<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 JUNE 30, 1999
/ / 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 001-13171
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 July 29, 1999, 14,429,971 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 June 30, 1999
and December 31, 1998........................................... 3
Consolidated Statements of Income for the Three and Six
Months Ended June 30, 1999 and 1998............................. 4-5
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1999 and 1998.................................... 6
Consolidated Statements of Comprehensive Income for the
Three and Six Months Ended June 30, 1999 and 1998............... 7
Notes to Consolidated Financial Statements......................... 8-9
Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 10-14
Quantitative and Qualitative Disclosure
About Market Risk............................................... 14
PART II. OTHER INFORMATION............................................. 15-16
</TABLE>
2
<PAGE>
EVERGREEN RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
CURRENT:
Cash and cash equivalents $ 2,611,710 $ 1,333,733
Accounts receivable 4,004,594 4,728,722
Other current assets 964,091 295,011
------------- -------------
TOTAL CURRENT ASSETS 7,580,395 6,357,466
------------- -------------
PROPERTY AND EQUIPMENT, AT COST, BASED ON FULL-COST ACCOUNTING FOR OIL
AND GAS PROPERTIES 170,247,731 147,176,068
Less accumulated depreciation, depletion and amortization 21,891,215 19,400,469
------------- -------------
NET PROPERTY AND EQUIPMENT 148,356,516 127,775,599
------------- -------------
DESIGNATED CASH 1,946,295 2,781,716
OTHER ASSETS 1,574,024 2,711,536
------------- -------------
$ 159,457,230 $ 139,626,317
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,877,157 $ 1,240,110
Amounts payable to oil and gas property owners 1,387,828 2,947,345
Accrued expenses and other 1,358,659 1,515,427
Current portion - capital leases -- 1,122,499
------------- -------------
TOTAL CURRENT LIABILITIES 5,623,644 6,825,381
PRODUCTION TAXES PAYABLE 1,946,295 2,781,716
NOTES PAYABLE -- 44,138,700
OBLIGATIONS UNDER CAPITAL LEASES -- 2,906,374
DEFERRED INCOME TAX LIABILITY 4,470,996 3,295,000
------------- -------------
TOTAL LIABILITIES 12,040,935 59,947,171
------------- -------------
STOCKHOLDERS' EQUITY:
Common stock, $.01 stated value; shares authorized,
50,000,000; shares issued and outstanding 14,414,971 and 11,142,613 144,150 111,426
Additional paid-in capital 144,720,411 78,379,816
Retained earnings 2,932,100 1,077,582
Foreign currency translation adjustment (380,366) 110,322
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 147,416,295 79,679,146
------------- -------------
$ 159,457,230 $ 139,626,317
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
EVERGREEN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------------
1999 1998
------------- -------------
<S> <C> <C>
REVENUES:
Natural gas revenues $ 5,139,381 $ 4,467,304
Interest 63,126 36,704
------------- -------------
TOTAL REVENUES 5,202,507 4,504,008
------------- -------------
EXPENSES:
Lease operating expenses 1,162,839 679,082
Depreciation, depletion and amortization 1,137,318 910,787
General and administrative expenses 738,009 447,748
Interest expense 751,596 416,701
Other expense -- --
------------- -------------
TOTAL EXPENSES 3,789,762 2,454,318
------------- -------------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 1,412,745 2,049,690
Income tax provision - deferred 545,066 791,000
------------- -------------
INCOME FROM CONTINUING OPERATIONS 867,679 1,258,690
DISCONTINUED OPERATIONS
Gain from disposal of discontinued operations, net -- --
Equity in earnings of discontinued operations, net -- 73,324
------------- -------------
NET INCOME $ 867,679 $ 1,332,014
------------- -------------
------------- -------------
BASIC INCOME PER COMMON SHARE:
From continuing operations $ 0.08 $ 0.12
From discontinued operations -- 0.01
------------- -------------
Basic income per common share $ 0.08 $ 0.13
------------- -------------
DILUTED INCOME PER COMMON SHARE:
From continuing operations $ 0.07 $ 0.11
From discontinued operations -- 0.01
------------- -------------
Diluted income per common share $ 0.07 $ 0.12
------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
EVERGREEN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------------
1999 1998
------------- -------------
<S> <C> <C>
REVENUES:
Natural gas revenues $ 9,711,577 $ 8,779,719
Interest 114,148 81,604
------------- -------------
TOTAL REVENUES 9,825,725 8,861,323
------------- -------------
EXPENSES:
Lease operating expenses 2,363,385 1,233,439
Depreciation, depletion and amortization 2,298,182 1,753,621
General and administrative expenses 1,333,567 847,927
Interest expense 1,541,318 760,574
Other expense -- 39,550
------------- -------------
TOTAL EXPENSES 7,536,452 4,635,111
------------- -------------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 2,289,273 4,226,212
Income tax provision - deferred 886,912 1,631,000
------------- -------------
INCOME FROM CONTINUING OPERATIONS 1,402,361 2,595,212
DISCONTINUED OPERATIONS
Gain from disposal of discontinued operations, net 452,157 --
Equity in earnings of discontinued operations, net -- 136,714
------------- -------------
NET INCOME $ 1,854,518 $ 2,731,926
------------- -------------
------------- -------------
BASIC INCOME PER COMMON SHARE:
From continuing operations $ 0.12 $ 0.25
From discontinued operations 0.04 0.01
------------- -------------
Basic income per common share $ 0.16 $ 0.26
------------- -------------
DILUTED INCOME PER COMMON SHARE:
From continuing operations $ 0.11 $ 0.23
From discontinued operations 0.04 0.01
------------- -------------
Diluted income per common share $ 0.15 $ 0.24
------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
EVERGREEN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------------
1999 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,854,518 $ 2,731,926
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation, depletion and amortization 2,430,833 1,829,627
Deferred income taxes 886,912 1,631,000
Gain on disposal of discontinued operations, net (452,157) --
Equity in earnings of discontinued operations, net -- (136,714)
Other 241,492 128,286
Changes in operating assets and liabilities:
Accounts receivable 721,720 (474,080)
Other current assets (655,277) (78,381)
Accounts payable 249,783 134,586
Accrued expenses (557,884) 121,506
------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,719,940 5,887,756
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property and equipment (21,621,345) (15,182,683)
Proceeds from the sale of investment 2,258,500 --
Designated cash 835,421 154,558
Change in production taxes payable (835,421) (154,558)
Increase in other assets (332,857) 32,368
------------- -------------
NET CASH USED BY INVESTING ACTIVITIES (19,695,702) (15,150,315)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (payments on) notes payable (44,138,700) 10,415,818
Proceeds from sale of common stock, net 66,043,472 814,939
Principal payments on capital lease obligations (4,028,873) (519,313)
Debt issue costs (56,774) --
Decrease in cash held from operating oil and gas properties (1,559,517) (70,274)
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 16,259,608 10,641,170
------------- -------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (5,869) 17,243
------------- -------------
INCREASE IN CASH AND CASH EQUIVALENTS 1,277,977 1,395,854
CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD 1,333,733 2,103,168
------------- -------------
CASH AND CASH EQUIVALENTS, END OF THE PERIOD $ 2,611,710 $ 3,499,022
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
EVERGREEN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income $ 867,679 $ 1,332,014 $ 1,854,518 $ 2,731,926
Foreign currency translation adjustments (202,289) (65,009) (490,688) (26,668)
----------- ----------- ----------- -----------
Comprehensive income $ 665,390 $ 1,267,005 $ 1,363,830 $ 2,705,258
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1999
(UNAUDITED)
1. Basis of Presentation
Evergreen Resources, Inc. ("Evergreen" or the "Company") is an independent
energy company engaged in the exploration, development, production,
operation and acquisition of oil and gas properties. Evergreen's primary
focus is on developing and expanding its coal bed methane properties
located on approximately 200,000 gross acres in the Raton Basin in
southern Colorado. The Company also holds exploration licenses on
approximately 513,000 acres onshore in the United Kingdom, and an oil and
gas exploration contract on approximately 2.4 million acres in northern
Chile. Evergreen operates all of its own producing properties.
The financial statements include the accounts of Evergreen and its
wholly-owned subsidiaries: Evergreen Operating Corporation ("EOC"),
Evergreen Resources (UK) Ltd., Powerbridge, Inc., Evergreen Well Service
Company ("EWS") and Primero Gas Marketing Company ("Primero"). All
significant intercompany balances and transactions have been eliminated in
consolidation.
The Company has a 40% ownership in Argos Evergreen Limited ("AEL"), a
Falkland Islands Company which holds a 5% interest in Tranche A in the
Falkland Islands Basin. This investment is accounted for by the equity
method of accounting. Effective February 1999, the Company sold its 49%
interest in Maverick Stimulation Company, LLC ("Maverick") which had
previously been accounted for using the equity method of accounting. See
Note 5 for further discussion.
The accompanying financial statements should be read in conjunction with
the Company's audited consolidated financial statements for the year ended
December 31, 1998. In the opinion of management, the accompanying
unaudited financial statements contain all adjustments necessary to
present fairly the Company's financial position as of June 30, 1999 and
the results of its operations and cash flows for the three and six months
then ended. Management believes all such adjustments are of a normal
recurring nature. The results of operations for interim periods are not
necessarily indicative of results to be expected for a full 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 including salaries, benefits
and other internal costs directly attributable to the activities. Costs
associated with production and general corporate activities are expensed
in the period incurred. Interest costs related to unproved properties and
properties under development are also capitalized to oil and gas
properties. 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 Six Months Ended
June 30, June 30,
------------------------------- ----------------------------------
1999 1998 1999 1998
----------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Numerator:
Income from continuing operations $ 867,679 $ 1,258,690 $ 1,402,361 $ 2,595,212
Gain on disposal of discontinued
operations, net -- -- 452,157 --
Equity in earnings of discontinued
operations, net -- 73,324 -- 136,714
----------- -------------- -------------- --------------
Net income $ 867,679 $ 1,332,014 $ 1,854,518 $ 2,731,926
----------- -------------- -------------- --------------
Denominator:
Denominator for basic earnings per
share - weighted average shares 11,489,759 10,461,694 11,347,382 10,443,852
Effect of dilutive securities:
Stock warrants 776,966 699,772 674,395 684,935
----------- -------------- -------------- --------------
Denominator for diluted earnings
per share - adjusted weighted
average shares and assumed
conversions 12,266,725 11,161,466 12,021,777 11,128,787
----------- -------------- -------------- --------------
----------- -------------- -------------- --------------
Basic income per common share:
From continuing operations $ 0.08 $ 0.12 $ 0.12 $ 0.25
From discontinued operations -- 0.01 0.04 0.01
----------- -------------- -------------- --------------
Basic income per common share $ 0.08 $ 0.13 $ 0.16 $ 0.26
----------- -------------- -------------- --------------
Diluted income per common share:
From continuing operations $ 0.07 $ 0.11 $ 0.11 $ 0.23
From discontinued operations -- 0.01 0.04 0.01
----------- -------------- -------------- --------------
Diluted income per common share $ 0.07 $ 0.12 $ 0.15 $ 0.24
----------- -------------- -------------- --------------
</TABLE>
4. Public Offering
On June 22, 1999, the Company completed a public offering of its common
shares, whereby it sold 3,162,500 shares at $22.00 per share. Proceeds,
net of underwriters' commissions and estimated expenses of $4.4 million,
were $65.1 million, of which $58 million and $3.6 million has been used to
pay off the line of credit and capital lease obligation. The remainder of
the proceeds will be used for general corporate purposes.
5. Discontinued Operations
Effective February 18, 1999, Evergreen sold its 49% interest in Maverick
to the managing members of Maverick for $2.26 million. The cash was
received in April 1999. The sale resulted in a gain net of tax of
approximately $452,200 or $0.04 per diluted share. This transaction has
been accounted for as a discontinued operation and the results of
operations have been excluded from continuing operations in the
consolidated statements of income for all periods presented.
9
<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. Such
risks and uncertanties include, 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. These and other risks and uncertanties, which are described in
more detail in the Company's Annual Report on Form 10-K and the Company's
Prospectus Supplement dated June 16, 1999, included in its Registration
Statement on Form S-3 (Registrations No. 333-78203) filed with the Securities
and Exchange Commission, could cause actual results and developments to be
materially different from those expressed or implied by any of these
forward-looking statements.
RECENT DEVELOPMENTS
GENERAL
Evergreen is an independent energy company engaged in the exploration,
development, production, operation and acquisition of oil and gas properties.
Evergreen's primary focus is on developing and expanding its coal bed methane
properties located on approximately 200,000 gross acres in the Raton Basin in
southern Colorado. The Company also holds exploration licenses on
approximately 513,000 acres onshore in the United Kingdom, a net 2% interest
in a consortium exploring offshore in the Falkland Islands, and an oil and
gas exploration contract on approximately 2.4 million acres in northern
Chile. Evergreen operates all of its producing properties.
RATON BASIN
As of July 29, 1999, Evergreen has 215 producing gas wells. Gas production
has continued to improve since sales began in January 1995 to a current level
of over 47.5 million cubic feet ("MMcf") per day gross.
The Company enters into contractual obligations that require future physical
delivery to attempt to manage price risk with regard to a portion of its
natural gas production. As of July 29, 1999, the Company had entered into
contracts to sell amounts equal to substantially all of its current sales of
37 MMcf per day at $1.59 per thousand cubic feet ("Mcf") for the period May
1, 1999 through October 31, 1999. For the period November 1, 1999, through
October 31, 2000, the Company has entered into contracts to sell
approximately 26 MMcf per day at $1.90.
10
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain operating data of the Company for the
periods presented.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Natural gas production (Mcf) 3,317,200 2,282,300 6,361,200 4,372,300
Average realized sales price per Mcf $1.55 $1.96 $1.53 $2.01
Cost per Mcfe:
Lease operating expense $0.35 $0.30 $0.37 $0.28
Depreciation, depletion and amortization $0.34 $0.40 $0.36 $0.40
General and administrative $.022 $0.20 $0.21 $0.19
</TABLE>
RESULTS OF OPERATIONS - THREE AND SIX MONTHS ENDED JUNE 30, 1999
The Company reported net income of $868,000 or $0.07 per diluted share for
the three months ended June 30, 1999, compared to net income of $ 1,332,000
or $0.12 per diluted share for the same period in 1998. Although sales volume
increased by 45% in the second quarter of 1999, net income decreased in 1999
as compared to 1998. The decrease was primarily due to a decrease in gas
prices of 21% to $1.55 per Mcf in 1999 from $1.96 in 1998 and increases in
lease operating expenses, general and administrative expense and interest
expense. For the six months ended June 30, 1999, the Company reported net
income of $1,854,000 or $0.15 per diluted share compared to net income of
$2,732,000 or $0.24 per diluted share in 1998. The six months earnings
included a one-time, after tax gain of $452,000 or $0.04 per diluted share,
resulting from the sale of Evergreen's 49% interest in Maverick. The decrease
in net income during the six months ended June 30, 1999 as compared to the
prior year was attributable to a decrease in gas prices and increases in
lease operating expense, general and administrative and interest expense.
Natural gas revenues increased to $5,139,000 during the three months ended
June 30, 1999, from $4,467,000 for the same period in the prior year. During
the six months ended June 30, 1999, natural gas revenues increased to
$9,711,000 from $8,780,000 for the same period in the prior year. The
increase in natural gas revenues for both the three and six month periods is
due to a 45% increase in sales volumes for both periods , which was
significantly offset by a 21% and 24% decrease in natural gas prices for the
three and six month periods. At June 30, 1999, the number of producing Raton
Basin wells increased to 201 net from 110 net producing wells at June 30,
1998. The increase in the number of producing wells in 1999 as compared to
1998 is due to the drilling of 48 new wells and the acquisition of 29 wells
in the Cottontail Pass Unit in July 1998, and the acquisition of 19 producing
wells in Long Canyon in December of 1998.
Lease operating expenses for the three months ended June 30, 1999, were
$1,162,000 or $0.35 per Mcf compared to $679,000 or $0.30 per Mcf for the
same period in 1998. During the six months ended June 30, 1999, lease
operating expenses were $2,363,000 or $0.37 per Mcf as compared to $1,233,000
or $0.28 per Mcf for the same period in the prior year. The increase in lease
operating expense for the three and six months in 1999 as compared to 1998 is
primarily due to increased water management costs. There was no significant
change in the lease operating expenses in the first and second quarters of
1999, however, the cost per Mcf dropped in the second quarter as compared to
the first quarter due to the increase in sales volume. The Company is
continuing its efforts to reduce water management costs through the drilling
of disposal wells and the continued approval of discharge permits. One
disposal well has been drilled and is awaiting completion and a second
disposal well is scheduled to be drilled within the next month.
11
<PAGE>
Depreciation, depletion and amortization expense for the three months ended
June 30, 1999, was $1,137,000 compared to $911,000 for the same period in
1998. During the six months ended June 30, 1999, depreciation, depletion and
amortization expense was $2,298,000 as compared to $1,754,000 for the same
period in the prior year. On an equivalent Mcf basis, depreciation, depletion
and amortization expense declined to $0.34 per Mcf in the three months ended
June 30, 1999, as compared to $0.40 per Mcf for the same period in the prior
year. For the six months ended June 30, 1999 depreciation, depletion and
amortization expenses were $0.36 per Mcf as compared to $0.40 per Mcf for the
same period in 1998. The decrease in cost per Mcf in 1999 as compared to 1998
is due to the significant increase in the estimated units of proved reserves
as a result of the number of new wells that have been drilled in 1999.
General and administrative expenses were $738,000 during the three months
ended June 30, 1999, as compared to $448,000 during the same period in 1998
and for the six months ended June 30, 1999 were $1,334,000 as compared to
$848,000 for the same period in the prior year. The increase in general and
administrative expenses of $290,000 for the three months ended June 30, 1999
as compared to 1998 and the increase of $486,000 for the six month period
ended June 30, 1999 is due to the increase in administrative staff and other
corporate expenses as a result of the significant growth of the Company.
Through March 1999, EOC, a wholly owned subsidiary of the Company, operated
properties for various third party working interest owners. In January 1999,
the working interest owners sold those properties. As a result, EOC did not
receive overhead charges for the operation of those properties in the quarter
ended June 30, 1999. Accordingly, the Company's general and administrative
expenses increased by $180,000.
Interest expense for the three months ended June 30, 1999, was $752,000
compared to $417,000 for the same period in 1998. During the six months ended
June 30, 1999, interest expense was $1,541,000 compared to $761,000 for the
same period in the prior year. The $335,000 increase for the three months
over the same period in the prior year and $780,000 increase for the six
months over the same period is due to increased borrowings. The Company's
line of credit increased to $58 million at June 22, 1999 from $21 million at
June 30, 1998. The increase in borrowings was incurred to fund development of
the Raton Basin. On June 22, 1999, the Company paid off the outstanding
balance of $58 million under the line of credit and on June 30, 1999, paid
off $3.6 million under the capital lease obligation, with the proceeds
received from the public offering of its common shares.
LIQUIDITY AND CAPITAL RESOURCES
On June 22, 1999, the Company completed a public offering of its common
shares, whereby it sold 3,162,500 shares at $22.00 per share. Proceeds, net
of underwriters' commissions and estimated expenses of $4.4 million, were
$65.1 million, of which $58 million and $3.6 million has been used to pay off
the line of credit and capital lease obligation. The remainder of the
proceeds will be used for general corporate purposes.
As of June 30, 1999, the Company had a $75 million revolving line of credit
with a bank group consisting of Hibernia National Bank, as agent, Chase Bank
of Texas and Paribas ("the Banks"). The line is available through June 2001.
Advances pursuant to this line of credit are limited to a borrowing base,
which is presently $75 million. At the Company's election, it may use either
the London interbank offered rate plus a margin of 1.38% to 1.75% or the
prime rate plus a margin of 0% to 0.25%, with margins on both rates
determined on the average outstanding borrowings under the credit facility.
The borrowing base is redetermined semi-annually by the banks based upon
reserve evaluations of the Company's oil and gas properties. An average
annual facility fee of 0.375% 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. At June 30, 1999,
no amounts were outstanding under the line of credit.
12
<PAGE>
The Company had a capital equipment lease with a bank with interest at 8.5%
through June 30, 1999. The Company primarily leased compressors and other
related production equipment for the Raton Basin gas collection system. On
June 30, 1999, the Company paid off the outstanding principal balance of $3.6
million.
In February 1999, the Company sold its 49% interest in Maverick for
approximately $2.3 million and formed a new well service company, EWS. The
well service company is currently providing fracture stimulation services,
cement work, drilling and workovers. Evergreen anticipates an increase in
quality control and cost savings from the services performed by EWS.
During 1999, the Company plans to spend approximately $45 million on its
total exploration and development program. Approximately $35 million of this
total is scheduled to be spent on drilling and gas collection systems, $5
million on well service equipment and $5 million on its international and
other projects. During the six months ended June 30, 1999, the Company spent
approximately $18 million on drilling and recompletion and gas collection
systems while $5 million was incurred on well service equipment.
Cash flows provided by operating activities were $4,720,000 for the six
months ended June 30, 1999 as compared to cash flows provided by operating
activities of $5,888,000 for the same period in 1998. The decrease in cash
flows in 1999 as compared to 1998 is primarily due to lower gas prices,
increased lease operating expenses and increased interest costs associated
with increased financing levels outstanding in 1999.
Cash flows used by investing activities were $19,696,000 for the six months
ended June 30, 1999 versus $15,150,000 during the same period in 1998. The
increase was due to the continued development of the Raton Basin, including
an upgrade of the gas collection system and $2,258,000 received from the sale
of Maverick.
Cash flows provided by financing activities were $16,260,000 during the six
months ended June 30, 1999 as compared to cash flows provided by financing
activities of $10,641,000 for the same period in 1998. The increase is
primarily due to the completion of the equity offering described above and
was offset by the repayment of all outstanding debt that had been incurred to
fund the development of the drilling and gas collection system in the Raton
Basin.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("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, 2000. 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 the 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
13
<PAGE>
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 expended 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 dependent on CIG for the delivery of the Company's
gas. CIG has provided the Company with written assurances that a CIG internal
task force has examined CIG's Year 2000 compliance and that CIG has no
material Year 2000 problem.
In the event that one or more of the Company's vendors 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 coal bed methane), which would not have a substantial
long-term impact on the Company's ability to conduct operations. The Company
does not believe that any contingency planning is necessary to address this
possibility.
ITEM 3. QUANTATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company measures its exposure to market risk at any point in time by
comparing its open positions to a market risk of fair value. The market
prices the Company uses to determine fair value are based on management's
best estimates, which consider various factors including closing exchange
prices, volatility factors and the time value of money. At June 30, 1999, the
Company was exposed to some market risk on foreign currency and natural gas
prices.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Except as provided below, 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.
On July 13, 1998, Southern Colorado C.U.R.E. filed a lawsuit under the
citizen suit provision of the Clean Water Act in the U.S. District Court for
the District of Colorado against EOC, related to its coal bed methane
drilling operations in the Raton Basin near Trinidad, Colorado. The Company's
gas production produces naturally occurring groundwater as a by-product of
its coal bed methane gas production operations. The storage, use and disposal
of the produced groundwater in evaporative ponds and natural collection
features located on the surface at or near the wellsite, and the legal and
regulatory treatment of this practice, underlie the lawsuit. The Company
believes the lawsuit to be without merit and responded by filing a Motion to
Dismiss all of Southern Colorado C.U.R.E.'s alleged claims. The Motion to
Dismiss is currently pending before the court, although a magistrate to whom
the judge presiding over the matter referred the Motion to Dismiss has
indicated that she will recommend to the judge that the motion be denied with
respect to certain of the allegations. EOC is also subject to federal, state
and local environmental laws and regulations, and is currently participating
with the EPA and the State of Colorado in the investigation of certain
practices in connection with these operations. An evaluation of costs of
potential liabilities associated with this investigation cannot be reasonably
determined at this time. The Company does not expect that the lawsuit or the
investigation, or the environmental costs or contingent liabilities of
either, if any, will have a material adverse effect on its consolidated
financial position or its results of operations.
ITEM 2. CHANGES IN SECURITIES.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The following summarizes the votes at the Company's annual meeting of
shareholders held on May 11, 1999:
ELECTION OF DIRECTORS - With terms expiring at the Annual Shareholders Meeting
in 2001:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--- ------- -------
<S> <C> <C> <C>
Larry D. Estridge 9,204,601 1,106 6,415
John J. Ryan, III 9,205,601 106 6,415
</TABLE>
ITEM 5. OTHER INFORMATION.
Not applicable.
15
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit 27 - Financial Data Schedule.
(b) Reports on Form 8-K.
A current report on Form 8-K/A to disclose pro-forma financial information
with respect to the acquisition of Powerbridge, Inc. was filed on May 3,
1999.
A current report on Form 8-K to disclose that the Company had commenced a
public offering of its common stock and to file certain expert consents was
filed on May 28, 1999.
A current report on Form 8-K to file the underwriting agreement relating to
the Company's public offering of common stock and a legal opinion relating
to the offering was filed on June 18, 1999. An amendment to this Form 8-K
was filed on June 21, 1999.
16
<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: August 4, 1999 By: /s/ Kevin R. Collins
--------------------------------------------
Kevin R. Collins
VP - Finance, Chief Financial Officer
(Principal Financial and Accounting Officer)
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,611,710
<SECURITIES> 0
<RECEIVABLES> 4,004,594
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,580,395
<PP&E> 170,247,731
<DEPRECIATION> 21,891,215
<TOTAL-ASSETS> 159,457,230
<CURRENT-LIABILITIES> 5,623,644
<BONDS> 0
0
0
<COMMON> 144,150
<OTHER-SE> 147,272,145
<TOTAL-LIABILITY-AND-EQUITY> 159,457,230
<SALES> 9,711,577
<TOTAL-REVENUES> 9,825,725
<CGS> 4,661,567
<TOTAL-COSTS> 5,995,134
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,541,318
<INCOME-PRETAX> 2,289,273
<INCOME-TAX> 886,912
<INCOME-CONTINUING> 1,402,361
<DISCONTINUED> 452,157
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,854,518
<EPS-BASIC> .16
<EPS-DILUTED> .15
</TABLE>
