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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the Fiscal Year Ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
COMMISSION FILE NO. 0-19279
EVERFLOW EASTERN PARTNERS, L.P.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 34-1659910
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
585 WEST MAIN STREET
P.O. BOX 629
CANFIELD, OHIO 44406
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (330) 533-2692
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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None
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
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
-----
There are 5,061,576 Units of limited partnership interest held by
non-affiliates of the Registrant as of March 20, 1997. The Units generally do
not have any voting rights, but, in certain circumstances, the Units are
entitled to one vote per Unit.
Except as otherwise indicated, the information contained in this Report
is as of December 31, 1996.
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PART I
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ITEM 1. BUSINESS
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Introduction
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Everflow Eastern Partners, L.P. (the "Company"), a Delaware
limited partnership, engages in the business of oil and gas exploration and
development. The Company was formed for the purpose of consolidating the
business and oil and gas properties of Everflow Eastern, Inc., an Ohio
corporation ("EEI"), and the oil and gas properties owned by certain limited
partnerships and working interest programs managed or operated by EEI (the
"Programs"). Everflow Management Company, an Ohio general partnership, is the
general partner of the Company.
EXCHANGE OFFER. The Company made an offer (the "Exchange
Offer") to acquire the common shares of EEI (the "EEI Shares") and the interests
of investors in the Programs (collectively the "Interests") in exchange for
units of limited partnership interest (the "Units"). The Exchange Offer was made
pursuant to a Registration Statement on Form S-1 declared effective by the
Securities and Exchange Commission on December 19, 1990 (the "Registration
Statement") and the Prospectus dated December 19, 1990 as filed with the
Commission pursuant to Rule 424(b).
The Exchange Offer terminated on February 15, 1991 and holders
of Interests with an aggregate value (as determined by the Company for purposes
of the Exchange Offer) of $66,996,249 accepted the Exchange Offer and tendered
their Interests. Effective on such date, the Company acquired such Interests,
which included partnership interests and working interests in the Programs, and
all of the outstanding EEI Shares. Of the Interests tendered in the Exchange
Offer, $28,565,244 was represented by the EEI Shares and $38,431,005 by the
remaining Interests.
The parties who accepted the Exchange Offer and tendered their
Interests received an aggregate of 6,632,464 Units. Everflow Management Company,
as General Partner of the Company, contributed Interests with an aggregate
Exchange Value of $670,980 in exchange for a 1% interest in the Company.
THE COMPANY. The Company was organized in September, 1990. The
principal executive offices of the Company, Everflow Management Company and EEI
are located at 585 West Main Street, Canfield, Ohio 44406 (telephone number
(330)533-2692).
General
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This Annual Report on Form 10-K contains forward-looking
statements which involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward-looking
statements. Factors that may cause such a difference include, but are not
limited to, the competition within the oil and gas industry, the price of oil
and gas in the Appalachian Basin area, the number of Units tendered pursuant to
the Repurchase Right and the ability to locate productive oil and gas prospects
for development by the Company.
Description of the Business
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GENERAL. Following the consummation of the Exchange Offer, the
Company has participated on an on-going basis in the acquisition and development
of undeveloped oil and gas properties and has pursued the acquisition of
producing oil and gas properties.
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SUBSIDIARIES. The Company has two subsidiaries. EEI was
organized as an Ohio corporation in February, 1979 and, since the consummation
of the Exchange Offer, has been a wholly-owned subsidiary of the Company. EEI is
engaged in the business of drilling, developing and operating oil and gas
properties and acting as the general partner or sponsor of the Programs. Prior
to the consummation of the Exchange Offer, EEI had acted as general contractor
in the drilling and completion of more than 550 wells and had served as operator
of more than 650 producing wells, the substantial majority of which are located
in the State of Ohio.
Everflow Nominee, Inc. ("Everflow Nominee") was organized as
an Ohio corporation in May 1987 and is a wholly-owned subsidiary of EEI and is
indirectly controlled by the Company. Everflow Nominee's sole business is to
serve as a nominee and agent to hold legal or record title to working interests
in drillsites developed by the Programs since 1987. Everflow Nominee, as nominee
of and agent for various Programs, holds the legal or record title to the
working interests in drillsites and wells beneficially owned by certain of the
Programs.
A-1 Storage of Canfield, Ltd. ("A-1 Storage") was organized an
Ohio Limited Liability Company in late 1995 and is 99% owned by the Company and
1% owned by EEI. A-1 Storage's business includes leasing of office space to the
Company as well as rental of storage units to non-affiliated parties.
CURRENT OPERATIONS. The properties acquired in the Exchange
Offer consist in large part of fractional undivided working interests in
properties containing Proved Reserves of oil and gas located in the Appalachian
Basin region of Ohio and Pennsylvania. Approximately 84% of the estimated future
gross cash flow from the oil and gas properties owned by the Company are
attributable to natural gas reserves. The substantial majority of such
properties are located in Ohio and consist primarily of proved producing
properties with established production histories.
The Company's operations since February 1991, following
consummation of the Exchange Offer, primarily involve the production and sale of
oil and gas from the properties acquired pursuant to the Exchange Offer and the
drilling and development of an additional 174 (net) wells. The Company serves as
the operator of approximately 60% of the gross wells and 75% of the net wells
which comprise the Company's properties.
The Company expects to hold its producing properties acquired
pursuant to the Exchange Offer until the oil and gas reserves underlying such
properties are substantially depleted. However, the Company may from time to
time sell any of its producing or other properties or leasehold interests if the
Company believes that such sale would be in its best interest.
BUSINESS PLAN. The Company intends to conduct its business to
enable it to maintain and possibly expand its reserve base. In order to further
this plan, the Company primarily intends to acquire and subsequently drill and
develop non-producing oil and gas properties and possibly acquire producing oil
and gas properties. Based on the current costs of drilling and development
activities, the current prices of oil and gas, and EEI's historical experience
with regard to finding oil and gas in commercially productive quantities as well
as estimates for such costs, prices and success rates in the immediate future,
the Company estimates it will need to acquire and drill approximately 25 to 35
(net) wells each year to maintain and possibly expand its reserve base. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
ACQUISITION OF PROSPECTS. The Company, through its
wholly-owned subsidiary EEI, maintains a leasehold inventory from which Everflow
Management Company will select oil and gas prospects for development by the
Company. EEI makes additions to such leasehold inventory on an ongoing basis.
The Company may also acquire leases from third parties. Historically, EEI
generated approximately 90% of the prospects which were drilled by the
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Programs. The Company expects EEI's ability to generate drilling prospects
internally to continue in order to further the Company's activities. EEI's
current leasehold inventory consists of approximately 164 prospects in various
stages of maturity representing approximately 2,800 net acres under lease.
In choosing oil and gas prospects for the Company, Everflow
Management Company does not attempt to manage the risks of drilling through a
policy of selecting diverse prospects in various geographic areas or with the
potential of oil and gas production from different geological formations.
Rather, substantially all prospects are expected to be located in the
Appalachian Basin of Ohio (and, to a lesser extent, Pennsylvania) and to be
drilled primarily to the Clinton/Medina Sands geological formation or closely
related oil and gas formations in such area.
ACQUISITION OF PRODUCING PROPERTIES. As a potential means of
increasing its reserve base, the Company expects to evaluate opportunities which
it may be presented with to acquire oil and gas producing properties from third
parties in addition to its ongoing leasehold acquisition and development
activities. To date, the Company has acquired only a very limited amount of
producing oil and gas properties.
The Company will continue to evaluate properties for
acquisition. Such properties may include, in addition to working interests,
royalty interests, net profit interests and production payments, other forms of
direct or indirect ownership interests in oil and gas production, and properties
associated with the production of oil and gas. The Company also may acquire
general or limited partner interests in general or limited partnerships and
interests in joint ventures, corporations or other entities that have, or are
formed to acquire, explore for or develop, oil and gas or conduct other
activities associated with the ownership of oil and gas production.
FUNDING FOR ACTIVITIES. The Company finances its current
operations and proposed undeveloped leasehold acquisition activities through
cash generated from operations and the proceeds of borrowings. Historically, EEI
had relied upon the formation of investor drilling programs to fund a portion of
its operations; but to date, the Company has elected not to pursue such
activities. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Results of Operations."
The Company is permitted to incur indebtedness for any
partnership purpose. It is currently anticipated that any such indebtedness will
consist primarily of borrowings from commercial banks. The Company and EEI has a
revolving credit facility with Bank One, Texas, National Association, pursuant
to which it had borrowed up to $4,800,000 in 1996 with a principal indebtedness
of $1,700,000 outstanding as of March 20, 1997. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Liquidity and
Capital Resources."
Although the Partnership Agreement does not contain any
specific restrictions on borrowings, the Company has no specific plans to borrow
to acquire any producing oil and gas properties. The Company expects that
borrowings may be made to acquire undeveloped acreage for future drilling and
development and to fund the Company's costs of drilling and completing wells. In
addition, the Company could borrow funds to enable it to repurchase any Units
tendered in connection with the Repurchase Right. See "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and
Capital Resources."
The Company has a substantial amount of oil and gas reserves
which have not been pledged as collateral for its existing loans. The Company
generally would not expect to borrow funds, from whatever source, in excess of
40% of its total Proved Reserves (as determined using the Company's Standardized
Measure of Discounted Future Net Cash Flows), although there can
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be no assurance that circumstances would not lead to the necessity of
borrowings in excess of this amount. Based upon its current business plan,
management has no present intention to have the Company borrow in excess of this
amount. The Company has estimated Proved and Proved Developed Reserves,
determined as of December 31, 1996, which aggregate $50,507,000 (Standardized
Measure of Discounted Future Net Cash Flows) with $4,000,000 of bank debt under
the revolving credit facility (as of such date).
Marketing
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The ability of the Company to market oil and gas found in and
produced on its properties will depend on many factors beyond its control, the
effect of which cannot be accurately anticipated or predicted. These factors
include, among others, the amount of domestic oil and gas production and foreign
imports available from other sources, the capacity and proximity of pipelines,
governmental regulations, and general market demand.
OIL. Any oil produced from the properties can be sold at the
prevailing field price to one or more of a number of unaffiliated purchasers in
the area. Generally, purchase contracts for the sale of oil are cancelable on 30
days' notice. The price paid by these purchasers is generally an established or
"posted" price which is offered to all producers. All posted prices in the areas
where the Company's properties are located are generally somewhat lower than the
spot market prices, although there have been substantial fluctuations in crude
oil prices in recent years.
The price of crude oil has decreased since the end of the
conflict in the Persian Gulf in March 1991, dropping from a high of $28.50 per
barrel in January 1991 to $13.50 in December 1993 and $22.50 in December 1996.
As of March 20, 1997 the posted field price in the Appalachian Basin area, the
Company's principal area of operation, was $17.75 per barrel of oil. There can
be no assurance that prices will not be subject to continual fluctuations.
Future oil prices are difficult to predict because of the impact of worldwide
economic trends, supply and demand variables, and such non-economic factors as
the political impact on pricing policies by the Organization of Petroleum
Exporting Countries ("OPEC") and the possibility of supply interruptions. To the
extent prices which the Company receives for its crude oil production decline or
remain at current levels, the Company's revenues from oil production will be
reduced accordingly.
Beginning in January 1993, the Company began selling the
majority of its crude oil production to Quaker State under the terms of the
Quaker State Full Load Crude Oil Purchase Agreement. This agreement provided the
Company with a $0.40 per barrel premium price for 80 net barrel minimum
quantities and an $0.80 per barrel premium price for 160 net barrel minimum
quantities. The term of the agreement was three years and included substantially
all of the Company's Appalachian Basin oil production. The nature of the
business has now made the provisions of this agreement customary for crude oil
production purchased in the Appalachian Basin. As a result, the Company
continues to receive pricing consistent with the terms of the agreement without
a formal agreement in place.
NATURAL GAS. The deliverability and price of natural gas is
subject to various factors affecting the supply and demand of natural gas as
well as the effect of federal regulations. During the past several years, there
has been a surplus of natural gas available for delivery to pipelines and other
purchasers. This oversupply, reduced demand due to economic conditions and
several mild winters have resulted in significant decreases in prices for
natural gas throughout the U.S., including the Appalachian Basin. From time to
time, especially in summer months, seasonal restrictions on natural gas
production have occurred as a result of distribution system restrictions.
Certain of the wells acquired by the Company in the Exchange Offer have been
subject to these limited, seasonal shut-ins and restrictions.
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Prior to the execution of the East Ohio Contract (discussed
below), EEI's historical practice had been to generally sell natural gas
pursuant to various purchase contracts with a number of natural gas brokerage
firms, pipeline companies or end-user customers. The provisions of these
contracts, both as to term and price, varied significantly. The term of these
contracts varied from short term, month-to-month arrangements up to the life of
a particular well. Most of these natural gas purchase contracts were for a term
of one year, expiring each October, and enabled the purchaser to renew the
contracts for additional one-year terms during the fourth quarter of the year.
Pricing provisions varied materially among the contracts.
The Company has various Intermediate Term Adjustable Price Gas
Purchase Agreements (the "East Ohio Contracts") with The East Ohio Gas Company
("East Ohio"). Pursuant to the East Ohio Contracts and subject to certain
restrictions and adjustments, East Ohio is obligated to purchase, and the
Company is obligated to sell, all natural gas production from a specified list
of wells (the "Contract Wells"). A summary of the Company's principal East Ohio
Contracts at December 31, 1996 follows:
<TABLE>
<CAPTION>
Contract Period Termination Number Required Shut-In Limitation
Date Covered Clause of Wells Purchases Provisions Provisions
------ ------- -------- -------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
9/3/91 11/91-10/01 11/97 449 275 days/year Maximum of May-Oct. - 50%
60 days (Nov.- of production
April) from prior 6
month period
3/10/94 4/94-3/00 None 49 275 days/year Maximum of May-Oct. - 50%
60 days (Nov.- of production
April) from prior 6
month period
8/10/94 11/94-10/00 None 28 Nov.-March April-Oct. Shut-in provisions
</TABLE>
<TABLE>
<CAPTION>
Net Price per MCF
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Initially Adjusted Prices
Contract ------------------------------------------------------------------------------------------------------
Date Nov.-April May-Oct. 11/94-4/95 5/95-10/95 11/95-4/96 5/96-10/96 11/96-4/97 5/97-10/97
-------- ---------- -------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
9/3/91 $2.85 $2.22 $3.34 $2.71 $2.84 $2.21 $3.31 $2.68
3/10/94 $2.98 $2.28 No adjustment $2.48 $1.78 $2.95 $2.25
8/10/94 $3.08 N/A No adjustment $2.82 N/A $3.55 N/A
</TABLE>
As detailed above, the price paid for natural gas purchased
under the East Ohio Contracts varies with the production period. Pricing under
the East Ohio Contracts is adjusted annually (after the first adjustment), up or
down, by an amount equal to 80% of the increase or decrease in East Ohio's
average Gas Cost Recovery ("GCR") rates. The net price per MCF includes $.20 per
MCF for transportation less a $.02 per MCF metering charge. Additionally, the
August 10, 1994 contract provides for a price cap equal to the quarterly GCR,
which amounted to $3.87 and $2.82 in November 1996 and 1995, respectively.
In addition to the East Ohio Contracts described above, the
Company has various short-term contracts (covering production from 45 gross
wells at December 31, 1996) which have
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a primary term of 15 months or less. Twenty-four of the wells are covered by
fixed price contracts that provide for the sale of the Company's gas at $2.65 to
$2.95 per MCF. The remaining twenty-one wells are covered by a variable rate
contract that provides for the sale of the Company's gas based on a monthly
NYMEX settlement, with no floor price provisions, plus $.35 (April-October) or
$.55 (November-March) per MCF (including transportation allowances). There are
no significant production restrictions under the Company's short-term contracts
as they relate to the Company's existing wells. Future wells can be added to
certain of the contracts subject to gross production restrictions under the
contracts. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Inflation and Changes in Prices."
For the year ended December 31, 1996, with the exception of
The East Ohio Gas Company, which purchased approximately 83% of the Company's
natural gas production in 1996, no one natural gas purchaser has accounted for
more than 10% of the Company's gas sales. The Company expects that East Ohio
will be the only material natural gas customer for 1997.
Seasonality
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The East Ohio Contract (i) provides that certain wells can be
shut-in for a period of time and (ii) limits the obligation of East Ohio to
purchase natural gas during the May to October production period. These
production restrictions, and the nature of the Company's business, result in
seasonal fluctuations in the Company's revenue, with the Company receiving more
income in the first and fourth quarters of its fiscal year.
Title to Properties
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As is customary in the oil and gas industry, the Company
performs a limited investigation as to ownership of leasehold acreage at the
time of acquisition and conducts a title examination and necessary curative work
prior to the commencement of drilling operations on a tract. Title examinations
have been performed for substantially all of the producing oil and gas
properties owned by the Company with regard to (i) substantial tracts of land
forming a portion of such oil and gas properties and (ii) the wellhead location
of such properties. The Company believes that title to its properties is
acceptable although such properties may be subject to royalty, overriding
royalty, carried and other similar interests in contractual arrangements
customary in the oil and gas industry. Also, such properties may be subject to
liens incident to operating agreements and liens for current taxes not yet due,
as well as other comparatively minor encumbrances.
Competition
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The oil and gas industry is highly competitive in all its
phases. The Company will encounter strong competition from major and independent
oil companies in acquiring economically desirable prospects as well as in
marketing production therefrom and obtaining external financing. Major oil and
gas companies, independent concerns, drilling and production purchase programs
and individual producers and operators are active bidders for desirable oil and
gas properties, as well as the equipment and labor required to operate those
properties. Many of the Company's competitors have financial resources,
personnel and facilities substantially greater than those of the Company.
The availability of a ready market for the oil and gas
production of the Company depends in part on the cost and availability of
alternative fuels, the level of consumer demand, the extent of other domestic
production of oil and gas, the extent of importation of foreign oil and gas, the
cost of and proximity to pipelines and other transportation facilities,
regulations by state and federal authorities and the cost of complying with
applicable environmental regulations. The
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continued period of reduced prices for oil and gas and the continued oversupply
of domestic natural gas has resulted in a curtailment in exploration for and
development of oil and gas properties.
There is also extensive competition in the market for gas
produced by the Company. Increases in worldwide energy production capability and
decreases in energy consumption as a result of conservation efforts have brought
about substantial surpluses in energy supplies in recent years. This, in turn,
has resulted in substantial competition for markets historically served by
domestic natural gas resources both with alternate sources of energy, such as
residual fuel oil, and among domestic gas suppliers. As a result, there have
been reductions in oil and gas prices, widespread curtailment of gas production
and delays in producing and marketing gas after it is discovered. Changes in
government regulations relating to the production, transportation and marketing
of natural gas have also resulted in significant changes in the historical
marketing patterns of the industry. Generally, these changes have resulted in
the abandonment by many pipelines of long-term contracts for the purchase of
natural gas, the development by gas producers of their own marketing programs to
take advantage of new regulations requiring pipelines to transport gas for
regulated fees, and an increasing tendency to rely on short-term sales contracts
priced at spot market prices. See "Marketing" above.
In light of these developments, many producers have accepted
prices that are lower than those previously prevailing to sell their production.
As a consequence, gas prices, which were once effectively determined by
government regulations, are now influenced largely by the effects of
competition. Competitors in this market include other producers, gas pipelines
and their affiliated marketing companies, independent marketers, and providers
of alternate energy supplies such as residual fuel oil.
Regulation of Oil and Gas Industry
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The exploration, production and sale of oil and natural gas
are subject to numerous state and federal laws and regulations. Such laws and
regulations govern a wide variety of matters, including the drilling and spacing
of wells, allowable rates of production, marketing, pricing and protection of
the environment. Such regulations may restrict the rate at which the Company's
wells produce oil and natural gas below the rate at which such wells could
produce in the absence of such regulations. In addition, legislation and
regulations concerning the oil and gas industry are constantly being reviewed
and proposed. The States of Ohio and Pennsylvania, the states in which the
Company owns properties and operates, have statutes and regulations governing a
number of the matters enumerated above. Compliance with the laws and regulations
affecting the oil and gas industry generally increases the Company's costs of
doing business and consequently affects its profitability. Inasmuch as such laws
and regulations are frequently amended or reinterpreted, the Company is unable
to predict the future cost or impact of complying with such regulations.
The interstate transportation and sale for resale of natural
gas is regulated by the Federal Energy Regulatory Commission (the "FERC") under
the Natural Gas Act of 1938 ("NGA"). The wellhead price of natural gas is also
regulated by FERC under the authority of the Natural Gas Policy Act of 1978
("NGPA"). Subsequently, the Natural Gas Wellhead Decontrol Act of 1989 (the
"Decontrol Act") was enacted on July 26, 1989. The Decontrol Act provided for
the phasing out of price regulation under the NGPA commencing on the date of
enactment and completely eliminated all such gas price regulation on January 1,
1993. In addition, FERC recently has proposed several rules or orders concerning
transportation and marketing of natural gas. The impact of these rules and other
regulatory developments on the Company cannot be predicted. It is expected that
the Company will sell natural gas produced by its oil and gas properties to a
number of purchasers, including various industrial customers, pipeline companies
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and local public utilities, although the majority will be sold to The East Ohio
Gas Company as discussed earlier.
As a result of the NGPA and the Decontrol Act, the Company's
gas production is no longer subject to price regulation. Gas which has been
removed from price regulation is subject only to that price contractually agreed
upon between the producer and purchaser. Under current market conditions,
deregulated gas prices under new contracts tend to be substantially lower than
most regulated price ceilings originally prescribed by the NGPA. FERC recently
has proposed and enacted several rules or orders concerning transportation and
marketing of natural gas. In 1992, the FERC finalized Order 636, a rule
pertaining to the restructuring of interstate pipeline services. This rule
requires interstate pipelines to unbundle transportation and sales services by
separately pricing the various components of their services, such as supply,
gathering, transportation and sales. These pipeline companies are required to
provide customers only the specific service desired without regard to the source
for the purchase of the gas. Although the Partnership is not an interstate
pipeline, it is likely that this regulation may indirectly impact the
Partnership by increasing competition in the marketing of natural gas, possibly
resulting in an erosion of the premium price historically available for
Appalachian natural gas. The impact of these rules and other regulatory
developments on the Company cannot be predicted.
Regulation of the production, transportation and sale of oil
and gas by federal and state agencies has a significant effect on the Company
and its operating results. Certain states have established rules and regulations
requiring permits for drilling operations, drilling bonds and reports concerning
the spacing of wells.
Environmental Regulation
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The activities of the Company are subject to various federal,
state and local laws and regulations designed to protect the environment. The
Company does not conduct activities offshore. Operations of the Company on
onshore oil properties may generally be liable for clean-up costs to the federal
government under the Federal Clean Water Act for up to $50,000,000 for each
incident of oil or hazardous pollution substance and for up to $50,000,000 plus
response costs under the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980 (Superfund) for hazardous substance contamination.
Liability is unlimited in cases of willful negligence or misconduct, and there
is no limit on liability for environmental clean-up costs or damages with
respect to claims by the state or private persons or entities. In addition, the
Company is required by the Environmental Protection Agency to prepare and
implement spill prevention control and countermeasure plans relating to the
possible discharge of oil into navigable waters; and the Environmental
Protection Agency will further require permits to authorize the discharge of
pollutants into navigable waters. State and local permits or approvals may also
be needed with respect to waste-water discharges and air pollutant emissions.
Violations of environment-related lease conditions or environmental permits can
result in substantial civil and criminal penalties as well as potential court
injunctions curtailing operations. Such enforcement liabilities can result from
prosecution by public or private entities.
Various state and governmental agencies are considering, and
some have adopted, other laws and regulations regarding environmental protection
which could adversely affect the proposed business activities of the Company.
The Company cannot predict what effect, if any, current and future regulations
may have on the operations of the Company.
In addition, from time to time, prices for either oil or
natural gas have been regulated by the federal government, and such price
regulation could be reimposed at any time in the future.
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Operating Hazards and Uninsured Risks
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The Company's oil and gas operations are subject to all
operating hazards and risks normally incident to drilling for and producing oil
and gas, such as encountering unusual formations and pressures, blow-outs,
environmental pollution and personal injury. The Company maintains such
insurance coverage as it believes to be appropriate taking into account the size
of the Company and its operations. Losses can occur from an uninsurable risk or
in amounts in excess of existing insurance coverage. The occurrence of an event
which is not insured or not fully insured could have an adverse impact on the
Company's revenues and earnings.
In certain instances, the Company may continue to engage in
exploration and development operations through drilling programs formed with
non-industry investors. In addition, the Company also will conduct a significant
portion of its operations with other parties in connection with the drilling
operations conducted on properties in which it has an interest. In these
arrangements, all joint interest parties, including the Company, may be fully
liable for their proportionate share of all costs of such operations. Further,
if any joint interest party defaults on its obligations to pay its share of
costs, the other joint interest parties may be required to fund the deficiency
until, if ever, it can be collected from the defaulting party. As a result of
the foregoing or similar oilfield circumstances, the Company could become liable
for amounts significantly in excess of amounts originally anticipated to be
expended in connection with such operations. In addition, financial difficulty
for an operator of oil and gas properties could result in the Company's and
other joint interest owners' interests in properties and the wells and equipment
located thereon becoming subject to liens and claims of creditors,
notwithstanding the fact that non-defaulting joint interest owners and the
Company may have previously paid to the operator the amounts necessary to pay
their share of such costs and expenses.
Conflicts of Interest
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The Partnership Agreement grants Everflow Management Company
broad discretionary authority to make decisions on matters such as the Company's
acquisition of or participation in a drilling prospect or a producing property.
To limit Everflow Management Company's management discretion might prevent
Everflow Management Company from managing the Company properly. However, because
the business activities of the affiliates of Everflow Management Company on the
one hand and the Company on the other hand are the same, potential conflicts of
interest are likely to exist, and it is not possible to completely mitigate such
conflicts.
The Partnership Agreement contains certain restrictions
designed to mitigate, to the extent practicable, these conflicts of interest.
The agreement restricts, among other things, (i) the cost at which the general
partner or its affiliates may acquire properties from or sell properties to the
Company; (ii) loans between the general partner, its affiliates and the Company,
and interest and other charges incurred in connection therewith; and (iii) the
use and handling of the Company's funds by the general partner.
Employees
- ---------
As of March 20, 1997, the Company (either directly or
indirectly through EEI) had 27 full-time employees. These employees primarily
are engaged in the following areas of business operations: six in land and lease
acquisition, seven in field operations, seven in accounting, and seven in
administration.
-9-
<PAGE> 11
ITEM 2. PROPERTIES.
- ---------------------------
Set forth below is certain information regarding the oil and
gas properties of the Company.
In the following discussion, "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 Company's percentage of working interests
therein. Because royalty interests held by the Company will not affect the
Company's working interests in its properties, neither gross nor net acres or
wells reflects such royalty interests.
PROVED RESERVES.(1) The following table reflects the estimates
of the Company's Proved Reserves which are based on the Company's report as of
December 31, 1996.
<TABLE>
<CAPTION>
Oil (BBLS) Gas (MCF)
---------- ---------
<S> <C> <C>
Proved Developed 912,000 41,015,000
Proved Undeveloped - -
------- ----------
Total 912,000 41,015,000
======= ==========
<FN>
----------
(1) The Company has not determined proved reserves
associated with its proved undeveloped acreage. A
reconciliation of the Company's proved reserves is
included in the Notes to the Financial Statements (page
F-21.)
</TABLE>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS.(1)
The following table summarizes as of December 31, 1996, the oil and gas reserves
attributable to the oil and gas properties owned by the Company. The
determination of the standardized measure of discounted future net cash flows as
set forth herein is based on criteria promulgated by the SEC, using calculations
based solely on Proved Reserves, current unescalated cost and price factors, and
discounted to present value at 10%.
<TABLE>
<CAPTION>
(Thousands)
-------------
<S> <C>
Future cash inflows from sales of oil and gas $ 132,308
Future production and development costs 49,255
Future income tax expense 2,171
-------------
Future net cash flows 80,882
Effect of discounting future net cash flows
at 10% per annum 30,375
Standardized measure of discounted future -------------
net cash flows $ 50,507
=============
<FN>
----------
(1) See the Notes to the Financial Statements for
additional information (pages F-19 to F-23).
</TABLE>
-10-
<PAGE> 12
PRODUCTION. The following table summarizes the net oil and gas
production, average sales prices and average production (lifting) costs per
equivalent unit of production for the periods indicated.
<TABLE>
<CAPTION>
Average
Production Sales Price
--------------------------- ---------------------- Average Lifting Cost
Oil (BBLS) Gas (MCF) per BBL per MCF per Equivalent MCF(1)
---------- --------- ------- ------- ------------------
<S> <C> <C> <C> <C> <C>
1996 112,000 4,264,000 $ 19.88 $ 2.78 $ .44
1995 107,000 4,259,000 16.68 2.86 .41
1994 107,000 4,342,000 15.79 3.04 .37
<FN>
- ----------
(1) Oil production is converted to MCF equivalents at the rate of 6 MCF per
BBL (barrel).
</TABLE>
PRODUCTIVE WELLS. The following table sets forth the gross and
net oil and gas wells of the Company as of December 31, 1996.
<TABLE>
<CAPTION>
Gross Wells Net Wells
----------------------------------------------------------------------------
Oil(1) Gas (1) Total Oil (1) Gas (1) Total
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
108 996 1,104 62 590 652
<FN>
----------
(1) Oil wells are those wells which generate the majority
of their revenues from oil production; gas wells are
those wells which generate the majority of their
revenues from gas production.
</TABLE>
ACREAGE. The Company had 52,357 gross developed acres and
30,692 net developed acres as of December 31, 1996. Developed acreage is that
acreage assignable to productive wells. The Company had approximately 2,800
gross and net undeveloped acres as of December 31, 1996.
DRILLING ACTIVITY. The following table sets forth the results
of drilling activities on properties owned by the Company. Such information and
the results of prior drilling activities should not be considered as necessarily
indicative of future performance.
<TABLE>
<CAPTION>
Development Wells(1)
--------------------------------------------------------------
Productive Dry
--------------------------- ---------------------------
Gross Net Gross Net
--------- --------- ---------- --------
<S> <C> <C> <C> <C>
1996 40 23.39 1 .23
1995 49 30.19 - -
1994 32 22.30 - -
<FN>
----------
(1) All wells are located in the United States. All wells are development wells; no
exploratory wells were drilled.
</TABLE>
-11-
<PAGE> 13
PRESENT ACTIVITIES. The Company has drilled 7 gross and 4.22
net development wells since December 31, 1996. As of March 20, 1997, the Company
had no gross or net wells in the process of being drilled.
DELIVERY COMMITMENTS. The Company entered into various East
Ohio contracts with East Ohio which, subject to certain restrictions and
adjustments, obligates East Ohio to purchase and the Company to sell all natural
gas production from certain contract wells. The contract wells comprise more
than 75% of the Company's net gas production.
ITEM 3. LEGAL PROCEEDINGS
- ---------------------------------
There are no material pending legal proceedings to which the
Company is a party or to which any of its property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -------------------------------------------------------------------
During the fourth quarter of the fiscal year ended December
31, 1996, there were no matters submitted to a vote of security holders through
the solicitation of proxies or otherwise.
-12-
<PAGE> 14
PART II
-------
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
- ---------------------------------------------------------------------
STOCKHOLDER MATTERS
- -------------------
Market
- ------
There is currently no established public trading market for
the Company's Units of Limited Partnership. At the present time, the Company
does not intend to list any of the Units for trading on any exchange or
otherwise take any action to establish any market for the Units. As of March 20,
1997, there were 6,379,941 Units of limited partnership interest held by 1,721
holders of record.
Distribution History.
- ---------------------
The Company commenced operations with the consummation of the
Exchange Offer in February 1991. Management's stated intention was to make
quarterly cash distributions equal to $0.125 per Unit (or $0.50 per Unit on an
annualized basis) for the first eight quarters following the closing date of the
Exchange Offer. The Company has paid a quarterly distribution every quarter
since July 1991. Based upon the current number of Units outstanding, each
quarterly distribution is expected to be approximately $806,000. The Company
currently intends to make quarterly distributions in April, July and October
1997.
Repurchase Right.
- -----------------
The Partnership Agreement provides, that beginning in 1992 and
annually thereafter, the Company will repurchase for cash up to 10% of the then
outstanding Units, to the extent Unitholders offer Units to the Company for
repurchase. The Repurchase Right entitles any Unitholder, between May 1 and June
30 of each year, to notify the Company that he elects to exercise the Repurchase
Right and have the Company acquire certain or all of his Units. The price to be
paid for any such Units is calculated based on the method provided for in the
Partnership Agreement. The Company accepted an aggregate of 26,958, 81,522 and
53,103 of its Units of limited partnership interest at a price of $4.55, $4.625
and $4.50 per Unit pursuant to the terms of the Company's Offers to Purchase
dated April 30, 1994, 1995 and 1996, respectively. See Note 3 in the Company's
financial statement for additional information on the Repurchase Right.
ITEM 6. SELECTED FINANCIAL DATA
- ---------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------
1996 1995 1994 1993 1992
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue . . . . . . . . . . . . . . . $14,557,405 $14,478,954 $15,363,555 $14,220,201 $14,694,927
Net Income . . . . . . . . . . . . . 4,227,854 5,247,086 5,915,578 4,966,312 4,407,618
Net Income Per Unit . . . . . . . .65 .80 .90 .75 .66
Total Assets . . . . . . . . . . . . 53,188,337 52,756,474 50,454,294 48,652,536 46,637,841
Long-term Debt(1). . . . . . . . . 4,405,834 4,718,207 3,800,000 4,500,000 4,200,000
Cash Distributions Per Unit . . .50 .50 .50 .50 .50
- ----------
(1) Long-term debt includes that portion of indebtedness classified as current.
</TABLE>
-13-
<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -----------------------------------------------------------------------------
AND RESULTS OF OPERATIONS
- -------------------------
GENERAL
The Company was organized in September 1990 as a limited
partnership under the laws of the State of Delaware. Everflow Management
Company, an Ohio general partnership, is the general partner of the Company. The
Company was formed to engage in the business of oil and gas exploration and
development through a proposed consolidation of the business and oil and gas
properties of EEI, and the oil and gas properties owned by certain limited
partnerships and working interest programs managed or operated by the Programs.
Effective February 15, 1991, pursuant to the Exchange Offer to
acquire the EEI shares and the Interests in exchange for Units of the Company's
limited partnership interest, the Company acquired the Interests and the EEI
Shares and EEI become a wholly-owned subsidiary of the Company.
Everflow Management Company, the general partner of the
Company, is a general partnership. The general partners of Everflow Management
Company are EMC, three individuals who are currently directors and/or officers
of EEI, David T. Matak, Thomas L. Korner and William A. Siskovic, and Sykes
Associates, a limited partnership controlled by Robert F. Sykes, the Chairman of
the Board of EEI.
LIQUIDITY AND CAPITAL RESOURCES
Financial Position
- ------------------
Working capital surplus of $2.9 million as of December 31,
1996 represented a $618 thousand increase from December 31, 1995 due primarily
to increases in cash and equivalents and accounts receivable as of December 31,
1996 compared to December 31, 1995. In January 1995, the Company refinanced a
previous credit facility with Bank One, Texas, National Association, providing
for a new three-year revolving line of credit in the amount of $7,000,000. In
December 1996, the revolving line of credit was extended for one year pursuant
to the Second Amendment to the Credit Agreement. The Company paid down $4.8
million of long-term debt under the revolving credit facility during 1996, all
of which was paid during the winter and spring months when cash flows from
production were higher. The Company borrowed $4.4 million under the revolving
credit facility during 1996. These borrowings were used to pay for the funding
of the Company's investment in the continued development of oil and gas
properties and to repurchase Units pursuant to the Repurchase Right. The Company
repurchased 53,103 Units at a price of $4.50 per Unit, or $239 thousand, on June
30, 1996. The Company also used its credit facility to make quarterly Cash
Distributions during the summer and fall months. The Company expects to continue
to pursue its long-term objective of developing oil and gas properties without
jeopardizing the Company's ability to meet such commitments as a result of
production restrictions caused by the seasonal nature of the Company's gas
purchase agreements with The East Ohio Gas Company.
-14-
<PAGE> 16
The following table summarizes the Company's financial
position at December 31, 1996 and December 31, 1995:
<TABLE>
<CAPTION>
(Amounts in Thousands) December 31, 1996 December 31, 1995
--------------------------- --------------------------
Amount % Amount %
--------------------------- --------------------------
<S> <C> <C> <C> <C>
Working capital $ 2,922 6% $ 2,305 5%
Property and equipment (net) 48,295 93 48,786 95
Other 406 1 111 -
------ --- ------ ---
Total $ 51,623 100% $ 51,202 100%
====== === ====== ===
Long-term debt $ 4,386 8% $ 4,707 9%
Deferred income taxes 278 1 288 1
Partners' equity 46,959 91% 46,207 90
------ --- ------ ---
Total $ 51,623 100% $ 51,202 100%
====== === ====== ===
</TABLE>
Cash Flows from Operating, Investing and Financing Activities
- -------------------------------------------------------------
The Company generated almost all of its cash sources from operating
activities. During the years ended 1996 and 1995, cash provided by operations
was used to fund the development of additional oil and gas properties and
distributions to partners.
-15-
<PAGE> 17
The following table summarizes the Company's Statements of
Cash Flows for the years ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
(Amounts in Thousands) 1996 1995
------------------------------------------------------------------
Dollars % Dollars %
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Activities:
Net income before adjustments $ 4,228 42% $ 5,247 48%
Adjustments 5,921 58 4,895 44
---------- ---------- ---------- --------
Cash flow from operations
before working capital
changes 10,149 100 10,142 92
Changes in working capital ( 648) ( 6) 478 4
--------- --------- ---------- --------
Net cash provided by
operating activities 9,501 94 10,620 96
Investing Activities:
Proceeds received on receivables
from officers and employees 518 5 557 5
Advances disbursed to officers
and employees ( 477) ( 5) ( 609) ( 6)
Purchase of property and
equipment ( 5,509) ( 54) ( 8,304) ( 75)
Proceeds on sale of property
and equipment 68 1 45 1
---------- ---------- ---------- --------
Net cash (used) by investing
activities ( 5,400) ( 53) ( 8,311) ( 75)
Financing Activities:
Distributions ( 3,237) ( 32) ( 3,280) ( 30)
Repurchase of Units ( 239) ( 2) ( 377) ( 3)
Long-term debt issuance 4,500 44 5,120 46
Long-term debt repayments ( 4,812) ( 48) ( 4,202) ( 38)
--------- --------- --------- --------
Net cash (used) by financing
activities ( 3,788) ( 38) ( 2,739) ( 25)
--------- --------- --------- --------
Increase (decrease) in cash
and equivalents 313 3 ( 430) ( 4)
<FN>
Note: All items in the previous table are calculated as a percentage of total
cash sources. Total cash sources include the following items, if
positive: cash flow from operations before working capital changes,
changes in working capital, net cash provided by investing activities
and net cash provided by financing activities, plus any decrease in
cash and cash equivalents.
</TABLE>
As the above table indicates, the Company's cash flow from
operations before working capital changes during the twelve months of 1996
represented 100% of total cash sources as compared with 92% during the twelve
months of 1995. Changes in working capital other than cash and equivalents
decreased cash by $648 thousand and increased cash by $478 thousand during 1996
and 1995, respectively. The increase in accounts receivable at December 31, 1996
compared to December 31, 1995 is the result of higher gas prices and
consequently, higher production revenues receivable as of December 31, 1996.
Total production revenues receivable as of December 31, 1996 amounted to $2.2
million compared to $1.9 million at December 31, 1995 and $2.2 million at
December 31, 1994. In addition, accounts receivable from officers and
-16-
<PAGE> 18
employees and joint venture partners decreased $64 thousand from $1,533 thousand
in 1995 to $1,469 thousand in 1996.
The Company's cash flows used by investing activities
decreased $2.9 million, or 35%, during 1996 as compared with 1995. The Company's
cash flows used by investing activities increased $2.0 million, or 32%, during
1995 as compared with 1994. The primary reason for the decrease in cash flows
used by investing activities in 1996 was the decrease in the purchase of
property and equipment. The purchase of property and equipment decreased $2.8
million, or 34%, during 1996 as compared with 1995. The Company drilled and
developed 23 net wells during 1996, compared with 30 net wells during 1995. The
primary reason for the increase in 1995 was due to the Company's increased
activity in the purchase of property and equipment. The purchase of property and
equipment increased $2.0 million, or 32%, during 1995 as compared with 1994. The
Company drilled and developed 30 net wells during 1995, compared with 22 net
wells in 1994.
The Company's cash flows used by financing activities
increased $1.0 million, or 38%, during 1996 as compared with 1995. The primary
reason for this increase was that payments on long-term debt increased $611
thousand to $4.8 million during 1996, and proceeds from the issuance of
long-term debt decreased $620 thousand to $4.5 million during 1996. The Company
had a decrease in the repurchase of Units pursuant to the Repurchase Right of
$138 thousand during 1996. The Company's cash flows used by financing activities
decreased $1.4 million, or 34%, during 1995 as compared with 1994. The primary
reason for this decrease was that payments on long-term debt decreased $1.1
million to $4.2 million during 1995, and proceeds from the issuance of long-term
debt increased $520 thousand to $5.1 million during 1995. The Company did,
however, have an increase in the repurchase of Units pursuant to the Repurchase
Right of $254 thousand during 1995.
The Company's ending cash and equivalents balance of $739
thousand at December 31, 1996, as well as ongoing monthly operating cash flows
should be adequate to meet short-term cash requirements. The Company has
established a quarterly distribution and management believes the payment of such
distributions will continue at least through 1997. The Company has paid a
quarterly distribution every quarter since July 1991. Total cash distributions
are estimated to be $806 thousand per quarter ($.125 per Unit).
Capital expenditures for the development of oil and gas
properties in the Company and the acquisition of undeveloped leasehold acreage
continue to be ongoing priorities of the Company. The Company drilled or
participated in the drilling of an additional 40 drillsites in 1996. The
Company's share of these drillsites amounts to 23 net developed wells. The
Company also made prepayments of intangible drilling costs on 1 gross and .82
net wells to be drilled by March 31, 1997. Proved reserves associated with the
prepaid well have not been determined. The Company's share of proved gas
reserves has increased by 957 thousand MCF's, or 2%, between December 31, 1995
and 1996, while proved oil reserves have increased by 80 thousand barrels, or
10%, between December 31, 1995 and 1996. The Company continues to develop
primarily natural gas fields, as represented by the discovery of 3.7 million
MCF's of natural gas versus 119 thousand barrels of crude oil during 1996. The
Standardized Measure of Discounted Future Net Cash Flows of the Company's
reserves increased by $8.7 million between December 31, 1995 and 1996. The
primary reasons for this increase was a significant increase in 1996 natural gas
and oil prices and upward revision of previous gas and oil reserve estimates.
Management of the Company believes the Company should be able to drill or
participate in the drilling of 20 to 30 net wells each year for the next few
years. Management believes it is necessary to meet this annual objective in
order to maintain its reserve base. At the point where the Company can no longer
generate adequate and sufficient drillsite locations, debt reductions and/or
additional distributions to partners may be made by the Company at the
discretion of management.
-17-
<PAGE> 19
The Partnership Agreement provides that the Company annually
offers to repurchase for cash up to 10% of the then outstanding Units, to the
extent Unitholders offer Units to the Company for repurchase pursuant to the
Repurchase Right. The Repurchase Right entitles any Unitholder, between May 1
and June 30 of each year, to notify the Company of his or her election to
exercise the Repurchase Right and have the Company acquire such Units. The price
to be paid for any such Units will be calculated based upon the audited
financial statements of the Company as of December 31 of the year prior to the
year in which the Repurchase Right is to be effective and independently prepared
reserve reports. The price per Unit will be equal to 66% of the adjusted book
value of the Company allocable to the Units, divided by the number of Units
outstanding at the beginning of the year in which the applicable Repurchase
Right is to be effective less all Interim Cash Distributions received by a
Unitholder. The adjusted book value is calculated by adding partner's equity,
the Standardized Measure of Discounted Future Net Cash Flows and the tax effect
included in the Standardized Measure and substracting from that sum the carrying
value of oil and gas properties (net of undeveloped lease costs). If more than
10% of the then outstanding Units are tendered during any period during which
the Repurchase Right is to be effective, the Investor's Units so tendered shall
be prorated for purposes of calculating the actual number of Units to be
acquired during any such period. The Company repurchased 53,103, 81,522 and
26,958 Units during 1996, 1995 and 1994 pursuant to the Repurchase Right at a
price of $4.50, $4.625 and $4.55 per Unit, respectively. The Company borrowed
against its credit facility to meet such obligations and would expect to do so
again in 1997. The Repurchase Right to be conducted in 1997 will result in
Unitholders being offered a price of $5.21 per Unit. The Company estimates it
would need to borrow $3.3 million in the event the 1997 Offering pursuant to the
Repurchase Right is fully subscribed.
In the fall of 1996, there was a significant increase in the
price received for natural gas pursuant to the pricing adjustments contained in
the Company's Intermediate Term Adjustable Price Gas Purchase Agreements with
The East Ohio Gas Company. These pricing adjustments should increase the
Company's cash flows from operations during 1997, assuming similar production
levels.
-18-
<PAGE> 20
RESULTS OF OPERATIONS
The following table and discussion is a review of the results
of operations of the Company for the twelve months ended December 31, 1996, 1995
and 1994. All items in the table are calculated as a percentage of total
revenues. This table should be read in conjunction with the discussions of each
item below:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1996 1995 1994
--------------------------------------------
<S> <C> <C> <C>
Revenues:
Oil and gas sales 97% 96% 97%
Well management and operating 3 4 3
Other - - -
--- --- ----
Total Revenues 100 100 100
Expenses:
Production costs 15 14 12
Well management and operating 1 2 2
Depreciation, depletion and amortization 35 34 33
Abandonment and write down
of oil and gas properties 5 1 1
General and administrative 13 13 14
Other 2 1 1
Income taxes - ( 1) ( 1)
--- ---- -----
Total Expenses 71 64 62
--- ---- ---
Net income 29% 36% 38%
=== === ===
</TABLE>
Revenues for the year ended December 31, 1996 increased $78
thousand, or 1%, compared to the same period in 1995. Revenues for the year
ended December 31, 1995 decreased $885 thousand, or 6%, compared to the same
period in 1994. These changes were due primarily to changes in oil and gas sales
between the periods involved.
Oil and gas sales increased $109 thousand, or 1%, from 1995 to
1996. The primary reason for this increase in oil and gas sales between 1995 and
1996 was an increase in oil production and oil prices. Effective with the
November 1996 production period, the price received for natural gas under the
majority of these agreements was increased by $.47 per MCF pursuant to the terms
of the gas purchase agreements with The East Ohio Gas Company. In addition, the
Company's gas production increased by 5 thousand MCF from 1995 to 1996. Oil and
gas sales decreased $915 thousand, or 6%, from 1994 to 1995. The primary reasons
for the decrease in oil and gas sales between 1994 and 1995 were that the gas
purchase agreement with The East Ohio Gas Company brought the Company a lower
gas price for the majority of the Company's wells and natural gas production
decreased by 83 thousand MCF from 1994 to 1995. The impact of lower gas prices
and decreased gas production was reduced by the fact that oil prices were
slightly higher during 1995 compared to 1994.
Production costs increased $160 thousand, or 8%, between 1995
and 1996. The primary reasons for this increase include increased operating
costs relating to older wells and the Company's increasing costs due to placing
newly drilled wells into production. Depreciation, depletion and amortization
increased $257 thousand, or 5%, between 1995 and 1996. This increase was the
result of an increase in wells placed into production and the downward revision
of reserve estimates on certain properties. Production costs increased $197
thousand, or 11%, and depreciation, depletion and amortization decreased $142
thousand, or 3%, between 1994 and
-19-
<PAGE> 21
1995. The increase in oil and gas production and sales and operating costs
associated with new wells drilled are the primary reasons for the increase in
production costs from 1994 to 1995.
Well management and operating revenues decreased $33 thousand,
or 7%, from 1995 to 1996. Well management and operating costs decreased $78
thousand, or 27%, from 1995 to 1996. The reason for these decreases was due to
the purchase of oil and gas properties by the Company which previously were only
operated by the Company. This purchase during 1996 decreased the third party
share of oil and gas properties managed and operated by the Company. Well
management and operating revenues increased $29 thousand, or 6%, from 1994 to
1995. Well management and operating costs increased $4 thousand, or 1%, from
1994 to 1995.
Abandonments and write downs of oil and gas properties
increased $534 thousand between 1995 and 1996. This increase was attributable to
the write down of oil and gas properties, abandonments of oil and gas properties
and leasehold impairments. During 1996, the Company wrote down oil and gas
properties by approximately $262,000 to provide for impairment on certain of its
oil and gas properties. Additionally, in 1996, the Company wrote off
approximately $210,000 of costs associated with an unsuccessful and abandoned
water flood project. Abandonments of oil and gas properties decreased $60
thousand between 1994 and 1995. Abandonments of oil and gas properties during
1994 and 1995 were attributable to leasehold impairment provisions and
abandonment of wells during such periods.
General and administrative expenses decreased $37 thousand, or
2%, between 1995 and 1996, while they decreased $221 thousand, or 10%, between
1994 and 1995. These decreases in general and administrative expenses are a
result of the continued reduction in administrative costs associated with the
consolidated structure of the Company since the Exchange Offer. Management
believes the Company can maintain the current level of overhead and related
expenses.
Net other expenses increased $81 thousand between 1995 and
1996, while increasing $17 thousand between 1994 and 1995. The increase between
1995 and 1996 was primarily attributable to increases in interest expense and
the loss on sale of oil and gas properties. Interest expense increased due to an
increase in the average outstanding debt relating to the Company's revolving
credit facility and additional interest expense as a result of the Company's
mortgage notes. The increase between 1994 and 1995 was primarily attributable to
higher interest rates during 1995 compared to 1994. The weighted average
interest rate during 1995 was 9.0% compared to 7.2% during 1994.
Income tax expense attributable to EEI increased $180 thousand
between 1995 and 1996 and decreased $10 thousand between 1994 and 1995. The
increase is due to the effect of timing adjustments as they relate to the
taxable income of EEI. The Company is not a tax paying entity, and the net
taxable income or loss, other than the taxable income or loss allocable to EEI,
is allocated directly to its respective partners.
Net income decreased $1,019 thousand, or 19%, between 1995 and
1996. The decrease resulted from increased costs, including production costs,
depreciation, depletion and amortization, abandonment and write down costs and
income tax expense. Net income decreased $668 thousand, or 11%, between 1994 and
1995. Revenues were lower due to a decrease in oil and gas sales. Net income
represented 29%, 36% and 38% of total revenues during the years ended December
31, 1996, 1995 and 1994, respectively.
NEW ACCOUNTING STANDARD
In March 1995, the Financial Accounting Standards Board issued
a new standard (SFAS 121), "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to
-20-
<PAGE> 22
be Disposed Of." SFAS 121 requires that long-lived assets (including oil and gas
properties) and certain identifiable intangibles to be held and used by an
entity be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. SFAS 121
is effective for financial statements for fiscal years beginning after December
15, 1995. Everflow adopted SFAS 121 in the first quarter of 1996 and utilizes a
field by field basis for assessing impairment of its oil and gas properties. The
impact of adopting SFAS 121 was not material to the Company's financial position
or results of operation.
INFLATION AND CHANGES IN PRICES
While the cost of operations is affected by inflation, oil and
gas prices have fluctuated in recent years and generally have not matched
inflation. The price of oil in the Appalachian Basin during the Persian Gulf
crisis ranged from a low of $18.00 per barrel on July 30, 1990 to a high of
$37.50 per barrel on October 13, 1990. The price of oil in the Appalachian Basin
more recently has ranged from a low of $13.50 per barrel in late 1993 and early
1994 to a high of $23.50 in January 1997. Although the Company's sales are
affected by this type of price instability, the impact on the Company is not as
dramatic as might be expected since only 16% of the Company's total future cash
inflows related to oil and gas reserves as of December 31, 1996 are comprised of
oil reserves.
The various gas purchase agreements with The East Ohio Gas
Company negotiated since 1991 had provided an increase in the average gas price
obtained from the Company's natural gas sales through 1994. The average price of
gas during 1994 and 1993 amounted to $3.04 and $2.80 per MCF, respectively, a
$0.24 and $0.12 increase over 1993 and 1992. The amount of the annual price
adjustment applicable to the first price adjustment in the Intermediate Term
Adjustable Price Gas Purchase Agreements with The East Ohio Gas Company
beginning November 1993 was an increase of $.55 per MCF. The amount of the
annual price adjustment beginning November 1994 was a decrease of $.06 per MCF.
These adjustments were based on 80% of the increase or decrease in The East Ohio
Gas Company's Gas Cost Recovery rates ("GCR") as specified in the contracts. The
average price of gas during 1995 amounted to $2.86 per MCF, an $.18 decrease
compared to 1994. The November 1995 annual price adjustment was a decrease of
$.50 per MCF. The average price of gas during 1996 amounted to $2.78 per MCF, a
$.08 decrease compared to 1995. The November 1996 annual price adjustment was an
increase of $.47 per MCF.
The Company's Standardized Measure of Discounted Future Net
Cash Flows increased by $8.7 million from December 31, 1995 to December 31, 1996
and decreased by $3.1 million from December 31, 1994 to December 31, 1995. A
reconciliation of the Changes in the Standardized Measures of Discounted Future
Net Cash Flows is included on page F-22 of the Company's consolidated financial
statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
- ---------------------------------------------------
See attached pages F-1 to F-23.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
- -------------------------------------------------------------
Not applicable.
-21-
<PAGE> 23
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------------
The Company, as a limited partnership, does not have any
directors or executive officers. The General Partner of the Company is Everflow
Management Company, an Ohio general partnership formed in September 1990 to act
as the Company's General Partner. The general partners of Everflow Management
Company as of March 20, 1995 are Everflow Management Corporation, an Ohio
corporation ("EMC"), Thomas L. Korner, William A. Siskovic and David T. Matak,
all of whom are directors and/or officers of EEI, and Sykes Associates, a
limited partnership controlled by Robert F. Sykes, Chairman of the Board of EEI.
EMC is the Managing General Partner of Everflow Management
Company. EMC was formed in September 1990 to act as the Managing General Partner
of Everflow Management Company. EMC is owned by the other general partners of
Everflow Management Company and EMC currently has no employees, but as Managing
General Partner of Everflow Management Company, makes all management and
business decisions on behalf of Everflow Management Company and thus on behalf
of the Company.
EEI has continued its separate existence and provides general,
administrative, management and leasehold functions for the Company. Personnel
previously employed by EEI to conduct its operation, drilling and field
supervisory functions have become employed directly by the Company and discharge
the same functions on behalf of the Company. All of EEI's outstanding shares are
owned by the Company.
DIRECTORS AND OFFICERS OF EEI AND EMC. The executive officers
and directors of EEI and EMC as of March 20, 1997 are as follows:
<TABLE>
<CAPTION>
Positions and Positions and
Name Age Offices with EEI Offices with EMC
- ------------------------ --- -------------------------- -------------------------
<S> <C> <C> <C>
Robert F. Sykes 73 Chairman of the Board Chairman of the Board
and Director
Thomas L. Korner 43 President and Director President and Director
David A. Kidder 58 Treasurer None
David T. Matak 38 Vice President/Land Vice President and
Director
William A. Siskovic 41 Vice President, Secretary, Vice President, Secretary-
Principal Financial and Treasurer, Principal
Accounting Officer and Financial and Accounting
Director Officer and Director
</TABLE>
All directors of EEI are elected to serve by the Company, which is EEI's sole
shareholder. All officers of EEI serve at the pleasure of the Board of
Directors. Directors and officers of EEI receive no compensation or fees for
their services to EEI or their services on behalf of the Company.
All directors and officers of EMC hold their positions with
EMC pursuant to a shareholders' agreement among EMC and such directors and
officers. The shareholders agreement controls the operation of EMC, provides for
changes in share ownership of EMC, and determines the identity of the directors
and officers of EMC as well as their replacement.
-22-
<PAGE> 24
ROBERT F. SYKES has been a Director of EEI since March 1987 and Chairman of the
Board since May 1988. Mr. Sykes is the Chairman of the Board and a Director of
EMC and has served in such capacities since its formation in September 1990. He
was the Chairman of the Board of Sykes Datatronics, Inc., Rochester, New York,
from its organization in 1986 until his resignation in January 1989. Sykes
Datatronics, Inc. is a manufacturer of telephone switching equipment. Mr. Sykes
also served as President and Chief Executive Officer of Sykes Datatronics, Inc.
from 1968 until October 1983 and from January 1985 until October 1985. Mr. Sykes
also has been a Director of Voplex, Inc., Rochester, New York, a manufacturer of
plastic products, since 1980 and a Director of ACC Corp., a long distance
telephone company, since 1988.
THOMAS L. KORNER has been President of EEI and EMC since November 1995 and the
President and Treasurer of Everflow Nominee. Mr. Korner is also a Director of
EMC and has served in such capacity since its formation in September 1990. He
served as Vice President and Secretary of EEI from April 1985 to November 1995
and as Vice President and Secretary of EMC from September 1990 to November 1995.
He served as the Treasurer of EEI from June 1982 to June 1986. Mr. Korner
supervises and oversees all aspects of EEI's business, including oil and gas
property acquisition, development, operation and marketing. Prior to joining EEI
in June 1982, Mr. Korner was a practicing certified public accountant with Hill,
Barth and King, certified public accountants, and prior to that with Arthur
Andersen & Co., certified public accountants. He has a Business Administration
Degree from Mt. Union College.
DAVID A. KIDDER has been the Treasurer of EEI since June 1986 and has been
employed by EEI since April 1985. From 1983 to 1985, he was Treasurer of LGM
Corporation, Columbus, Ohio, an oil and gas service company; from 1982 to 1983,
he was Treasurer of OPEX, Inc., Columbus, Ohio, a producer of oil and gas; and
from 1980 to 1981, he was Treasurer of United Petroleum, Inc., Columbus, Ohio, a
producer of oil and gas. From 1973 to 1980, Mr. Kidder was involved in the oil
and gas industry in various financial and accounting capacities. Prior to that
time, Mr. Kidder practiced as a certified public accountant with Coopers &
Lybrand, certified public accountants. Mr. Kidder has a Bachelor of Arts Degree
in Accounting from the University of Cincinnati.
DAVID T. MATAK has been Vice President of EEI since July 1987. He is primarily
responsible for the exploration and development activities of EEI. Mr. Matak is
a Vice President and a Director of EMC and has served in such capacities since
its formation in September 1990. From September 1982 to June 1984, Mr. Matak
served as a teaching assistant in the Geology Department of the University of
Akron and worked on the Clinton Research Project at the university. From March
1984 to July 1986, Mr. Matak was a geologist with Gasearch, Inc., Girard, Ohio,
where he logged and evaluated over 200 wells and evaluated and reviewed all
locations to be drilled by Gasearch, Inc. Mr. Matak has a Bachelor of Science
Degree in Biology and Geology from Mt. Union College and a Masters Degree in
Geology from the University of Akron.
WILLIAM A. SISKOVIC has been a Vice President of EEI since January 1989. Mr.
Siskovic is a Vice President, Secretary-Treasurer, Principal Financial and
Accounting Officer and a Director of EMC. He has served as Principal Financial
Officer and Secretary of EMC since November 1995 and in all other capacities
since the formation of EMC in September 1990. He is responsible for the
financial operations of the Company and EEI. From August 1980 to July 1984, Mr.
Siskovic served in various financial and accounting capacities including
Assistant Controller of Towner Petroleum Company, a public independent oil and
gas operator, producer and drilling fund sponsor company. From August 1984 to
September 1985, Mr. Siskovic was a Senior Consultant for Arthur Young & Company,
certified public accountants, where he was primarily responsible for the firm's
oil and gas consulting practice in the Cleveland, Ohio, office. From October
1985 until joining EEI in April 1988, Mr. Siskovic served as Controller and
Principal Accounting Officer of Lomak Petroleum, Inc., a public independent oil
and gas operator and producer. He has a Business Administration Degree in
Accounting from Cleveland State University.
-23-
<PAGE> 25
SECTION 16 DISCLOSURE. Section 16(a) of the Securities
Exchange Act of 1934 requires the Company's officers and directors, and persons
who own more than 10% of the Units to file reports of ownership and changes in
ownership with the Securities and Exchange Commission. Officers, directors and
greater than 10% Unitholders are required by SEC regulation to furnish the
Company with copies of all Section 16(a) forms they file.
Based solely on review of the copies of such forms furnished
to the Company, the Company believes that for all of 1996, all Section 16(a)
filing requirements applicable to its officers, directors and greater than 10%
beneficial owners were complied with.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------------
As a limited partnership the Company has no executive officers
or directors, but is managed by Everflow Management Company, the General Partner
of the Company. The executive officers of EMC and EEI are compensated either
directly by the Company or indirectly through EEI. The compensation described
below represents all compensation from either the Company or EEI.
-24-
<PAGE> 26
The following table sets forth information concerning the
annual and long-term compensation for services in all capacities to the Company
for the fiscal years ended December 31, 1996, 1995 and 1994, of those persons
who were, at December 31, 1996: (i) the chief executive officer; and (ii) the
other two most highly compensated executive officers of the Company. The Chief
Executive Officer and such other executive officers are hereinafter referred to
collectively as the "Named Executive Officers."
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation
-------------------------------------------------------
Other
Annual All Other
Name and Compen- Compen-
Principal Position Year Salary Bonus sation (1) sation (2)
------------------ ---- ------ ----- ---------- -----------
<S> <C> <C> <C> <C> <C>
Thomas L. Korner 1996 71,250 75,500 2,190 26,846(3)
President 1995 45,000 33,000 3,236 30,653(3)
1994 45,000 50,000 4,823 26,982(3)
David T. Matak 1996 73,000 95,500 1,241 28,530(4)
Vice President 1995 52,000 75,000 3,636 32,798(4)
1994 50,250 88,000 5,418 29,606(4)
William A. Siskovic 1996 75,625 65,500 2,073 17,996(5)
Vice President and 1995 62,500 28,500 2,136 20,007(5)
Principal Financial and 1994 62,500 40,000 2,596 16,320(5)
Accounting Officer
<FN>
- ----------
No Named Executive Officer received personal benefits or perquisites during
1996, 1995 and 1994 in excess of the lesser of $50,000 or 10% of his aggregate
salary and bonus.
(1) Includes payments to cover certain executive's taxes.
(2) Includes amounts received from participation in certain overriding
royalty interest arrangements organized by EEI. Also includes amounts
contributed under the Company's 401(K) Retirement Savings Plan. The
Company matched an employee's contribution to the 401(K) Retirement
Savings Plan to the extent of 50% of the first 6% of a participant's
salary reduction. The amounts attributable to the Company's matching
contribution vest immediately.
(3) Includes amounts received by Thomas L. Korner from participation in
certain overriding royalty interest arrangements organized by EEI
of $22,602, $28,280 and $24,387 in 1996, 1995 and 1994, respectively.
(4) Includes amounts received by David T. Matak from participation in
certain overriding royalty interest arrangements organized by EEI
of $24,365, $30,518 and $27,247 in 1996, 1995 and 1994, respectively.
(5) Includes amounts received by William A. Siskovic from participation in
certain overriding royalty interest arrangements organized by EEI of
$13,762, $17,247 and $13,214 in 1996, 1995 and 1994, respectively.
</TABLE>
-25-
<PAGE> 27
Everflow Management Company, EMC and the general partners do not receive any
separate compensation or reimbursement for their management efforts on behalf of
the Company. All direct and indirect costs incurred by the Company are borne by
Everflow Management Company as General Partner of the Company and the
Unitholders as Limited Partners of the Company in proportion to their respective
interest in the Company. The general partners are not entitled to any fees or
other compensation as a result of the acquisition or operation of oil and gas
properties by the Company. The general partners, in their individual capacities,
are not entitled to share in distributions from or income of the Company on an
ongoing basis, upon liquidation or otherwise. The general partners only share in
the revenues, income and distributions of the Company indirectly through their
ownership of Everflow Management Company, as the General Partner of the Company.
Everflow Management Company is entitled to share in the income and expense of
the Company on the basis of its interests as the General Partner of the Company.
Everflow Management Company contributed Interests (as defined and described in
"Item 1. Business" above) with an Exchange value of $670,980 for its interest as
a general partner in the Company.
None of the officers of EEI or EMC has an employment agreement
with either EEI or EMC.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------------
Everflow Management Company is a general partnership of which
EMC, an Ohio corporation is the Managing General Partner. The general partners
of Everflow Management Company are Thomas L. Korner, William A. Siskovic and
David T. Matak, all of whom are directors or officers of EEI, and Sykes
Associates, a limited partnership controlled by Robert F. Sykes, Chairman of the
Board of EEI and EMC. The general partners and their affiliates currently hold
(in addition to Everflow Management Company's interest as a general partner of
the Company) 1,318,365 Units, representing approximately 21% of the outstanding
Units.
Everflow Management Company, as General Partner of the
Company, owns a 1.03% general partner's interest in the Company.
The following table sets forth certain information with
respect to the number of Units beneficially owned as of March 20, 1997 by each
person known to the management of the Company to own beneficially more than 5%
of the outstanding Units; by each director and officer of the Company; and by
all directors and officers as a group. The table also sets forth (i) the
ownership interests of Everflow Management Company, and (ii) the ownership of
EMC.
-26-
<PAGE> 28
BENEFICIAL OWNERSHIP OF UNITS IN THE COMPANY,
EVERFLOW MANAGEMENT COMPANY AND EMC
<TABLE>
<CAPTION>
Percentage
Interest in
Percentage Everflow Percentage
Name Units of Units Management Interest in
of Holder in Company in Company(1) Company(2) EMC
- --------------------------------- ---------- ------------- ---------- -----
<S> <C> <C> <C> <C>
Robert F. Sykes(3) 1,062,854 16.66 57.1429 57.1429
Estate of Joseph W. Baschnagel 546,716 8.57 - -
Thomas L. Korner 135,504 2.12 14.2857 14.2857
David T. Matak 74,029 1.16 14.2857 14.2857
William A. Siskovic 45,978 .72 14.2857 14.2857
All officers and directors as
a group (4 persons in
Everflow Management
Company) 1,318,365 20.66 100.0000 100.0000
<FN>
- ----------
(1) Does not include the interest in the Company owned indirectly by such
individuals as a result of their ownership in (i) Everflow Management
Company (based on Everflow Management Company's 1.04% general partner's
interest in the Company) or (ii) EMC (based on EMC's 1% managing general
partner's interest in Everflow Management Company).
(2) Includes the interest in Everflow Management Company owned indirectly by
such individuals as a result of their share ownership in EMC resulting from
EMC's 1% managing general partner's interest in Everflow Management
Company.
(3) Includes 739,245 Units held by Sykes Associates, a New York limited
partnership comprised of Mr. Sykes and his wife as general partners and
four adult children as limited partners. On January 1, 1994, Mr. Sykes
transferred 323,609 Units of the Company held in his name to Robert F.
Sykes Annuity Trust (162,462 Units) and Catherine Sykes Annuity Trust
(161,147 Units). Mr. Sykes has pledged all Units held by Sykes Associates
to Central Trust Company of Rochester, New York.
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------------
In the past, certain officers, directors and more than 10%
Unitholders of the Company have invested, and may in the future invest, in oil
and gas programs sponsored by EEI on the same terms as unrelated investors. In
the past, certain officers, directors and/or more than 10% Unitholders of the
Company have frequently participated and will likely participate in the future
as working interest owners in wells in which the Company has an interest. The
Company anticipates that any such participation by individual members of the
Company's management would enable such individuals to participate in the
drilling and development of undeveloped drillsites on an equal basis with the
Company or the particular drilling program acquiring such drillsites, which
participation would be on a uniform basis with respect to all drilling conducted
during a specified time frame, as opposed to selective participation.
Frequently, such participation has been on more favorable terms than the terms
which were available to unrelated investors. Frequently, EEI loaned its officers
the funds necessary to participate in the drilling and development of such
wells. The loans are secured by the interests in the oil and gas properties.
Such loans currently accrue interest at the rate of 1% over the prime rate per
annum. As of December 31, 1996, the aggregate outstanding balance of such
indebtedness was approximately $543,000, with Thomas L. Korner, David T. Matak
and William A. Siskovic owing $181,000, $187,000 and $175,000, respectively.
Certain officers and directors of EMC own oil and gas
properties and, as such, contract with the Company to provide field operations
on such properties. These ownership
-27-
<PAGE> 29
interests are charged per well fees for such services on the same basis as all
other working interest owners.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------------
(a) (1) Financial Statements
--------------------
The following Consolidated Financial Statements of the
Registrant and its subsidiaries are included in Part II, Item 8:
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C>
Auditors' Report on Audited Financial Statements F-3
Balance Sheets F-4 - F-5
Statements of Income F-6
Statements of Partners' Equity F-7
Statements of Cash Flows F-8 - F-9
Notes to Financial Statements F-10 - F-23
</TABLE>
(a) (2) Financial Statements Schedules
------------------------------
All schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.
(a) (3) Exhibits
--------
See the Exhibit Index at page E-1 of this Annual Report on
Form 10-K.
(b) On October 22, 1996, the Registrant filed a current report on Form 8-K
relating to pricing adjustments under the Company's Agreements with The East
Ohio Gas Company.
-28-
<PAGE> 30
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
EVERFLOW EASTERN PARTNERS, L.P.
By: EVERFLOW MANAGEMENT COMPANY,
General Partner
By: EVERFLOW MANAGEMENT CORPORATION,
Managing General Partner
<TABLE>
<S> <C> <C> <C>
By: /s/Robert F. Sykes Director March 24 , 1997
-------------------------------------------- ----
Robert F. Sykes
By: /s/Thomas L. Korner President and Director March 24 , 1997
-------------------------------------------- ----
Thomas L. Korner
By: /s/William A. Siskovic Vice President, March 24 , 1997
-------------------------------------------- Secretary-Treasurer ----
William A. Siskovic and Director (principal
financial and accounting
officer)
By: /s/David T. Matak Vice President and March 24 , 1997
-------------------------------------------- Director ----
David T. Matak
</TABLE>
<PAGE> 31
Exhibit Index
-------------
<TABLE>
<CAPTION>
Exhibit No. Description Page
----------- ----------- ----
<S> <C> <C>
4.1 Certificate of Limited Partnership of the Registrant (1)
dated September 13, 1990, as filed with the Delaware
Secretary of State on September 14, 1990
4.2 Form of Agreement of Limited Partnership of the (1)
Registrant
4.3 General Partnership Agreement of Everflow (1)
Management Company
4.4 Articles of Incorporation of Everflow Management (1)
Corporation
4.5 Code of Regulations of Everflow Management (1)
Corporation
4.6 Shareholders Agreement for Everflow Management (1)
Corporation
4.7 Third Amended and Restated Loan Agreement, (2)
dated as of May 1, 1991 between Everflow
Eastern, Inc., the Registrant and the banks listed
therein, with National Bank of Detroit as Agent
4.8 First Amendment to Third Amended and Restated (5)
Loan and Security Agreements dated July 1, 1993,
between Everflow Eastern, Inc. and Everflow Eastern
Partners, L.P. and the banks listed therein, with
National Bank of Detroit as Agent
4.9 Revolving Credit Note to First Amendment to Third (5)
Amended and Restated Loan and Security Agreement
dated as of July 1, 1993
4.10 Credit Agreement dated January 19, 1995 between (8)
Everflow Eastern, Inc. and Everflow Eastern Partners, L.P.
and Bank One, Texas, National Association
4.11 Amendment to Credit Agreement dated February 23, 1996 57
between Everflow Eastern, Inc. and Everflow Eastern
Partners, L.P. and Bank One, Texas, National Association
4.12 Second Amendment to Credit Agreement dated December 30, 59
1996 between Everflow Eastern, Inc. and Everflow Partners,
L.P. and Bank One, Texas, National Association
</TABLE>
E-1
<PAGE> 32
<TABLE>
<CAPTION>
Exhibit No. Description Page
----------- ----------- ----
<S> <C> <C>
10.1 Lease Agreement dated June 30, 1984 by and (1)
between Village Green Associates, Inc. and
Everflow Eastern, Inc.
10.2 Gas Purchase Agreement dated September 3, 1991 (3)
by and between the Registrant and The East Ohio
Gas Company
10.3 Intermediate Term Adjustable Price Gas Purchase (4)
Agreement, contract #10342, dated October 9, 1992,
between The East Ohio Gas Company and Everflow
Eastern Partners, L.P.
10.4 Quaker State Full Load Crude Oil Purchase Agreement (4)
Dated January 13, 1993, between Quaker State Oil
Refining corporation and Everflow Eastern Partners, L.P.
10.5 Intermediate Term Adjustable Gas Purchase Agreement, (6)
Contract #10461, dated March 10, 1994, between The
East Ohio Gas Company and Everflow Eastern Partners, L.P.
10.6 Intermediate Term Adjustable Gas Purchase Agreement, (7)
Contract #10515, dated August 10, 1994, between The
East Ohio Gas Company and Everflow Eastern Partners, L.P.
10.7 Operating facility lease dated October 3, 1995 between (9)
Everflow Eastern Partners, L.P. and A-1 Storage of
Canfield, Ltd.
10.8 Intermediate Term Adjustable Gas Purchase Agreement, (11)
Contract #11245, dated May 29, 1996, between The
East Ohio Gas Company and Everflow Eastern Partners, L.P.
10.9 Intermediate Term Adjustable Gas Purchase Agreement, (11)
Contract #11285, dated May 29, 1996, between The
East Ohio Gas Company and Everflow Eastern Partners, L.P.
10.10 One Year Term Gas Purchase Agreement dated August 1, (12)
1996, between Everflow Eastern Partners, L.P. and
JDS Energy Corporation
10.11 One Year Term Gas Purchase Agreement dated January 20, 60
1997, between Everflow Eastern Partners, L.P. and
JDS Energy Corporation
22.1 Subsidiaries of the Registrant (10)
</TABLE>
E-2
<PAGE> 33
- ----------
(1) Incorporated herein by reference to the appropriate exhibit to
Registrant's Registration Statement on Form S-1 (Reg. No. 33-36919).
(2) Incorporated herein by reference to the appropriate exhibit to the
Registrant's Quarterly Report on Form 10-Q for the second quarter ended
June 30, 1991.
(3) Incorporated herein by reference to the appropriate exhibit to
Registrant's Annual Report on Form 10-K for the year ended December 31,
1991 (File No. 0-19279).
(4) Incorporated herein by reference to the appropriate exhibit to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1992 (File No. 0-19279).
(5) Incorporated herein by reference to the appropriate exhibit to the
Registrant's Quarterly Report on Form 10-Q for the second quarter ended
June 30, 1993.
(6) Incorporated herein by reference to the appropriate exhibit to the
Registrant's Quarterly Report on Form 10-Q for the second quarter ended
June 30, 1994.
(7) Incorporated herein by reference to the appropriate exhibit to the
Registrant's Quarterly Report on Form 10-Q for the third quarter ended
September 30, 1994.
(8) Incorporated herein by reference to the appropriate exhibit to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1994 (File No. 0-19279).
(9) Incorporated herein by reference to the appropriate exhibit to the
Registrant's Quarterly Report on Form 10-Q for the third quarter ended
September 30, 1995.
(10) Incorporated herein by reference to the appropriate exhibit to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1995 (File No. 0-19279).
(11) Incorporated herein by reference to the appropriate exhibit to the
Registrant's Quarterly Report on Form 10-Q for the third quarter ended
June 30, 1996.
(12) Incorporated herein by reference to the appropriate exhibit to the
Registrant's Quarterly Report on Form 10-Q for the third quarter ended
September 30, 1996.
E-3
<PAGE> 34
EVERFLOW EASTERN PARTNERS, L. P.
1996 CONSOLIDATED FINANCIAL REPORT
<PAGE> 35
EVERFLOW EASTERN PARTNERS, L. P.
CONTENTS
-----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
AUDITORS' REPORT ON THE FINANCIAL STATEMENTS F-3
FINANCIAL STATEMENTS
Consolidated balance sheets F-4 - F-5
Consolidated statements of income F-6
Consolidated statements of partners' equity F-7
Consolidated statements of cash flows F-8 - F-9
Notes to consolidated financial statements F-10 - F-23
</TABLE>
F-2
<PAGE> 36
Independent Auditors' Report
----------------------------
To the Partners
Everflow Eastern Partners, L. P.
Canfield, Ohio
We have audited the accompanying consolidated balance sheets of
Everflow Eastern Partners, L. P. and subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of income, partners' equity, and
cash flows for each of the three years in the period ended December 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 consolidated financial position of
Everflow Eastern Partners, L. P. and subsidiaries as of December 31, 1996 and
1995, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
HAUSSER + TAYLOR
Cleveland, Ohio
March 13, 1997
F-3
<PAGE> 37
EVERFLOW EASTERN PARTNERS, L. P.
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
--------------------------
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
ASSETS
------
CURRENT ASSETS
Cash and equivalents $ 739,370 $ 426,743
Accounts receivable:
Production 2,195,525 1,823,044
Officers and employees 929,457 969,609
Joint venture partners 539,852 564,034
Other 82,824 75,899
----------- -----------
Total current assets 4,487,028 3,859,329
PROPERTY AND EQUIPMENT
Proved properties (successful efforts accounting method) 98,321,815 95,362,378
Pipeline and support equipment 451,971 426,500
Corporate and other 1,025,175 806,370
----------- -----------
99,798,961 96,595,248
Less accumulated depreciation, depletion, amortization
and write down 51,503,495 47,809,014
----------- -----------
48,295,466 48,786,234
OTHER ASSETS 405,843 110,911
----------- -----------
$53,188,337 $52,756,474
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 38
EVERFLOW EASTERN PARTNERS, L. P.
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
--------------------------
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
LIABILITIES AND PARTNERS' EQUITY
--------------------------------
CURRENT LIABILITIES
Current portion of long-term debt $ 19,600 $ 11,700
Accounts payable 1,246,050 1,243,830
Accrued expenses 298,980 299,059
----------- -----------
Total current liabilities 1,564,630 1,554,589
LONG-TERM DEBT 4,386,234 4,706,507
DEFERRED INCOME TAXES 278,000 288,000
COMMITMENTS AND CONTINGENCIES
LIMITED PARTNERS' EQUITY, SUBJECT TO REPURCHASE
RIGHT
Authorized - 8,000,000 units
Issued and outstanding - 6,379,941 and 6,433,044 units,
respectively 46,471,094 45,731,442
GENERAL PARTNER'S EQUITY 488,379 475,936
----------- -----------
Total partners' equity 46,959,473 46,207,378
----------- -----------
$53,188,337 $52,756,474
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 39
EVERFLOW EASTERN PARTNERS, L. P.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1996, 1995 and 1994
--------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
REVENUES
Oil and gas sales $ 14,078,491 $ 13,969,378 $ 14,884,027
Well management and operating 474,851 507,873 478,609
Other 4,063 1,703 919
------------ ------------ ------------
14,557,405 14,478,954 15,363,555
DIRECT COST OF REVENUES
Production costs 2,192,349 2,032,706 1,835,432
Well management and operating 207,951 286,206 282,615
Depreciation, depletion and amortization 5,155,681 4,898,667 5,040,940
Abandonment and write down of oil and gas
properties 671,992 137,587 197,691
------------ ------------ ------------
Total direct cost of revenues 8,227,973 7,355,166 7,356,678
GENERAL AND ADMINISTRATIVE EXPENSE 1,870,646 1,907,188 2,128,504
------------ ------------ ------------
Total cost of revenues 10,098,619 9,262,354 9,485,182
------------ ------------ ------------
INCOME FROM OPERATIONS 4,458,786 5,216,600 5,878,373
OTHER INCOME (EXPENSE)
Interest income 78,668 71,516 49,308
Interest expense (262,659) (218,496) (193,279)
(Loss) gain on sale of property and equipment (56,941) (12,534) 1,176
------------ ------------ ------------
(240,932) (159,514) (142,795)
------------ ------------ ------------
INCOME BEFORE INCOME TAXES 4,217,854 5,057,086 5,735,578
PROVISION (CREDIT) FOR INCOME TAXES
Current -- -- (43,000)
Deferred (10,000) (190,000) (137,000)
------------ ------------ ------------
(10,000) (190,000) (180,000)
------------ ------------ ------------
NET INCOME $ 4,227,854 $ 5,247,086 $ 5,915,578
============ ============ ============
Allocation of Partnership Net Income
Limited Partners $ 4,184,053 $ 5,193,251 $ 5,855,417
General Partner 43,801 53,835 60,161
------------ ------------ ------------
$ 4,227,854 $ 5,247,086 $ 5,915,578
============ ============ ============
Earnings per unit $ .65 $ .80 $ .90
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 40
EVERFLOW EASTERN PARTNERS, L. P.
CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY
Years Ended December 31, 1996, 1995 and 1994
--------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
PARTNERS' EQUITY - JANUARY 1 $ 46,207,378 $ 44,617,973 $ 42,122,626
Net income 4,227,854 5,247,086 5,915,578
Cash distributions ($.50 per unit each year) (3,236,795) (3,280,642) (3,297,572)
Purchase and retirement of Units (238,964) (377,039) (122,659)
------------ ------------ ------------
PARTNERS' EQUITY - DECEMBER 31 $ 46,959,473 $ 46,207,378 $ 44,617,973
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 41
EVERFLOW EASTERN PARTNERS, L. P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996, 1995 and 1994
--------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,227,854 $ 5,247,086 $ 5,915,578
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization 5,202,435 4,935,223 5,073,804
Abandonment and write down of oil and gas
properties 671,992 137,587 197,691
Loss (gain) on sale of property and equipment 56,941 12,534 (1,176)
Deferred income taxes (10,000) (190,000) (137,000)
Changes in assets and liabilities:
Accounts receivable (348,299) 567,230 (444,354)
Other current assets (6,925) 6,961 36,433
Other assets (294,932) (81,007) 4,319
Accounts payable 2,220 (17,952) 138,256
Accrued expenses (79) 2,520 5,155
------------ ------------ ------------
Total adjustments 5,273,353 5,373,096 4,873,128
------------ ------------ ------------
Net cash provided by operating activities 9,501,207 10,620,182 10,788,706
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds received on receivables from officers and
employees 517,652 557,206 592,401
Advances disbursed to officers and employees (477,500) (608,675) (623,410)
Purchase of property and equipment (5,508,792) (8,303,950) (6,269,058)
Proceeds on sale of property and equipment 68,192 44,486 8,475
------------ ------------ ------------
Net cash used by investing activities (5,400,448) (8,310,933) (6,291,592)
CASH FLOWS FROM FINANCING ACTIVITIES
Distributions (3,236,795) (3,280,642) (3,297,572)
Repurchase of Units (238,964) (377,039) (122,659)
Proceeds from issuance of long-term debt 4,500,000 5,120,000 4,600,000
Payments on long-term debt (4,812,373) (4,201,793) (5,300,000)
------------ ------------ ------------
Net cash used by financing activities (3,788,132) (2,739,474) (4,120,231)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
EQUIVALENTS 312,627 (430,225) 376,883
CASH AND EQUIVALENTS - JANUARY 1 426,743 856,968 480,085
------------ ------------ ------------
CASH AND EQUIVALENTS - DECEMBER 31 $ 739,370 $ 426,743 $ 856,968
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE> 42
EVERFLOW EASTERN PARTNERS, L. P.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31, 1996, 1995 and 1994
--------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $223,286 $169,739 $192,848
Income taxes -- -- --
Supplemental disclosure of noncash investing and financing activities:
See notes to financial statements for noncash investing and financing
information on the Company's equity transactions and bank borrowings.
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE> 43
EVERFLOW EASTERN PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Organization - Everflow Eastern Partners, L. P. ("Everflow")
is a Delaware limited partnership which was organized in
September 1990 to engage in the business of oil and gas
exploration and development. Everflow was formed to
consolidate the business and oil and gas properties of
Everflow Eastern, Inc. ("EEI") and subsidiaries and the oil
and gas properties owned by certain limited partnership and
working interest programs managed or sponsored by EEI ("EEI
Programs" or "the Programs").
Everflow offered to exchange (the "Exchange Offer") its Units
of limited partnership interest for the common shares of EEI
and the interests of the Investors in the Programs
(collectively the "Interests"). The Exchange Offer was made
pursuant to a Registration Statement on Form S-1 declared
effective by the Securities and Exchange Commission on
December 19, 1990 and the Prospectus dated December 19, 1990
as filed with the Commission pursuant to Rule 424(b).
The Exchange Offer terminated on February 15, 1991 and holders
of Interests with an aggregate Exchange Value of $66,996,249
accepted the offer and tendered their Interests. Effective on
such date, Everflow acquired these Interests, which include
partnership interests and working interests in the Programs,
and all of the outstanding EEI shares. Of these Interests
tendered in the Exchange Offer, $28,565,244 was represented by
the EEI shares and $38,431,005 by the remaining Interests.
Approximately 6,632,000 of Everflow's Units were issued
pursuant to the Exchange Offer.
The tax-free combination of the Programs and EEI with Everflow
was accounted for as a reorganization of affiliated entities
under common control. Accordingly, the accompanying financial
statements reflect the historical costs of the Programs and
EEI.
Everflow Management Company, an Ohio general partnership, is
the general partner of Everflow. Everflow Management Company
is authorized, in general, to perform all acts necessary or
desirable to carry out the purposes and conduct of the
business of Everflow.
The partners of Everflow Management Company are Everflow
Management Corporation ("EMC"), three individuals who are
Officers and Directors of EEI and Sykes Associates, a limited
partnership controlled by Robert F. Sykes, the Chairman of the
Board of EEI. EMC is an Ohio corporation formed in September
1990 and is the managing general partner of Everflow
Management Company.
B. Principles of Consolidation - The consolidated financial
statements include the accounts of Everflow, its wholly-owned
subsidiaries, including EEI and EEI's wholly-owned
subsidiaries, and investments in oil and gas drilling and
income partnerships (collectively, "the Company") which are
accounted for under the proportional consolidation method. All
significant accounts and transactions between the consolidated
entities have been eliminated.
F-10
<PAGE> 44
EVERFLOW EASTERN PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
C. Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates.
D. Fair Value of Financial Instruments - The fair values of cash,
accounts receivable, accounts payable and other short-term
obligations approximate their carrying values because of the
short maturity of these financial instruments. The carrying
values of the Company's long-term obligations approximate
their fair value. In accordance with Statement of Financial
Accounting Standards No. 107, "Disclosure About Fair Value of
Financial Instruments," rates available at balance sheet dates
to the Company are used to estimate the fair value of existing
debt.
E. Cash Equivalents - For purposes of the statement of cash
flows, the Company considers all highly liquid debt
instruments purchased with a maturity of three months or less
to be cash equivalents. The Company maintains at various
financial institutions cash and cash equivalents which may
exceed federally insured amounts at times and which may, at
times, significantly exceed balance sheet amounts due to
float.
F. Property and Equipment - The Company uses the successful
efforts method of accounting for oil and gas exploration and
production activities. Under successful efforts, costs to
acquire mineral interests in oil and gas properties and to
drill and equip development wells are initially capitalized.
Costs of development wells (on properties the Company has no
further interest in) that do not find proved reserves and
geological and geophysical costs are expensed. The Company has
not participated in exploratory drilling and owns no interest
in unproved properties.
Capitalized costs of proved properties, after considering
estimated dismantlement and abandonment costs and estimated
salvage values, are amortized by the unit-of-production method
based upon estimated proved developed reserves. Depletion,
depreciation and amortization on proved properties amounted to
$5,127,388, $4,874,691 and $5,014,758 for the years ended
December 31, 1996, 1995 and 1994, respectively.
On sale or retirement of a unit of a proved property (which
generally constitutes the amortization base), the cost and
related accumulated depreciation, depletion, amortization and
write down are eliminated from the property accounts, and the
resultant gain or loss is recognized.
Pipeline and support equipment and other corporate property
and equipment are depreciated principally on the straight-line
method over their estimated useful lives (pipeline and support
equipment - 10 years, other corporate equipment - 3 to 7
years, other corporate property - building and improvements
with a cost of $659,000 - 39 years). Depreciation on pipeline
and support equipment and other corporate property and
equipment amounted to $75,047, $60,532 and $59,046 for the
years ended December 31, 1996, 1995 and 1994, respectively.
F-11
<PAGE> 45
EVERFLOW EASTERN PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
F. Property and Equipment (Continued)
Maintenance and repairs of property and equipment are expensed
as incurred. Major renewals and improvements are capitalized,
and the assets replaced are retired.
G. Revenue Recognition - The Company recognizes revenue from oil
and gas production as it is extracted and sold from the
properties. Other revenue is recognized at the time it is
earned and the Company has a contractual right to such
revenue.
The Company participates (and may act as drilling contractor)
with unaffiliated joint venture partners in the drilling,
development and operation of jointly owned oil and gas
properties. Each owner, including the Company, has an
undivided interest in the jointly owned property(ies).
Generally, the joint venture partners participate on the same
drilling/development cost basis as the Company and, therefore,
no revenue, expense or income is recognized on the drilling
and development of the properties. Accounts receivable from
joint venture partners consist principally of drilling and
development costs the Company has advanced or incurred on
behalf of joint venture partners. The Company will earn and
receive monthly management and operating fees from certain
joint venture partners after the properties are completed and
placed into production.
H. Income Taxes - Everflow is not a tax-paying entity and the net
taxable income or loss, other than the taxable income or loss
allocable to EEI, which is a C corporation owned by Everflow,
will be allocated directly to its respective partners. The
Company is not able to determine the net difference between
the tax bases and the reported amounts of Everflow's assets
and liabilities due to separate tax elections that were made
by owners of the working interests and limited partnership
interests that comprised Programs.
EEI and its subsidiaries account for income taxes under
Statement of Financial Accounting Standards No. 109 (SFAS
109), "Accounting for Income Taxes." Income taxes are provided
for all items (as they relate to EEI and its subsidiaries) in
the Consolidated Statement of Income regardless of the period
when such items are reported for income tax purposes. SFAS 109
provides that deferred tax assets and liabilities be
recognized for temporary differences between the financial
reporting basis and tax basis of certain of EEI's and its
subsidiaries' assets and liabilities. In addition, SFAS 109
requires that deferred tax assets and liabilities be measured
using enacted tax rates expected to apply to taxable income in
the years in which the temporary differences are expected to
be recovered or settled. The impact on deferred taxes of
changes in tax rates and laws, if any, is reflected in the
financial statements in the period of enactment. In some
situations, SFAS 109 permits the recognition of expected
benefits of utilizing net operating loss and tax credit
carryforwards.
F-12
<PAGE> 46
EVERFLOW EASTERN PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
I. Allocation of Income and Per Unit Data - Under the terms of
the limited partnership agreement, initially, 99% of revenues
and costs are allocated to the Unitholders (the limited
partners) and 1% of revenues and costs are allocated to the
General Partner. Such allocation changes as Unitholders elect
to exercise the Repurchase Right (see Note 3).
Earnings and distributions per limited partner Unit have been
computed based on the weighted average number of Units
outstanding during the year for each year presented. Average
outstanding Units for earnings and distributions per Unit
calculations amount to 6,406,492, 6,476,150 and 6,528,045 in
1996, 1995 and 1994, respectively.
J. New Accounting Standard - In March 1995, the Financial
Accounting Standards Board issued a new standard (SFAS 121),
"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." SFAS 121 requires that
long-lived assets (including oil and gas properties) and
certain identifiable intangibles to be held and used by an
entity be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset
may not be recoverable. SFAS 121 is effective for financial
statements for fiscal years beginning after December 15, 1995.
Everflow adopted SFAS 121 in the first quarter of 1996 and
utilizes a field by field basis for assessing impairment of
its oil and gas properties. The effect of adopting SFAS 121
was not material to the Company's financial position or
results of operations. During 1996, the Company wrote down oil
and gas properties by approximately $262,000 to provide for
impairment on certain of its oil and gas properties.
Additionally, in 1996, the Company wrote off approximately
$210,000 of costs associated with an unsuccessful and
abandoned water flood project.
K. Reclassifications - Certain reclassifications were made to
prior period financial statement presentations to conform with
current period presentations.
NOTE 2. LONG-TERM DEBT
In January 1995, the Company entered into an agreement that replaced
all prior credit agreements. The agreement provides for a revolving
line of credit in the amount of $7,000,000, all of which is available.
The new revolving line of credit provides for interest payable
quarterly at prime plus 1/8% and the principal due at maturity,
November 1, 1997. In December 1996, the agreement was amended extending
the maturity date by one year to November 1, 1998. Borrowings under the
facility are unsecured. However, the Company has agreed, if requested
by the bank, to execute any supplements to the agreement including
security and mortgage agreements on the Company's assets. The agreement
requires the borrower to pay engineering fees of $10,000 per year and
commitment fees of 3/8% per annum on the daily average of the
difference between the current available amount and the aggregate of
loans outstanding. The agreement contains restrictive covenants
requiring Everflow to maintain the following: (i) loan balance not to
exceed the borrowing base of $7,000,000; (ii) tangible net worth of at
least $30,000,000; and (iii) a total debt to tangible net worth ratio
of not more than 0.7 to 1.0. In addition, there are restrictions on
mergers, sales and acquisitions, the incurrence of additonal debt and
the pledge or mortgage of the Company's assets.
F-13
<PAGE> 47
EVERFLOW EASTERN PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. LONG-TERM DEBT (CONTINUED)
Borrowings on long-term revolving credit facilities amounted to
$4,000,000 and $4,400,000 at December 31, 1996 and 1995, respectively.
The following schedule reflects activity under the Company's long-term
revolving credit facilities for the years ended December 31, 1996, 1995
and 1994. The average amount outstanding under the facility was
calculated using daily balances and a 365 day period. The weighted
average interest rates were calculated by dividing the interest expense
for the year for such borrowings by the average amounts outstanding
during the period.
<TABLE>
<CAPTION>
Weighted
Maximum Average Average
Amount Amount Interest
Outstanding Outstanding Rate
----------- ----------- ----
<S> <C> <C> <C>
Year Ended December 31:
1996 $4,800,000 $2,645,479 8.4%
1995 $4,400,000 $2,235,000 9.0%
1994 $5,000,000 $2,531,000 7.2%
</TABLE>
For purposes of the Company's borrowings the prime rate was 8.25%,
8.50% and 8.50% at December 31, 1996, 1995 and 1994, respectively.
The Company purchased a building and funded its cost, including
improvements, in part, through mortgage notes. The notes, which have an
aggregate balance of $405,834 and $318,207 at December 31, 1996 and
1995, respectively, bear interest at 8.22% per annum until October 6,
1998 and then a variable rate of .5% above prime until maturity. The
notes require aggregate payments of principal and interest of $4,353
per month. Maturities on the notes are expected to be as follows: 1997
- $19,600; 1998 - $21,300, 1999 - $23,000; 2000 - $25,000; 2001 -
$27,200; thereafter - $289,734.
NOTE 3. PARTNERS' EQUITY
Units represent limited partnership interests in Everflow. The Units
are transferable subject only to the approval of any transfer by
Everflow Management Company and to the laws governing the transfer of
securities. The Units are not listed for trading on any securities
exchange nor are they quoted in the automated quotation system of a
registered securities association. However, Unitholders have an
opportunity to require Everflow to repurchase their Units pursuant to
the Repurchase Right.
Under the terms of the limited partnership agreement, initially, 99% of
revenues and costs are allocated to the Unitholders (the limited
partners) and 1% of revenues and costs are allocated to the General
Partner. Such allocation has changed and will change in the future due
to Unitholders electing to exercise the Repurchase Right.
F-14
<PAGE> 48
EVERFLOW EASTERN PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. PARTNERS' EQUITY (CONTINUED)
The partnership agreement provides that Everflow will repurchase for
cash up to 10% of the then outstanding Units, to the extent Unitholders
offer Units to Everflow for repurchase pursuant to the Repurchase
Right. The Repurchase Right entitles any Unitholder, between May 1 and
June 30 of each year, to notify Everflow that he elects to exercise the
Repurchase Right and have Everflow acquire certain or all of his Units.
The price to be paid for any such Units will be calculated based upon
the audited financial statements of the Company as of December 31 of
the year prior to the year in which the Repurchase Right is to be
effective and independently prepared reserve reports. The price per
Unit will be equal to 66% of the adjusted book value of the Company
allocable to the Units, divided by the number of Units outstanding at
the beginning of the year in which the applicable Repurchase Right is
to be effective less all Interim Cash Distributions received by a
Unitholder. The adjusted book value is calculated by adding partners'
equity, the Standardized Measure of Discounted Future Net Cash Flows
and the tax effect included in the Standardized Measure and subtracting
from that sum the carrying value of oil and gas properties (net of
undeveloped lease costs). If more than 10% of the then outstanding
Units are tendered during any period during which the Repurchase Right
is to be effective, the Investors' Units so tendered shall be prorated
for purposes of calculating the actual number of Units to be acquired
during any such period. The price associated with the Repurchase Right,
based upon the December 31, 1996 calculation, is estimated to be $5.21
per Unit, net of the distributions ($.25 per Unit in total) expected to
be made in January and April 1997.
Units repurchased pursuant to the Repurchase Right, for each of the
four years in the period ended December 31, 1996, are as follows:
<TABLE>
<CAPTION>
Per Unit
------------------------------------------------------
Calculated Units
Price for Less Outstanding
Repurchase Premium Interim Net # of Units Following
Year Right Offered Distributions Price Paid Repurchased Repurchase
---- ---------- ------- ------------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
1993 $4.60 $ -- $.25 $ 4.35 40,002 6,541,524
1994 $4.80 $ -- $.25 $ 4.55 26,958 6,514,566
1995 $4.72 $.28 $.375 $4.625 81,522 6,433,044
1996 $4.48 $.27 $.25 $ 4.50 53,103 6,379,941
</TABLE>
NOTE 4. PROVISION FOR INCOME TAXES
As referred to in Note 1, EEI and its subsidiaries account for current
and deferred income taxes under the provisions of SFAS No. 109. The
deferred taxes are the result of temporary differences arising from
differences in financial reporting and tax reporting methods for EEI's
proved properties.
F-15
<PAGE> 49
EVERFLOW EASTERN PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. PROVISION FOR INCOME TAXES (CONTINUED)
A reconciliation between taxes computed at the Federal statutory rate
and the effective tax rate in the statements of income follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------
1996 1995 1994
------------------ ------------------ ------------------
Amount % Amount % Amount %
------ --- ------ --- ------ ---
<S> <C> <C> <C> <C> <C> <C>
Provision based on the
statutory rate (for taxable
income up to $10,000,000) $ 1,434,000 34.0 $ 1,719,000 34.0 $ 1,950,000 34.0
Tax effect of:
Non-taxable status of the
Programs and Everflow (1,368,000) (32.4) (1,688,000) (33.4) (1,927,000) (33.6)
Excess statutory depletion (90,000) (2.1) (102,000) (2.0) (116,000) (2.0)
Graduated tax rates, state
income tax and other - net 14,000 0.3 (119,000) (2.4) (87,000) (1.5)
----------- ---- ----------- ---- ----------- ----
Total $ (10,000) (0.2) $ (190,000) (3.8) $ (180,000) (3.1)
=========== ==== =========== ==== =========== ====
</TABLE>
EEI has percentage depletion deduction carryforwards for tax purposes
of approximately $2,000,000. These carryforwards can be carried forward
indefinitely. For financial reporting purposes, the deferred tax
liability at December 31, 1996 and 1995 has been reduced by
approximately $680,000 and $750,000, respectively, for the tax effect
of carryforwards.
NOTE 5. RETIREMENT PLAN
The Company has a defined contribution plan pursuant to Section 401(K)
of the Internal Revenue Code for all employees who had reached the age
of 21 and completed one year of service. Contributions to the plan are
at the discretion of EMC's Board of Directors. The Company made
contributions of $38,595, $35,815 and $37,440 for the years ended
December 31, 1996, 1995 and 1994, respectively.
NOTE 6. RELATED PARTY TRANSACTIONS
Since 1989, EEI provided certain employees with an opportunity to
receive assignments of certain Overriding Royalty Interests which were
created at the time EEI generated an oil and gas lease for acquisition
by oil and gas drilling programs. Not all leases generated and acquired
by such Programs had an Overriding Royalty Interest reserved for
assignment to employees. Certain Employees of the Company have been
given the option of having a portion of their compensation in the form
of an assignment in certain of such Overriding Royalty Interests. Those
employees who elect to receive a portion of their compensation in this
form receive an assignment of a pro rata portion of each of the
Overriding Royalty Interests selected. During the calendar years ended
December 31, 1996, 1995 and 1994, approximately $121,000, $199,000 and
$157,000, respectively, was distributed to such employees from such
Overriding Royalty Interests.
F-16
<PAGE> 50
EVERFLOW EASTERN PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. RELATED PARTY TRANSACTIONS (CONTINUED)
The Company's Officers, Directors, Affiliates and certain employees
have frequently participated and will likely participate in the future
as working interest owners in wells in which the Company has an
interest. Frequently, the Company has loaned the funds necessary to
participate in the drilling and development of such wells. Such loans
currently accrue interest at the prime rate plus 1% per annum. Such
receivables are expected to be paid from production revenues
attributable to such interests or through joint interest assessments.
NOTE 7. BUSINESS SEGMENTS, RISKS AND MAJOR CUSTOMERS
The Company operates exclusively in the United States, almost entirely
in Ohio and Pennsylvania, in the exploration, development and
production of oil and gas.
The Company operates in an environment with many financial risks,
including, but not limited to, the ability to acquire additional
economically recoverable oil and gas reserves, the inherent risks of
the search for, development of and production of oil and gas, the
ability to sell oil and gas at prices which will provide attractive
rates of return, and the highly competitive nature of the industry and
worldwide economic conditions. The Company's ability to expand its
reserve base and diversify its operations is also dependent upon the
Company's ability to obtain the necessary capital through operating
cash flow, additional borrowings or additional equity funds. Various
federal, state and governmental agencies are considering, and some have
adopted, laws and regulations regarding environmental protection which
could adversely affect the proposed business activities of the Company.
The Company cannot predict what effect, if any, current and future
regulations may have on the operations of the Company.
Approximate percentages of oil and gas sales from purchasers who
represented greater than 10% of total oil and gas sales for the years
ended December 31, 1996, 1995 and 1994, respectively, were as follows:
<TABLE>
<CAPTION>
Customer 1996 1995 1994
-------- ---- ---- ----
<S> <C> <C> <C>
The East Ohio Gas Company 72% 77% 72%
Quaker State Refining Corporation 12 11 10
-- -- --
84% 88% 82%
== == ==
</TABLE>
F-17
<PAGE> 51
EVERFLOW EASTERN PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. BUSINESS SEGMENTS, RISKS AND MAJOR CUSTOMERS (CONTINUED)
The Company has various Intermediate Term Adjustable Price Gas Purchase
Agreements (the "East Ohio Contracts") with The East Ohio Gas Company
("East Ohio"). Pursuant to the East Ohio Contracts and subject to
certain restrictions and adjustments, East Ohio is obligated to
purchase, and the Company is obligated to sell, all natural gas
production from a specified list of wells (the "Contract Wells"). A
summary of Everflow's principal East Ohio Gas Contracts at December 31,
1996 follows:
<TABLE>
<CAPTION>
Contract Period Termination Number Required Shut-In Limitation
Date Covered Clause of Wells Purchases Provisions Provisions
-------- ------- ----------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
9/3/91 11/91-10/01 11/97 449 275 days/year Maximum of May-Oct. - 50% of
60 days (Nov.- production from
April) prior 6 month period
3/10/94 4/94-3/00 None 49 275 days/year Maximum of May-Oct. - 50% of
60 days (Nov.- production from
April) prior 6 month period
8/10/94 11/94-10/00 None 28 Nov.-March April-Oct. Shut-in provisions
<CAPTION>
Net Price per MCF
------------------------------------------------------------------------------------------------------
Initially Adjusted Prices
Contract ---------------------------------------------------------------------------------------------
Date Nov.-April May-Oct. 11/94-4/95 5/95-10/95 11/95-4/96 5/96-10/96 11/96-4/97 5/97-10/97
-------- ---------- -------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
9/3/91 $ 2.85 $ 2.22 $ 3.34 $ 2.71 $ 2.84 $ 2.21 $ 3.31 $ 2.68
3/10/94 $ 2.98 $ 2.28 No adjustment $ 2.48 $ 1.78 $ 2.95 $ 2.25
8/10/94 $ 3.08 N/A No adjustment $ 2.82 N/A $ 3.55 N/A
</TABLE>
As detailed above, the price paid for natural gas purchased under the
East Ohio Contracts varies with the production period. Pricing under
the East Ohio Contracts is adjusted annually (after the first
adjustment), up or down, by an amount equal to 80% of the increase or
decrease in East Ohio's average Gas Cost Recovery ("GCR") rates. The
net price per MCF includes $.20 per MCF for transportation less a $.02
per MCF metering charge. Additionally, the 8/10/94 contract provides
for a price cap equal to the quarterly GCR, which amounted to $3.87 and
$2.82 in November 1996 and 1995, respectively.
In addition to the East Ohio Contracts described above, the Company has
various short-term contracts (covering production from 45 gross wells
at December 31, 1996) which have a primary term of 15 months or less.
Twenty-four of the wells are covered by fixed price contracts that
provide for the sale of the Company's gas at $2.65 to $2.95 per MCF.
The remaining twenty-one wells are covered by a variable rate contract
that provides for the sale of the Company's gas based on a monthly
NYMEX settlement, with no floor price provisions, plus $.35
(April-Oct.) or $.55 (Nov.-March) per MCF (including transportation
allowances). There are no significant production restrictions under the
Company's short-term contracts as they relate to the Company's existing
wells. Future wells can be added to certain of the contracts subject to
gross production restrictions under the contracts.
F-18
<PAGE> 52
EVERFLOW EASTERN PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. BUSINESS SEGMENTS, RISKS AND MAJOR CUSTOMERS (CONTINUED)
In January 1993, the Company entered into a 3 year crude oil purchase
agreement with Quaker State Refining Corporation ("Quaker State"). The
agreement provides for the sale of significantly all of the Company's
crude oil production to Quaker State at a premium price of $.40 or $.80
per barrel over Quaker State's posted price. The Company is entitled to
the premium provided it makes available to Quaker State its product in
80 ($.40 premium) or 160 ($.80 premium) barrel minimum quantities. The
provisions of this agreement are now customary for crude oil production
purchased in the Appalachian Basin. As a result, the Company expects to
continue to receive pricing consistent with the terms of the agreement
without a formal agreement in place.
The Company expects that East Ohio and Quaker State will be the only
major customers in 1997.
NOTE 8. COMMITMENTS AND CONTINGENCIES
Everflow paid a dividend in January 1997 of $.125 per Unit. The
distribution amounted to approximately $806,000.
The Company is the General Partner in certain oil and gas partnerships.
As General Partner, the Company shares in unlimited liability to third
parties with respect to the operations of the Partnerships and may be
liable to limited partners for losses attributable to breach of
fiduciary obligations.
NOTE 9. SUPPLEMENTAL INFORMATION RELATING TO OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
The following supplemental unaudited oil and gas information is
required by Statement of Financial Accounting Standards (SFAS) No. 69,
"Disclosures About Oil and Gas Producing Activities."
The tables on the following pages set forth pertinent data with respect
to the Company's oil and gas properties, all of which are located
within the continental United States.
CAPITALIZED COSTS RELATING TO OIL AND GAS
PRODUCING ACTIVITIES
<TABLE>
<CAPTION>
December 31,
-------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Proved oil and gas properties $98,321,815 $95,362,378 $87,964,253
Pipeline and support equipment 451,971 426,500 358,263
----------- ----------- -----------
98,773,786 95,788,878 88,322,516
Accumulated depreciation,
depletion, amortization
and write down 51,286,350 47,598,650 42,837,170
----------- ----------- -----------
Net capitalized costs $47,487,436 $48,190,228 $45,485,346
=========== =========== ===========
</TABLE>
F-19
<PAGE> 53
EVERFLOW EASTERN PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. SUPPLEMENTAL INFORMATION RELATING TO OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
COSTS INCURRED IN OIL AND GAS PRODUCING ACTIVITIES
December 31,
------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Property acquisition costs $ 972,653 $ 1,056,162 $ 1,119,842
Development costs 4,109,532 6,675,443 5,113,387
<CAPTION>
RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES
December 31,
------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Oil and gas sales $ 14,078,491 $ 13,969,378 $ 14,884,027
Production costs (2,192,349) (2,032,706) (1,835,432)
Depreciation, depletion and
amortization (5,155,681) (4,898,667) (5,040,940)
Abandonment and write down of
oil and gas properties (671,992) (137,587) (197,691)
------------ ------------ ------------
6,058,469 6,900,418 7,809,964
Income tax expense 360,000 272,000 280,000
------------ ------------ ------------
Results of operations for oil and
gas producing activities
(excluding corporate overhead
and financing costs) $ 5,698,469 $ 6,628,418 $ 7,529,964
============ ============ ============
</TABLE>
Income tax expense was computed using statutory tax rates and reflects
permanent differences that are reflected in the Company's consolidated
income tax expense for the year.
F-20
<PAGE> 54
EVERFLOW EASTERN PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. SUPPLEMENTAL INFORMATION RELATING TO OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED) (CONTINUED)
ESTIMATED QUANTITIES OF PROVED OIL AND GAS RESERVES
<TABLE>
<CAPTION>
Oil Gas
(BBLS) (MCF)
------ -----
<S> <C> <C>
Balance, December 31, 1993 813,000 38,106,000
Extensions, discoveries and other
additions 39,000 3,650,000
Production (107,000) (4,342,000)
Revision of previous estimates 64,000 533,000
-------- ----------
Balance, December 31, 1994 809,000 37,947,000
Extensions, discoveries and other
additions 120,000 5,891,000
Production (107,000) (4,259,000)
Revision of previous estimates 10,000 479,000
-------- ----------
Balance, December 31, 1995 832,000 40,058,000
Extensions, discoveries and other
additions 119,000 3,665,000
Production (112,000) (4,264,000)
Revision of previous estimates 73,000 1,556,000
-------- ----------
Balance, December 31, 1996 912,000 41,015,000
======== ==========
PROVED DEVELOPED RESERVES:
December 31, 1993 813,000 38,106,000
December 31, 1994 809,000 37,947,000
December 31, 1995 832,000 40,058,000
December 31, 1996 912,000 41,015,000
</TABLE>
The Company has not determined proved reserves associated with its
proved undeveloped acreage. At December 31, 1996 and 1995, the Company
had 2,800 and 3,000 net proved undeveloped acres, respectively. The
carrying cost of the proved undeveloped acreage that is included in
proved properties amounted to $1,794,477 and $1,633,563 at December 31,
1996 and 1995, respectively.
F-21
<PAGE> 55
EVERFLOW EASTERN PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. SUPPLEMENTAL INFORMATION RELATING TO OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE
NET CASH FLOWS
December 31,
---------------------------------------
1996 1995 1994
---- ---- ----
(Thousands of Dollars)
<S> <C> <C> <C>
Future cash inflows from sales of oil
and gas $132,308 $111,753 $119,170
Future production and development
costs 49,255 42,417 43,861
Future income tax expense 2,171 2,090 2,538
-------- -------- --------
Future net cash flows 80,882 67,246 72,771
Effect of discounting future net cash
flows at 10% per annum 30,375 25,441 27,896
-------- -------- --------
Standardized measure of discounted
future net cash flows $ 50,507 $ 41,805 $ 44,875
======== ======== ========
<CAPTION>
CHANGES IN THE STANDARDIZED MEASURE OF DISCOUNTED
FUTURE NET CASH FLOWS
December 31,
---------------------------------------
1996 1995 1994
---- ---- ----
(Thousands of Dollars)
<S> <C> <C> <C>
Balance, beginning of year $ 41,805 $ 44,875 $ 47,070
Extensions, discoveries and other
additions 6,168 8,229 5,263
Development costs incurred 308 351 246
Revision of previous estimates 2,616 634 909
Sales of oil and gas, net of production
costs (11,886) (11,937) (13,049)
Net change in income taxes (20) 279 316
Net changes in prices and production
costs 5,660 (5,241) (2,219)
Accretion of discount 4,181 4,488 4,707
Other 1,675 127 1,632
--------- --------- ---------
Balance, end of year $ 50,507 $ 41,805 $ 44,875
========= ========= =========
</TABLE>
F-22
<PAGE> 56
EVERFLOW EASTERN PARTNERS, L. P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. SUPPLEMENTAL INFORMATION RELATING TO OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED) (CONTINUED)
Under the guidelines of SFAS No. 69, estimated future cash flows are
determined based on year-end prices for crude oil, current allowable
prices applicable to expected natural gas production, estimated
production of proved crude oil and natural gas reserves, estimated
future production and development costs of reserves, based on current
economic conditions, and the estimated future income tax expense, based
on year-end statutory tax rates (with consideration of future tax rates
already legislated) to be incurred on pretax net cash flows less the
tax basis of the properties involved. Such cash flows are then
discounted using a 10% rate.
The methodology and assumptions used in calculating the standardized
measure are those required by SFAS No. 69. It is not intended to be
representative of the fair market value of the Company's proved
reserves. The valuation of revenues and costs does not necessarily
reflect the amounts to be received or expended by the Company. In
addition to the valuations used, numerous other factors are considered
in evaluating known and prospective oil and gas reserves.
F-23
<PAGE> 1
EXHIBIT 4.11
AMENDMENT TO
CREDIT AGREEMENT
----------------
This Amendment is made and entered into this 23rd day of
February, 1996, by and between EVERFLOW EASTERN, INC., an Ohio corporation (the
"Company"), EVERFLOW EASTERN PARTNERS, L.P., a Delaware limited partnership
(the "Partnerships") (the Company and the Partnership being referred to
collectively as the "Borrower"), and BANK ONE, TEXAS, NATIONAL ASSOCIATION, a
national banking association (the "Lender").
RECITALS:
---------
Borrower and Lender have entered into a Credit Agreement dated
January 19, 1995, pursuant to which Lender has agreed to make loans to Borrower
upon the terms and conditions set forth in the Credit Agreement. Borrower and
Lender have agreed, and by this Amendment, do hereby agree to amend the Credit
Agreement so as to reflect the acquisition by the Company of A-1 Storage of
Canfield, Ltd.
NOW, THEREFORE, the Credit Agreement is amended in the
following respects:
1. Section 6.1 is amended to read as follows:
"6.1 INDEBTEDNESS. Create, incur, assume or suffer to exist,
or permit any Subsidiary of the Borrower to create, incur, assume or suffer to
exist, any Indebtedness, whether by way of loan or otherwise; PROVIDED, HOWEVER,
the foregoing restriction shall not apply to (a) the Obligations or (b)
unsecured accounts payable incurred in the ordinary course of business, which
are not unpaid in excess of 60 days beyond invoice date or are being contested
in good faith as to which such reserve as is required by GAAP has been made or
(c) Indebtedness in the aggregate amount not to exceed $150,000; PROVIDED,
HOWEVER, that the Company's Subsidiary, A-1 Storage of Canfield, Ltd.'s
Indebtedness to Bank One, Youngstown, N.A. shall be permitted hereunder and
shall be excluded from any aggregate Indebtedness determined under this section.
2. Section 6.2 is amended to read as follows:
"6.2 CONTINGENT OBLIGATIONS. Create, incur, assume or suffer
to exist, or permit any Subsidiary of the Borrower to create, incur, assume or
suffer to exist, any Contingent Obligation; PROVIDED, HOWEVER, the foregoing
restriction shall not apply to (a) performance guarantees and performance surety
or other bonds provided in the ordinary course of business; or (b) trade credit
incurred or operating leases entered into the ordinary course of business, or
(c) the Company's guarantee of its Subsidiary, A-1 Storage of Canfield, Ltd.,
Indebtedness to Bank One, Youngstown, N.A."
<PAGE> 2
3. Section 6.3 is amended to read as follows:
"6.3 LIENS. Create, incur, assume or suffer to exist, or
permit any Subsidiary of the Borrower to create, incur, assume or suffer to
exist, any Lien or any of its Oil and Gas Properties or any other Property,
whether now owned or hereafter acquired; PROVIDED, HOWEVER, the foregoing
restriction shall not apply to Permitted Liens or to mortgage liens granted by
the Company's Subsidiary, A-1 Storage of Canfield, Ltd., to Bank One,
Youngstown, N.A."
4. Section 6.7 is amended to read as follows:
"6.7 LINES OF BUSINESS. Expand, on its own or through any
Subsidiary, into any line of business other than those in which the Borrower is
engaged as of January 19, 1995; PROVIDED, HOWEVER, the foregoing restriction
shall not apply to the expansion of the Company into the ownership, construction
and management of self-storage facilities by the Company's Subsidiary, A-1
Storage of Canfield, Ltd."
5. In all other respects, the terms and provisions of the
Credit Agreement are hereby confirmed.
IN WITNESS WHEREOF, this Amendment has been executed by the
parties on the date first above written, but effective for all purposes, as of
December 20, 1995.
BANK ONE, TEXAS, NATIONAL EVERFLOW EASTERN, INC.
ASSOCIATION
By: /s/ James S. Bolinger By: /s/ William A. Siskovic
--------------------------------- ------------------------------
James S. Bolinger, Vice President Its: Vice President
EVERFLOW EASTERN PARTNERS, L.P.
By: Everflow Management Company,
its general partner
By: Everflow Management Corporation
By: /s/ William A. Siskovic
-------------------------------
Its: Vice President
<PAGE> 1
EXHIBIT 4.12
SECOND AMENDMENT TO
CREDIT AGREEMENT
----------------
This Second Amendment to Credit Agreement is made and entered
into this 30 day of December, 1996, by and between EVERFLOW EASTERN, INC., an
Ohio corporation (the "Company"), EVERFLOW EASTERN PARTNERS, L.P., a Delaware
limited partnership (the "Partnerships") (the Company and the Partnership being
referred to collectively as the "Borrower"), and BANK ONE, TEXAS, NATIONAL
ASSOCIATION, a national banking association (the "Lender").
RECITALS:
---------
Borrower and Lender have entered into a Credit Agreement dated
January 19, 1995, pursuant to which Lender has agreed to make loans to
Borrower upon the terms and conditions set forth in the Credit Agreement.
Borrower and Lender have agreed, and by this Amendment, do hereby agree to
further amend the Credit Agreement so as to extend the terms of this Agreement
and the loans made thereunder.
NOW, THEREFORE, the Credit Agreement is amended in the
following respects:
1. The definition of "Commitment Termination Date" in
Section 1.2 is amended to read as follows:
"Commitment Termination Date" shall mean November 1, 1998."
2. In all other respects, the terms and provisions of the
Credit Agreement are hereby confirmed.
IN WITNESS WHEREOF, this Second Amendment has been executed by
the parties on the date first above written, but effective for all purposes, as
of December 31, 1996.
BANK ONE, TEXAS, NATIONAL EVERFLOW EASTERN, INC.
ASSOCIATION
By: /s/ James S. Bolinger By: /s/ William A. Siskovic
----------------------------- -----------------------------
James S. Bolinger, Vice President Its: Vice President
EVERFLOW EASTERN PARTNERS, L.P.
By: Everflow Management Company,
its general partner
By: Everflow Management Corporation
By: /s/ William A. Siskovic
-------------------------------
Its: Vice President
<PAGE> 1
EXHIBIT 10.11
ONE YEAR TERM
-------------
GAS PURCHASE AGREEMENT
----------------------
THIS AGREEMENT, entered into this 20th day of January, 1997, between Everflow
Eastern Partners, L.P. ("Seller"), and JDS Energy Systems, Inc. ("Buyer"),
WITNESSETH:
-----------
WHEREAS, Seller has available a supply of natural gas at certain points of
connection on the pipeline system of The East Ohio Gas Company; and
WHEREAS, Buyer desires to purchase natural gas for use in its customers' plants
located in Ohio.
NOW, THEREFORE, in consideration of the premises and the covenants herein
contained, Seller agrees to sell and deliver from wells listed in Exhibit "A"
to Buyer and Buyer agrees to purchase and receive from Seller, a quantity of
natural gas pursuant to the terms and conditions hereinafter set forth, to-wit:
ARTICLE 1
---------
DEFINITIONS
-----------
Except where expressly stated otherwise, the following terms where used in this
Contract shall mean:
1.1 "GAS" means all elements and compounds and mixtures thereof comprising the
effluent vapor stream as produced at the mouth of Seller's natural gas wells.
1.2 "MCF" means one thousand (1,000) cubic feet of gas measured at the
temperature and pressure specified by The East Ohio Gas Company in their gas
transportation agreements.
ARTICLE 2
---------
POINTS OF DELIVERY
------------------
2.1 The points of delivery of gas to be delivered to Buyer from Seller hereunder
shall be at the point of interconnection of Seller's gathering facilities with
the metering facilities of The East Ohio Gas Company.
2.2 Seller shall be in control and possession of the gas and responsible for any
damage or injury caused thereby until same shall have been delivered to Buyer
at the point of delivery.
ARTICLE 3
---------
QUANTITY
--------
3.1 Commencing with the date of initial delivery and continuing for the term of
this Contract, Buyer agrees to purchase and Seller agrees to sell and endeavor
to deliver at the point specified in Article 2 hereunder, volumes of gas passing
through the stations listed in Exhibit "A", up to a monthly maximum volume of
15,000 mcf.
3.2 In the event Seller has increases or decreases in excess of ten percent over
such quantity stated in 3.1 above, Seller shall notify Buyer. Seller shall also
notify Buyer in the event of production variation due to force majeure
situations.
1
<PAGE> 2
ARTICLE 4
---------
MEASUREMENT OF GAS
------------------
4.1 ALL gas delivered to Buyer from Seller hereunder shall be measured by The
East Ohio Gas Company at the points of delivery and as specified in its gas
transportation agreements.
4.2 Seller shall provide the results of a twenty-four hour measurement test to
be taken monthly during the first week of each production period. Seller shall
notify Buyer of such test results within ten days of such tests.
ARTICLE 5
---------
QUALITY
-------
5.1 All gas delivered to Buyer from Seller at the point of delivery hereunder
shall be merchantable gas and shall conform to the standard contract quality
specifications of The East Ohio Gas Company.
ARTICLE 6
---------
TERM
----
6.1 The term of this contract shall commence with the March, 1997, production
period, and shall continue for twelve (12) full production periods. At the end
of the primary term, the contract will continue in effect on a month to month
basis unless cancelled by either party with thirty (30) days written notice.
ARTICLE 7
---------
PRICE
-----
7.1 Commencing with the initial delivery of gas hereunder and extending through
twelve full production periods, Seller shall receive $2.95 per mcf at the point
of delivery. At the end of the initial twelve month period and each succeeding
twelve month period thereafter, the gas shall be priced on an annual basis.
Should the parties fail to reach an agreement thirty (30) days prior to the
effective date for the renegotiated price, either party may terminate this
Agreement in accordance with Article 6.1 above.
ARTICLE 8
---------
TAXES
-----
8.1 All production, severance, gathering, excise, and similar taxes imposed or
levied by the state, or other governmental authority on the gas produced,
delivered, or sold hereunder shall be paid by Seller. Buyer shall be responsible
to pay all taxes and assessments imposed upon Buyer with respect to its
facilities, gas delivered hereunder, and the purchase of the gas.
ARTICLE 9
---------
BILLING AND PAYMENT
-------------------
9.1 Buyer shall remit to Seller the full amount owed for the gas as measured by
East Ohio, within twenty-five days of the receipt of the East Ohio Gas Delivery
Statement.
9.2 Should Buyer fail to pay the full amount due Seller when the same is due,
interest thereon shall accrue at the rate of one (1) percent per month from the
date when such payment is due until the same is paid.
2
<PAGE> 3
9.3 Buyer agrees to diligently pursue and use its best efforts to recover any
monies owed to Buyer by the ultimate purchaser which would effect the payment to
Seller hereunder. In the event that Seller does not receive payment for gas sold
hereunder, Seller may terminate this Agreement. However, termination does not
absolve Buyer of its responsibility to pay Seller for gas delivered hereunder.
ARTICLE 10
----------
FORCE MAJEURE
-------------
10.1 Neither party shall be liable for any failure of performance due to causes
beyond its reasonable control, the occurrence of which could have not been
prevented by the exercise of due diligence, including but not limited to acts of
God, acts of the other party, acts of civil or military authority, fires,
strikes, floods, epidemics, force majeure under any agreement with a producer,
supplier or intrastate transporter, war or riot. Provided, however, that neither
party shall be relieved of any of its financial obligations hereunder solely by
reason of an event of force majeure.
ARTICLE 11
----------
MISCELLANEOUS
-------------
11.1 This Contract is subject to all valid legislation, both State and Federal,
and to all valid present and future orders, rules and regulations of duly
constituted authorities having jurisdiction.
11.2 This Contract shall bind and inure to the benefit of the parties hereto,
their successors and assigns, but no party may assign any of its rights
hereunder without the written consent of the other, which consent shall not be
unreasonably withheld.
11.3 This Contract contains the entire agreement between the parties and there
are no oral promises, agreements or warranties affecting it.
11.4 The numbering and titling of particular provisions of this Contract is for
the purpose of facilitating administration and shall not be construed as having
any substantive effect on the terms of this agreement.
11.5 Seller warrants its title and right to sell all natural gas delivered
hereunder, and warrants that such gas shall be free and clear from liens and
adverse claims and is in conformity with all valid laws, orders, rules, and
regulations of duly constituted authorities having jurisdiction.
11.6 Seller warrants it will not circumvent Buyer in order to negotiate with or
sell Buyer's end use customer for natural gas during the term of Buyer's
agreement with such end user.
3
<PAGE> 4
ARTICLE 12
----------
NOTICES
-------
12.1 The address of Buyer for the purpose of all notices and communications
hereunder, unless another address is designated by Buyer in writing shall be:
JDS Energy Systems, Inc.
7033 Mill Road
Brecksville, Ohio 44141
Attn: David I. Mansbery, President
12.2 The address of Seller for the purpose of all notices and communications
hereunder, unless another address is designated by the Seller in writing, shall
be:
Everflow Eastern Partners, L.P.
585 W. Main Street
P.O. Box 629
Canfield, Ohio 44406
Attn: Thomas L. Korner, President
EXECUTED this 20th day of January, 1997.
Witness: Buyer: JDS Energy Systems, Inc.
By: /s/ Leanne M. Ventre By: /s/ John J. Labuda, Treasurer for
----------------------------- ----------------------------------
David I. Mansbery, President
Witness: Seller: Everflow Eastern Partners, L.P.
By: /s/ Claudia Morgan By: /s/ Thomas L. Korner
----------------------------- -----------------------------------
Its: President
----------------------------------
4
<PAGE> 5
<TABLE>
EXHIBIT "A"
-----------
<CAPTION>
WELL NAME PERMIT # S/L TOWNSHIP COUNTY
- --------- -------- --- -------- ------
<S> <C> <C> <C> <C>
Kistler #2D 5019 12 Perry Stark
Premium Unit #1D 3636 22 Warren Trumbull
</TABLE>
5
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 739,370
<SECURITIES> 0
<RECEIVABLES> 3,664,834
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,487,028
<PP&E> 99,798,961
<DEPRECIATION> 51,503,495
<TOTAL-ASSETS> 53,188,337
<CURRENT-LIABILITIES> 1,564,630
<BONDS> 4,386,234
<COMMON> 0
0
0
<OTHER-SE> 46,959,473
<TOTAL-LIABILITY-AND-EQUITY> 53,188,337
<SALES> 14,078,491
<TOTAL-REVENUES> 14,557,405
<CGS> 2,192,349
<TOTAL-COSTS> 10,098,619
<OTHER-EXPENSES> 240,932
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 262,659
<INCOME-PRETAX> 4,217,854
<INCOME-TAX> (10,000)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,227,854
<EPS-PRIMARY> .65
<EPS-DILUTED> 0
</TABLE>
