UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1998
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-10077
EVERGREEN RESOURCES, INC.
(Exact name of registrant as specified in its charter)
COLORADO 84-0834147
--------------------------------- -------------------------------
(State or Other Jurisdiction (I.R.S. Employer Identification
of Incorporation or Organization) Number)
1401 17TH STREET SUITE 1200
DENVER, COLORADO 80202
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(Address of Principal Executive (Zip Code)
Offices)
Registrant's Telephone Number, Including Area Code (303) 298-8100
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. X YES NO
--- ---
As of August 7, 1998, 10,509,677 shares of the Registrant's Common Stock, no
par value, were outstanding.
EVERGREEN RESOURCES, INC.
INDEX
Page
Number
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PART I. FINANCIAL INFORMATION
Consolidated Balance Sheets as of June 30, 1998
and December 31, 1997................................................. 3
Consolidated Statements of Income for the Three and Six
Months Ended June 30, 1998 and 1997................................... 4 - 5
Consolidated Statements of Comprehensive Income for the
Three and Six Months ended June 30, 1998 and 1997..................... 6
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1998 and 1997.......................................... 7
Notes to Consolidated Financial Statements............................... 8 - 9
Management's Discussion and Analysis of Financial
Condition and Results of Operations................................... 10 - 15
PART II. OTHER INFORMATION................................................... 16
2
EVERGREEN RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
June 30, 1998 December 31, 1997
------------- -----------------
CURRENT:
Cash and cash equivalents $ 3,499,022 $ 2,103,168
Accounts receivable:
Oil and gas sales 2,888,746 2,298,861
Joint interest billings and other 1,195,745 1,311,587
Other current assets 374,565 321,764
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TOTAL CURRENT ASSETS 7,958,078 6,035,380
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PROPERTY AND EQUIPMENT:
Proved oil and gas properties, based on full-cost accounting 64,247,448 58,937,182
Unevaluated properties not subject to amortization 11,463,815 9,700,838
Gas gathering equipment 28,016,267 21,635,598
Support equipment 3,019,545 1,851,966
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106,747,075 92,125,584
Less accumulated depreciation, depletion and amortization 17,192,684 15,361,174
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NET PROPERTY AND EQUIPMENT 89,554,391 76,764,410
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DESIGNATED CASH 1,988,325 2,142,883
OTHER ASSETS 2,522,466 2,362,829
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$102,023,261 $87,305,502
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------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 682,835 $ 1,645,467
Amounts payable to oil and gas property owners 2,898,553 2,968,827
Accrued expenses and other 615,758 494,252
Current portion - capital leases 1,106,987 1,061,090
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TOTAL CURRENT LIABILITIES 5,304,133 6,169,636
Production taxes payable 1,988,325 2,142,883
Notes payable 21,227,818 10,812,000
Obligations under capital leases 3,463,662 4,028,872
Deferred income tax liability 1,715,000 --
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TOTAL LIABILITIES 33,698,938 23,153,391
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COMMON STOCKHOLDERS' EQUITY:
Common stock, shares issued and outstanding,
10,509,677 and 10,395,266 105,077 103,953
Additional paid-in capital 68,952,617 67,948,743
Accumulated deficit (924,057) (4,134,705)
Foreign currency translation adjustment 190,686 234,120
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TOTAL STOCKHOLDERS' EQUITY 68,324,323 64,152,111
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$102,023,261 $87,305,502
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See accompanying notes to consolidated financial statements
3
EVERGREEN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended June 30,
---------------------------------------
1998 1997
---- ----
REVENUES:
Natural gas revenues $4,467,304 $2,520,800
Equity in earnings of investment 120,324 --
Interest 36,704 31,317
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TOTAL REVENUES 4,624,332 2,552,117
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EXPENSES:
Lease operating expenses 679,082 483,728
Depreciation, depletion and amortization 910,787 704,796
General and administrative expenses 447,748 296,038
Interest expense 416,701 165,654
Other expense -- 41,956
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TOTAL EXPENSES 2,454,318 1,692,172
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NET INCOME BEFORE INCOME TAXES 2,170,014 859,945
Income tax provision - deferred 838,000 --
---------- ----------
NET INCOME 1,332,014 859,945
Preferred stock dividends -- 120,000
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NET INCOME ATTRIBUTABLE TO COMMON STOCK $1,332,014 $ 739,945
---------- ----------
---------- ----------
NET INCOME PER SHARE OF COMMON STOCK
Basic $ .13 $ .08
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Diluted $ .12 $ .08
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See accompanying notes to consolidated financial statements.
4
EVERGREEN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Six Months Ended June 30,
-----------------------------------
1998 1997
---- ----
REVENUES:
Natural gas revenues $8,779,719 $4,958,501
Equity in earnings of investment 220,714 --
Interest 81,604 71,806
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TOTAL REVENUES 9,082,037 5,030,307
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EXPENSES:
Lease operating expenses 1,233,439 888,731
Depreciation, depletion and amortization 1,753,621 1,291,505
General and administrative expenses 847,927 594,288
Interest expense 760,574 271,590
Other expense 39,550 84,013
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TOTAL EXPENSES 4,635,111 3,130,127
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NET INCOME BEFORE INCOME TAXES 4,446,926 1,900,180
Income tax provision - deferred 1,715,000 --
---------- ----------
NET INCOME 2,731,926 1,900,180
Preferred stock dividends -- 240,000
---------- ----------
NET INCOME ATTRIBUTABLE TO COMMON STOCK $2,731,926 $1,660,180
---------- ----------
---------- ----------
NET INCOME PER SHARE OF COMMON STOCK
Basic $ .26 $ .18
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Diluted $ .24 $ .18
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See accompanying notes to consolidated financial statements.
5
EVERGREEN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
June 30 June 30,
--------------------------- ----------------------------
1998 1997 1998 1997
---- ---- ---- ----
Net income attributable to common stock $1,332,014 $739,945 $2,731,926 $1,660,180
Foreign currency translation adjustments,
net of fax (65,009) 75,763 (26,668) 33,307
---------- -------- ---------- ----------
Comprehensive income $1,267,005 $815,708 $2,705,258 $1,693,487
---------- -------- ---------- ----------
---------- -------- ---------- ----------
See accompanying notes to consolidated financial statements.
6
EVERGREEN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended June 30,
--------------------------------
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $2,731,926 $1,900,180
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation, depletion and amortization 1,829,627 1,291,505
Deferred income taxes 1,715,000 --
Equity in earnings of investment (220,714) --
Other 128,286 44,160
Changes in operating assets and liabilities:
Accounts receivable (474,080) (448,018)
Other current assets (78,381) (119,045)
Accounts payable 134,586 (637,185)
Accrued expenses 121,506 (20,152)
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NET CASH PROVIDED BY OPERATING ACTIVITIES 5,887,756 2,011,445
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CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property and equipment (15,182,683) (10,086,339)
Designated cash 154,558 24,488
Change in production taxes payable (154,558) (24,488)
Increase in other assets 32,368 (191,711)
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NET CASH USED BY INVESTING ACTIVITIES (15,150,315) (10,278,050)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from notes payable and long-term debt 10,415,818 7,327,120
Proceeds from sale of common stock 814,939 --
Principal payments on capital lease obligations (519,313) (264,332)
Payment of preferred stock dividends -- (240,000)
Debt issue costs -- (19,416)
Increase (decrease) in cash held from operating oil
and gas properties (70,274) 1,416,285
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NET CASH PROVIDED BY FINANCING ACTIVITIES 10,641,170 8,219,657
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EFFECT OF EXCHANGE RATE CHANGES ON CASH 17,243 2,922
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,395,854 (44,026)
CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD 2,103,168 2,640,300
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CASH AND CASH EQUIVALENTS, END OF THE PERIOD $ 3,499,022 $ 2,596,274
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See accompanying notes to consolidated financial statements.
7
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
1. Basis of Presentation
Evergreen is an independent energy company engaged in the exploration,
development and acquisition of oil and gas properties. Evergreen's primary
focus is on developing coalbed methane properties located on approximately
200,000 gross acres in the Raton Basin in southern Colorado. The Company
also holds exploration licenses on approximately 371,000 acres onshore in
the United Kingdom, a net 2% interest in an offshore Falkland Islands
exploration license, and an oil and gas exploration contract on
approximately 2.4 million acres in northern Chile. Evergreen operates all
of its own producing properties and also acts as operator on a contract
basis for properties owned by others.
The financial statements include the accounts of Evergreen Resources, Inc.
("ERI") and its wholly-owned subsidiaries (the "Company"); Evergreen
Operating Corporation ("EOC") and Evergreen Resources (UK) Ltd.,
Powerbridge, Inc., and Primero Gas Marketing Company ("Primero"). All
significant intercompany balances and transactions have been eliminated in
consolidation.
The consolidated financial statements also include the Company's 49%
ownership in Maverick Stimulation Company, LLC ("Maverick") and 40%
ownership in Argos Evergreen Limited ("AEL"), a Falkland Islands Company
which holds a 5% interest in Tranche A in the Falkland Islands Basin. The
Company accounts for these investments by the equity method of accounting.
All significant intercompany balances and transactions have been
eliminated. Maverick provides pressure pumping, fracture stimulation and
other oilfield services to the petroleum industry in the Rocky Mountain
region.
In the opinion of Management, the accompanying unaudited financial
statements contain all adjustments necessary to present fairly the
Company's financial position as of June 30, 1998 and the results of its
operations and changes in financial position for the three and six months
then ended. All such adjustments are of a normal recurring nature. The
results of operations for interim periods are not necessarily indicative of
the results of operations of the full fiscal year.
2. Oil and Gas Properties
The Company follows the full-cost method of accounting for oil and gas
properties. Under this method, all productive and nonproductive costs
incurred in connection with the exploration for and development of oil and
gas reserves are capitalized. Such capitalized costs include lease
acquisition, geological and geophysical work, delay rentals, drilling,
completing and equipping oil and gas wells and other related costs. Normal
dispositions of oil and gas properties are accounted for as adjustments of
capitalized costs, with no gain or loss recognized.
Depreciation and depletion of proved oil and gas properties is computed on
the units-of-production method based upon estimates of proved reserves with
oil and gas being converted to a common unit of measure based on the
relative energy content. Unproved oil and gas properties, including any
related capitalized interest expense, are not amortized, but are assessed
for impairment either individually or on an aggregated basis.
8
3. Earnings per Share
The following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended Six Months Ended
June 30 June 30,
------------------------------- -------------------------------
1998 1997 1998 1997
---- ---- ---- ----
Numerator:
Net income $ 1,332,014 $ 859,945 $ 2,731,926 $1,900,180
Preferred stock dividends -- (120,000) -- (240,000)
----------- ------------ ----------- ------------
Numerator for basic earnings per share
-income available to common
stockholders 1,332,014 739,945 2,731,926 1,660,180
Effect of dilutive securities:
Preferred stock dividends -- 120,000 -- 240,000
----------- ------------ ----------- ------------
Numerator for dilutive earnings per share-
income available to common
stockholders after assumed conversions $ 1,332,014 859,945 $ 2,731,926 $ 1,900,180
----------- ------------ ----------- ------------
Denominator:
Denominator for basic earnings per
share - weighted average shares 10,461,694 9,392,720 10,443,852 9,392,720
Effect of dilutive securities:
Employee stock warrants 699,772 202,021 684,935 138,510
8% Convertible preferred stock -- 905,660 -- 905,660
----------- ------------ ----------- ------------
Dilutive potential common shares 699,772 1,107,681 684,935 1,044,170
----------- ------------ ----------- ------------
Denominator for diluted earnings per
share - adjusted weighted average
shares and assumed conversions 11,161,466 10,500,401 11,128,787 10,436,890
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
Basic earnings per share $ .13 $ .08 $ .26 $ .18
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
Diluted earnings per share $ .12 $ .08 $ .24 $ .18
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4. Comprehensive Income
During 1998, the Company adopted Statement of Financial Accounting Standards
("SFAS") No 130, Reporting Comprehensive Income. The implementation of SFAS
No. 130 required comparative information for earlier years to be restated.
The Company has elected to report comprehensive income in a consolidated
statement of comprehensive income. Comprehensive income is comprised of net
income and all changes to stockholders' equity, except those due to
investments by stockholders, changes in paid in capital and distributions to
stockholders.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), including statements regarding, among other
items, (i) the Company's growth strategies, (ii) anticipated trends in the
Company's business and its future results of operations, and (iii) market
conditions in the oil and gas industry. These forward-looking statements are
based largely on the Company's expectations and are subject to a number of
risks and uncertainties, many of which are beyond the Company's control,
including those described below. Actual results could differ materially from
these forward-looking statements as a result of, among other things, a
decline in natural gas production, a decline in natural gas prices, incorrect
estimations of required capital expenditures, increases in the cost of
drilling, completion and gas gathering, an increase in the cost of production
and operations, an inability to meet growth projections, and/or changes in
general economic conditions. In light of these risks and uncertainties, there
can be no assurance that actual results will be as projected in the
forward-looking statements.
RECENT DEVELOPMENTS
RATON BASIN
On July 2, 1998, Evergreen completed the acquisition, effective July 1, 1998,
of approximately 100% of the working interest in 27,590 acres in Amoco
Production Company's ("Amoco") Cottontail Pass Federal Unit, together with 28
existing well bores, current production of 3.7 million cubic feet ("MMcf")
per day and related gathering facilities. Evergreen estimates that 40 billion
cubic feet ("Bcf") will be added to the 225 BCF of proved reserves the
Company reported at December 31, 1997. The Company estimates that there are
approximately 100 additional drilling locations in the Unit.
The Cottontail Pass Unit is situated between Evergreen's Spanish Peaks and
Sangre de Cristo Federal Units.
The acquisition of the Cottontail Pass Federal Unit from Amoco resolves the
preferential rights litigation between Evergreen and Amoco.
The purchase price was approximately $13,100,000 cash, funded by the
Company's line of credit with Hibernia National Bank as administrative agent.
Also on July 2, 1998, Evergreen formed a joint venture with Infinity, Inc. to
develop the 17,000 acre Lorencito Property in the Raton Basin with Infinity's
gas exploration company (CIS oil and gas). Evergreen will initially have a
35% working interest in the properties which are located just south of
properties currently being developed by Evergreen. The Company estimates that
it will drill approximately 15 wells on the Lorencito property over the next
eighteen months.
On August 7, 1998, Evergreen formed a second joint venture with Infinity to
develop the 24,000 acre Long Canyon property. Evergreen will initially have a
25% working interest in the properties.
Primero will purchase Long Canyon and Lorencito Property gas at the wellhead
and will be responsible for all costs to construct, own, and operate all
gathering, dehydration, and compression facilities.
As of August 7, 1998, Evergreen was producing from 140 gas wells in the
Spanish Peaks and Cottontail Pass Units. Gas production has continued to
improve since January 1995 to a current level of over 37 MMcf per day gross.
The Company enters into contractual obligations that require future physical
delivery to attempt to manage price risk with regard to a portion of its
natural gas production. As of July 31, 1998, the Company had entered into
contracts to sell amounts equal to substantially all of its then current
sales of 33.5 MMcfd at $1.93 per Mcf for the period August 1, 1998 through
October 1998.
10
SOUTHERN UTE INDIAN TRIBE V. AMOCO PRODUCTION COMPANY LITIGATION
Under a 1981 opinion of the Solicitor for the Department of the Interior,
coalbed methane ("CBM") was included in the definition of "gas" and excluded
from the definition of "coal" for purposes of determining ownership of rights
to CBM with respect to a particular tract of land under certain federal laws.
On July 20, 1998, in Southern Ute Indian Tribe v. Amoco Production Company,
an en banc panel of the Tenth Circuit Federal Court of Appeals affirmed a
recent prior holding by a panel of that court which held that CBM maybe
included in the definition of "coal" rather than "gas". See the Company's
1997 Form 10-K for additional disclosures. Amoco Production Company has the
right to and is expected to, appeal this holding to the U.S. Supreme Court.
The Company was not a party to this litigation. This holding could have
certain impact on the way royalties are distributed by entities such as the
Company, which are currently extracting CBM under oil and gas leases rather
than coal leases. Approximately one third of the Company's wells and leases
pertain to land where the Company is currently extracting CBM in areas where
the oil and gas estate is severed from the Federal Coal estate. The Company
is unable to determine at this time what the effect of the holding on the
Company might be. The ruling is believed to be potentially adverse to royalty
owners, but not necessarily the Company. At this time, the Company does not
intend to change its drilling plans in response to the holding.
LIQUIDITY AND CAPITAL RESOURCES
Evergreen currently has a $50.0 million revolving line of credit with a bank
group consisting of Hibernia National Bank, as agent, Banque Paribas and
Chase Bank of Texas, which is available through June 2001. Advances pursuant
to this line of credit are limited to the borrowing base, which is presently
$50.0 million. At the Company's election, it may use either the London
interbank offered rate ("Libor") plus a margin of 1.38% to 1.75% or the prime
rate plus a margin of 0% to .25%, with margins on both rates determined on
the average outstanding borrowings under the credit facility. In addition,
the Company has a $10.0 million equipment line of credit for Primero.
Payments will be level monthly principal payments, plus interest based on 5
year treasuries plus 2%. The interest rate will be fixed and the principal
payments amortized over 5 years at the time of any drawdown. The Company
anticipates that the existing capital lease obligations will be paid off with
the equipment line.
The Company has a capital equipment lease with the Bank with interest at
prime (8.5% at March 31, 1998) for a term of five years ending through April
2002, with an option to purchase the equipment at nominal amounts at the end
of the lease term. The Company primarily leases compressors for the Raton
Basin gas gathering system and other related production equipment.
The Company is a guarantor of a line of credit and a capital lease for
Maverick up to $2.5 million. The guaranteed obligations amounted to $ 970,000
at June 30, 1998.
During 1998, the Company anticipates drilling 60 new wells and expanding and
upgrading gas gathering facilities in the Raton Basin. The Company also is
proceeding with international exploration activities. Capital expenditures
for 1998 have been increased to approximately $25 million for the Raton Basin
development. The Company believes that cash flow from operations and
available borrowings under its line of credit will be sufficient to fund 1998
capital expenditures including the Cottontail Pass Unit acquisition. Future
development of the Raton Basin and other projects will require additional
capital. For the foreseeable future the Company believes it will have
sufficient capacity to fund all of its projects through its anticipated cash
flows and its lines of credit. However, as the Company continues to grow and
expand, the Company believes that additional equity capital may be required
to fund development of its projects. Oil and gas leases expiring in fiscal
1998 are not material and do not require significant drilling expenditures.
11
Cash flows provided by operating activities were $ 5,887,800 for the six
months ended June 30, 1998 as compared to cash flows provided by operating
activities of $ 2,011,500 in the prior year. The significant increase in the
cash flows provided by operating activities is due primarily to improved
operating results as a result of increased gas production and higher gas prices.
Cash flows used by investing activities were $ 15,150,300 during the six
months ended June 30, 1998 versus $10,278,000 during the same period in 1997.
The increase was due to the continued development of the Raton Basin
including upgrades to the gas gathering system.
Cash flows provided by financing activities were $ 10,641,200 during the six
months ended June 30, 1998 as compared to cash flows provided by financing
activities of $ 8,219,700 in the prior period. The increase was due primarily
to increased borrowings to fund the development of the drilling and gathering
system in the Raton Basin.
The Company has conducted a review of its computer systems to identify the
systems that could be affected by the Year 2000 issue. The "Year 2000"
problem is the result of computer programs being written using two digits
rather than four to define the applicable year. Any of the Company's programs
that have time-sensitive software may recognize a date using `00' as the year
1900 rather than the year 2000. This could result in a major system failure
or miscalculations.
The Company presently believes that the Year 2000 problem will not pose
significant operational problems for the Company's computer systems. The
Company's current software system versions have been certified as Year 2000
compliant and therefore the Company will not incur significant software costs
as related to the Year 2000 issues. The Company has an ongoing program to
review its vendors' Year 2000 issues, that may impact the Company's
operations. Currently no significant issues have been identified.
PRODUCTION DATA
The following table sets forth certain operating data of the Company for the
periods presented.
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
1998 1997 1998 1997
---- ---- ---- ----
Natural gas production (Mcf) 2,282,300 1,459,200 4,372,300 2,757,000
Average realized sales price per Mcf $1.96 $1.73 $2.01 $1.80
Cost per Mcfe:
Lease operating expense $.30 $.32 $.28 $.33
Depreciation, depletion and amortization .40 .48 .40 .47
General and administrative .20 .20 .19 .22
12
RESULTS OF OPERATIONS - THREE AND SIX MONTHS ENDED JUNE 30, 1998
The company reported net income of $1,332,000 or $.13 per common share for
the three months ended June 30, 1998, compared to net income of $740,000 or
$.08 per common share for the same period in 1997. For the six months ended
June 30, 1998, the Company reported net income of $2,731,900 or $.26 per
common share compared to net income of $1,660,200 or $.18 per common share
for the same period in 1997. The significant increase in net income during
the three and six months ended June 30, 1998 as compared to the prior year is
attributable to increased Raton Basin production volumes and improved natural
gas prices.
Natural gas revenues increased to $4,467,300 during the three months ended
June 30, 1998, from $2,520,800 for the same period in the prior year. During
the six months ended June 30, 1998, natural gas revenues increased to
$8,779,700 from $4,958,500 in the prior year. The significant increase in
natural gas revenues for both the three and six month period is due to a
combination of the increase in gas production volumes and gas prices as noted
in the table above for all periods presented. At June 30, 1998 the number of
producing Raton Basin wells increased to 110 from 71 producing wells at June
30, 1997 and is the primary factor for the increase in production volumes.
The average gas prices increased for the three and six month periods in 1998
as compared to 1997 due to an improvement in the overall market for natural
gas.
Equity in earnings of investment (which refers to the Company's 49% interest
in Maverick) increased to $120,300 and $220,700 for the three and six months
ended June 30, 1998. During the same periods in 1997, the Company's share of
Maverick profits after intercompany elimination was not material. Equity in
earnings of investment is due to the Company's 49% ownership in Maverick, an
oil and gas well servicing company. The Company accounts for the investment
in Maverick under the equity method of accounting. The increase in Maverick's
net income is due to the increase in its oil and gas stimulation services for
third party entities. Maverick provides certain well stimulation services to
the Company and during the three and six months ended June 30, 1998 such
services amounted to $776,000 and $1,215,800 of which $270,300 was unpaid at
June 30, 1998. The Company guaranteed approximately $970,000 of Maverick's
outstanding debt at June 30, 1998. The investment in Maverick was $1,223,200
at June 30, 1998.
Lease operating expenses for the three months ended June 30, 1998, were
$679,800 compared to $483,700 for the same period in 1997. During the six
months ended June 30, 1998, lease operating expenses were $1,233,400 versus
$888,700 in the prior year. On an equivalent Mcf basis (Mcfe), lease
operating expenses declined to $.30 per Mcfe in the three months ended June
30, 1998, as compared to $.32 per Mcfe in the prior year. For the six months
ended June 30, 1998 lease operating expenses were $.28 per Mcfe versus $.33
per Mcfe in 1997. The significant decrease in lease operating expenses on an
Mcfe basis is due to the economies of scale as a result of the increase in
producing wells in the Raton Basin.
Depreciation, depletion and amortization expense for the three months ended
June 30, 1998, was $910,800 compared to $704,800 for the same period in 1997.
During the six months ended June 30, 1998, depreciation, depletion and
amortization expense was $1,753,600 versus $1,291,500 in the prior year. On
an equivalent Mcfe basis, depreciation, depletion and amortization expense
declined to $.40 per Mcfe in the three months ended June 30, 1998, as
compared to $.48 per Mcfe in the prior year. For the six months ended June
30, 1998 depreciation, depletion and amortization expenses were $.40 per Mcfe
versus $.47 per Mcfe in 1997. The decrease in cost per Mcfe in 1998 as
compared to 1997 is due to amortizing capital costs over a significant
increase in the units of proved reserves.
13
General and administrative expenses were $447,700 during the three months
ended June 30, 1998 as compared to $296,000 during the same period in 1997
and for the six months ended June 30, 1998 were $847,900 as compared to
$594,300 in the prior year. The increase in general and administrative
expenses of $151,700 for the three months ended June 30, 1998 as compared to
1997 and the increase of $253,600 for the six month period ended June 30,
1998 versus the same period in 1997 is due to the expected increase in
overall corporate activity, including salaries and related increases in
personnel and moving costs associated with the corporate headquarters.
Although the overall expense increased for the six months ended June 30,
1998, the cost per Mcfe decreased to $0.19 from the prior year cost per Mcfe
of $0.22.
Interest expense for the three months ended June 30, 1998, was $416,700
compared to $165,700 for the same period in 1997. During the six months ended
June 30, 1998, interest expense was $760,600 versus $271,600 in the prior
year. The $251,000 increase for the three months over the same period in the
prior year and $489,000 increase for the six months over the same period in
the prior year is due to increased borrowings under the Company's line of
credit to $21.2 million at June 30, 1998 from $7 million at June 30, 1997 and
an increase in the equipment lease line to $4.6 million at June 30, 1998 from
$3.9 million at June 30, 1997, to fund the Raton Basin development.
Prior to 1998, the Company was not required to record income tax expense,
primarily due to the availability of net operating loss carryforwards. However,
as a result of the recently reported profitability and the significant
difference between the book and tax basis of assets, the Company estimates
that it will be required to provide for deferred income taxes in the
statement of operations in 1998 and subsequent years. The Company estimates
that it will not be required to pay current income tax in the near future due
to the availability of net operating loss carryforwards of approximately $30
million and current deductions for intangible drilling costs. For the three
and six months ended June 30, 1998 the Company recorded a deferred tax
provision of $838,000 and $1,715,000.
The oil and gas service income and related cost of service have been
reclassified and included with general and administrative expenses for all
periods presented.
ACCOUNTING PRONOUNCEMENTS
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" which supersedes SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise." SFAS No. 131 establishes
standards for the way that public companies report information about
operating segments in annual financial statements and requires reporting of
selected information about operating segments in interim financial statements
issued to the public. It also establishes standards for disclosure regarding
products and services, geographic areas and major customers. SFAS No. 131
defines operating segments as components of a company about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in
assessing performance. Management believes the adoption of this statement
will have no material impact on the Company's financial statement.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" which standardizes the disclosure
requirements for pensions and other postretirement benefits and requires
additional information on changes in the benefit obligations and fair value
of plan assets that will facilitate financial analysis. SFAS No. 132 is
effective for years beginning after December 15, 1997 and requires
comparative information for earlier years to be restated, unless such
information is not readily available. Management believes the adoption of
this statement will have no material impact on the Company's financial
statements.
14
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which establishes accounting and
reporting standards for derivative instruments including certain derivative
instruments embedded in other contracts and for hedging activities. SFAS 133
is effective for all fiscal quarters of fiscal years beginning after June 15,
1999. Management believes the adoption of this statement will not have a
material impact on the Company's financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is not engaged in any material pending legal proceedings
to which the Company or its subsidiaries is a party or to which any of its
property is subject.
ITEM 2. CHANGES IN SECURITIES.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The following summarizes the votes at the Company's Annual Meeting held on
May 12, 1998:
FOR AGAINST ABSTAIN
--- ------- -------
ELECTION OF DIRECTORS - With terms expiring at
the Annual Shareholders Meeting in 2001:
Dennis R. Carlton 8,756,112 310,121 8,459
Mark S. Sexton 8,754,619 312,321 7,892
AMENDMENTS - To Evergreen Resources, Inc.'s
Articles of Incorporation.
Article XVI Relevant Factors 4,316,583 2,312,867 22,790
Article XV Supermajority* 4,327,514 2,300,314 26,607
Article XVII Board Enlargement* 4,803,902 1,724,160 27,054
Article XIII Liability Limitation 8,693,532 385,104 26,946
*Did not pass
INITIAL STOCK OPTION PLAN - 5,519,508 1,107,267 28,637
ISSUANCE OF 79,990 WARRANTS - 5,490,448 1,125,318 42,717
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Not applicable.
(b) Reports on Form 8-K.
A report on Form 8-K regarding amendments to Articles of Incorporation and
new bylaws of the Company was filed on June 6, 1998.
A report on Form 8-K regarding the acquisition of Amoco Production Company's
Cottontail Pass Federal Unit was filed on July 16, 1998.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
EVERGREEN RESOURCES, INC.
(Registrant)
DATE: August 7, 1998 By: /s/ Kevin R. Collins
----------------------------
Kevin R. Collins
VP - Finance
Chief Financial Officer
17