 1998
---- ---- ---- ----
REVENUES
Oil and gas sales $ 2,603,248 $ 2,971,179 $ 6,688,289 $ 7,939,958
Well management and operating 110,300 109,994 244,524 246,838
Other 1,091 990 1,995 2,081
----------- ----------- ----------- -----------
2,714,639 3,082,163 6,934,808 8,188,877
DIRECT COST OF REVENUES
Production costs 467,096 475,401 1,059,893 1,039,784
Well management and operating 74,950 66,203 146,138 130,729
Depreciation, depletion and amortization 915,416 942,221 2,401,224 2,637,687
Abandonment and write down of
oil and gas properties 25,000 - 50,000 -
----------- ----------- ----------- -----------
Total direct cost of revenues 1,482,462 1,483,825 3,657,255 3,808,200
GENERAL AND ADMINISTRATIVE
EXPENSE 420,667 487,277 1,012,263 937,654
----------- ----------- ----------- -----------
Total cost of revenues 1,903,129 1,971,102 4,669,518 4,745,854
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS 811,510 1,111,061 2,265,290 3,443,023
OTHER INCOME (EXPENSE)
Interest income 21,226 7,487 57,543 20,137
Interest expense (26,105) (30,445) (72,574) (102,178)
Gain on sale of property and equipment 8,994 - 8,994 -
----------- ----------- ----------- -----------
4,115 (22,958) (6,037) (82,041)
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 815,625 1,088,103 2,259,253 3,360,982
PROVISION FOR INCOME TAXES
Current - - - -
Deferred - - - -
----------- ----------- ----------- -----------
- - - -
----------- ----------- ----------- -----------
NET INCOME $ 815,625 $ 1,088,103 $ 2,259,253 $ 3,360,982
=========== =========== =========== ===========
Allocation of Partnership Net Income
Limited Partners $ 806,854 $ 1,076,460 $ 2,234,958 $ 3,325,019
General Partner 8,771 11,643 24,295 35,963
----------- ----------- ----------- -----------
$ 815,625 $ 1,088,103 $ 2,259,253 $ 3,360,982
=========== =========== =========== ===========
Earnings per unit $ .13 $ .17 $ .36 $ .54
=========== =========== =========== ===========
See notes to unaudited consolidated financial statements.
F-3
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EVERFLOW EASTERN PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY
Six Months Ended June 30, 1999 and 1998
---------------------------------------
(Unaudited)
1999 1998
---- ----
EQUITY - JANUARY 1 $ 52,171,076 $ 48,577,802
Net income 2,259,253 3,360,982
Cash distributions (2,339,863) (1,568,687)
Repurchase Right - Units tendered (447,822) (175,219)
-------------- --------------
EQUITY - JUNE 30 $ 51,642,644 $ 50,194,878
=============== ===============
See notes to unaudited consolidated financial statements.
F-4
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EVERFLOW EASTERN PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 1999 and 1998
---------------------------------------
(Unaudited)
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,259,253 $ 3,360,982
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization 2,431,450 2,653,491
Abandonment and write down of
oil and gas properties 50,000 -
(Gain) loss on sale of property and equipment (8,994) -
Changes in assets and liabilities:
Accounts receivable 1,234,923 1,321,465
Short-term investments 2,221,056 -
Other current assets (30,038) (48,648)
Other assets (18,652) (291,777)
Accounts payable (697,104) (328,875)
Accrued expenses (295,350) (118,321)
----------- -----------
Total adjustments 4,887,291 3,187,335
----------- -----------
Net cash provided by operating activities 7,146,544 6,548,317
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds received on receivables from officers and
employees 463,851 453,574
Advances disbursed to officers and employees (51,620) (238,867)
Purchase of property and equipment (2,179,684) (2,213,724)
Proceeds on sale of property and equipment 25,000 -
----------- -----------
Net cash used by investing activities (1,742,453) (1,999,017)
CASH FLOWS FROM FINANCING ACTIVITIES
Distributions (2,339,863) (1,568,687)
Proceeds from issuance of debt, including
revolver activity 2,000,000 1,100,000
Payments on debt, including revolver activity (3,717,488) (4,716,195)
----------- -----------
Net cash used by financing activities (4,057,351) (5,184,882)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND
EQUIVALENTS 1,346,740 (635,582)
-----------
CASH AND EQUIVALENTS AT BEGINNING
OF YEAR 294,158 679,531
----------- -----------
CASH AND EQUIVALENTS AT END OF
SECOND QUARTER $ 1,641,258 $ 43,949
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 83,065 $ 93,503
Income taxes - -
See notes to unaudited consolidated financial statements.
F-5
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EVERFLOW EASTERN PARTNERS, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization and Summary of Significant Accounting Policies
A. Interim Financial Statements - The interim
consolidated financial statements included herein
have been prepared by the management of Everflow
Eastern Partners, L.P., without audit. In the opinion
of management, all adjustments (which include only
normal recurring adjustments) necessary to present
fairly the financial position and results of
operations have been made.
Use of Estimates - The preparation of financial
statements in conformity with generally accepted
accounting principles requires management to make
estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of
revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Information and footnote disclosures normally
included in financial statements prepared in
accordance with generally accepted accounting
principles have been condensed or omitted. It is
suggested that these financial statements be read in
conjunction with the financial statements and notes
thereto which are incorporated in Everflow Eastern
Partners, L.P.'s report on Form 10-K filed with the
Securities and Exchange Commission on March 31, 1999.
The results of operations for the interim periods may
not necessarily be indicative of the results to be
expected for the full year.
B. 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. Everflow Management Limited, LLC is
authorized, in general, to perform all acts necessary
or desirable to carry out the purposes and conduct of
the business of
F-6
9
EVERFLOW EASTERN PARTNERS, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Note 1. Organization and Summary of Significant Accounting Policies
(Continued)
B. Organization (Continued)
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.
C. Principles of Consolidation - The consolidated
financial statements include the accounts of
Everflow, 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.
D. 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. Such allocation has changed and will change
in the future due to Unitholders electing to exercise
the Repurchase Right (see Note 4).
Earnings per limited partner Unit have been computed
based on the weighted average number of Units
outstanding, during the period for each period
presented. Average outstanding Units for earnings per
Unit calculations amounted to 6,172,537 for the three
and six months ended June 30, 1999, and 6,207,651 for
the three and six months ended June 30, 1998.
E. New Accounting Standards - In June 1997, SFAS 130,
"Reporting Comprehensive Income," was issued. SFAS
130 established new standards for reporting
comprehensive income and its components and is
effective for fiscal years beginning after December
15, 1997. In June 1997, the Financial Accounting
Standards Board issued SFAS 131, "Disclosure About
Segments of an Enterprise and Related Information."
SFAS 131 changes the standards for reporting
financial results by operating segments, related
products and services,
F-7
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EVERFLOW EASTERN PARTNERS, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Note 1. Organization and Summary of Significant Accounting Policies
(Continued)
E. New Accounting Standards (Continued)
geographical areas and major customers and is
adoptable by December 31, 1998. In February 1998,
SFAS 132, "Employers' Disclosures About Pensions and
Other Postretirement Benefits," was issued. SFAS 132
standardizes the disclosure requirements for pension
and other postretirement benefit plans but does not
change the measurement or recognition of those plans.
SFAS 132 is effective for fiscal years beginning
after December 15, 1997. In June 1998, SFAS 133,
"Accounting for Derivative Instruments and Hedging
Activities," was issued. SFAS 133 establishes
accounting and reporting standardsfor derivative
instruments and hedging activities. SFAS 133 is
effective for fiscal years beginning after June 15,
1999. The effect of adoption or anticipated adoption
of the above standards had no, or is expected to have
no, material effect on the Company's financial
statements.
F. Year 2000 - The Year 2000 problem, software, hardware
or an embedded chip that does not correctly process
date information for years after 1999, results from
the practice of storing date information with only
the last two digits of the year. The Company began to
address Year 2000 issues in 1997. The scope of the
Year 2000 readiness effort includes the Company's
internal information technology ("IT") systems, such
as hardware and software; non-IT systems with
date-sensitive characteristics; the status of key
third parties, including suppliers, service providers
and customers. The Company's major IT applications
are currently Year 2000 ready. Remediation and
testing of the balance of the IT systems are expected
to be completed by fall 1999. The Company is in the
process of analyzing the readiness of non-IT systems
and anticipates that remediation and testing of any
noncompliant systems will be completed by October
1999. The Company also has taken steps to determine
the compliance of key third parties and expects that
it will have received and reviewed responses from the
majority of such parties by October 1999. Although
the Company expects to meet the target dates for
completion of remediation and testing and for
determining the status of key third parties, the
Company will attempt to develop contingency plans
should the programs not be completed
F-8
11
EVERFLOW EASTERN PARTNERS, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Note 1. Organization and Summary of Significant Accounting Policies
(Continued)
F. Year 2000 (Continued)
when anticipated or should the third parties not be
ready on a timely basis.
Costs of addressing the Year 2000 issue to date
approximate $65,000. It is anticipated that an
additional $75,000 will be incurred. Substantially
all of these outlays are expected to result from
remediation of existing systems as opposed to
replacing existing systems. Costs are being funded
from operating cash flows. The actual costs of the
Company's Year 2000 efforts may vary from current
estimates, which are based on information available
at this time.
Although the Company believes that it is taking
appropriate precautions against disruption of its
systems due to the Year 2000 issue, there can be no
assurance that the Company will identify all Year
2000 problems in advance of their occurrence(s) or
that the Company will be able to successfully remedy
all problems that are discovered. Furthermore, there
can be no assurance that the Company's third party
relationships will not be adversely affected by Year
2000 issues. The Company is in the process of
developing contingency plans to address the potential
effects of problems arising from Year 2000
noncompliance. While the Company does not anticipate
that costs of Year 2000 disruptions will have a
material adverse effect, Year 2000 disruptions,
arising either from within the Company or through
third party relationships, could have a material
adverse effect on the Company's business, operating
results and financial condition.
Note 2. Short-Term Investments
Short-term investments consist 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 May 1999, the Company entered into an agreement that
modified the prior credit agreements. The credit agreement
provides for a revolving line of credit
F-9
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EVERFLOW EASTERN PARTNERS, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Note 3. Credit Facilities and Long-Term Debt (Continued)
in the amount of $7,000,000, all of which is available. The
revolving line of credit provides for interest payable
quarterly at LIBOR plus 175 basis points with the principal
due at maturity, May 31, 2001. The previous credit agreement
contained generally the same terms. 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 $7,000,000; (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.
The Company purchased a building and funded its cost,
including improvements, in part, through mortgage notes. The
notes, which have an aggregate balance of $350,513 and
$363,053 at June 30, 1999 and December 31, 1998, respectively,
bear interest at 6.51% per annum until October 6, 2001 and
then a variable rate of .5% above prime or the Three Year
Constant Treasury Maturity Index plus 2.25% until maturity. A
third note, which has a balance of $89,026 and $92,845 at June
30, 1999 and December 31, 1998, respectively, bears interest
at 8.41% per annum until June 25, 2000 and then a variable
rate of .5% above prime or the Three Year Constant Treasury
Maturity Index plus 2.25% until maturity. The three notes
require aggregate payments of principal and interest of
approximately $5,300 per month. A fourth note, which has a
balance of $98,871 at June 30, 1999, bears interest at 7.35%
per annum until May 28, 2004 and then the Five Year Treasury
Securities Rate plus 2.25% until maturity.
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.
F-10
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EVERFLOW EASTERN PARTNERS, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Note 4. Partners' Equity (Continued)
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. 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 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 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
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 price associated with the Repurchase
Right, based upon the December 31, 1998 calculation was $5.79
per Unit, net of the distributions ($.375 per Unit in total)
made in January and April 1999.
F-11
14
EVERFLOW EASTERN PARTNERS, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Note 4. Partners' Equity (Continued)
Units repurchased pursuant to the Repurchase Right, for each
of the last five years, are as follows:
Calculated Units
Price for Less # of Out-standing
Repurchase Premium Interim Net Units Following
Year Right Offered Distributions Price Paid Repurchased Repurchase
---- ----- ------- ------------- ---------- ----------- ----------
1995 $4.72 $.28 $.375 $4.625 81,522 6,433,044
1996 $4.48 $.27 $.250 $4.500 53,103 6,379,941
1997 $5.46 $ - $.250 $5.210 172,290 6,207,651
1998 $5.24 $ - $.250 $4.990 35,114 6,172,537
1999 $6.16 $- $.375 $5.790 77,344 6,095,193
Note 5. Commitments and Contingencies
Everflow paid a quarterly dividend in July 1999 of $.125 per
Unit to Unitholders of record on June 30, 1999. The
distribution amounted to approximately $770,000.
EEI is the general partner in certain oil and gas
partnerships. As general partner, EEI 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.
The Company operates exclusively in the United States, almost
entirely in Ohio and Pennsylvania, in the exploration,
development and production of oil and gas.
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 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
F-12
15
EVERFLOW EASTERN PARTNERS, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Note 5. Commitments and Contingencies (Continued)
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.
F-13
16
Part I: Financial Information
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes the Company's financial position at June
30, 1998 and December 31, 1998:
March 31, 1999 December 31, 1998
-------------- -----------------
(Amounts in Thousands) Amount % Amount %
------ - ------ -
Working capital $ 2,267 4% $ 2,424 5%
Property and equipment (net) 49,928 96 50,246 95
Other 72 - 54 -
---------- --- ---------- ---
Total $ 52,267 100% $ 52,724 100%
========== === ========== ===
Long-term debt $ 497 1% 425 1%
Deferred income taxes 128 - 128 -
Partners' equity 51,642 99 52,171 99
---------- --- ---------- ---
Total $ 52,267 100% $ 52,724 100%
========== === ========== ===
Working capital surplus of $2,267 thousand as of June 30, 1999
represented a decrease of approximately $157 thousand from December 31, 1998.
The primary reasons for this decrease in working capital was due to the
Company's revolving credit facility being significantly lower at June 30, 1999
versus December 31, 1998 and the Company's cash (including short-term
investments), and production receivable also being lower at June 30, 1999 versus
December 31, 1998. Seasonal gas production is responsible for the decrease in
production receivable. The Company reduced bank debt by $1.7 million during the
six months ended June 30, 1999. Management of the Company believes it can
maintain a reduced level of debt until such time as additional borrowings are
required to fund the ongoing development of oil and gas properties and the
Company's quarterly distributions in July and October, when cash generated from
operations should decrease due to production restrictions. The Company used
existing cash on hand during July 1999 for the repurchase of Units pursuant to
the Repurchase Right, the payment of a quarterly distribution and the funding of
and development of oil and gas properties.
The Company's cash flow from operations before the change in working
capital decreased $1,283 thousand, or 21%, during the six months ended June 30,
1999 as compared to the same period in 1998. Changes in working capital other
than cash and equivalents
3
17
increased cash by $2,415 thousand and $534 thousand during the six months ended
June 30, 1999 and 1998, respectively. The reductions in accounts receivable of
$1.2 million and $1.3 million at June 30, 1999 and 1998, respectively, compared
to December 31, 1998 and 1997 are the result of lower production revenues
receivable and reduced accounts receivable balances from joint venture partners.
The reduction in short-term investments of $2.2 million at June 30, 1999
compared to December 31, 1998 resulted from the elimination of short-term
investments during the six months ended June 30, 1999. Other assets increased
$19 thousand during the six months ended June 30, 1999 and $292 thousand during
the same period in 1998. Additional investments in a related limited liability
company that the Company owned an interest was responsible for most of this
increase in 1998. Accounts payable, exclusive of the payable associated with the
Repurchase Right of $448 thousand and $175 thousand at June 30, 1999 and 1998,
decreased $697 thousand and $329 thousand during the six months ended June 30,
1999 and 1998, respectively. The reason for these changes is the result of lower
production revenues payable in the summer months due to production restrictions
associated with seasonal gas purchase agreements. Accrued expenses decreased
$295 thousand and $118 thousand during the six months ended June 30, 1999 and
1998, respectively. The reason for these changes is the result of timing
differences.
Cash flows provided by operating activities was $7.1 million for the
six months ended June 30, 1999. Cash was used to purchase property and
equipment, pay quarterly distributions and reduce debt.
Additional borrowings for operations may be required during the third
quarter due to the seasonal nature of the gas purchase agreements with The East
Ohio Gas Company. Seasonal price reductions and production restrictions during
the summer months will reduce operating revenues and consequently cash flows
from operations during such periods.
Management of the Company believes the existing revolving credit
facility of $7,000,000 should be sufficient to meet the funding requirements of
ongoing operations, capital investments to develop oil and gas properties, the
repurchase of Units pursuant to the Repurchase Right and the payment of
quarterly distributions.
In the fall of 1998, the Company received a decrease in the price
received for natural gas pursuant to the pricing adjustments contained in the
Company's Intermediate Term Adjustable Price Gas Purchase Agreements with The
East Ohio Gas Company. These pricing adjustments have caused the Company's cash
flows from operations to decrease during 1999.
Recently, management of the Company has explored the possible sale of
the Company. Although management may, from time to time, continue to engage in
discussions concerning a potential sale, management does not intend to actively
pursue a sale of the Company at the present time. Management will continue to
evaluate other alternatives in attempting to maximize Unitholder value.
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RESULTS OF OPERATIONS
The following table and discussion is a review of the results of
operations of the Company for the three and six months ended June 30, 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:
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
Revenues:
Oil and gas sales 96% 96% 96% 97%
Well management and operating 4 4 4 3
---- ---- --- ---
Total Revenues 100 100 100 100
Expenses:
Production costs 17 15 15 13
Well management and operating 3 2 2 2
Depreciation, depletion and amortization 34 31 35 32
Abandonment and write down of
oil and gas properties 1 - 1 -
General and administrative 15 16 14 11
Other - 1 - 1
Income taxes - - - -
---- ---- --- ---
Total Expenses 70 65 67 59
==== ==== === ===
Earnings 30% 35% 33% 41%
=== === == ==
Revenues for the three and six months ended June 30, 1999 decreased
$368 thousand and $1,254 thousand, respectively, compared to the same periods in
1998. This decrease was due primarily to a decrease in oil and gas sales during
the three and six months ended June 30, 1999 compared to the same period in
1998.
Oil and gas sales decreased $368 thousand, or 12%, during the three
months ended June 30, 1999 compared to the same period in 1998. Oil and gas
sales decreased $1,252 thousand, or 16%, during the six months ended June 30,
1999 compared to the same six month period in 1998. These decreases are the
result of decreased production levels resulting from normal declines where new
producing well activity has yet to replace these reduced production levels.
These decreases are also attributable to a decrease in gas prices resulting from
a $.19 per MCF price reduction, received in the fall of 1998, for natural gas
pricing adjustments contained in the Company's Intermediate Term Adjustable
Price Gas Purchase Agreements with The East Ohio Gas Company.
Production costs decreased $8 thousand, or 2%, during the three months
ended June 30, 1999 and increased $20 thousand, or 2%, during the six months
ended June 30, 1999 compared to the same periods in 1998.
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Depreciation, depletion and amortization expenses decreased $26
thousand, or 3%, and $236 thousand, or 9%, during the three and six months ended
June 30, 1998 compared with the same periods in 1998. These decreases are the
result of decreased production levels during 1999.
General and administrative expenses decreased $67 thousand, or 14%,
during the three months ended June 30, 1999, compared with the same period in
1998. General and administrative expenses increased $75 thousand, or 8%, during
the six months ended June 30, 1999, compared with the same period in 1998. This
increase was the result of higher professional fees and associated costs
involved with exploring the possible sale of the Company during the first
quarter of 1999. The Company expects a reduction in general and administrative
expenses beginning in the third quarter of 1999. This expectation is the result
of the decision to reduce personnel based on the Company's decision to decrease
its level of activity in the development of oil and gas properties.
Net other income showed an increase of $27 thousand and $76 thousand
during the three and six months ended June 30, 1999, compared to the same
periods in 1998. An increase in interest income and decrease in interest expense
as a result of increased cash levels and reduced debt levels was primarily
responsible for these increases.
The Company reported net income of $816 thousand, a decrease of $272
thousand, or 25%, during the three months ended June 30, 1999 compared to the
same period in 1998. The Company reported net income of $2,259 thousand, a
decrease of $1,102 thousand, or 33%, during the six months ended June 30, 1999
compared to the same period in 1998.
Management continually evaluates whether the Company can develop oil
and gas properties at historical levels given the Company's experience with
regard to finding oil and gas in commercially productive quantities. As a
result, the Company expects to decrease its level of activity in the development
of oil and gas properties compared with historical levels. Although net income
is lower during 1999 compared to 1998, the Company believes it will be able to
continue to pay quarterly distributions.
Except for historical financial information contained in this Form
10-Q, the statements made in this report are forward-looking statements. Factors
that may cause actual results to differ materially from those in the forward
looking statement include price adjustments pursuant to the Company's
Intermediate Term Adjustable Price Gas Purchase Agreements with The East Ohio
Gas Company, price fluctuations in the gas market in the Appalachian Basin and
the weather in the Northeast Ohio area, the number of Units tendered pursuant to
the Repurchase Right and the ability to locate economically productive oil and
gas prospects for development by the Company.
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Part II. Other Information
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.17 Loan Modification Agreement dated May 29,
1999 between Bank One, N.A., successor to
Bank One Texas, N.A. and Everflow Eastern,
Inc. and Everflow Eastern Partners, L.P.
(b) On July 6, 1999, the Registrant filed a current
report on Form 8-K
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SIGNATURE
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EVERFLOW EASTERN PARTNERS, L.P.
By: EVERFLOW MANAGEMENT LIMITED, LLC,
General Partner
By: EVERFLOW MANAGEMENT CORPORATION
Managing Member
By: /s/ William A. Siskovic
------------------------------------------
August 12, 1999 William A. Siskovic
Vice President and Principal Accounting
Officer (Duly Authorized Officer)
8