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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 Year Ended March 31, 1996
or
/ / 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 of (I.R.S. Employer
incorporation or organization) Identification No.)
1000 WRITER SQUARE
1512 LARIMER STREET
DENVER, COLORADO 80202
(Address of principal executive offices) (Zip Code)
(303) 534-0400
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
(None)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, NO PAR VALUE PER SHARE
Title of Class
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. /X/ Yes / / No
Indicate by check mark if there are no delinquent filers to disclose herein
pursuant to Item 405 of Regulation S-K, and there will not be any delinquent
filers to disclose, 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. /X/
As of June 24, 1996, the Registrant had 5,899,736 common shares
outstanding, and the aggregate market value of the common shares held by non-
affiliates was approximately $18,600,000, based upon the closing price of $6.00
per share for the common stock on June 24, 1996 reported by NASDAQ.
DOCUMENTS INCORPORATED BY REFERENCE: DEFINITIVE PROXY MATERIALS FOR 1996 ANNUAL
MEETING OF STOCKHOLDERS - PART III, ITEMS 10,11,12, AND 13.
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TABLE OF CONTENTS
PART I PAGE
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Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . 5
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . 10
Item 4. Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . . . . . . 10
PART II
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Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters. . . . . . . . . . . . 10
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . 11
Item 7. Management's Discussion and Analysis of
Financial Condition and Results
of Operations. . . . . . . . . . . . . . . . . . . . . 11
Item 8. Financial Statements and Supplementary Data. . . . . . 15
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . . . . . 15
PART III
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Item 10. Directors and Executive Officers of the
Registrant . . . . . . . . . . . . . . . . . . . . . . 15
Item 11. Executive Compensation . . . . . . . . . . . . . . . . 15
Item 12. Security Ownership of Certain Beneficial
Owners and Management. . . . . . . . . . . . . . . . . 15
Item 13. Certain Relationships and Related Transactions . . . . 15
PART IV
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Item 14. Exhibits, Consolidated Financial Statement Schedules
and Reports on Form 8-K. . . . . . . . . . . . . . . . 15
Signatures . . . . . . . . . . . . . . . . . . . . . . 16
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PART I
ITEM 1. BUSINESS
GENERAL
Evergreen Resources, Inc. ("Evergreen" or "the Company"), is a Colorado
corporation organized on January 14, 1981. Evergreen was formed to engage in
exploration for, and acquisition, development, production and sale of, oil and
gas. Evergreen maintains its principal executive offices at Suite 1000, 1512
Larimer Street, Denver, Colorado 80202, and its telephone number is (303) 534-
0400.
Evergreen Operating Corporation, a wholly owned subsidiary, presently is
designated Operator for 150 oil and gas wells for Evergreen and also for other
owners.
Evergreen Resources (UK) Ltd., a wholly owned subsidiary, holds extensive
exploration licenses onshore in the United Kingdom.
The authorized capitalization of the Company is 50,000,000 shares of no par
value common stock of which 5,899,736 shares were issued and outstanding at June
25, 1996. Evergreen has an authorized capital of 25,000,000 shares of $1.00 par
value Preferred Stock, 7,500,000 of which were issued and outstanding at June
25, 1996.
Virtually 100% of the Company's proved reserves, oil and gas production and
revenues are attributable to natural gas.
FOCUS
The Company intends to dedicate the majority of its resources for the
foreseeable future on development of Evergreen's coalbed methane project in the
Raton Basin of Colorado.
At March 31, 1996, the Raton Basin represented 93% of the Company's total
proved reserves on both a unit and value basis.
As of mid-June 1996, the Raton Basin represented approximately 90% of
Evergreen's net daily production of natural gas.
Since December 1991, Evergreen has acquired oil and gas leases covering
over 120,000 gross acres in the Raton Basin, Las Animas County in Southeastern
Colorado. This acreage position will support over 500 wells on 160 acre
spacing. Independent engineering estimates indicate reserve potential of
approximately 1.5 - 2.0 billion cubic feet of gas per well.
Over the last 18 months, 31 wells have been drilled and placed on
production. Combined daily gross production from these wells now exceeds 8.3
million cubic feet per day, approximately 4.8 million cubic feet per day net to
Evergreen.
Finding costs and lifting costs to date demonstrate that the Project is
worthy of full scale development.
Recent higher gas volumes have permitted access to new gas markets,
resulting in significantly improved gas prices than were obtained in Summer
1995.
OTHER ACTIVITIES
The Company continues to hold discussions with various funding sources,
including potential Industry Partners, for the purpose of resuming evaluation
and development of Evergreen's substantial onshore UK licenses.
The Company continually reviews opportunities for the acquisition of oil
and gas properties, particularly in areas in which Evergreen presently operates
properties or has developed technical and operational expertise.
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The Company also continually reviews opportunities for exposure to
substantial reserves through participation in domestic and international
exploration projects at prudent levels of risk and capital expenditure for a
Company of Evergreen's size.
CUSTOMERS AND MARKETS
Substantially all of the Company's oil and gas production is sold at the
well site as it is produced. The principal markets for oil and gas are
refineries, gas marketing and transmission companies which have facilities near
the Company's producing properties.
Evergreen's business is not seasonal in nature, except to the extent that
weather conditions at certain times of the year may affect Evergreen's access to
its oil and gas properties and its ability to drill oil and gas wells. The
impact of inflation on the Company's activities is minimal.
Evergreen had three major customers for the sale of oil and gas as of March
31, 1996, who purchased approximately 41% (Conoco), 26% (Coastal Gas Marketing)
and 11% (Eighty-Eight Oil) of the Company's oil and gas production respectively.
The loss of these customers would not have a material adverse effect on
Evergreen's business.
COMPETITION
The Company competes with numerous other companies and individuals,
including many that have significantly greater resources, in virtually all
facets of its business. Such competitors may be able to pay more for desirable
leases and to evaluate, bid for and purchase a greater number of properties than
the financial or personnel resources of the Company permit. The ability of the
Company to increase reserves in the future will be dependent on its ability to
select and acquire suitable producing properties and prospects for future
exploration and development. The availability of a market for oil and natural
gas production depends upon numerous factors beyond the control of producers,
including but not limited to the availability of other domestic or imported
production, the locations and capacity of pipelines, and the effect of federal
and state regulation on such production. Domestic oil and natural gas must
compete with imported oil and natural gas, coal, atomic energy, hydroelectric
power and other forms of energy. The Company does not hold a significant
competitive position in the oil and gas industry.
EMPLOYEES
At June 25, 1996, the Company had 25 employees.
REGULATION
The oil and gas industry is extensively regulated by federal, state and
local authorities. Legislation and regulation affecting the industry are under
constant review for amendment or expansion, raising the possibility of changes
that may affect, among other things, the pricing or marketing of oil and gas
production. Substantial penalties may be assessed for noncompliance with
various applicable statutes and regulations, and the overall regulatory burden
on the industry increases its cost of doing business and, in turn, its
profitability.
Federal, state and local authorities regulate various aspects of oil and
gas drilling and production activities, including the drilling of wells (through
permit and bonding requirements), the spacing of wells, the unitization or
pooling of oil and gas properties, environmental matters, safety standards, the
sharing of markets, production limitations, plugging and abandonment, and
restoration.
ENVIRONMENTAL CONSIDERATIONS
Various federal, state and local laws and regulations covering the
discharge of materials into the environment, or otherwise relating to the
protection of the environment, may affect the operations and costs of the
Company. It is not anticipated that the Company will be required in the near
future to expend amounts that are material in relation to its total capital
expenditure program by reason of environmental laws and regulations. However,
inasmuch as such laws and regulations are frequently changed, the Company is
unable to predict the ultimate cost of compliance.
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TITLE TO PROPERTIES
As is customary in the oil and gas industry, only a preliminary title
examination is conducted at the time properties believed to be suitable for
drilling operations are acquired by the Company. Prior to the commencement of
drilling operations, a thorough title examination of the drill site tract is
conducted. The Company believes that the title to its leasehold properties is
good and defensible in accordance with standards generally acceptable in the oil
and gas industry.
CERTAIN RISKS
In order for Evergreen to develop the Raton Basin project, the Company must
make significant capital expenditures. There can be no assurance additional
capital will be available to the Company, or that capital, if any, will be
available on satisfactory terms.
Oil and natural gas prices are likely to continue to be volatile. Prices
are affected by, among other things, market supply and demand factors, market
uncertainty, and actions of the United States and foreign governments and
international cartels. These factors are beyond the control of the Company. To
the extent that oil and gas prices decline, the Company's revenues, cash flows,
earnings and operations would be adversely impacted. The Company is unable to
accurately predict future oil and natural gas prices.
The oil and gas business involves a variety of operating risks, including
the risk of fire, explosions and blow-outs, as well as risks associated with
production, marketing and general economic conditions. The Company maintains
insurance against some, but not all, of these risks, any of which could result
in substantial losses to the Company. There can be no assurance that insurance
will be adequate to cover losses or exposure to liability or whether insurance
will continue to be available at premium levels that justify its purchase.
The Company's largest source of operating income is from sales of its
natural gas production. Therefore, the levels of the Company's revenues and
earnings are affected by prices at which natural gas is being sold. As a
result, the Company's operating results for any prior period are not necessarily
indicative of future operating results because of the fluctuations in gas prices
and the lack of predictability of those fluctuations as well as changes in
production levels.
There are numerous uncertainties inherent in estimating natural gas and oil
reserves and their estimated values, including many factors beyond the control
of the producer. Reservoir engineering is a subjective process of estimating
underground accumulations of natural gas and oil that cannot be measured in an
exact manner. The accuracy of any reserve estimate is a function of the quality
of available data and of engineering and geological interpretation and judgment.
Estimates of reserves are subject to revision based upon actual production,
results of future development and exploration activities, prevailing gas and oil
prices, operating costs and other factors, which revisions may be material.
Accordingly, reserve estimates are often different from the quantities of
natural gas and oil that are ultimately recovered. The Company's reserve values
remain sensitive to gas prices in the current environment of fluctuating
commodities prices.
In general, the volume of production from gas and oil properties owned by
the Company declines as reserves are depleted. Except to the extent the Company
acquires additional properties containing proved reserves or conducts successful
exploration and development activities, or both, the proved reserves of the
Company will decline as reserves are produced. Volumes generated from future
activities of the Company are therefore highly dependent upon the level of
success in acquiring or finding additional reserves and the costs incurred in
doing so.
ITEM 2. PROPERTIES
PROPERTY CONSOLIDATION
In August 1994, Management decided to focus the Company's domestic efforts
and resources on development of the Raton Basin of Colorado. The number of
states in which Evergreen owns or operates oil and gas properties has now been
reduced from twelve to two states, with no material impact on the Company's
reserves or financial condition.
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OPERATIONS
The Company's wholly owned subsidiary, Evergreen Operating Corporation
(EOC), is primarily responsible for drilling, evaluation and production
activities associated with various properties and for negotiating the sales of
oil and gas production from the properties. As of March 31, 1996, EOC was
serving as operator for approximately 150 producing wells owned by the Company
and also by other affiliated and unaffiliated third parties.
The Company believes that, as operator, it is in a better position to
control costs, safety, and timeliness of work as well as other critical factors
affecting the economics of a well or a property, including maintaining good
community relations.
EOC presently operates wells which represent virtually 100% of Evergreen's
proved reserves.
OIL AND GAS RESERVES
The table below sets forth the Company's quantities of proved reserves, as
estimated by independent petroleum engineers, all of which were located in the
continental U.S., and the present value of estimated future net revenues from
these reserves on a non-escalated basis discounted by 10 percent per year as of
the end of each of the last three fiscal years. There has been no major
discovery or other favorable or adverse event that is believed to have caused a
significant change in estimated proved reserves subsequent to March 31, 1996.
1996 1995 1994
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Estimated Proved Gas Reserves (Mcf) 80,926,100 57,882,080 51,588,125
Estimated Proved Oil Reserves (Bbls) 4,842 842,868 1,643,073
Present Value of Future Net Revenues
(before future income tax expense) $30,163,420 $23,312,330 $32,443,800
Reference should be made to Supplemental Oil and Gas Information on pages
F-18 - 25 of this report for additional information pertaining to the Company's
proved oil and gas reserves. During fiscal 1996 the Company did not file any
reports that include estimates of total proved net oil or gas reserves with any
federal agency other than the Securities and Exchange Commission.
PRODUCTION
The following table sets forth the Company's net oil and gas production for
the last three fiscal years.
YEAR ENDED MARCH 31
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1996 1995 1994
Natural Gas (Mcf) 941,200 782,000 637,900
Crude Oil & Condensate (Bbls) 9,700 36,600 57,500
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"Bbls" means barrels
"Mcf" means one thousand cubic feet
AVERAGE SALES PRICES AND PRODUCTION COSTS
The following table sets forth the average gross sales price and the
average production cost per unit of oil and of gas produced, including
production taxes, for the last three fiscal years. For purposes of calculating
production cost per equivalent Mcf, barrels of oil have been converted at a BTU
equivalent ratio of six Mcf of gas for each barrel of oil:
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YEAR ENDED MARCH 31
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1996 1995 1994
Average Sales Price
Gas (per Mcf) $1.28 $1.70 $2.15
Oil (per Bbl) 18.40 15.96 14.50
Average Production Cost $ 0.77 $ 1.10 $ 1.21
Per Equivalent Mcf
PRODUCING WELLS AND DEVELOPED ACREAGE
The following table sets forth, as of June 25, 1996, the approximate number
of gross and net producing oil and gas wells and their related developed acres
owned by the Company. Productive wells are producing wells and wells capable of
production, including shut-in wells. Developed acreage consists of acres spaced
or assignable to productive wells.
"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
percentage of working interest owned by the Company.
PRODUCING WELLS DEVELOPED ACRES
--------------- ---------------
OIL GAS GROSS NET
------------- ------------ ----- ---
GROSS NET GROSS NET
1 .58 50 30.65 22,917 13,109
UNDEVELOPED ACREAGE
At June 25, 1996, Evergreen held undeveloped acreage as set forth below:
UNDEVELOPED ACRES
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LOCATION GROSS NET
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Colorado 121,925 73,537
New Mexico 640 324
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TOTAL 122,565 73,861
United Kingdom 630,480 630,480
The following table sets forth the expiration dates of the gross and net
acres subject to Colorado leases summarized in the table of undeveloped acreage.
Acres Expiring
-------------------------
Twelve Months Ending: GROSS NET
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March 31, 1997. . . . . . . . . . . . . . . . 12,356 7,165
March 31, 1998. . . . . . . . . . . . . . . . 18,405 12,584
March 31, 1999. . . . . . . . . . . . . . . . 15,124 7,212
March 31, 2000 and later. . . . . . . . . . . 4,316 2,262
DRILLING ACTIVITIES
The Company's drilling activities for the years ended March 31, 1996, 1995,
and 1994 are set forth below:
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1996 1995 1994
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GROSS NET GROSS NET GROSS NET
Exploratory Wells:
Productive . . . . . . . . . 0 0.00 0 0.00 4 2.00
Dry. . . . . . . . . . . . . 0 0.00 0 0.00 0 0.00
---- ----- --- ----- -- -----
0 0.00 0 0.00 4 2.00
Development Wells:
Productive . . . . . . . . . 22 15.75 6 3.00 6 2.25
Dry. . . . . . . . . . . . . 0 0.00 0 0.00 0 0.00
---- ----- --- ----- -- -----
22 15.75 6 3.00 6 2.25
PRINCIPAL PROPERTIES
The following are brief descriptions of Evergreen's principal properties:
RATON BASIN
Since December 1991, Evergreen has acquired oil and gas leases covering
over 120,000 gross acres in the Raton Basin, Las Animas County in Southeastern
Colorado. This acreage position will support over 500 wells on 160 acre
spacing. Independent engineering estimates indicate reserve potential of
approximately 1.5 -2.0 billion cubic feet of gas per well.
In August 1993 Evergreen formed a joint venture with PBI Fuels LP ("PBI").
PBI has the right to participate with a 25 - 50% working interest in development
of the Project. Evergreen has retained the remaining 50 - 75% working interest
and serves as Operator.
Since early 1994 Evergreen has drilled and completed thirty-two coalbed
methane gas wells in the Vermejo coals at depths of 1,000 to 2,100 feet.
Evergreen has a 50%-100% interest in these wells, thirty-one of which are in
production - one to be placed in production when gathering facilities are
available.
Gas sales began in January 1995 and have improved as new wells have been
drilled to a present level of 8.3 million cubic feet per day gross, or
approximately 4.8 million cubic feet per day net to Evergreen.
In March 1995, the Bureau of Land Management designated approximately
67,000 acres of Evergreen's Raton Basin oil and gas leases as a Federal Unit
called the Spanish Peaks Unit. Evergreen has been named Unit Operator.
Formation of the Unit allows Evergreen to base development decisions within the
Unit on technical, geologic and geophysical data rather than the fulfillment of
term lease obligations.
Evergreen's remaining Unit commitment is to drill and evaluate two new unit
obligation wells by December 31, 1997.
Evergreen plans continual development of the Raton Basin acreage, including
drilling of ten new wells in July 1996, and expansion of gathering and
compression systems in Fall 1996.
SAN JUAN BASIN
Effective June 1, 1996, Evergreen sold, pending a favorable IRS ruling, its
working interests in six producing wells in the San Juan Basin, Rio Arriba
County, New Mexico. The wells qualify for the Section 29 tax credit.
The working interests were sold to a limited partnership owned and
controlled by Banque Paribas.
Evergreen will receive $53,000 cash and a volumetric production payment
under which Evergreen will receive 99% of the cash flow from the wells until
approximately 1.1 billion cubic feet of gas have been produced and sold net to
the well interests. At present production levels, the production payment will
end in 4 - 5 years.
In addition to the production payment, Evergreen will receive monthly
payments based on production from the wells through 2002.
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Evergreen has the option to repurchase the interests at any time between
December 31, 2002, and January 1, 2008, and will automatically revert to 75%
ownership in the interests if and when approximately 1.8 BCF have been produced
net to the wells.
If no favorable IRS ruling is obtained by November 30, 1996, the
transaction is subject to cancellation at the option of the purchaser.
Evergreen owns varying interests in sixteen additional wells in the San
Juan Basin, the majority of which are shut-in at present because of low
production volumes and gas prices.
UNITED KINGDOM
In 1991 and 1992 the Company's wholly owned subsidiary, Evergreen Resources
(U.K.) Ltd.("ERUK"), was awarded seven onshore U.K. hydrocarbon Exploration
Licenses for the development of coalbed methane gas and conventional
hydrocarbons (the "Licenses").
The Licenses provide ERUK with the largest onshore acreage position in the
U.K., and cover substantially all of six distinct onshore U.K. basins. Over
400,000 acres are considered prospective specifically for coalbed methane.
Selection of the Licensed areas was made after evaluating extensive
geological, petrophysical and measured methane gas content data bases. The
majority of the original data base was acquired through technology sharing
agreements with British Coal Corporation, who shared all relevant available data
on the six basins and granted ownership of this data to ERUK. ERUK has
augmented this data with proprietary seismic and coalbed methane well data and
also geologic data from the British Geologic Survey, and other sources.
During the period 1992 to 1994, Evergreen conducted seismic work and
drilled three wells on two of the Licenses. The wells encountered 30' to 80' of
gross coal. Two of the wells were hydraulically fracture stimulated and one was
tested for permeability. Following extensive production testing, none of the
three wells produced gas in economic quantities. The three wells are presently
shut-in.
Under a new onshore Licensing regime implemented by the UK Department of
Trade and Industry (DTI), Evergreen will convert its existing onshore
Exploration Licenses to new onshore Licenses, called Petroleum Exploration and
Development Licenses.
These new Licenses will provide up to a 30 year term with periodic
relinquishment, approximately every 5 years, of up to 50% of the acreage subject
to future development plans.
Work commitments on the existing Licenses have been fulfilled through 1997
as a result of Evergreen's prior UK activity. There are no royalties or burdens
encumbering the Licenses.
ERUK believes that a major resource is in place within the License areas.
Further evaluation will be required to determine the economic viability of
extracting this resource - License by License - since success or lack of success
on one License may not be translated to similar results on other Licenses or
separate geologic basins.
Over 500 drilling locations are feasible on the Licenses. Over 50 of these
locations have been permitted by ERUK, representing the largest inventory of
onshore UK coalbed methane locations available.
The UK market for the purchase and sale of natural gas became fully
deregulated in April 1996. The impact of deregulation to date has been a sharp
decline in short term or "spot" gas prices.
Evergreen continues to believe that higher prices justifying onshore
coalbed methane development are available by supplying local end users directly
under long term contracts.
Evergreen is continuing to hold discussions with various funding sources,
including potential industry partners, for the purpose of resuming evaluation
and development of the Licenses.
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ITEM 3. LEGAL PROCEEDINGS
The Company is not engaged in any material pending legal proceedings to
which the Company or its subsidiaries are a party or to which any of its
property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR EVERGREEN'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS
PRINCIPAL MARKET OR MARKETS
The Company's common stock is traded on the NASDAQ National Market System
under the symbol "EVER". The range of high and low prices for each quarterly
period during the two most recent fiscal years ended March 31, 1996, as reported
by NASDAQ is as follows :
HIGH LOW
---- ---
Fiscal 1995
First Quarter $8.75 $6.50
Second Quarter 8.25 6.50
Third Quarter 8.25 5.25
Fourth Quarter 6.00 4.00
Fiscal 1996
First Quarter $5.75 $4.25
Second Quarter 5.50 4.00
Third Quarter 5.37 3.50
Fourth Quarter 6.16 5.00
On June 24, 1996, the closing price for the common stock as reported by the
NASDAQ National Market System was $6.00 per share.
APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK
The number of holders of record of Evergreen's no par value common stock at
June 25, 1996, was approximately 4,000.
DIVIDENDS
Holders of common stock are entitled to receive such dividends as may be
declared by Evergreen's Board of Directors. The Company has not paid any cash
dividends since its inception. The Company anticipates that future earnings
will be retained for the development of its business and that no cash dividends
will be declared in the foreseeable future.
PREFERRED STOCK
On December 8, 1994, the Company received $3.75 million through the private
placement, with Institutional Investors, of 3,750,000 shares of ten year term 8%
Convertible Preferred Stock, $1.00 par value ("the Preferred"). The Company
received an additional $3.75 million on July 26, 1995 by issuing an additional
3,750,000 shares. All proceeds have been used for development of the Company's
oil and gas leases in the Raton Basin of Colorado.
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The Preferred is convertible into common stock at a conversion price of
$8.34 per share. Annual cash dividends of 8% are payable quarterly. Evergreen
may call the Preferred at any time in whole or in part prior to the mandatory
redemption (minimum call being 20% of original issue), at par value, plus
accrued dividends.
Evergreen can require the conversion of all of the Preferred into common
stock provided the common stock has traded at not less than $16 per share for 30
consecutive days.
A mandatory Sinking Fund of $1,250,000 is due annually commencing in
December 1999. All outstanding shares of Preferred must be redeemed by
Evergreen in ten years (2004) at par value, plus accrued dividends.
Evergreen has issued warrants which will be triggered and will become
exerciseable for 10 years at $8.34 per share if Evergreen exercises all or part
of its call option (up to 899,281 warrants).
The Preferred carries antidilution provisions, registration rights and,
under certain circumstances, voting rights.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data of the Company for
each of the last five fiscal years ended March 31. This information should be
read in conjunction with the Consolidated Financial Statements and Notes thereto
and Management's discussion and analysis of Financial Condition and Results of
Operations. Certain reclassifications have been made to prior financial
statements to conform with current presentation.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
------------------------------------------------------------
1996 1995 1994 1993 1992
(in $ thousands except per share amounts)
<S> <C> <C> <C> <C> <C>
Revenues $ 2,935 $ 3,351 $ 4,342 $ 4,947 $ 3,646
Net Income (Loss) (607) (705) 44 726 (272)
Per common share (0.10) (0.13) 0.01 0.15 (.08)
Total Assets 44,172 39,140 32,880 31,125 30,690
Long Term Bank Debt -- -- -- -- --
Other Long-term Obligations 1,823 1,094 -- -- --
Redeemable Preferred Stock 7,500 3,750 -- -- --
Stockholders' Equity 31,589 32,202 30,413 30,026 29,145
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Evergreen currently has a $7.5 million revolving line of credit with
Hibernia National Bank of New Orleans with interest at the Bank's prime rate.
Advances pursuant to this line of credit are limited to the borrowing base,
which has recently been increased to $7.5 million. There are no restrictions
associated with advances under the line. An annual fee of one half of one
percent is paid quarterly for any unused portion of the credit line. The
borrowing base is redetermined semi-annually by the bank based upon reserve
evaluations of the Company's oil and gas properties. At June 25, 1996, the
Company had not used any portion of this line.
The Company's present focus on the Raton Basin has increased its reserve
base and its cash flow. Continuing increases in production combined with the
continuing decline in lifting costs and the monitization of the Section 29 tax
credits will enable the Company to improve its operating cash flow in 1997.
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In addition to the 31 producing Raton Basin wells the Company anticipates
drilling an additional 40 wells and expanding and upgrading gas gathering
facilities during fiscal 1997. The total estimated capital requirements for
fiscal 1997 are estimated to be approximately $7.0 million. Management
anticipates that in addition to the increase in cash flow from operations and
the availability of funds under its line of credit, additional funds may be
needed to complete the 1997 capital requirements. The Company is evaluating
potential funding alternatives.
Cash flows provided by operating activities were $1,130,000 for the year
ended March 31, 1996 as compared to $407,600 in the prior year. The increase is
due primarily to changes in operating assets and liabilities which are the
result of the significant increase in drilling activities in 1996 as compared to
1995.
Cash flows from investing activities were $2,763,800 during the year ended
March 31, 1996 versus $2,958,300 during 1995. The investment in property and
equipment during 1996 was $3,988,000 versus $6,844,200 in 1995. The decrease in
the investment in property and equipment of $2,856,000 was due to the completion
of the initial phase of the Raton Basin gas gathering system in 1995
($2,200,000) and a decrease in the UK activity ($1,300,000). The decreases were
offset by the drilling of an additional 22 wells in the Raton Basin during 1996
versus 6 wells in the Basin in 1995. During 1996 the Company completed its
divestiture of substantially all properties outside the Raton and San Juan
Basins and received sale proceeds of $540,400 in 1996 as compared to $1,324,400
in 1995.
Cash flows provided by financing activities were $3,328,600 in 1996 as
compared to $3,635,400 in 1995. The decrease of $306,800 was due to the
increase in dividends paid on preferred stock of $410,500 which was offset by
the increase in the proceeds from issuance of common stock of $226,300.
Under the terms of certain gas gathering and tie-in agreements, EOC is
committed to meeting certain minimum volume levels during the term of the
agreements. Through March 31, 1996, volume levels have been below the required
minimums and EOC has accrued approximately $1,631,000 for this shortfall, which
is included with long-term liabilities. Such amount is refundable if future
volumes exceed the minimums. EOC is currently in discussions with the owner of
the system concerning obtaining additional volumes or other possible
alternatives which include the purchase of a portion of the system.
The Financial Accounting Standards Board has recently issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets" and SFAS No. 123, "Accounting for the Stock Based
Compensation". SFAS No. 121 provides standards for accounting for the
impairment of various long-lived assets. The Company uses the full cost method
which requires an impairment to be recorded when total capitalized costs exceed
the present value, discounted at 10%, of estimated future net cash flows from
proved oil and gas reserves. Therefore, the adoption of SFAS No. 121 is not
expected to have a material effect on the financial position or results of
operations of the Company.
SFAS No. 123 encourages the accounting for stock-based employee
compensation programs to be reported within the financial statements on a fair
value based method. If the fair value based method is not adopted, then the
statement requires pro-forma disclosure of net income and earnings per share as
if the fair value based method had been adopted. The Company has not yet
determined how SFAS No. 123 will be adopted nor its impact on the financial
statements. Both statements are effective for fiscal years beginning after
December 15, 1995.
RESULTS OF OPERATIONS - FISCAL YEAR ENDED MARCH 31, 1996 COMPARED TO THE FISCAL
YEAR ENDED MARCH 31, 1995
The Company reported a net loss of $606,800 (after preferred stock
dividends of $504,600) or $.10 per common share for the year ended March 31,
1996, compared to a net loss of $704,700 (after preferred stock dividends of
$94,200) or $.13 per share for the year ended March 31, 1995.
Production revenues during 1996 were $1,392,700 as compared to $1,916,300
in 1995, a decrease of $523,600 or 27%. The decrease in production revenues is
due primarily to lower gas prices and the sale of oil and gas properties. Gas
production increased to 941,174 Mcf in 1996 from 782,000 Mcf in 1995. However,
average gas prices decreased approximately $.41 per Mcf to $1.29 per Mcf in 1996
as compared to $1.70 during 1995. The decrease in gas prices more than offset
the increased production and reduced gas revenues to $1,211,000 in 1996 from
$1,331,000 in 1995 for a reduction of
-12-
<PAGE>
$120,000 or 9%. Oil revenues decreased to $178,000 in 1996 versus $584,000 in
1995 for a reduction of $406,000 or 70%. This reduction is due to the sale of
substantially all oil properties.
Cost of production and operations was $875,500 for the year ended March 31,
1996 versus $1,231,700 for the same period in 1995. The decrease in cost of
production and operations of $356,200 or 29% is due primarily to the sale or
shut-in of uneconomical oil and gas properties with high lifting costs. The
average production cost per Mcfe was $.77 in 1996 as compared to $1.10 in 1995.
During the year ended March 31, 1996 the lifting costs have continued on a
downward trend. As previously noted the Company has focused its efforts on the
Raton Basin and as additional wells are drilled the Company expects the lifting
costs for the Raton Basin to continue to decrease.
Oil and gas service revenues and cost of oil and gas services are
attributable to the Company's wholly owned subsidiary Evergreen Operating
Corporation (EOC), which is primarily responsible for drilling, evaluation and
production activities associated with various properties and for negotiating the
sales of oil and gas production from the properties. As of March 31, 1996, EOC
was serving as operator for approximately 150 producing wells owned by the
Company, unaffiliated third parties and affiliated parties.
Oil and gas service revenues during 1996 were $779,100 versus $858,300 in
the same period during 1995. The $79,000 decrease was primarily due to non-
recurring special service fees of approximately $201,000, which were offset by
increased operating fees of approximately $111,000 in 1996.
Interest and dividend income was $206,800 during the year ended March 31,
1996 as compared to $116,300 during the year ended March 31, 1995. The increase
in interest and dividends of $90,500 is due to an increase in cash from the
proceeds of the preferred stock offering.
Other income was $556,200 during the year ended March 31, 1996 versus
$460,000 for the same period in 1995. In 1996 the Company sold its interest in
ANGI Ltd., to an unaffiliated entity for $580,000 which resulted in a gain of
$525,000.
Costs of oil and gas services were $727,100 during the year ended March 31,
1996 as compared to $789,800 during the year ended March 31, 1995. The decrease
of $62,700 or 8% was primarily due to a reduction in personnel and related
salary expense.
Depreciation, depletion and amortization was $590,000 during the year ended
March 31, 1996 as compared to $709,000 in 1995. While there was no significant
change in total production from the prior year the decrease in depreciation,
depletion and amortization is due primarily to the increase in estimated
reserves of approximately 30%.
General and administrative expenses were $819,800 during the year ended
March 31, 1996 as compared to $850,100 during the same period in 1995. The
decrease of $30,300 was due to general overhead reductions. During fiscal 1997
the Company anticipates further general and administrative reductions.
RESULTS OF OPERATIONS - FISCAL YEAR ENDED MARCH 31, 1995 COMPARED TO THE FISCAL
YEAR ENDED MARCH 31, 1994
The Company reported a net loss of $704,700 attributable to common stock
(which includes $94,200 of preferred stock dividends) or $0.13 per share of
common stock for the year ended March 31, 1995, compared to net income of
$43,500 or $0.01 per share of common stock in 1994.
Principal factors in the year to year earnings decline were lower gas
prices, reduced oil production and service revenues, lower interest and other
income and preferred stock dividends during the year ended March 31, 1995.
Oil prices averaged $15.96 per barrel during the year ended March 31, 1995
versus $14.50 per barrel during the same period in 1994. Gas prices averaged
$1.70 per Mcf in 1995 versus $2.15 per Mcf in 1994.
-13-
<PAGE>
Natural gas production increased 23% during the year ended March 31, 1995,
to 782,000 million cubic feet principally due to acquisition of increased
interests in the San Juan Basin.
Oil production declined 36% during the year ended March 31, 1995 versus the
prior year, principally due to the sale of non-strategic properties.
Oil and gas service revenues and cost of oil and gas services are
attributable to the Company's wholly owned subsidiary Evergreen Operating
Corporation (EOC), which is primarily responsible for drilling, evaluation and
production activities associated with various properties and for negotiating the
sales of oil and gas production from the properties. As of March 31, 1995, EOC
was serving as operator for approximately 150 producing wells owned by the
Company and also by other unaffiliated third parties.
Oil and gas service revenues were $244,300 lower in 1995 than 1994 due
primarily to non-recurring special service fees received in the prior year.
Interest and dividend income declined from $238,000 in 1994 to $116,300 in
1995 because of less cash available for investment.
Other income totaled $459,900 in the fiscal year ended March 31, 1995,
principally from a gain on the sale of oil and gas assets of $330,900.
Oil and gas production costs and taxes for the year ended March 31, 1995
were 6% lower than in the prior fiscal year. On a production equivalent unit
basis, costs and taxes declined to $1.10 per MCF equivalent in1995 from $1.21 in
1994.
Cost of oil and gas services in 1995 declined by 15% from 1994 primarily
because of reduced staffing.
General and Administrative expenses for the year ended March 31, 1995 were
37% lower than the prior year primarily because of non-recurring legal fees in
the prior year and an ongoing overhead reduction program.
Depreciation, depletion and amortization expenses for 1995 were
approximately 7% higher than in 1994 due to increased production.
Other expenses increased to $351,200 in the fiscal year ended March 31,
1995 from $34,500 in the fiscal year ended March 31, 1994, due primarily to a
loss on the sale of marketable securities ($122,100) and a write-down on the
valuation of certain non-oil and gas assets ($217,000).
INCOME TAXES AND NET OPERATING LOSSES
As discussed in Note 3 in the accompanying consolidated financial
statements, the Company has net operating loss carry forwards for income tax
purposes of approximately $12,000,000, certain of which are limited due to stock
issuances in 1988 and 1990. A valuation allowance has been recorded for the net
deferred tax asset arising from the loss carry forward in excess of the deferred
tax liability resulting from depreciation and amortization differences. The
valuation allowance was recorded as it was unable to be determined if such tax
benefits would be more likely than not be realized.
-14-
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Certified Public Accountants . . . . . . F-1
Consolidated Balance Sheets, March 31, 1996 and 1995 . . . . . F-2 and F-3
Consolidated Statements of Operations for the Years Ended
March 31, 1996, 1995 and 1994. . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Stockholders' Equity for
the Years Ended March 31, 1996, 1995 and 1994. . . . . . . . . F-5
Consolidated Statements of Cash Flows for the Years Ended
March 31, 1996, 1995, and 1994 . . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . F-7 to F-25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
Since the Company's inception, there has not been any Form 8-K filed
under the Securities and Exchange Act of 1934 reporting a change in accountants
in which there was a reported disagreement on any matter of accounting
principles or practices or financial statement disclosure.
PART III
The information required by Part III of Form 10-K is incorporated herein by
reference to Registrant's definitive Proxy Statement previously filed in
connection with the Annual Meeting of Shareholders to be held on August 15,
1996.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K
(a)(1) See Index to Consolidated Financial Statements at Item 8.
(a)(2) All other schedules have been omitted because the required information
is inapplicable or is shown in the notes to the financial statements.
(a)(3) EXHIBITS:
3.2 Articles of Incorporation as amended, are incorporated
herein by reference from Exhibit I of Registrant's Report on
Form 8-K dated December 9, 1994.
22 Reserve Report prepared by Resource Services
International, Inc.
27 Financial Data Schedule
(b) No reports on Form 8-K were filed by the Company during the
last quarter of the fiscal year ended March 31, 1996.
-15-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: June 26, 1996 By: /s/ Mark S. Sexton
-----------------------------------
Mark S. Sexton, President and Chief
Executive Officer
Date: June 26, 1996 By: /s/ Kevin R. Collins
----------------------------------
Kevin R. Collins, Vice President,
Treasurer and Chief Financial Officer
Principal Accounting Officer
SIGNATURES
Date: June 26, 1996 By: /s/ Dennis R. Carlton
----------------------------------
Dennis R. Carlton, Director
Date: June 26, 1996 By: /s/ James C. Ryan, Jr.
----------------------------------
James C. Ryan, Jr., Director
Date: June 26, 1996 By: /s/ Mark S. Sexton
----------------------------------
Mark S. Sexton, Director
Date: June 26, 1996 By: /s/ James S. Williams
----------------------------------
James S. Williams, Director
-16-
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
Evergreen Resources, Inc.
Denver, Colorado
We have audited the accompanying consolidated balance sheets of Evergreen
Resources, Inc. and subsidiaries as of March 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended March 31, 1996. 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 generally accepted auditing
standards. 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 financial position of Evergreen Resources, Inc. and
subsidiaries as of March 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
1996, in conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
Denver, Colorado
May 24, 1996
F-1
<PAGE>
EVERGREEN RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
March 31, 1996 1995
- --------------------------------------------------------------------------------
Assets
Current:
Cash and cash equivalents $ 3,702,511 $ 2,038,157
Accounts receivable:
Joint interest billings and other 897,142 945,557
Oil and gas sales 237,178 297,602
Other current assets 132,446 76,341
- --------------------------------------------------------------------------------
Total current assets 4,969,277 3,357,657
- --------------------------------------------------------------------------------
Property and equipment (Note 13):
Proved oil and gas properties, based on
full-cost accounting 36,378,828 33,442,534
Unevaluated properties not subject to
amortization 7,792,739 8,136,519
Gas gathering equipment 4,415,439 3,417,086
Support equipment 595,656 676,051
- --------------------------------------------------------------------------------
49,182,662 45,672,190
Less accumulated depreciation, depletion
and amortization 11,558,516 11,140,276
- --------------------------------------------------------------------------------
Net property and equipment 37,624,146 34,531,914
DESIGNATED CASH (Note 2) 770,076 593,024
OTHER ASSETS 808,218 657,573
- --------------------------------------------------------------------------------
$44,171,717 $39,140,168
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
F-2
<PAGE>
EVERGREEN RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
March 31, 1996 1995
- --------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,204,378 $ 700,201
Amounts payable to oil and gas property
owners 1,123,465 711,307
Accrued expenses and other 162,127 89,646
- --------------------------------------------------------------------------------
Total current liabilities 2,489,970 1,501,154
Production taxes payable 770,076 593,024
Long-term liabilities (Note 9) 1,822,834 1,094,128
- --------------------------------------------------------------------------------
Total liabilities 5,082,880 3,188,306
- --------------------------------------------------------------------------------
Redeemable preferred stock (Note 4) 7,500,000 3,750,000
- --------------------------------------------------------------------------------
Commitments (Note 9)
Stockholders' equity (Notes 5 and 6):
Common stock, $.01 stated value; shares
authorized, 50,000,000;
shares issued and outstanding,
5,899,736 and 5,672,159 58,998 56,721
Additional paid-in capital 41,822,026 41,419,179
Accumulated deficit (9,873,715) (9,266,898)
Foreign currency translation adjustment (418,472) (7,140)
- --------------------------------------------------------------------------------
Total stockholders' equity 31,588,837 32,201,862
- --------------------------------------------------------------------------------
$44,171,717 $39,140,168
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-3
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended March 31, 1996 1995 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Oil and gas production (Note 7) $ 1,392,695 $ 1,916,262 $2,207,102
Oil and gas services (Note 11) 779,146 858,298 1,102,572
Interest and dividends 206,769 116,320 238,135
Other (Note 10) 556,221 459,948 794,378
- ----------------------------------------------------------------------------------------------------
Total revenues 2,934,831 3,350,828 4,342,187
- ----------------------------------------------------------------------------------------------------
Costs and expenses:
Cost of production and operations 875,543 1,231,669 1,259,478
Cost of oil and gas services 727,121 789,778 928,890
Depreciation, depletion and amortization 589,936 709,008 659,820
General and administrative expenses 818,805 850,088 1,349,768
Interest expense 36,620 29,688 -
Other (10,997) 351,158 100,682
- ----------------------------------------------------------------------------------------------------
Total costs and expenses 3,037,028 3,961,389 4,298,638
- ----------------------------------------------------------------------------------------------------
Net income (loss) (102,197) (610,561) 43,549
Preferred stock dividends 504,620 94,167 -
- ----------------------------------------------------------------------------------------------------
Net income (loss) attributable
to common stock $ (606,817) $ (704,728) $ 43,549
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Net income (loss) per common share $ (.10) $ (.13) $ .01
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Weighted average common shares
outstanding 5,800,036 5,446,741 5,234,636
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-4
<PAGE>
EVERGREEN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
Common Stock
---------------------- Foreign
$.01 Stated Value Additional Currency Total
---------------------- Paid-In Accumulated Translation Stockholders'
Shares Amount Capital Deficit Adjustment Equity
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, April 1, 1993 4,958,120 $ 49,581 $39,086,812 $(8,605,720) $(504,113) $30,026,560
Exercise of stock purchase warrants 18,750 188 46,688 - - 46,876
Common stock issued to ESOP 30,000 300 125,325 - - 125,625
Issuance of common stock as
employee bonus 51,500 515 175,798 - - 176,313
Other increases 131 1 (575) - - (574)
Foreign currency translation - - - - (5,210) (5,210)
Net income - - - 43,549 - 43,549
- -------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1994 5,058,501 50,585 39,434,048 (8,562,171) (509,323) 30,413,139
Issuance of common stock for well
interests (Note 5) 501,040 5,010 1,748,630 - - 1,753,640
Issuance of common stock (Note 5) 81,368 813 158,688 - - 159,501
Exercise of stock purchase warrants
(Note 5) 31,250 313 77,813 - - 78,126
Foreign currency translation - - - - 502,183 502,183
Preferred stock dividends - - - (94,167) - (94,167)
Net loss - - - (610,560) - (610,560)
- -------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1995 5,672,159 56,721 41,419,179 (9,266,898) (7,140) 32,201,862
Exercise of stock purchase warrants
(Note 5) 159,059 1,592 302,315 - - 303,907
Common stock issued to ESOP 10,000 100 19,900 - - 20,000
Issuance of common stock for services 55,000 550 116,840 - - 117,390
Other 3,518 35 (36,208) - - (36,173)
Preferred stock dividends - - - (504,620) - (504,620)
Foreign currency translation - - - - (411,332) (411,332)
Net loss - - - (102,197) - (102,197)
- -------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1996 5,899,736 $58,998 $41,822,026 $(9,873,715) $(418,472) $31,588,837
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-5
<PAGE>
Evergreen Resources, Inc.
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
Year Ended March 31, 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income (loss) $ (102,197) $ (610,561) $ 43,549
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Depreciation, depletion and amortization 589,936 708,933 659,820
Gain on sale of subsidiaries (525,287) (330,856) -
Writedown of investments - 217,438 -
(Gain) loss on sale of marketable securities - 113,074 (24,996)
Stock issued for services 31,555 50,837 131,871
Changes in operating assets and liabilities:
Accounts receivable 106,209 770,058 (1,153,551)
Other current assets (56,520) 82,881 (140,437)
Accounts payable 1,010,077 (633,403) 1,021,449
Accrued expenses 76,178 39,228 (52,521)
- --------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,129,951 407,629 485,184
- --------------------------------------------------------------------------------------------------------------
Investing activities:
Purchase of marketable securities - - (5,281,930)
Sale of marketable securities - 2,014,708 10,204,140
Investment in property and equipment (3,988,233) (6,844,206) (6,278,393)
Proceeds from sale of oil and gas assets
and support equipment 540,413 1,324,390 1,125,875
Proceeds from sale of subsidiary 580,000 - -
Designated cash (177,052) (144,307) (165,405)
Change in production taxes payable 177,052 144,307 158,655
Change in other assets 104,058 546,843 (69,821)
- --------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (2,763,762) (2,958,265) (306,879)
- --------------------------------------------------------------------------------------------------------------
Financing activities:
Proceeds from issuance of redeemable
preferred stock, net 3,714,736 3,685,532 -
Dividends paid on preferred stock (504,620) (94,167) -
Proceeds from issuance of common stock 303,904 77,584 47,117
Principal payments on capital lease obligations (46,526) - -
Debt issue costs (49,037) (57,541) (33,689)
Change in cash held from operating oil and gas
properties (89,880) 23,964 228,071
- --------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 3,328,577 3,635,372 241,499
- --------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (30,412) 23,148 (1,081)
- --------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 1,664,354 1,107,884 418,723
Cash and cash equivalents, at beginning of year 2,038,157 930,273 511,550
- --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, at end of year $ 3,702,511 $ 2,038,157 $ 930,273
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-6
<PAGE>
Evergreen Resources, Inc.
Summary of Accounting Policies
Consolidation
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. EOC has a 50% ownership in
a joint venture, Primero Gas Gathering, Co. (Primero), which is recorded on a
pro-rata consolidation basis.
The companies are engaged in the operation, acquisition, exploration and
development of oil and gas properties. All significant intercompany balances
and transactions have been eliminated in consolidation.
Concentrations
of Credit Risk
The Company's financial instruments that are exposed to concentrations of credit
risk consist primarily of cash equivalents.
The Company's cash equivalents are cash investment funds which are placed with a
major financial institution. The investment policy limits the Company's
exposure to concentrations of credit risk.
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 consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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. If the net investment in oil and gas
properties exceeds an amount equal to the sum of (1) the standardized measure of
discounted future net cash flows from proved reserves (see Note 13), and (2) the
lower of cost or fair market value of properties in process of development and
unexplored acreage, the excess is charged to expense as additional depletion.
Normal dispositions of oil and gas properties are accounted for as adjustments
of capitalized costs, with no gain or loss recognized.
F-7
<PAGE>
EVERGREEN RESOURCES, INC.
SUMMARY OF ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 their 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.
Gas Gathering and
Support Equipment
Gas gathering and support equipment are stated at cost. Depreciation and
amortization for the gas gathering system is computed on the units-of-production
method based upon estimated gas production over a twenty-year life. Certain gas
gathering system components and other support equipment are depreciated using
the straight-line method over the estimated useful lives of the assets of 3 to
20 years.
Amounts Payable to
Oil and Gas
Property Owners
Amounts payable to oil and gas property owners consist of cash calls from
working interest owners to pay for development costs of properties being
currently developed, production revenue that the Company, as operator, is
collecting and distributing to revenue interest owners and production revenue
taxes that the Company, as operator, has withheld for timely payment to the tax
agencies.
Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" which requires the
use of the "liability method". Accordingly, deferred tax liabilities and assets
are determined based on the temporary differences between the financial
statement and tax bases of assets and liabilities, using enacted tax rates in
effect for the year in which the differences are expected to reverse.
Management and
Operator Fees
The Company receives management fees for services performed as the managing
venturer and operator for a gas gathering and pipeline joint venture. Such fees
are included in income. Income from operating wells for third parties is
recognized pursuant to the applicable operating agreements when the services are
performed.
F-8
<PAGE>
EVERGREEN RESOURCES, INC.
SUMMARY OF ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Net Income (Loss)
Per Share
Net income (loss) per common share has been computed by dividing net income
(loss), after reduction for preferred stock dividends, by the weighted average
number of common shares and common share equivalents outstanding during each of
the periods presented. Options and warrants to purchase stock are included as
common stock equivalents when dilutive. In 1994, common stock equivalents of
221,029 shares are included in the weighted average number of common shares
outstanding. Common stock equivalents are not utilized in 1996 and 1995 as
their effect is antidilutive.
Cash Equivalents
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
Foreign Currency
Translation
The functional currency for the Company's foreign operations is the applicable
local currency. The translation of the applicable foreign currency into U.S.
dollars is performed for balance sheet accounts using current exchange rates in
effect at the balance sheet date and for revenue and expense accounts using a
weighted average exchange rate during the period. The gains or losses resulting
from such translation are included in stockholders' equity.
Recent Accounting
Pronouncements
The Financial Accounting Standards Board has recently issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets" and SFAS No. 123, "Accounting for Stock Based
Compensation". SFAS No. 121 provides standards for accounting for the
impairment of various long-lived assets. The Company uses the full cost method
of accounting for its oil and gas properties, which requires an impairment to be
recorded when total capitalized costs exceed the present value, discounted at
10%, of estimated future net cash flows from proved oil and gas reserves.
Therefore, the adoption of SFAS 121 is not expected to have a material effect on
the financial position or results of operations of the Company.
F-9
<PAGE>
EVERGREEN RESOURCES, INC.
SUMMARY OF ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SFAS No. 123 encourages the accounting for stock-based employee compensation
programs to be reported within the financial statements on a fair value based
method. If the fair value based method is not adopted, then the statement
requires pro-forma disclosure of net income and earnings per share as if the
fair value based method had been adopted. The Company has not yet determined
how SFAS No. 123 will be adopted nor its impact on the financial statements.
Both statements are effective for fiscal years beginning after December 15,
1995.
Reclassifications
Certain items included in prior years financial statements have been
reclassified to conform to current year presentation.
F-10
<PAGE>
Evergreen Resources, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1. Financing
Agreements
The Company has a $7,500,000 revolving line of credit with a bank. Subsequent
to March 31, 1996 the available borrowing base was increased to $7,500,000 and
is derived from oil and gas reserves. Interest on any borrowings outstanding is
at the bank's prime rate and is paid monthly. The line of credit matures in
August 1997. There are no restrictions associated with advances under the line.
An annual facility fee of one-half of one percent is charged quarterly for any
unused portion of the credit line. The agreement is collateralized by oil and
gas properties and also contains certain net worth and ratio requirements. No
amounts were outstanding under the line of credit at March 31, 1996 and 1995.
2. Designated
Cash and
Related
Production
Taxes Payable
Designed cash represents the cash withheld for payment of production taxes from
third party revenue interest owners. The non-current portion of production
taxes payable relates to ad valorem taxes collected for production through
March, 1996 which is not payable until fiscal 1997 or later. The related cash
collected from third party revenue interest owners designated for payment of
non-current ad valorem taxes is reflected as a non-current asset.
3. Income Taxes
Due primarily to the availability of net operating loss carryovers, the Company
had no significant taxable income during the years ended March 31, 1996, 1995
and 1994.
F-11
<PAGE>
Evergreen Resources, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A reconciliation of the effective tax rates and the statutory U.S. federal
income tax rates is as follows:
1996 1995 1994
- --------------------------------------------------------------------------------
Percent of pre-tax income
tax at U.S. federal
statutory rates (34.0)% (34.0)% 34.0%
State income taxes, net
of federal tax benefit (3.3) (3.3) 3.3
Expenses not deductible
for taxes - 2.2 1.8
Increase in deferred
tax asset valuation
allowance 37.3 35.1 (39.1)
- --------------------------------------------------------------------------------
Effective tax rate - % - % - %
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The components of the net deferred income tax in the accompanying balance sheets
are as follows:
1996 1995
- --------------------------------------------------------------------------------
Deferred tax assets $ 2,064,000 $ 1,224,000
Valuation allowance (2,064,000) (1,224,000)
- --------------------------------------------------------------------------------
Net deferred tax asset $ - $ -
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Company recorded a valuation allowance at March 31, 1996 and 1995 equal to
the excess of deferred tax assets over deferred tax liabilities as they are
unable to determine that these tax benefits are more likely than not to be
realized.
F-12
<PAGE>
Evergreen Resources, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The components of the net deferred tax assets and liabilities are shown below:
1996 1995
- --------------------------------------------------------------------------------
Net operating loss
carryforward $4,551,000 $3,680,000
Revenues and other 201,000 9,000
- --------------------------------------------------------------------------------
Total gross deferred tax assets 4,752,000 3,689,000
Valuation allowance (2,064,000) (1,224,000)
- --------------------------------------------------------------------------------
Net deferred tax asset 2,688,000 2,465,000
Deferred tax liability - depreciation,
depletion and amortization (2,688,000) (2,465,000)
- --------------------------------------------------------------------------------
Net deferred taxes $ - $ -
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
As of March 31, 1996, the Company has net operating loss carryforwards for tax
purposes of approximately $12,000,000. Issuances of common stock and common
stock equivalents during 1988 and 1990 limits a portion of this amount to
approximately $330,000 per year (additional amounts would be available to offset
gains on the sale of assets) through 2003. In addition, unused investment tax
credits of $89,000 are available to offset income taxes payable through 2001.
4. Redeemable
Preferred Stock
In December 1994, the Company issued $3,750,000 in redeemable preferred stock.
The Company received an additional $3,750,000 in July 1995 by issuing an
additional 3,750,000 shares.
All outstanding shares of the preferred stock plus accrued dividends must be
redeemed by the Company on the tenth anniversary of the original issuance.
Commencing in December 1999, the Company is required to fund an annual mandatory
sinking fund of $1,250,000. The preferred stock is also callable at the
Company's option at a call price equal to par value, plus accrued dividends.
F-13
<PAGE>
Evergreen Resources, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Cumulative annual cash dividends of 8% are payable quarterly. During the year
ended March 31, 1996 and 1995, the Company paid $504,620 and $94,167 in
dividends. The preferred stock is convertible at a price of $8.34 per share
into 899,281 shares of the Company's common stock.
5. Stockholders'
Equity
During the year ended March 31, 1996, pursuant to the exercise of certain stock
purchase warrants, 71,250 shares of common stock were issued at $2.50 per share,
in exchange for 30,941 shares of common stock currently issued and outstanding
with a market value of approximately $5.50. In addition, 118,750 shares of
common stock were issued under terms of warrants previously granted, resulting
in proceeds to the Company of $303,907. In 1996, the Company issued common
stock valued at $117,390 as a bonus to certain employees.
During the year ended March 31, 1995, 31,250 shares of common stock were issued
under terms of warrants previously granted, yielding proceeds to the Company of
$78,126. Additionally, the Company issued common stock valued at $168,000 as a
bonus to employees and $50,000 as payment in lieu of salary.
In August 1994, the Company issued 501,040 shares of common stock valued at
$1,753,640 in exchange for certain working interest in wells in the San Juan
Basin in a non-cash transaction.
In 1994, the Company issued common stock valued at $125,625 to the Employee
Stock Ownership Plan and issued common stock as a bonus valued at $176,313 to
employees.
F-14
<PAGE>
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
6. STOCK OPTIONS
Under the terms of its Key Employee Equity Plan, options and/or warrants are
granted to key employees at not less than the market price of the Company's
common stock on the date of grant. The presently outstanding warrants expire
in 1997 to 2000.
<TABLE>
<CAPTION>
Exercise
Price
Warrants Per Share
- ------------------------------------------------------------------
<S> <C> <C>
April 1, 1993 468,300 $ 2.50-8.75
Granted 79,000 9.50
Exercised (18,750) 2.50
- ------------------------------------------------------------------
March 31, 1994 528,550 2.50-9.50
Exercised (31,250) 2.50
- ------------------------------------------------------------------
March 31, 1995 497,300 2.50-9.50
Granted 20,000 4.25
Exercised (190,000) 2.50
- ------------------------------------------------------------------
March 31, 1996 327,300 $ 3.625- 9.50
- ------------------------------------------------------------------
- ------------------------------------------------------------------
</TABLE>
7. MAJOR CUSTOMERS
During the years ended March 31, 1996, 1995 and 1994, the Company made sales to
unrelated entities which individually comprised greater than 10% of total oil
and gas sales. The following is a table summarizing the percentage provided by
each customer:
<TABLE>
<CAPTION>
Year Ended March 31, A B C D
- ------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996 41% 11% 25% -%
1995 35 10 - -
1994 18 14 - 16
</TABLE>
F-15
<PAGE>
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
8. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the years ended March 31, 1996, 1995 and 1994, for interest
were approximately $37,000, $22,000 and $4,000. During the year ended March 31,
1995, approximately $1,978,000 of common stock was issued for services and
acquisition of well interests. Also in 1995, the Company assumed approximately
$267,000 in liabilities for the acquisition of certain equipment. See Notes 5
and 9 for additional noncash transactions in 1996, 1995 and 1994.
9. COMMITMENTS
The Company leases its primary office space for approximately $12,800 a month
under a lease expiring in March 1998. The Company has the option to cancel the
lease at anytime subsequent to March 31, 1996. Rental expense, net of sublease
income, for all facilities was approximately $143,000, $177,000 and $178,000
for the years ended March 31, 1996, 1995 and 1994.
During a portion of the current year, the Company leased additional office
space from an affiliated entity under a month-to-month operating lease which is
now cancelled. Rent expense was approximately $2,300 and $28,000 for this
facility in 1996 and 1995.
The Company has an Employee Stock Ownership Plan (ESOP), with contributions to
the ESOP determined at the discretion of the Company. For the years ended March
31, 1996, 1995 and 1994, the Company contributed $20,000, $0 and $125,625 to
the plan.
Under the terms of certain gas gathering and tie-in agreements, EOC is
committed to meeting certain minimum volume levels during the term of the
agreement. Through March 31, 1996, volume levels have been below the required
minimums and EOC has accrued approximately $1,631,000 for this shortfall, which
is included with long-term liabilities. Such amount is refundable if future
volumes exceed the minimums and EOC is currently having discussions with the
owner of the system concerning obtaining additional volumes or other possible
alternatives which includes the purchase of a portion of the system.
F-16
<PAGE>
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
10. OTHER INCOME
Other income consisted of the following:
<TABLE>
Year Ended March 31, 1996 1995 1994
- ------------------------------------------------------------------
<S> <C> <C> <C>
Gain on sales of
subsidiaries/assets $ 525,287 $ 330,856 $ -
Lawsuit settlement - - 561,050
Other 30,934 129,092 233,328
- ------------------------------------------------------------------
$ 556,221 $ 459,948 $ 794,378
- ------------------------------------------------------------------
- ------------------------------------------------------------------
</TABLE>
In September 1995, the Company sold its interest in ANGI Limited for $580,000
which resulted in a gain of approximately $525,000.
The income related to a lawsuit settlement for the year ended March 31, 1994,
represented the allocation of a settlement to be received by JCI as a result of
a dispute with the purchaser regarding gathering fees.
In December 1994, the Company sold certain assets and its 100% interest in JCI
which had been acquired in March 1993. Prior to the consummation of the sale,
oil and gas properties with a cost of approximately $300,000 were transferred
into JCI. The sales price was $1,000,000 cash and a gain of approximately
$331,000 was recognized from the transaction. Included in the group acquiring
these properties and JCI, was an affiliate of the Company, which represented
approximately 39% of the group.
11. RELATED PARTIES
EOC provides well services to an affiliated entity for which it receives fees
pursuant to written operating agreements. For the year ended March 31, 1996
and 1995, such fees totalled approximately $575,600 and $316,000. Additionally,
EOC provides non-operating services to affiliates, as requested by them for
engineering, evaluation, acquisition and similar services for which EOC was
compensated approximately $24,000 and $229,000 during the years ended March 31,
1996 and 1995. As of March 31, 1996 and 1995, approximately $50,500 and
$103,000 was payable to EOC from the affiliates for fees and other services.
F-17
<PAGE>
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
12. SECTION 29 TAX CREDITS
Subsequent to year end, effective June 1, 1996, the Company sold, pending a
favorable IRS ruling, its working interests in six producing wells in the San
Juan Basin. The wells qualify for the Section 29 tax credit.
The Company will receive $53,000 cash and a volumetric production payment under
which the Company will receive 99% of the cash flow from the wells until
approximately 1.1 billion cubic feet of gas have been produced and sold net to
the well interests.
In addition to the production payment, Evergreen will receive monthly payments
based on production from the wells through 2002.
If no favorable IRS ruling is obtained by November 30, 1996, the transaction is
subject to cancellation at the option of the purchaser.
13. SUPPLEMENTAL INFORMATION OF OIL AND GAS PRODUCING ACTIVITIES
The Company's oil and gas activities are conducted in the United States and the
United Kingdom. The following costs were incurred in oil and gas acquisition,
exploration, development and producing activities at March 31:
<TABLE>
<CAPTION>
United United
States Kingdom Total
- ------------------------------------------------------------------
<S> <C> <C> <C>
1996
- ----
Acquisition costs:
Proved $ - $ - $ -
Unproved - - -
Exploration 155,000 - 155,000
Development 3,476,707 516,659 3,993,366
1995
- ----
Acquisition costs:
Proved $ 1,753,640 $ - $ 1,753,640
Unproved - - -
Exploration 317,890 - 317,890
Development 1,565,690 1,841,964 3,407,654
1994
- ----
Acquisition costs:
Proved $ - $ - $ -
Unproved - - -
Exploration 4,176,809 - 4,176,809
Development 233,145 1,770,908 2,004,053
</TABLE>
F-18
<PAGE>
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Aggregate capitalized costs and related accumulated depreciation, depletion and
amortization relating to oil and gas producing activities at March 31 are as
follows:
<TABLE>
<CAPTION>
United United
States Kingdom Total
- ----------------------------------------------------------------------
<S> <C> <C> <C>
1996
- ----
Proved properties $ 36,378,828 $ - $ 36,378,828
Unproved properties 896,301 6,896,438 7,792,739
- ----------------------------------------------------------------------
37,275,129 6,896,438 44,171,567
Accumulated depletion,
depreciation and
amortization (11,169,882) - (11,169,882)
- ----------------------------------------------------------------------
Net capitalized costs $ 26,105,247 $ 6,896,438 $ 33,001,685
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
1995
- ----
Proved properties $ 33,442,534 $ - $ 33,442,534
Unproved properties 1,127,475 7,009,044 8,136,519
- ----------------------------------------------------------------------
34,570,009 7,009,044 41,579,053
Accumulated depletion,
depreciation and
amortization (10,776,960) - (10,776,960)
- ----------------------------------------------------------------------
Net capitalized costs $ 23,793,049 $ 7,009,044 $ 30,802,093
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
</TABLE>
F-19
<PAGE>
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Costs of oil and gas properties excluded from the amortization base, at March
31, are as follows:
<TABLE>
<CAPTION>
United United
States Kingdom Total
- ----------------------------------------------------------------------
<S> <C> <C> <C>
1996
- ----
Leasehold costs $ 896,301 $ 2,232,588 $ 3,128,889
Development costs - 4,663,850 4,663,850
- ----------------------------------------------------------------------
$ 896,301 $ 6,896,438 $ 7,792,739
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
1995
- ----
Leasehold costs $ 1,127,475 $ 2,225,064 $ 3,352,539
Development costs - 4,783,980 4,783,980
- ----------------------------------------------------------------------
$ 1,127,475 $ 7,009,044 $ 8,136,519
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
</TABLE>
Depreciation and depletion per equivalent MCF was $.39, $.51 and $.51 for the
years ended March 31, 1996, 1995 and 1994.
Results of operations from United States production activities for 1996, 1995
and 1994 are presented below in accordance with Financial Accounting Standards
No. 69, "Disclosures About Oil and Gas Activities," which excludes
consideration of general and administrative, and interest expense. There was
no production activity in the United Kingdom.
F-20
<PAGE>
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended March 31, 1996 1995 1994
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Oil and gas sales $ 1,392,695 $ 1,916,262 $ 2,207,102
- ----------------------------------------------------------------------
Cost of production and
operations 875,543 1,231,669 1,259,478
Depreciation and depletion 393,581 510,538 503,222
- ----------------------------------------------------------------------
1,269,124 1,742,207 1,762,700
- ----------------------------------------------------------------------
Results of operations
from producing
activities (excluding
corporate overhead
and interest costs) $ 123,571 $ 174,055 $ 444,402
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
</TABLE>
OIL AND GAS RESERVE INFORMATION (UNAUDITED)
The estimates of the Company's proved reserves and related future net cash
flows that are presented in the following tables are based upon estimates made
by independent petroleum engineering consultants for the United States only.
The Company is in the process of developing properties in the United Kingdom
and is unable to prepare reserve information in this area. The Company's
reserve information was prepared as of March 31, 1996, 1995 and 1994. The
Company cautions that there are many inherent uncertainties in estimating
proved reserve quantities, projecting future production rates, and timing of
development expenditures. Accordingly, these estimates are likely to change as
future information becomes available.
Proved oil and gas reserves are the estimated quantities of crude oil,
condensate, natural gas and natural gas liquids which geological and
engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic and operating
conditions.
F-21
<PAGE>
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
OIL AND GAS RESERVE INFORMATION - CONTINUED (UNAUDITED)
Proved developed reserves are those reserves expected to be recovered through
existing wells, with existing equipment and operating methods.
Estimated quantities of proved reserves and proved developed reserves of crude
oil and natural gas (all of which are located within the United States), as
well as the changes in proved reserves, are as follows:
<TABLE>
<CAPTION>
Oil and
Natural Gas Natural
Liquids Gas
Proved Reserves (bbls) (mcf)
- ----------------------------------------------------------------------
<S> <C> <C>
At April 1, 1993 2,457,900 36,663,100
Revisions of previous estimates (746,300) (9,275,000)
Extensions and discoveries - 24,903,900
Sales of reserves (11,000) (66,000)
Production (57,500) (637,900)
- ----------------------------------------------------------------------
At March 31, 1994 1,643,100 51,588,100
Revisions of previous estimates (609,300) (12,474,600)
Extensions and discoveries - 18,441,300
Sales of reserves (154,300) (3,891,100)
Purchases of reserves - 5,000,000
Production (36,600) (781,700)
- ----------------------------------------------------------------------
At March 31, 1995 842,900 57,882,000
Revisions of previous estimates - (3,482,000)
Extensions and discoveries - 31,163,500
Sales of reserves (828,400) (3,696,300)
Production (9,700) (941,200)
- ----------------------------------------------------------------------
At March 31, 1996 4,800 80,926,000
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
</TABLE>
F-22
<PAGE>
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
OIL AND GAS RESERVE INFORMATION - CONTINUED (UNAUDITED)
<TABLE>
<CAPTION>
Oil and
Natural Gas Natural
Liquids Gas
Proved Developed Reserves (bbls) (mcf)
- ----------------------------------------------------------------------
<S> <C> <C>
March 31, 1994 349,600 23,721,000
March 31, 1995 289,800 18,007,300
March 31, 1996 4,800 41,359,700
</TABLE>
The following table sets forth a standardized measure of the estimated
discounted future net cash flows attributable to the Company's proved oil and
gas reserves. Estimated future cash inflows were computed by applying year-end
prices of oil and gas to the estimated future production of proved oil and gas
reserves at March 31, 1996, 1995 and 1994. The future production and
development costs represent the estimated future expenditures to be incurred in
developing and producing the proved reserves, assuming continuation of existing
economic conditions. Future income tax expense was computed by applying
statutory income tax rates to the difference between pretax net cash flows
relating to the Company's proved oil and gas reserves and the tax basis of
proved oil and gas properties and available operating loss and excess statutory
depletion carryovers, reduced by investment tax and Section 29 credits.
In 1995, the Company determined that the likelihood of paying income tax in the
future was minimal due to net operating losses and future drilling plans. As
such, the effects of income taxes were excluded from this calculation.
In 1996, future income taxes were included in the standardized measure of the
future net cash flows due to the monitization of the Section 29 tax credits and
the increase in future cash inflows which are the result of additional reserves.
F-23
<PAGE>
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
OIL AND GAS RESERVE INFORMATION - CONTINUED (UNAUDITED)
<TABLE>
<CAPTION>
Year Ended March 31, 1996 1995 1994
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Future cash inflows $ 121,049,400 $ 86,666,340 $ 113,077,100
Future cash outflows:
Production costs (30,640,700) (20,671,010) (23,959,500)
Development costs (7,389,400) (9,460,563) (11,479,300)
- ----------------------------------------------------------------------------------
Future net cash flows before
future income taxes 83,019,300 56,534,767 77,638,300
Future income taxes (13,789,400) - (16,117,900)
- ----------------------------------------------------------------------------------
Future net cash flows 69,229,900 56,534,767 61,520,400
Effect of discounting future
annual net cash flows at
10% (44,076,600) (33,222,437) (35,811,500)
- ----------------------------------------------------------------------------------
Standardized measure of
discounted future net cash
flows $ 25,153,300 $ 23,312,330 $ 25,708,900
- ----------------------------------------------------------------------------------
</TABLE>
F-24
<PAGE>
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
OIL AND GAS RESERVE INFORMATION - CONTINUED (UNAUDITED)
The following summarizes the principal factors comprising the changes in the
standardized measure of discounted future net cash flows for the years ended
March 31, 1996, 1995 and 1994:
<TABLE>
Year Ended March 31, 1996 1995 1994
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Standardized measure,
beginning of period $ 23,312,300 $ 25,708,900 $ 29,403,300
Sales of oil and gas, net
of production costs (517,100) (684,600) (947,600)
Extensions and discoveries 10,500,400 6,110,500 11,419,300
Net change in sales prices,
net of production costs 2,866,900 (9,124,600) (2,921,300)
Purchase of reserves - 2,073,700 -
Sale of reserves (5,542,300) (2,901,100) (75,900)
Revisions of quantity
estimates (1,567,000) (9,536,000) (12,854,000)
Accretion of discount 1,664,300 3,244,400 3,510,300
Net change in income taxes (5,010,100) 6,735,500 (1,034,800)
Changes in future
development costs 2,293,900 3,628,100 -
Changes in rates of
production and other (2,848,000) (1,942,500) (790,400)
- ----------------------------------------------------------------------------
Standardized measure,
end of period $ 25,153,300 $ 23,312,300 $ 25,708,900
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
</TABLE>
F-25
<PAGE>
[LOGO]
April 12, 1996
Evergreen Resources, Inc.
1000 Writer Square
1512 Larimer Street
Denver, Colorado 80202
Gentlemen:
We have reviewed and compiled the estimates, prepared by Evergreen
Resources, Inc. ("Evergreen"), and Resource Services, International, Inc.
(RSII), of the extent and value of the proved reserves of crude oil, natural
gas, and natural gas liquids for certain leases owned by Evergreen, as of April
1, 1996. The appraised properties are located in Colorado and New Mexico.
Evergreen's estimates of proved reserves, future net revenue, and
present value of net proved reserves summarized in this report are intended
to be submitted to the Securities and Exchange Commission ("SEC") as part of
Evergreen's annual report filed on Form 10-K. The reserve estimates are
prepared according to applicable SEC rules and utilize conventional and
generally accepted engineering methods.
Our review of Evergreen's reserve estimates is based upon a study of
Evergreen's properties. During this investigation, we consulted with the
officers and employees of Evergreen and were given access to such accounts,
records, geological and engineering reports, and other data as were desired for
examination. We previously have prepared studies of oil and gas properties in
areas where Evergreen's properties are located. Property interests owned,
production from such properties, current prices for production, agreements
relating to current and future operations and sale of production, gas tax credit
sales agreements, and various other information and data were furnished to RSII
by Evergreen and are accepted as factual without independent verification of
such facts. We did not make a field examination of the operations or physical
condition of the appraised properties.
Crude oil, natural gas, and natural gas liquid reserves included in this
report are classified as proved and are judged to be economically producible in
future years from known reservoirs under existing economic and operating
conditions, assuming continuation of the current regulatory practices, and using
conventional production methods and equipment.
<PAGE>
Evergreen Resources, Inc.
April 12, 1996
Page 2
Definitions of proved reserves used in this evaluation are those set forth
in Rule 4-10(a) of Regulation S-X, as adopted by the SEC:
"PROVED OIL AND GAS RESERVES. Proved oil and gas reserves are
the estimated quantities of crude oil, natural gas, and natural gas
liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known
reservoirs under existing economic and operating conditions, i.e.,
prices and costs as of the date the estimate is made. Prices include
consideration of changes in existing prices provided only by
contractual arrangements, but not on escalations based upon future
conditions.
"(i) Reserves are considered proved if economic producibility is
supported by either actual production or conclusive formation tests.
The area of a reservoir considered proved includes (A) that portion
delineated by drilling and defined by gas-oil and/or oil-water
contacts, if any, and (B) the immediately adjoining portions not yet
drilled, but which can be reasonably judged as economically productive
on the basis of available geological and engineering data. In the
absence of information on fluid contacts, the lowest known structural
occurrence of hydrocarbons controls the lower proved limit of the
reservoir.
"(ii) Reserves which can be produced economically through
application of improved recovery techniques (such as fluid injection)
are included in the 'proved' classification when successful testing by
a pilot project, or the operation of an installed program in the
reservoir, provides support for the engineering analysis on which the
project or program was based.
"(iii) Estimates of proved reserves do not include the
following: (A) oil that may become available from known reservoirs
but is classified separately as 'indicated additional reserves'; (B)
crude oil, natural gas, and natural gas liquids, the recovery of which
is subject to reasonable doubt because of uncertainty as to geology,
reservoir characteristics, or economic factors; (C) crude oil, natural
gas, and natural gas liquids, that may occur in undrilled prospects;
and (D) crude oil, natural gas, and natural gas liquids, that may be
recovered from oil shales, gilsonite and other such sources.
"PROVED DEVELOPED OIL AND GAS RESERVES. Proved developed oil and
gas reserves are reserves that can be expected to be recovered through
existing wells with existing equipment and operating methods.
Additional oil and gas expected to be obtained through the application
of fluid injection or other improved recovery techniques for
supplementing the natural forces and mechanisms of primary recovery
should be included as 'proved developed reserves' only after testing
by a pilot project or after the operation of an installed program has
confirmed through production response that increased recovery will be
achieved.
<PAGE>
Evergreen Resources, Inc.
April 12, 1996
Page 3
"PROVED UNDEVELOPED OIL AND GAS RESERVES. Proved undeveloped oil
and gas reserves are reserves that are expected to be recovered from
new wells on undrilled acreage, or from existing wells where a
relatively major expenditure is required for recompletion. Reserves
on undrilled acreage shall be limited to those drilling units
offsetting productive units that are reasonably certain of production
when drilled. Proved reserves for other undrilled units can be
claimed only where it can be demonstrated with certainty that there is
continuity of production from the existing productive formation.
Under no circumstances should estimates for proved undeveloped
reserves be attributable to any acreage for which an application of
fluid injection or other improved recovery technique is contemplated
unless such techniques have been proved effective by actual tests in
the area and in the same reservoir."
Natural gas volumes are expressed at standard conditions of temperature and
pressure applicable in the area the gas is purchased. Condensate reserves
estimated are those obtained from normal separator recovery. Crude oil and
natural gas liquids are stated as standard barrels of 42 U.S. gallons per
barrel.
Estimated net proved reserves of crude oil, natural gas, and natural gas
liquids, as of April 1, 1996, are:
Crude Oil
and Natural
Gas Liquids Natural Gas
----------- -----------
Barrels MCF
Total Proved Developed Producing Reserves 4,842 26,700,580
Total Proved Developed Non-Producing Reserves 0 14,659,080
Total Proved Undeveloped Reserves 0 39,566,440
- ----------
TOTAL PROVED RESERVES 4,842 80,926,100
----- ----------
----- ----------
Value of net proved reserves is expressed in terms of estimated future net
revenue and present value of future net revenue. Future net revenue is
calculated by deducting estimated operating expenses, future development costs,
and severance and ad valorem taxes from the future gross revenue.
Present value of future net revenue is calculated by discounting the
future net revenue at the arbitrary rate of 10 percent per year compounded
monthly over the expected period of realization. Present value, as expressed
herein, should not be construed as fair market value since no consideration
has been given to many factors which influence the prices at which petroleum
properties are traded, such as taxes on operating profits, allowance for
return on the investment, and normal risks incident to the oil business.
<PAGE>
Evergreen Resources, Inc.
April 12, 1996
Page 4
Evergreen hedges natural gas prices, and as a result, natural gas prices
included in this appraisal reflect Evergreen's expected prices as of April 1,
1996. Gas prices used in the Raton Basin are based on existing gas sales
contracts. Gas prices used in the Rosa Unit reflect income from Evergreen's
sale of their tax credits for coal bed methane reserves. Current average
operating costs are used to estimate future costs required to operate the
properties.
Estimated future net revenue and net present value of future net revenue
from proved crude oil, natural gas, and natural gas liquid reserves, as of April
1, 1996, follow:
10% Disc.
Future Net Future Net
Revenue $ Revenue $
Total Proved Developed Producing Reserves 29,108,160 13,608,700
Total Proved Developed Non-Producing Reserves 14,893,489 5,126,980
Total Proved Undeveloped Reserves 39,017,620 11,427,740
---------- ----------
TOTAL PROVED RESERVES 83,019,269 30,163,420
---------- ----------
---------- ----------
The estimated net present value of total proved reserves increased
$6,851,096 from the previous year's appraisal. This increase is attributable to
higher gas prices and drilling and completing new wells in the Raton Basin.
Natural gas reserves increased from 57.9 Bcf to 80.9 Bcf from the previous year
due to this activity. Proved crude oil reserves significantly decreased due to
sales of properties located in Wyoming, Oklahoma, and New Mexico.
Production rates of Evergreen's coalbed methane reserves are reduced from
the previous year's appraisal. The decreased production rates reflect actual
field and sales conditions which require Evergreen to restrict the production
rates of individual wells. As of April 1, 1996, the gas gathering system which
collects natural gas is operating at full capacity, and as a result, well head
pressures are higher than required for optimal production. Further, the high
well head pressures restrict flow of water into the well, lengthening the
dewatering period. As a result, the individual well production gas rates are
projected to be lower than the prior year's estimates. However, ultimate
economic recoverable reserve quantities are essentially unchanged.
Virtually all of Evergreen's gas reserves are coal gas located in the Raton
Basin, Colorado, and the San Juan Basin, New Mexico. Projection of coalbed
methane gas reserves is generally more complicated than projection of
conventional hydrocarbon reservoirs due to complex reservoir properties and the
dewatering process required to develop producible natural gas reservoirs.
Therefore, reserve estimates and gas production rates for coalbed methane wells
are modified frequently as gas and water production data becomes available.
With one exception, the producing wells in the Raton Basin are completed in
the Vermejo coal interval. Most of these wells contain the Raton Coal section
above the producing Vermejo Coal zone. Gas reserves in the Raton Coal interval
in the currently
<PAGE>
Evergreen Resources, Inc.
April 12, 1996
Page 5
drilled wells are classified as Proved Developed Non-Producing (Behind Pipe),
due to relatively small expenditures required to complete the Raton Coal in the
existing wellbore. Evergreen does not plan to aggressively complete these
reserves for two to seven years.
The Don #44-7, Rudy Bo #12-16, Taylor #42-10, and Taylor #42-7 wells are
currently candidates for refracturing. The production rates of these wells are
expected to increase to the level reflected in the projections. These
projections are based on high rates observed after successful refracture
operations performed on the Taylor #44-1 and Taylor #12-8 wells.
The negative investment values occurring in 2002 for certain Proved
Developed Non-Producing wells located in the Raton Basin are due to unitization
capital costs and the return of payment advances used by Evergreen to purchase
certain portions of their working interests in those wells.
The estimates of reserves, future net revenue, and net present value are
determined according to our understanding of applicable regulations of the
Securities and Exchange Commission. These estimates have not been filed with
any other federal authority or agency.
Resource Services International, Inc. and its principals are unrelated to
Evergreen, its officers, shareholders, and properties evaluated in this report.
We do not own a direct or indirect financial interest in Evergreen or its
properties.
Submitted,
/s/ Resource Services International, Inc.
RESOURCE SERVICES INTERNATIONAL, INC.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 3,702,511
<SECURITIES> 0
<RECEIVABLES> 1,134,320
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,969,277
<PP&E> 49,182,662
<DEPRECIATION> (11,558,516)
<TOTAL-ASSETS> 44,171,717
<CURRENT-LIABILITIES> 2,489,970
<BONDS> 0
7,500,000
0
<COMMON> 58,998
<OTHER-SE> 31,529,839
<TOTAL-LIABILITY-AND-EQUITY> 44,171,717
<SALES> 2,171,841
<TOTAL-REVENUES> 2,934,831
<CGS> 2,192,600
<TOTAL-COSTS> 3,011,405
<OTHER-EXPENSES> (10,997)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36,620
<INCOME-PRETAX> (102,197)
<INCOME-TAX> 0
<INCOME-CONTINUING> (102,197)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (606,817)<F1>
<EPS-PRIMARY> (.10)<F2>
<EPS-DILUTED> 0
<FN>
<F1>Net loss attributable to common stock after Preferred Stock dividends of
$504,620.
<F2>Per common share, after cash dividends paid on Preferred Stock.
</FN>
</TABLE>
