<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from_______ to _______
Commission file number 0-10077
EVERGREEN RESOURCES, INC.
(Exact name of registrant as specified in its charter)
Colorado 84-0834147
- ------------------------------------- -------------------------------
(State or Other Jurisdiction (I.R.S. Employer Identification
of Incorporation or Organization) Number)
1401 17th Street Suite 1200
Denver, Colorado 80202
- ------------------------------------- ------------------------------
(Address of Principal Executive (Zip Code)
Offices)
Registrant's Telephone Number, Including Area Code (303) 298-8100
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. X Yes No
----- -----
As of November 6, 1998, 10,655,911 shares of the Registrant's Common Stock, no
par value, were outstanding.
<PAGE>
EVERGREEN RESOURCES, INC.
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheets as of September 30, 1998
and December 31, 1997................................................... 3
Consolidated Statements of Income for the Three and Nine
Months Ended September 30, 1998 and 1997................................ 4 - 5
Consolidated Statements of Comprehensive Income for the
Three and Nine Months Ended September 30, 1998 and 1997................. 6
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1998 and 1997....................................... 7
Notes to Consolidated Financial Statements................................. 8 - 10
Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................... 11 - 16
PART II. OTHER INFORMATION..................................................... 17
</TABLE>
2
<PAGE>
EVERGREEN RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
ASSETS
Current:
Cash and cash equivalents $ 2,160,215 $ 2,103,168
Accounts receivable:
Oil and gas sales 3,573,104 2,298,861
Joint interest billings and other 973,420 1,311,587
Other current assets 241,665 321,764
------------ -----------
Total current assets 6,948,404 6,035,380
------------ -----------
Property and equipment:
Proved oil and gas properties, based on full-cost accounting 72,505,562 58,937,182
Unevaluated properties not subject to amortization 21,231,331 9,700,838
Gas gathering equipment 31,902,540 21,635,598
Support equipment 3,217,148 1,851,966
------------ -----------
128,856,581 92,125,584
Less accumulated depreciation, depletion and amortization 18,371,003 15,361,174
------------ -----------
Net property and equipment 110,485,578 76,764,410
------------ -----------
Designated cash 2,410,373 2,142,883
Other assets 2,824,194 2,362,829
------------ -----------
$122,668,549 $87,305,502
------------ -----------
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 823,722 $ 1,645,467
Amounts payable to oil and gas property owners 2,950,339 2,968,827
Accrued expenses and other 531,592 494,252
Current portion -- capital leases 1,130,680 1,061,090
------------ -----------
Total current liabilities 5,436,333 6,169,636
Production taxes payable 2,410,373 2,142,883
Notes payable 38,582,000 10,812,000
Obligations under capital leases 3,171,950 4,028,872
Deferred income tax liability 2,622,000 --
------------ -----------
Total liabilities 52,222,656 23,153,391
------------ -----------
Stockholders' equity:
Common stock, shares issued and outstanding,
10,569,954 and 10,395,266 105,680 103,953
Additional paid-in capital 69,958,870 67,948,743
Retained earnings (deficit) 46,369 (4,134,705)
Foreign currency translation adjustment 334,974 234,120
------------ -----------
Total stockholders' equity 70,445,893 64,152,111
------------ -----------
$122,668,549 $87,305,502
------------ -----------
------------ -----------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
EVERGREEN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
1998 1997
---------- ----------
<S> <C> <C>
Revenues:
Natural gas revenues $5,409,288 $3,236,216
Equity in earnings of investment 207,760 226,000
Interest 50,920 37,427
---------- ----------
Total revenues 5,667,968 3,499,643
---------- ----------
Expenses:
Lease operating expenses 1,031,972 555,118
Depreciation, depletion and amortization 1,093,623 751,003
General and administrative expenses 525,457 336,201
Interest expense 546,477 239,769
Other expense 114,290 180,452
---------- ----------
Total expenses 3,311,819 2,062,543
---------- ----------
Net income before income taxes 2,356,149 1,437,100
Income tax provision -- deferred 907,000 --
---------- ----------
Net income 1,449,149 1,437,100
Preferred stock dividends -- 120,000
---------- ----------
Net income attributable to common stock $1,449,149 $1,317,100
---------- ----------
---------- ----------
Net income per share of common stock
Basic $ .14 $ .14
---------- ----------
Diluted $ .13 $ .13
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
EVERGREEN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------
1998 1997
---- ----
<S> <C> <C>
Revenues:
Natural gas revenues $14,189,007 $ 8,194,717
Equity in earnings of investment 428,474 226,000
Interest 132,525 103,424
---------- -----------
Total revenues 14,750,006 8,524,141
---------- -----------
Expenses:
Lease operating expenses 2,265,412 1,443,849
Depreciation, depletion and amortization 2,847,244 2,042,508
General and administrative expenses 1,373,385 930,489
Interest expense 1,307,051 511,359
Other expense 153,840 258,656
---------- -----------
Total expenses 7,946,932 5,186,861
---------- -----------
Net income before income taxes 6,803,074 3,337,280
Income tax provision--deferred 2,622,000 --
---------- -----------
Net income 4,181,074 3,337,280
Preferred stock dividends -- 360,000
---------- -----------
Net income attributable to common stock $4,181,074 $ 2,977,280
---------- -----------
---------- -----------
Net income per share of common stock
Basic $.40 $.32
---------- -----------
Diluted $.38 $.31
---------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
EVERGREEN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income attributable to common stock $1,449,149 $1,317,100 $4,181,074 $2,977,280
Foreign currency translation adjustments,
net of tax 88,593 (97,915) 61,924 (64,608)
---------- ---------- ---------- ----------
Comprehensive income $1,537,742 $1,219,185 $4,242,998 $2,912,672
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
EVERGREEN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,181,074 $ 3,337,280
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation, depletion and amortization 2,918,417 2,042,508
Deferred income taxes 2,622,000 --
Equity in earnings of investment (428,474) (226,159)
Other 238,494 89,895
Changes in operating assets and liabilities:
Accounts receivable (945,034) (374,768)
Other current assets 55,858 (93,549)
Accounts payable 281,438 (714,271)
Accrued expenses 37,340 75,002
----------- -----------
Net cash provided by operating activities 8,961,113 4,135,938
----------- -----------
Cash flows from investing activities:
Investment in property and equipment (36,913,304) (14,338,817)
Designated cash (267,490) (295,974)
Change in production taxes payable 267,490 295,974
Increase in other assets (159,459) (193,722)
----------- -----------
Net cash used by investing activities (37,072,763) (14,532,539)
----------- -----------
Cash flows from financing activities:
Net proceeds from notes payable and long-term debt 27,770,000 8,777,120
Proceeds from sale of common stock 1,303,074 279,076
Principal payments on capital lease obligations (787,333) (448,608)
Payment of preferred stock dividends -- (360,000)
Debt issue costs (106,527)
Cash held from operating oil and gas properties (18,488) 1,608,046
----------- -----------
Net cash provided by financing activities 28,160,726 9,855,634
----------- -----------
Effect of exchange rate changes on cash 7,971
----------- -----------
Increase (decrease) in cash and cash equivalents 57,047 (540,967)
Cash and cash equivalents, beginning of the period 2,103,168 2,640,300
----------- -----------
Cash and cash equivalents, end of the period $ 2,160,215 $ 2,099,333
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(Unaudited)
1. Basis of Presentation
Evergreen is an independent energy company engaged in the exploration,
development, production and acquisition of oil and gas properties.
Evergreen's primary focus is on developing coalbed methane properties
located on approximately 200,000 gross acres in the Raton Basin in southern
Colorado. The Company also holds exploration licenses on approximately
371,000 acres onshore in the United Kingdom, a net 2% interest in an
offshore Falkland Islands exploration license, and an oil and gas
exploration contract on approximately 2.4 million acres in northern Chile.
Evergreen operates all of its own producing properties and also acts as
operator on a contract basis for properties owned by others.
The financial statements include the accounts of Evergreen Resources, Inc.
("ERI" or the "Company") and its wholly-owned subsidiaries; Evergreen
Operating Corporation ("EOC"), Evergreen Resources (UK) Ltd., Powerbridge,
Inc., and Primero Gas Marketing Company ("Primero"). All significant
intercompany balances and transactions have been eliminated in
consolidation.
The consolidated financial statements also include the Company's 49%
ownership in Maverick Stimulation Company, LLC ("Maverick") and 40%
ownership in Argos Evergreen Limited ("AEL"), a Falkland Islands Company,
which holds a 5% interest in Tranche A in the Falkland Islands Basin. The
Company accounts for these investments by the equity method of accounting.
All significant intercompany balances and transactions have been
eliminated. Maverick provides pressure pumping, fracture stimulation and
other oilfield services to the petroleum industry in the Rocky Mountain
region.
In the opinion of Management, the accompanying unaudited financial
statements contain all adjustments necessary to present fairly the
Company's financial position as of September 30, 1998 and the results of
its operations and changes in financial position for the three and nine
months then ended. All such adjustments are of a normal recurring nature.
The results of operations for interim periods are not necessarily
indicative of the results of operations of the full fiscal year.
2. Oil and Gas Properties
The Company follows the full-cost method of accounting for oil and gas
properties. Under this method, all productive and nonproductive costs
incurred in connection with the exploration for and development of oil and
gas reserves are capitalized. Such capitalized costs include lease
acquisition, geological and geophysical work, delay rentals, drilling,
completing and equipping oil and gas wells and other related costs. Normal
dispositions of oil and gas properties are accounted for as adjustments of
capitalized costs, with no gain or loss recognized.
Depreciation and depletion of proved oil and gas properties is computed on
the units-of-production method based upon estimates of proved reserves with
oil and gas being converted to a common unit of measure based on the
relative energy content. Unproved oil and gas properties, including any
related capitalized interest expense, are not amortized, but are assessed
for impairment either individually or on an aggregated basis.
8
<PAGE>
3. Earnings per Share
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- ----------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Net income $1,449,149 $1,437,100 $4,181,074 $3,337,280
Preferred stock dividends -- (120,000) -- (360,000)
---------- ---------- ---------- ----------
Numerator for basic earnings per share--
income available to common
stockholders 1,449,149 1,317,100 4,181,074 2,977,280
Effect of dilutive securities:
Preferred stock dividends -- 120,000 -- 360,000
---------- ---------- ---------- ----------
Numerator for dilutive earnings per
share--income available to common
stockholders after assumed conversions $1,449,149 $1,437,100 $4,181,074 $3,337,280
---------- ---------- ---------- ----------
Denominator:
Denominator for basic earnings per share--
weighted average shares 10,540,545 9,424,837 10,476,437 9,403,543
Effect of dilutive securities:
Stock warrants 638,381 492,862 669,417 256,628
8% Convertible preferred stock -- 905,660 -- 905,660
---------- ---------- ---------- ----------
Dilutive potential common shares 638,381 1,398,522 669,417 1,162,288
---------- ---------- ---------- ----------
Denominator for diluted earnings per
share--adjusted weighted average
shares and assumed conversion 11,178,926 10,823,359 11,145,854 10,565,831
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Basic earnings per share $.14 $.14 $.40 $.32
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted earnings per share $.13 $.13 $.38 $.31
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
4. Comprehensive Income
During 1998, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 130, Reporting Comprehensive Income. The implementation of SFAS No.
130 required comparative information for earlier years to be restated. The
Company has elected to report comprehensive income in a consolidated statement
of comprehensive income. Comprehensive income is comprised of net income and all
changes to stockholders' equity, except those due to investments by
stockholders, changes in paid in capital and distributions to stockholders.
5. Financing Agreement
As of July 1, 1998, the Company increased its revolving line of credit to $50.0
million with a bank group consisting of Hibernia National Bank, as agent, Banque
Paribas and Chase Bank of Texas. The line is available through June 2001.
Advances pursuant to this line of credit are limited to a borrowing base, which
is presently $50.0 million. At the Company's election, it may use either the
London interbank offered rate ("Libor") plus a margin of 1.38% to 1.75% or the
prime rate plus a margin of 0% to .25%, with margins on both rates determined on
the average outstanding borrowings under the credit facility.
9
<PAGE>
6. Property Acquisition
On July 2, 1998, Evergreen completed the acquisition, effective July 1, 1998, of
approximately 100% of the working interest in 27,590 acres in Amoco Production
Company's ("Amoco") Cottontail Pass Federal Unit, together with 28 existing well
bores, current production of 3.7 million cubic feet ("MMcf") per day and related
gathering facilities. The Company estimates that there are approximately 100
additional drilling locations in the Unit.
The Cottontail Pass Unit is situated between Evergreen's Spanish Peaks and
Sangre de Cristo Federal Units.
The acquisition of the Cottontail Pass Federal Unit from Amoco resolves the
preferential rights litigation between Evergreen and Amoco.
The purchase price was approximately $13,100,000 cash, funded by the Company's
line of credit with Hibernia National Bank as administrative agent.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), including statements regarding, among other items,
(i) the Company's growth strategies, (ii) anticipated trends in the Company's
business and its future results of operations, and (iii) market conditions in
the oil and gas industry. These forward-looking statements are based largely on
the Company's expectations and are subject to a number of risks and
uncertainties, many of which are beyond the Company's control, including those
described below. Actual results could differ materially from these
forward-looking statements as a result of, among other things, a decline in
natural gas production, a decline in natural gas prices, incorrect estimations
of required capital expenditures, increases in the cost of drilling, completion
and gas gathering, an increase in the cost of production and operations, an
inability to meet growth projections, and/or changes in general economic
conditions. In light of these risks and uncertainties, there can be no assurance
that actual results will be as projected in the forward-looking statements.
Recent Developments
- -------------------
Raton Basin
As of October 31, 1998, Evergreen was producing from 148 gas wells, which
compared to 89 productive wells at the beginning of the year. Another nine gas
wells are awaiting pipeline connection. Gross gas production has continued to
improve since sales began in January 1995 to a current level of approximately 40
million cubic feet ("MMcf") per day.
As of September 1, 1998, the Company's natural gas reserves increased 50% to an
estimated 336.1 billion cubic feet equivalent (Bcfe), up 111.7 Bcfe from
year-end 1997. The September 1, 1998, reserve estimate was audited by
independent petroleum engineering consultants Netherland Sewell & Associates and
Resource Service International, Inc. Natural gas in the southern Colorado
portion of the Raton Basin constitutes all of Evergreen's net proved reserves,
60% of which are classified as developed as of September 1, 1998.
The increase in reserves is attributable to both the July 1, 1998, acquisition
of properties from Amoco Production Company and Evergreen's successful drilling
results in the Raton Basin. Also contributing to the reserve increase were two
joint-venture agreements with Infinity, Inc., which provide Evergreen with
working interests in an aggregate 41,300 gross acres in the Raton Basin.
The present value of estimated future net revenues from Evergreen's proved
reserves discounted at 10% was $231.1 million as of September 1, 1998, which
compared to $159.3 million at December 31, 1997. The calculation for this
reserve update was based on an unescalated average gas price of $1.93 per
thousand cubic feet (Mcf), versus $1.86 per Mcf at year-end 1997.
In early September 1998, Colorado Interstate Gas (CIG) completed the Campo
Lateral expansion project. The expansion significantly lowers pipeline pressures
and increases initial pipeline capacity from the Raton Basin to 100 MMcf of gas
per day, up from 47 MMcf per day.
11
<PAGE>
On October 21, 1998, President Clinton signed into law a bill that protects
existing royalty ownership of coalbed methane gas produced from existing oil and
gas leases, where the coal rights were severed and owned by the Federal
Government. In the Company's opinion this legislation favorably eliminates the
uncertainty regarding title ownership on any of Evergreen's existing acreage in
the Raton Basin. This legislation was introduced in response to a July 20, 1998,
U.S. Tenth Circuit Court of Appeals ruling, in Southern Ute Indian Tribe v.
Amoco Production Company, which held that coalbed methane rights may be included
in the definition of "coal" rather than "gas."
Hedging
The Company typically enters into contractual obligations that require future
physical delivery in an attempt to manage price risk with regard to a portion
of its natural gas production. Approximately 90% of the Company's sales were
hedged at $1.93 per mcf through October 1998. Due to current market
conditions the Company has not hedged any of its production as of November 6,
1998; however, if market conditions improve, the Company expects to hedge
some or all of its natural gas sales for a period of one year or less.
International
The Company has recently completed a 3D seismic program in the United Kingdom in
an area in which Evergreen plans to drill a five well pilot coalbed methane
project. The Company has recently purchased a drilling rig for this project and
anticipates delivery of the rig by year-end. This rig initially will be tested
in the Raton Basin and shipped to the United Kingdom for the drilling of the
five wells in the second quarter of 1999.
The Falkland Island consortium, in which Evergreen has a net 2% interest, has
completed operations on the second well (and the industry's fifth well) in the
North Falklands Basin. Well 14/9-2 was spudded on October 13, 1998, and finished
drilling on October 28, 1998. It reached a total depth of approximately 8,000
feet and was plugged and abandoned as a dry hole with oil shows.
The abandonment of well 14/9-2 completes the initial drilling campaign on
Tranche A. The two wells on Tranche A have established good source rocks and
potential reservoir rocks. The consortium will assess the data gathered from the
two wells to determine the future strategy for the acreage.
Liquidity and Capital Resources
- -------------------------------
Evergreen currently has a $50.0 million revolving line of credit with a bank
group consisting of Hibernia National Bank, as agent, Banque Paribas and Chase
Bank of Texas. The line is available through June 2001. Advances pursuant to
this line of credit are limited to a borrowing base, which is presently $50.0
million. At the Company's election, it may use either the London interbank
offered rate ("Libor") plus a margin of 1.38% to 1.75% or the prime rate plus a
margin of 0% to .25%, with margins on both rates determined on the average
outstanding borrowings under the credit facility. The Company anticipates
increasing its credit facility to $75 million by year end.
In addition, the Company has a $10.0 million equipment line of credit for
Primero. Payments will be level monthly principal payments, plus interest based
on 5 year treasuries plus 2%. The interest rate will be fixed and the principal
payments amortized over 5 years at the time of any drawdown. The Company
anticipates that the existing capital lease obligations will be paid off with
the equipment line.
The Company has a capital equipment lease with Hibernia National Bank with
interest at prime for a term of five years ending through April 2002, with an
option to purchase the equipment at nominal amounts at the end of the lease
term. The Company primarily leases compressors for the Raton Basin gas gathering
system and other related production equipment.
The Company is a guarantor of a capital lease for Maverick with a potential
liability of up to $1.53 million. The guaranteed obligations amounted to
$656,000 at September 30, 1998.
12
<PAGE>
During 1998, the Company anticipates drilling a total of approximately 60 new
wells and expanding and upgrading gas gathering facilities in the Raton Basin.
As of October 29, 1998, a total of 43 wells have been drilled to date during
1998. In addition the Company has started construction on a second compressor
station in the northern portion of the Spanish Peaks Unit along with the related
infrastructure, which includes a 24-inch trunk gathering line and a 12-inch high
pressure sales line that connects to the CIG's Picketwire Lateral. These items
were originally planned and budgeted for the first quarter of 1999. However, due
to pressure constraints in the gathering system caused by increasing pressures
and additional gas volumes from newer wells drilled, the accelerated
construction of the compressor station and the infrastructure are needed to
optimize production in the Spanish Peaks and Cottontail Pass Units. Capital
expenditures for 1998 have been increased to approximately $31 million for the
Raton Basin development.
The Company believes that cash flow from operations and available borrowings
under its line of credit will be sufficient to fund 1998 capital expenditures,
including the Cottontail Pass Unit acquisition. Future development of the Raton
Basin and other projects will require additional capital. For the foreseeable
future the Company believes it will have sufficient capacity to fund all of its
projects through its anticipated cash flow and its lines of credit. However, as
the Company continues to grow and expand, the Company believes that additional
equity capital may be required to fund development of its projects. Oil and gas
leases expiring in fiscal 1998 and 1999 are not material and do not require
significant drilling expenditures.
Cash flows provided by operating activities were $8,961,000 for the nine months
ended September 30, 1998, as compared to cash flows provided by operating
activities of $4,135,900 in the prior year. The significant increase in the cash
flows provided by operating activities is due primarily to improved operating
results as a result of increased gas production and higher gas prices.
Cash flows used by investing activities were $37,073,000 during the nine months
ended September 30, 1998, versus $14,532,500 during the same period in 1997. The
increase in 1998 was due to the acquisition of the Cottontail Pass Unit for
$13,100,000 in July, 1998, and the continued development of the drilling and
gathering system in the Raton Basin of $22,900,000.
Cash flows provided by financing activities were $28,161,000 during the nine
months ended September 30, 1998, as compared to cash flows provided by financing
activities of $ 9,855,600 in the prior period. The increase was due primarily to
increased borrowings to fund the development of the drilling and gathering
system in the Raton Basin as well as the acquisition of the Cottontail Pass Unit
of $27,770,000 and proceeds from the exercise of stock warrants for
approximately $1,303,000.
Production Data
- ---------------
The following table sets forth certain operating data of the Company for the
periods presented.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ----------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Natural gas sales (Mcf) 2,728,000 1,807,300 7,100,300 4,564,300
Average realized sales price per Mcf $ 1.98 $ 1.79 $ 2.00 $ 1.80
Cost per Mcfe:
Lease operating expense $ .38 $ .31 $ .32 $ .31
Depreciation, depletion .40 .42 .40 .45
and amortization
General and administrative .19 .19 .19 .20
</TABLE>
13
<PAGE>
Results of Operations - Three and Nine Months Ended September 30, 1998
- ----------------------------------------------------------------------
The Company reported net income of $1,449,100 or $.13 per diluted share for the
three months ended September 30, 1998, compared to net income of $1,317,100 or
$.13 per diluted share for the same period in 1997. For the nine months ended
September 30, 1998, the Company reported net income of $4,181,100 or $.38 per
diluted share compared to net income of $2,977,280 or $.31 per diluted share for
the same period in 1997. Pretax net income increased significantly to $2,356,100
for the three months ended September 30, 1998, as compared to $1,437,100 in the
prior period. Due to a deferred income tax provision of $907,000 in 1998 versus
no deferred income tax provision in 1997 the Company's net income increased
slightly. The significant increase in net income during the nine months ended
September 30, 1998, as compared to the prior year, is attributable to increased
Raton Basin production volumes and improved natural gas prices. Net income for
the nine months ended September 30, 1998, has also been reduced by a deferred
income tax provision of $2,622,000 as compared to no deferred income tax
expenses in 1997.
Natural gas revenues increased to $5,409,300 during the three months ended
September 30, 1998, from $3,236,200 for the same period in the prior year.
During the nine months ended September 30, 1998, natural gas revenues increased
to $14,189,000 from $8,194,700 in the prior year. The significant increase in
natural gas revenues for both the three and nine month period is due to a
combination of the increase in gas production volumes and gas prices as noted in
the table above for all periods presented. At September 30, 1998, the number of
producing Raton Basin wells increased to 148 from 73 producing wells at
September 30, 1997, and is the primary factor for the increase in production
volumes. The average gas prices increased for the three and nine month periods
in 1998 as compared to 1997 is principally due to the Company's gas price
hedging strategies.
Equity in earnings of investment (which refers to the Company's 49% interest in
Maverick) was $207,800 for the three months ended September 30, 1998, as
compared to $226,000 in 1997. During the nine months ended September 30, 1998,
equity in earnings of investment was $428,500 as compared to $226,000 in the
prior year. The increase in Maverick's nine month net income is due to the
increase in its oil and gas stimulation services for third party entities. The
Company accounts for the investment in Maverick under the equity method of
accounting. Maverick provides certain well stimulation services to the Company
and during the three and nine months ended September 30, 1998, such services
amounted to $592,500 and $1,808,300 of which $104,200 was unpaid at September
30, 1998. The Company guaranteed approximately $656,000 of Maverick's
outstanding debt at September 30, 1998. The investment in Maverick was
$1,266,000 at September 30, 1998.
Lease operating expenses for the three months ended September 30, 1998, were
$1,032,000 compared to $555,100 for the same period in 1997. During the nine
months ended September 30, 1998, lease operating expenses were $2,265,400 versus
$1,443,900 in the prior year. On an equivalent basis (Mcfe), lease operating
expenses were $.38 per Mcfe in the three month period in 1998 as compared to
$.31 per Mcfe in the prior year. For the nine months ended September 30, 1998,
lease operating expenses were $.32 per Mcfe versus $.31 per Mcfe in 1997. The
$.07 increase during the three months in 1998 over the prior year is primarily
due to an increase in water management costs. The increase in water management
costs is due to drilling wells where there has been a significant increase in
water production. The Company estimates that the lease operating expense per
Mcfe will be maintained at this higher level for the remainder of 1998, and some
portion of 1999 until new discharge permits are obtained, disposal wells are
drilled and additional water trucks are added for the water management program.
14
<PAGE>
Depreciation, depletion and amortization expense for the three months ended
September 30, 1998, was $1,093,600 compared to $751,000 for the same period in
1997. During the nine months ended September 30, 1998, depreciation, depletion
and amortization expense was $2,847,200 versus $2,042,500 in the prior year. On
an equivalent Mcfe basis, depreciation, depletion and amortization expense
declined to $.40 per Mcfe in the three months ended September 30, 1998, as
compared to $.42 per Mcfe in the prior year. For the nine months ended September
30, 1998, depreciation, depletion and amortization expenses were $.40 per Mcfe
versus $.45 per Mcfe in 1997. The decrease in cost per Mcfe in 1998 as compared
to 1997 is due to amortizing capital costs over a significant increase in the
units of proved reserves.
General and administrative expenses were $525,500 during the three months ended
September 30, 1998, as compared to $336,200 during the same period in 1997, and
for the nine months ended September 30, 1998, were $1,373,400 as compared to
$930,500 in the prior year. The increase in general and administrative expenses
of $189,300 for the three months ended September 30, 1998, as compared to 1997,
and the increase of $442,900 for the nine month period ended September 30, 1998,
versus the same period in 1997, is due to the expected increase in overall
corporate activity, including salaries and related increases in personnel and
moving costs associated with the corporate headquarters. The increase in
personnel costs is due to higher staff levels for the expected increase in
drilling activity in 1999. Although the overall expense increased for the nine
months ended September 30, 1998, the cost per Mcfe remained at $0.19 in both
1998 and 1997.
Interest expense for the three months ended September 30, 1998, was $546,500
compared to $239,800 for the same period in 1997. During the nine months ended
September 30, 1998, interest expense was $1,307,100 versus $511,400 in the prior
year. The $306,700 increase for the three months over the same period in the
prior year and $795,700 increase for the nine months over the same period in the
prior year is due to increased borrowings under the Company's line of credit to
$38.6 million at September 30, 1998, from $8.4 million at September 30, 1997,
and an increase in the equipment lease line to $4.3 million at September 30,
1998, from $3.7 million at September 30, 1997, to fund the Raton Basin
development and acquire the Cottontail Pass Unit.
Prior to 1998, the Company was not required to record income tax expense,
primarily due to the availability of net operating loss carryforwards. However,
as a result of the recently reported profitability and the significant
difference between the book and tax basis of assets, the Company estimates that
it will be required to provide for deferred income taxes in the statement of
operations in 1998 and subsequent years. The Company estimates that it will not
be required to pay current income tax in the near future due to the availability
of net operating loss carryforwards of approximately $30 million and current
deductions for intangible drilling costs. For the three and nine months ended
September 30, 1998, the Company recorded a deferred tax provision of $907,000
and $2,622,000.
The oil and gas service income and related cost of service have been
reclassified and included with general and administrative expenses for all
periods presented.
Accounting Pronouncements
- -------------------------
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information" which
supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise." SFAS No. 131 establishes standards for the way that public
companies report information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial statements issued to the public. It also
establishes standards for disclosure regarding products and services, geographic
areas and major customers. SFAS No. 131 defines operating segments as components
of a company about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Management believes the
adoption of this statement will have no material impact on the Company's
financial statements.
15
<PAGE>
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" which standardizes the disclosure
requirements for pensions and other postretirement benefits and requires
additional information on changes in the benefit obligations and fair value of
plan assets that will facilitate financial analysis. SFAS No. 132 is effective
for years beginning after December 15, 1997 and requires comparative information
for earlier years to be restated, unless such information is not readily
available. Management believes the adoption of this statement will have no
material impact on the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
Management believes the adoption of this statement will not have a material
impact on the Company's financial statements.
Year 2000
- ---------
The Company has conducted a review of its computer systems to identify the
systems that could be affected by the "Year 2000" issue. The Year 2000 problem
is the result of computer programs being written using two digits rather than
four to define the applicable year. Any of the Company's programs that have
time-sensitive software may recognize a date using '00' as the year 1900 rather
than the year 2000. This could result in a major system failure or
miscalculations.
The Company believes that Year 2000 problem will not pose material operational
problems for the Company and that it is adequately prepared for the Year 2000.
The Company's computer software provider has assured the Company that all of the
Company's software is Year 2000 compliant (i.e. will function properly in the
year 2000 and beyond). The Company's software provider provides written
assurance that its products are Year 2000 compliant on its web site. To the
Company's knowledge after investigation no "imbedded technology" (such as
microchips in an electronic control system) of the Company poses a material Year
2000 problem.
Because the Company believes that it has no material internal Year 2000
problems, the Company has not and does not expect to expend a significant amount
of funds to address Year 2000 issues. It is Company policy to continue to review
its suppliers' Year 2000 compliance and require assurance of Year 2000
compliance from new suppliers; however, such monitoring does not involve a
significant cost to the Company.
In addition to the foregoing, the Company has contacted its major vendors and
received either oral or written assurances from its major vendors or viewed
assurances contained on vendors' web sites that they have no material Year 2000
problems. The Company believes that its vendors are largely fungible; therefore,
in the event a vendor's representations regarding its Year 2000 compliance were
untrue for any reason, the Company believes that it could find adequate Year
2000 compliant vendors as substitutes.
The Company is materially dependant on CIG for the delivery of the Company's
gas. CIG has provided the Company with oral assurances that a CIG internal task
force has examined CIG's Year 2000 compliance and that CIG has no material Year
2000 problem. The Company expects to receive written assurance to this effect
from CIG.
In the event that one or more of the Company's vendors or CIG were to have a
material Year 2000 problem, the Company believes that the foreseeable
consequences would be a temporary delay in revenue collection caused by an
interruption in computerized billing (and not an interruption in the actual flow
of the Company's coalbed methane), which would not have a substantial long-term
impact on the Company's ability to conduct operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
16
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is not engaged in any material pending legal proceedings to
which the Company or its subsidiaries is a party or to which any of its property
is subject.
ITEM 2. CHANGES IN SECURITIES.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Not applicable.
(b) Reports on Form 8-K.
A report on Form 8-K regarding the acquisition of Amoco Production Company's
Cottontail Pass Federal Unit was filed on July 16, 1998. An amendment to this
Form 8-K was filed on September 3, 1998.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
EVERGREEN RESOURCES, INC.
(Registrant)
Date: November 10, 1998 By: /s/ Kevin R. Collins
-----------------------
Kevin R. Collins
VP - Finance
Chief Financial Officer
18
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