ITEM 1. BUSINESS
GENERAL
Evergreen Resources, Inc. ("Evergreen" or "the Company"), is a Colorado corporation organized on January 14, 1981. Evergreen was formed to engage in exploration for, and acquisition, development, production and sale of, oil and gas. Evergreen maintains its principal executive offices at Suite 1000, 1512 Larimer Street, Denver, Colorado 80202, and its telephone number is (303) 534- 0400.
Evergreen Operating Corporation, a wholly owned subsidiary, presently is designated Operator for 170 oil and gas wells for Evergreen and also for other owners.
Evergreen Resources (UK) Ltd., a wholly owned subsidiary, holds extensive exploration licenses onshore in the United Kingdom and 2% interest in a group exploring offshore in the Falkland Islands.
The authorized capitalization of the Company is 50,000,000 shares of no par value common stock of which 9,392,220 shares were issued and outstanding at March 21, 1997. Evergreen has an authorized capital of 25,000,000 shares of $1.00 par value Preferred Stock, 6,000,000 of which were issued and outstanding at March 21, 1997.
Virtually 100% of the Company's proved reserves, production and revenues are attributable to natural gas.
RECENT DEVELOPMENTS
FISCAL YEAR
Effective with the period ended December 31, 1996, the Company elected to begin utilizing a December 31 fiscal year end. Therefore, the period ended December 31, 1996 represents a nine-month short period as compared to the twelve month fiscal years ended March 31, 1996, 1995, and 1994.
CHILE
On March 18, 1997 the Government of Chile awarded an oil and gas exploration contract to Evergreen on two 5,000 square kilometer (1.2 million acre) blocks in Northern Chile.
Evergreen has 75% working interest in the blocks and will serve as Operator. Empresa Nacional del Petroleo (ENAP), the State-owned energy company, holds the remaining 25% working interest. The Chilean government will initially receive a 10% royalty on production up to 10,000 barrels per day.
Both exploration blocks are located in the Tamarugal Basin, which has been identified by Evergreen as a probable geologic analogue to the Neuquen Basin of Argentina. The Tamarugal Basin is thought to be a thermally-mature Jurassic back-arc basin, comprised of thick sequences of source rock, along with potential reservoir beds in the form of sandstone and limestone.
The Neuquen Basin has proved oil reserves of 1.9 billion barrels of oil and 18 trillion cubic feet of gas, representing a substantial percentage of the total oil and gas reserves of Argentina.
Evergreen and ENAP will share the following work commitments proportionately, stated as Exploration Periods for each block:
PERIOD TERM WORK COMMITMENT - ------ ---- --------------- 1 1 Year Geologic mapping, aeromagnetic and gravity surveys 2 2 Years 200 km seismic 3 2 Years 1 exploratory well 4-9 1 year each 1 exploratory well
Evergreen and ENAP may relinquish up to 100% of the blocks at the end of each exploration period. If the blocks go into production, the contracts will last 35 years.
SANGRE DE CRISTO UNIT
In January, 1997, the Bureau of Land Management designated approximately 33,000 acres of Evergreen's Raton Basin oil and gas leases as a new Federal Unit called the Sangre de Cristo Unit. Evergreen has been named Unit Operator. Evergreen's Unit obligation is to drill and attempt completion of two new wells in the Unit during 1997. The previously formed 67,000 acre Spanish Peaks Unit combined with the new Sangre de Cristo Unit represent approximately 83% of Evergreen's 120,000 gross acres in the Raton Basin.
PREFERRED CONVERSION
As of December 1, 1996, 1,500,000 shares of the Preferred were converted to 230,770 shares of common stock and 250,000 five-year stock purchase warrants. 100,000 of the warrants are exercisable at $7.80 per share and 150,000 are exercisable at $7.00 per share.
PBI ACQUISITION
Effective August 1, 1996, Evergreen acquired 100% of the outstanding common stock of Powerbridge, Inc. and the limited partnership interests of Energy Investor Funds I and II (collectively "PBI").
Evergreen acquired approximately 37 BCF of proved natural gas reserves, approximately 24 BCF of which are developed, together with a 25% working interest in 120,000 gross acres and a 50% interest in an associated gas gathering and marketing system. All of these assets are located on Evergreen's present acreage position in the Raton Basin. Evergreen issued 1,162,266 restricted shares of Evergreen Common Stock and assumed $3.6 million of long term bank debt owed to Hibernia National Bank.
The acquisition of these assets increased Evergreen's interest to 100% in all leases, reserves, production, and associated gathering facilities on the Company's 120,000 gross acres in the Raton Basin.
UNDERWRITING
On October 28, 1996, the Company completed a public offering of its common shares, whereby it sold 2,000,000 shares at $5.75 per share. Total proceeds, net of underwriters' commissions, were approximately $10.3 million.
CIG AGREEMENT
On September 5, 1996, Evergreen (through its wholly owned subsidiary Primero Gas Marketing Company) entered into a firm transportation agreement for a ten-year term with Colorado Interstate Gas Company ("CIG"). The firm transportation agreement, effective January 1, 1997, at CIG's current tariff rates, allows the Company to transport gas to Dumas, Texas. Evergreen will be obligated to transport at least 10,000 MMBtu per day, and will be allowed to transport an additional 15,000 MMBtu per day at a fixed charge. The transportation agreement provides Evergreen access to Midwest markets and the Company believes that this will improve gas marketing options.
FALKLAND ISLANDS
Evergreen has a net 2% working interest in a consortium which has recently been awarded an exploration license for Tranche A in the First Offshore Falkland Islands Licensing Round.
Amerada Hess (Falklands Islands) Limited is Operator of the consortium, which includes Fina Exploration Atlantic BV, Murphy South Atlantic Oil Company, Teikoku Oil Co. Ltd., and Argos Evergreen Limited.
Argos Evergreen Limited, a 5% working interest holder in the consortium, is a joint venture company formed in the Falkland Islands and owned 60% by Argos Resources Limited and 40% by Evergreen Resources (UK) Limited, the UK subsidiary of Evergreen Resources Inc.
The license covers 626 square miles and lies approximately 225 miles to the north of the islands in water depths ranging up to 1,575 feet. This area incorporates part of a major unexplored sedimentary basin which has not yet been tested by drilling. It therefore represents a rare opportunity to be involved during the early phase of exploration in an unexplored basin.
FOCUS
The Company intends to dedicate the majority of its resources for the foreseeable future on development of Evergreen's coalbed methane project in the Raton Basin of Colorado.
At December 31, 1996, the Raton Basin represented 97% of the Company's total proved reserves on both a unit and value basis.
As of mid-March 1997, the Raton Basin represented approximately 95% of Evergreen's net daily production of natural gas.
Since December 1991, Evergreen has acquired oil and gas leases covering over 120,000 gross acres in the Raton Basin, Las Animas County in Southeastern Colorado. This acreage position will support over 500 wells on 160 acre spacing. Independent engineering estimates indicate reserve potential of approximately 1.5 - 2.0 billion cubic feet of gas per well.
Since first test drilling and evaluation, begun in August 1993, 54 wells have been drilled, 52 of which are presently on production. Combined daily gross production from the 52 producing wells now exceeds 17.5 million cubic feet per day.
Evergreen management believes that the Company's Raton Basin Project is worthy of full scale development for these reasons:
- DRILLING RESULTS ON TARGET -- The first 52 producing wells now exceed 17.5 million cubic feet of combined gross daily gas production -- higher than Evergreen's original forecasts.
- LOW FINDING AND DEVELOPMENT COSTS -- Wells drilled, completed and hooked- up for gas sales to date in the Raton Basin have average reserves estimated at 1.8 BCF of gas at a cost per well of approximately $300,000. Average finding cost for the period August 1, 1993 through December 31, 1996 was $0.21 per Mcf.
- LOW LIFTING COSTS -- Lifting costs were approximately $0.33 per MCF during the nine months ended December 31, 1996. Additional economies of scale may be achievable in the future as more wells are developed.
- LARGE ACREAGE POSITION -- Evergreen has over 120,000 gross acres under lease in the Raton Basin, 100,000 of which are presently held by two Federal Units. This acreage will support a multi-year development project of over 500 wells.
- IMPROVED GAS PRICES -- Recent higher gas volumes have permitted access to new gas markets and improved gas prices.
OTHER ACTIVITIES
The Company continues to hold discussions with various funding sources, including potential Industry Partners, for the purpose of resuming evaluation and development of Evergreen's onshore UK licenses.
The Company continually reviews opportunities for the acquisition of oil and gas properties, particularly in areas in which Evergreen presently operates properties or has developed technical and operational expertise.
The Company also continually reviews opportunities for exposure to substantial reserves through participation in domestic and international exploration projects at prudent levels of risk and capital expenditure for a Company of Evergreen's size.
CUSTOMERS AND MARKETS
Substantially all of the Company's production is sold at the well site as it is produced. The principal markets for oil and gas are refineries, gas marketing and transmission companies which have facilities near the Company's producing properties.
Evergreen's business is not seasonal in nature, except to the extent that weather conditions at certain times of the year may affect supply and demand for natural gas as well as Evergreen's access to its properties and its ability to drill gas wells. The impact of inflation on the Company's activities is minimal.
Evergreen had three major customers for the sale of oil and gas as of December 31, 1996, who purchased approximately 59% (Natural Gas Transmission Services, Inc.), 12% (AIG Trading Corporation) and 12% (Aquila Energy Corporation) of the Company's oil and gas production respectively. The loss of these customers would not have a material adverse effect on Evergreen's business.
COMPETITION
The Company competes with numerous other companies and individuals, including many that have significantly greater resources, in virtually all facets of its business. Such competitors may be able to pay more for desirable leases and to evaluate, bid for and purchase a greater number of properties than the financial or personnel resources of the Company permit. The ability of the Company to increase reserves in the future will be dependent on its ability to select and acquire suitable producing properties and prospects for future exploration and development. The availability of a market for oil and natural gas production depends upon numerous factors beyond the control of producers, including but not limited to the availability of other domestic or imported production, the locations and capacity of pipelines, and the effect of federal and state regulation on such production. Domestic oil and natural gas must compete with imported oil and natural gas, coal, atomic energy, hydroelectric power and other forms of energy. The Company does not hold a significant competitive position in the oil and gas industry.
EMPLOYEES
At March 21, 1997, the Company had 33 employees.
REGULATION
The oil and gas industry is extensively regulated by federal, state and local authorities. Legislation and regulation affecting the industry are under constant review for amendment or expansion, raising the possibility of changes that may affect, among other things, the pricing or marketing of oil and gas production. Substantial penalties may be assessed for noncompliance with various applicable statutes and regulations, and the overall regulatory burden on the industry increases its cost of doing business and, in turn, its profitability.
Federal, state and local authorities regulate various aspects of oil and gas drilling and production activities, including the drilling of wells (through permit and bonding requirements), the spacing of wells, the unitization or pooling of oil and gas properties, environmental matters, safety standards, the sharing of markets, production limitations, plugging and abandonment, and restoration.
ENVIRONMENTAL CONSIDERATIONS
Various federal, state and local laws and regulations covering the discharge of materials into the environment, or otherwise relating to the protection of the environment, may affect the operations and costs of the Company. It is not anticipated that the Company will be required in the near future to expend amounts that are material in relation to its total capital expenditure program by reason of environmental laws and regulations. However, inasmuch as such laws and regulations are frequently changed, the Company is unable to predict the ultimate cost of compliance.
TITLE TO PROPERTIES
As is customary in the oil and gas industry, only a preliminary title examination is conducted at the time properties believed to be suitable for drilling operations are acquired by the Company. Prior to the commencement of drilling operations, a thorough title examination of the drill site tract is conducted. The Company believes that the title to its leasehold properties is good and defensible in accordance with standards generally acceptable in the oil and gas industry.
CERTAIN RISKS
Natural gas prices are likely to continue to be volatile. Prices are affected by, among other things, market supply and demand factors. These factors are beyond the control of the Company. To the extent that oil and gas prices decline, the Company's revenues, cash flows, earnings and operations would be adversely impacted. The Company is unable to accurately predict future natural gas prices.
The oil and gas business involves a variety of operating risks, including the risk of fire, explosions and blow-outs, as well as risks associated with production, marketing and general economic conditions. The Company maintains insurance against some, but not all, of these risks, any of which could result in substantial losses to the Company. There can be no assurance that insurance will be adequate to cover losses or exposure to liability or whether insurance will continue to be available at premium levels that justify its purchase.
The Company's largest source of operating income is from sales of its natural gas production. Therefore, the levels of the Company's revenues and earnings are affected by prices at which natural gas is being sold. As a result, the Company's operating results for any prior period are not necessarily indicative of future operating results because of the fluctuations in gas prices and the lack of predictability of those fluctuations as well as changes in production levels.
There are numerous uncertainties inherent in estimating natural gas and oil reserves and their estimated values, including many factors beyond the control of the producer. Reservoir engineering is a subjective process of estimating underground accumulations of natural gas and oil that cannot be measured in an exact manner. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. Estimates of reserves are subject to revision based upon actual production, results of future development and exploration activities, prevailing gas and oil prices, operating costs and other factors, which revisions may be material. Accordingly, reserve estimates are often different from the quantities of natural gas and oil that are ultimately recovered. The Company's reserve values remain sensitive to gas prices in the current environment of fluctuating commodities prices.
In general, the volume of production from gas properties owned by the Company declines as reserves are depleted. Except to the extent the Company acquires additional properties containing proved reserves or conducts successful exploration and development activities, or both, the proved reserves of the Company will decline as reserves are produced. Volumes generated from future activities of the Company are therefore highly dependent upon the level of success in acquiring or finding additional reserves and the costs incurred in doing so.
ITEM 2.
ITEM 2. PROPERTIES
PROPERTY CONSOLIDATION
In August 1994, Management decided to focus the Company's domestic efforts and resources on development of the Raton Basin of Colorado. The number of states in which Evergreen owns or operates oil and gas properties has now been reduced from twelve to two states, with no material impact on the Company's reserves or financial condition.
OPERATIONS
The Company's wholly owned subsidiary, Evergreen Operating Corporation (EOC), is primarily responsible for drilling, evaluation and production activities associated with various properties and for
negotiating the sales of oil and gas production from the properties. As of March 21, 1997, EOC was serving as operator for approximately 170 producing wells owned by the Company and also by other affiliated and unaffiliated third parties.
The Company believes that, as operator, it is in a better position to control costs, safety, and timeliness of work as well as other critical factors affecting the economics of a well or a property, including maintaining good community relations.
EOC presently operates wells which represent 100% of Evergreen's proved reserves.
OIL AND GAS RESERVES
The table below sets forth the Company's quantities of proved reserves, as estimated by independent petroleum engineers, all of which were located in the continental U.S., and the present value of estimated future net revenues from these reserves on a non-escalated basis discounted by 10 percent per year as of the end of each of the last three fiscal years and the nine months ended December 31, 1996. There has been no major discovery or other favorable or adverse event that is believed to have caused a significant change in estimated proved reserves subsequent to December 31, 1996.
Reference should be made to Supplemental Oil and Gas Information beginning on page of this report for additional information pertaining to the Company's proved oil and gas reserves. During fiscal 1996 the Company did not file any reports that include estimates of total proved net oil or gas reserves with any federal agency other than the Securities and Exchange Commission.
PRODUCTION
The following table sets forth the Company's net oil and gas production for the nine months ended December 31, 1996 and for the years ended March 31, 1996, 1995 and 1994.
NINE MONTHS ENDED DECEMBER 31 YEAR ENDED MARCH 31 ------------ --------------------------- 1996 1996 1995 1994
Natural Gas (Mcf) 2,104,400 941,200 782,000 637,900 Crude Oil & Condensate (Bbls) --- 9,700 36,600 57,500
AVERAGE SALES PRICES AND PRODUCTION COSTS
The following table sets forth the average gross sales price and the average production cost per unit of oil and of gas produced, including production taxes, for the nine months ended December 31, 1996 and for the years ended March 31, 1996, 1995 and 1994. For purposes of calculating production cost per equivalent Mcf, barrels of oil have been converted at a BTU equivalent ratio of six Mcf of gas for each barrel of oil:
NINE MONTHS ENDED YEAR ENDED MARCH 31 DECEMBER 31 ---------------------------- 1996 1996 1995 1994 ----------- ------ ------ ------ Average Sales Price Gas (per Mcf) $ 1.66 $ 1.29 $ 1.70 $ 2.15 Oil (per Bbl) ---- 18.40 15.96 14.50
Average Production Cost $ 0.33 $ 0.65 $ 0.99 $ 0.81 Per Equivalent Mcf
PRODUCING WELLS AND DEVELOPED ACREAGE
The following table sets forth, as of March 21, 1997, the approximate number of gross and net producing gas wells and their related developed acres owned by the Company. Productive wells are producing wells and wells capable of production, including shut-in wells. Developed acreage consists of acres spaced or assignable to productive wells.
"Gross" refers to the total acres or wells in which the Company has a working interest, and "Net" refers to gross acres or wells multiplied by the percentage of working interest owned by the Company.
PRODUCING GAS WELLS DEVELOPED ACRES ----------------------- ---------------------- GROSS NET GROSS NET ----- ----- ------ ------ 75 69.75 26,775 20,018
UNDEVELOPED ACREAGE
At March 21, 1997, Evergreen held undeveloped acreage as set forth below:
UNDEVELOPED ACRES ------------------------- LOCATION GROSS NET -------- --------- --------- Colorado 115,165 93,100 New Mexico 320 320 --------- --------- TOTAL 115,485 93,420
United Kingdom 630,480 630,480 Falkland Islands 400,640 8,012 Chile 2,400,000 1,800,000
The following table sets forth the expiration dates of the gross and net acres subject to Colorado leases summarized in the table of undeveloped acreage.
Acres Expiring -------------- Gross Net Twelve Months Ending: ----- ----- December 31, 1997............................ 9,298 7,041 December 31, 1998............................ 3,693 3,388 December 31, 1999............................ 3,290 2,209 December 31, 2000 and later.................. 1,862 1,862
DRILLING ACTIVITIES
The Company's drilling activities for the nine months ended December 31, 1996 and for the years ended March 31, 1996 and 1995 are set forth below:
Nine Months Ended December 31 Years Ended March 31 ------------- ----------------------------- 1996 1996 1995 ------------- ------------- ------------- Gross Net Gross Net Gross Net ----- ----- ----- ----- ----- ----- Exploratory Wells: Productive........ 0 0.00 0 0.00 0 0.00 Dry............... 0 0.00 0 0.00 0 0.00 -- ----- -- ----- - ---- 0 0.00 0 0.00 0 0.00 Development Wells: Productive........ 26 26.00 22 15.75 6 3.00 Dry............... 0 0.00 0 0.00 0 0.00 -- ----- -- ----- - ---- 26 26.00 22 15.75 6 3.00
PRINCIPAL PROPERTIES
The following are brief descriptions of Evergreen's principal properties:
RATON BASIN
Since December 1991, Evergreen has acquired oil and gas leases covering over 120,000 gross acres in the Raton Basin, Las Animas County in Southeastern Colorado. This acreage position will support over 500 wells on 160 acre spacing. Independent engineering estimates indicate reserve potential of approximately 1.5 -2.0 billion cubic feet of gas per well.
Since Fall 1993 Evergreen has drilled 54 coalbed methane gas wells in the Vermejo coals at depths of 1,000 to 2,100 feet. Evergreen has a 100% interest in these wells, 52 of which are in production - one of which is awaiting hook- up, and one to be re-drilled.
Gas sales began in January 1995 and have improved as new wells have been drilled to a present level of 17.5 million cubic feet per day gross.
In March 1995, the Bureau of Land Management designated approximately 67,000 acres of Evergreen's Raton Basin oil and gas leases as a Federal Unit called the Spanish Peaks Unit. Evergreen has been named Unit Operator. Formation of the Unit allows Evergreen to base development decisions within the Unit on technical, geologic and geophysical data rather than the fulfillment of term lease obligations. Evergreen's remaining Unit commitment is to drill and evaluate one new unit obligation well by December 31, 1997.
In January, 1997, the Bureau of Land Management designated approximately 33,000 acres of Evergreen's Raton Basin oil and gas leases as a new Federal Unit called the Sangre de Cristo Unit. Evergreen has been named Unit Operator. Evergreen's Unit obligation is to drill and attempt completion of two new wells in the Unit during 1997. The previously formed 67,000 acre Spanish Peaks Unit combined with the new Sangre de Cristo Unit represent approximately 83% of Evergreen's 120,000 gross acres in the Raton Basin.
On March 10, 1997, drilling commenced on 18 new development wells and 4 exploratory wells. All wells will be drilled to the Vermejo coal intervals at depths ranging from 900 feet to 3100 feet.
Three groups of six development wells will be drilled, completed and placed into production in approximately 45-day intervals. These 18 wells will be located in the Southern portion of the Spanish Peaks Unit.
Two of the exploratory wells will be drilled in the Northern portion of the Spanish Peaks Unit, and the other two exploratory wells will be drilled in the central portion of the Sangre de Cristo Unit. The exploratory wells are being drilled in order to test production levels, provide additional geologic control, and also to fulfill Unit obligations.
Evergreen plans continual development of the Raton Basin acreage, including drilling of 40-50 new wells every year.
SAN JUAN BASIN
Effective June 1, 1996, Evergreen sold its working interests in six producing wells in the San Juan Basin, Rio Arriba County, New Mexico. The wells qualify for the IRS Code Section 29 tax credit. The working interests were sold to a limited partnership owned and controlled by Banque Paribas.
Evergreen received $53,000 cash and a volumetric production payment under which Evergreen will receive 99% of the cash flow from the wells until approximately 1.1 billion cubic feet of gas have been produced and sold net to the well interests.
In addition to the production payment, Evergreen will receive monthly payments based on production from the wells through 2002.
Evergreen has the option to repurchase the interests at any time between December 31, 2002, and January 1, 2008, and will automatically revert to 75% ownership in the interests if and when approximately 1.8 BCF have been produced net to the wells.
Evergreen owns varying interests in sixteen additional wells in the San Juan Basin, the majority of which are shut-in at present because of low production volumes.
UNITED KINGDOM
In 1991 and 1992 the Company's wholly owned subsidiary, Evergreen Resources (U.K.) Ltd.("ERUK"), was awarded seven onshore U.K. hydrocarbon Exploration Licenses for the development of coalbed methane gas and conventional hydrocarbons (the "Licenses").
The Licenses provide ERUK with the largest onshore acreage position in the U.K., and cover substantially all of six distinct onshore U.K. basins. Over 400,000 acres are considered prospective specifically for coalbed methane.
Selection of the Licensed areas was made after evaluating extensive geological, geophysical, petrophysical and measured methane gas content data bases. The majority of the original data base was acquired through technology sharing agreements with British Coal Corporation, who shared all relevant available data on the six basins and granted use of this data to ERUK. ERUK has augmented this data with proprietary seismic and coalbed methane well data and also geologic data from the British Geologic Survey, and other sources.
During the period 1992 to 1994, Evergreen conducted seismic work and drilled three wells on two of the Licenses. The wells encountered 30' to 80' of gross coal. Two of the wells were hydraulically fracture stimulated and one was tested for permeability. Following extensive production testing, none of the three wells produced gas in economic quantities. The three wells are presently shut-in.
Under a new onshore Licensing regime implemented by the UK Department of Trade and Industry (DTI), Evergreen has converted its existing onshore Exploration Licenses to new onshore Licenses, called Petroleum Exploration and Development Licenses.
These new Licenses will provide up to a 30 year term with optional periodic relinquishment of portions of the licenses, subject to future development plans. There are no royalties or burdens encumbering the Licenses.
Work commitments on the former and new Licenses have been fulfilled through 1997 as a result of Evergreen's prior UK activity. By June 30, 1997, Evergreen will notify the DTI of the Company's intention regarding relinquishment of portions of the acreage presently licensed. Work commitments for acreage retained will include remote sensing studies, additional seismic studies and the drilling of three wells, one per year beginning in 1999.
ERUK believes that a major resource is in place within the License areas. Further evaluation will be required to determine the economic viability of extracting this resource - License by License - since
success or lack of success on one License may not be translated to similar results on other Licenses or separate geologic basins.
Evergreen is continuing to hold discussions with various funding sources, including potential industry partners, for the purpose of resuming evaluation and development of the Licenses.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is not engaged in any material pending legal proceedings to which the Company or its subsidiaries are a party or to which any of its property is subject.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR EVERGREEN'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
PRINCIPAL MARKET OR MARKETS
The Company's common stock is traded on the NASDAQ National Market System under the symbol "EVER". The range of high and low prices for each quarterly period during the two most recent years ended December 31, 1996, as reported by NASDAQ is as follows :
HIGH LOW 1995 ----- ----- First Quarter $6.00 $4.00 Second Quarter 5.75 4.25 Third Quarter 5.50 4.00 Fourth Quarter 5.37 3.50 First Quarter $6.16 $5.00 Second Quarter 7.25 5.75 Third Quarter 7.22 5.75 Fourth Quarter 8.75 5.50
On March 20, 1997, the closing price for the common stock as reported by NASDAQ was $8.00 per share.
APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK
The number of holders of Evergreen's no par value common stock at March 21, 1997, was approximately 4,000.
DIVIDENDS
Holders of common stock are entitled to receive such dividends as may be declared by Evergreen's Board of Directors. The Company has not paid any cash dividends since its inception. The Company anticipates that future earnings will be retained for the development of its business and that no cash dividends will be declared in the foreseeable future.
PREFERRED STOCK
On December 8, 1994, the Company received $3.75 million through the private placement, with Institutional Investors, of 3,750,000 shares of ten year term 8% Convertible Preferred Stock, $1.00 par value ("the Preferred"). The Company received an additional $3.75 million on July 26, 1995 by issuing an additional 3,750,000 shares. All proceeds were used for development of the Company's oil and gas leases in the Raton Basin of Colorado.
As of December 1, 1996, 1,500,000 shares of the Preferred were converted to 230,770 shares of common stock and 250,000 five-year stock purchase warrants. 100,000 of the warrants are exercisable at $7.80 per share and 150,000 are exercisable at $7.00 per share.
The remaining Preferred is convertible into common stock at a conversion price of $6.50 per share. Annual cash dividends of 8% are payable quarterly. Evergreen may call the Preferred at any time in whole or in part prior to the mandatory redemption (minimum call being 20% of original issue), at par value, plus accrued dividends.
Evergreen can require the conversion of all of the Preferred into common stock provided the common stock has traded at not less than $16 per share for 30 consecutive days.
Mandatory repayments of $1,000,000 are due annually commencing in December 1999. All outstanding shares of Preferred must be redeemed by Evergreen in ten years (2005) at par value, plus accrued dividends.
Evergreen has issued warrants which will be triggered and will become exerciseable for 10 years at $6.50 per share if Evergreen exercises all or part of its call option (up to 923,077 warrants).
The Preferred carries antidilution provisions, registration rights and, under certain circumstances, voting rights.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Effective with the period ended December 31, 1996, the Company elected to begin utilizing a December 31 fiscal year end. Therefore, the period ended December 31, 1996 represents a nine-month short period as compared to the twelve month fiscal years ended March 31, 1996, 1995, 1994 and 1993.
This information should be read in conjunction with the Consolidated Financial Statements and Notes thereto and Management's discussion and analysis of Financial Condition and Results of Operations. Certain reclassifications have been made to prior financial statements to conform with current presentation.
NINE MONTHS ENDED DECEMBER 31 YEARS ENDED MARCH 31 ----------- -------------------------------------- 1996 1996 1995 1994 1993 (in $ thousands except per share amounts) Revenues $ 4,228 $ 2,935 $ 3,351 $ 4,342 $ 4,947 Net Income (Loss) 675 (607) (705) 44 726 Per common share 0.10 (0.10) (0.13) 0.01 0.15 Total Assets 68,244 44,172 39,140 32,880 31,125 Long Term Bank Debt 1,173 191 -- -- -- Other Long-term Obligations 3,724 2,400 1,687 448 290 Redeemable Preferred Stock 6,000 7,500 3,750 -- -- Stockholders' Equity 52,364 31,589 32,202 30,413 30,026
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
On August 14, 1996, Evergreen acquired, effective as of August 1, 1996, approximately 37 BCF of proved natural gas reserves, approximately 24 BCF of which are developed, together with a 25% working interest in 120,000 gross acres and a 50% interest in an associated gas gathering and marketing system. All of these assets are located on Evergreen's present acreage position in the Raton Basin. Evergreen issued 1,162,266 restricted shares of Evergreen Common Stock and assumed $3.6 million of long term bank debt owed to Hibernia National Bank.
The acquisition of these assets increased Evergreen's interest to 100% in all leases, reserves, production, and associated gathering facilities on the Company's 120,000 gross acres in the Raton Basin.
Evergreen currently has a $15.0 million revolving line of credit with Hibernia National Bank of New Orleans with interest at the Bank's prime rate. Advances pursuant to this line of credit are limited to the borrowing base, which is presently $15.0 million. There are no restrictions associated with advances under the line. An annual fee of one half of one percent is paid quarterly for any unused portion of the credit line. The borrowing base is redetermined semi-annually by the bank based upon reserve evaluations of the Company's oil and gas properties. The Company used a portion of the proceeds of the underwriting to retire $2.5 million outstanding under the line of credit and the $3.6 million assumed in the PBI acquisition. As of March 15, 1997, the Company had utilized $1.7 million of the line.
The Company has a $4.0 million equipment lease line with Hibernia National Bank with interest at prime plus .25% (8.5% at December 31, 1996) for a term of five years and include options to purchase the equipment at a nominal amount at the end of the lease term. The Company primarily leases compressors for the Raton Basin gas gathering system and other related production equipment. It is anticipated that the Company will require additional leases of approximately $1.5 - $2.0 million during 1997 for additional compressors and other equipment.
The Company and its subsidiaries are contingently liable individually and jointly with others as guarantors of a $2.5 million line of credit and an obligation related to leased equipment. The contingent obligations amounted to $1.1 million at December 31, 1996.
The Company anticipates drilling approximately 40 wells and expanding and upgrading gas gathering facilities during fiscal 1997. Capital requirements for fiscal 1997 are estimated to be approximately $16 million. The Company believes that cash flow from operations and the availability of funds under its line of credit will be sufficient to fulfill the 1997 development objectives.
Leases expiring in fiscal 1997 are not material and do not require significant drilling expenditures.
Cash flows provided by operating activities were $1,524,000 for the nine months ended December 31, 1996 as compared to cash provided by operating activities of $1,130,000 during the twelve months ended March 31, 1996. The significant increase in the cash flows provided by operating activities is due primarily to improved operating results as a result of higher gas production, higher gas prices, the PBI acquisition and the monetization of the San Juan Basin section 29 tax credits.
Cash flows used by investing activities were $8,600,000 during the nine months ended December 31, 1996 versus $2,800,000 during the twelve months ended March 31, 1996. The increase in cash flows used by operating activities was primarily due to the continued development of the Raton Basin which included the drilling of an additional 26 wells along with the associated gas gathering costs and an upgrade to the gas gathering mainline system during the nine months ended December 31, 1996.
Cash flows provided by financing activities were $6,000,000 during the nine months ended December 31, 1996 as compared to $3,439,000 during the twelve months ended March 31, 1996. The increase in cash provided by financing activities was due to the sale of 2,000,000 shares of common stock at $5.75 per share in a public offering which was completed on October 28, 1996. The Company received proceeds, net of expenses, of $10.3 million. The proceeds from the public offering were used to pay down the Company's line of credit of $2.5 million and pay off the debt assumed in the PBI
acquisition of $3.6 million. During the year ended March 31, 1996 the Company received approximately $3.75 million from the sale of preferred stock.
The Company's production from its San Juan basin properties has not met the minimum volume requirements under its transportation agreements with El Paso Field Services ("El Paso"). As of December 31, 1996, the cumulative obligation of the Company to El Paso resulting from this shortfall was $2,231,000. At current rates of production, this liability would increase to over $3 million by the end of the contract term in July 1998. The Company is currently in discussions with El Paso concerning alternative resolutions to the shortfall, including the purchase by the Company of a portion of El Paso's pipeline system. However, there is no assurance that an alternative agreement will be reached.
RESULTS OF OPERATIONS - NINE-MONTH FISCAL PERIOD ENDED DECEMBER 31, 1996 COMPARED TO THE FISCAL YEAR ENDED MARCH 31, 1996
The Company reported net income of $674,900 or $0.10 per common share for the nine months ended December 31, 1996, compared to a net loss of $606,800 or $0.10 per common share for the year ended March 31, 1996.
Natural gas revenues were $3,500,000 during the nine months ended December 31, 1996, compared to $1,392,700 for the fiscal year ended March 31, 1996.
The Company has no significant oil reserves, production or revenues.
The significant increase in natural gas revenue during the nine months ended December 31, 1996, as compared to the year ended December 31, 1996, is attributable to substantially higher Raton Basin production volumes, sharply higher natural gas prices, the PBI acquisition and the monetization of the San Juan Basin tax credit.
During the nine months ended December 31, 1996, Raton Basin gas production represented over 88% of the Company's total gas production, compared to 51% for the year ended March 31, 1996. At December 31, 1996, there were 42 producing Raton Basin wells compared to 21 producing wells at March 31, 1996.
Production costs and taxes (lifting costs) for the nine months ended December 31, 1996, were $700,900 compared to $656,900 for the twelve months ended March 31, 1996. On an equivalent Mcf basis (Mcfe), lifting costs declined from $0.65 per Mcf during the twelve month fiscal year ended March 31, 1996 to $0.33 per Mcf in the current period. The decrease in the average production cost of $0.32 per Mcfe was due to the sale or shut-in of uneconomical oil and gas properties with high lifting costs during the year ended March 31, 1996. Additionally, the significant increase in production in the Raton Basin over the prior year contributed to the decrease in production costs.
Nine Months Ended Year Ended December 31, March 31, ----------------- ---------- 1996 1996
Gas Production (Mcf) 2,104,400 941,200 Gas Revenues $3,500,000 $1,392,700 Avg. Price per Mcf $1.66 $1.29
Production Cost per Mcfe $0.33 $0.65
Oil and gas service revenues and cost of oil and gas services are attributable to the Company's wholly owned subsidiary Evergreen Operating Corporation (EOC), which is primarily responsible for drilling, evaluation and production activities associated with various properties and for negotiating the sales of oil and gas production from the properties. As of March 15, 1997, EOC was serving as Operator for approximately 170 producing wells owned by the Company and also by other unaffiliated third parties.
During the nine months ended December 31, 1996, oil and gas service revenues were $545,000, versus $779,000 for the twelve months ended March 31, 1996, a 30% decrease. Costs of oil and gas services during the nine months ended December 31, 1996 were $621,500 vs. $727,100 for the prior
twelve month fiscal year. The decrease in both oil and gas service revenues and cost of oil and gas services expense is due primarily to a nine month reporting period versus a twelve month reporting period.
Depreciation, depletion and amortization expense for the nine months ended December 31, 1996 was $966,000 compared to $590,000 in the prior twelve month fiscal year. The increase is due to the significantly higher gas production in the Raton Basin.
General and administrative expenses were $504,500 during the nine months ended December 31, 1996 as compared to $818,800 during the twelve months ended March 31, 1996, or a decrease of $314,300. The decrease of $314,300 is due to expenses incurred during a nine month reporting period versus a twelve month reporting period and also reductions in administrative personnel and related salary expense.
Interest income for the nine months ended December 31, 1996 was $142,500 compared to $206,700 for the twelve months ended March 31, 1996. The decrease in interest income is due primarily to the nine month reporting period versus a twelve month reporting period.
Interest expense for the nine months ended December 31, 1996 was $192,700 versus $36,600 during the twelve months ended March 31, 1996. The $156,100 increase is due to the debt assumed by the Company as a result of the PBI acquisition, the interest on the line of credit borrowings, and the interest on the capital lease obligations.
The Company reported $37,900 of other income during the nine months ended December 31, 1996, compared to $556,200, which was primarily due to the sale of the Company's interest in ANGI, Ltd., during the twelve months ended March 31, 1996.
RESULTS OF OPERATIONS - FISCAL YEAR ENDED MARCH 31, 1996 COMPARED TO THE FISCAL YEAR ENDED MARCH 31, 1995
The Company reported a net loss of $606,800 or $.10 per common share for the year ended March 31, 1996, compared to a net loss of $704,700 or $.13 per share for the year ended March 31, 1995.
Production revenues during 1996 were $1,392,700 as compared to $1,916,300 in 1995, a decrease of $523,600 or 27%. The decrease in production revenues is due primarily to lower gas prices and the sale of oil and gas properties. Gas production increased to 941,200 Mcf in 1996 from 782,000 Mcf in 1995. However, average gas prices decreased approximately $.41 per Mcf to $1.29 per Mcf in 1996 as compared to $1.70 during 1995. The decrease in gas prices more than offset the increased production and reduced gas revenues to $1,211,000 in 1996 from $1,331,000 in 1995 for a reduction of $120,000 or 9%. Oil revenues decreased to $178,000 in 1996 versus $584,000 in 1995 for a reduction of $406,000 or 70%. This reduction is due to the sale of substantially all oil properties.
Cost of production and operations was $656,900 for the year ended March 31, 1996 versus $993,800 for the same period in 1995. The decrease in cost of production and operations of $336,900 or 34% is due primarily to the sale or shut-in of uneconomical oil and gas properties with high lifting costs. The average production cost per Mcfe was $.65 in 1996 as compared to $0.99 in 1995. During the year ended March 31, 1996 the lifting costs have continued on a downward trend.
Oil and gas service revenues and cost of oil and gas services are attributable to the Company's wholly owned subsidiary Evergreen Operating Corporation (EOC), which is primarily responsible for drilling, evaluation and production activities associated with various properties and for negotiating the sales of oil and gas production from the properties. As of March 31, 1996, EOC was serving as operator for approximately 150 producing wells owned by the Company, unaffiliated third parties and affiliated parties.
Oil and gas service revenues during 1996 were $779,100 versus $858,300 in the same period during 1995. The $79,000 decrease was primarily due to non- recurring special service fees of approximately $201,000, which were offset by increased operating fees of approximately $111,000 in 1996.
Interest and dividend income was $206,800 during the year ended March 31, 1996 as compared to $116,300 during the year ended March 31, 1995. The increase in interest and dividends of $90,500 is due to an increase in cash from the proceeds of the preferred stock offering.
Other income was $556,200 during the year ended March 31, 1996 versus $460,000 for the same period in 1995. In 1996 the Company sold its interest in ANGI Ltd., to an unaffiliated entity for $580,000 which resulted in a gain of $525,000.
Costs of oil and gas services were $727,100 during the year ended March 31, 1996 as compared to $789,800 during the year ended March 31, 1995. The decrease of $62,700 or 8% was primarily due to a reduction in personnel and related salary expense.
Depreciation, depletion and amortization was $590,000 during the year ended March 31, 1996 as compared to $709,000 in 1995. While there was no significant change in total production from the prior year the decrease in depreciation, depletion and amortization is due primarily to the increase in estimated reserves of approximately 30%.
General and administrative expenses were $818,800 during the year ended March 31, 1996 as compared to $850,100 during the same period in 1995. The decrease of $31,300 was due to general overhead reductions.
INCOME TAXES AND NET OPERATING LOSSES
As discussed in Note 4 in the accompanying consolidated financial statements, the Company has net operating loss carry forwards for income tax purposes of approximately $14,000,000, certain of which are limited due to stock issuances in 1988 and 1990. A valuation allowance of $2,885,000 has been recorded for the net deferred tax asset arising from the loss carry forward in excess of the deferred tax liability resulting from depreciation and amortization differences. The valuation allowance was recorded as the Company was unable to determine that these tax benefits are more likely than not to be realized.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
Since the Company's inception, there has not been any Form 8-K filed under the Securities and Exchange Act of 1934 reporting a change in accountants in which there was a reported disagreement on any matter of accounting principles or practices or financial statement disclosure.
PART III
The information required by Part III of Form 10-K is incorporated herein by reference to Registrant's definitive Proxy Statement previously filed in connection with the Annual Meeting of Shareholders to be held on May 28, 1997
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) See Index to Consolidated Financial Statements at Item 8. (a)(2) All other schedules have been omitted because the required information is inapplicable or is shown in the notes to the financial statements.
(a)(3) EXHIBITS: 22 Reserve Report prepared by Resource Services International, Inc. 27 Financial Data Schedule
(b) A report on Form 8-K was filed by the Company during the last quarter of the fiscal year ended December 31, 1996 - describing the change in the Company's fiscal year.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
EVERGREEN RESOURCES, INC.
Date: March 21, 1997 By: /s/ Mark S. Sexton ---------------------------------------- Mark S. Sexton, President and Chief Executive Officer
Date: March 21, 1997 By: /s/ Kevin R. Collins ---------------------------------------- Kevin R. Collins, Vice President - Finance CFO and Treasurer Principal Accounting Officer
SIGNATURES
Date: March 21, 1997 By: /s/ Alain Blanchard ---------------------------------------- Alain Blanchard, Director
Date: March 21, 1997 By: /s/ Dennis R. Carlton ---------------------------------------- Dennis R. Carlton, Director
Date: March 21, 1997 By: /s/ Larry D. Estridge ---------------------------------------- Larry D. Estridge, Director
Date: March 21, 1997 By: /s/ John J. Ryan III ---------------------------------------- John J. Ryan III, Director
Date: March 21, 1997 By: /s/ Mark S. Sexton ---------------------------------------- Mark S. Sexton, Director
Date: March 21, 1997 By: /s/ Scott D. Sheffield ---------------------------------------- Scott D. Sheffield, Director
Date: March 21, 1997 By: /s/ James S. Williams ---------------------------------------- James S. Williams, Director
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors Evergreen Resources, Inc. Denver, Colorado
We have audited the accompanying consolidated balance sheets of Evergreen Resources, Inc. and subsidiaries as of December 31, 1996 and March 31, 1996 and the related consolidated statements of operations, stockholders' equity, and cash flows for the nine month period ended December 31, 1996 and for each of the two years in the period ended March 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Evergreen Resources, Inc. and subsidiaries as of December 31, 1996 and March 31, 1996 and the results of their operations and their cash flows for the nine month period ended December 31, 1996 and for each of the two years in the period ended March 31, 1996, in conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
Denver, Colorado March 18, 1997
EVERGREEN RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS - ----------------------------------------------------------------------------- - -----------------------------------------------------------------------------
DECEMBER 31, March 31, 1996 1996 - -----------------------------------------------------------------------------
ASSETS
CURRENT: Cash and cash equivalents $ 2,640,300 $ 3,702,511 Accounts receivable: Oil and gas sales 1,182,635 237,178 Joint interest billings and other 727,283 897,142 Other current assets 113,964 132,446 - ----------------------------------------------------------------------------- Total current assets 4,664,182 4,969,277 - -----------------------------------------------------------------------------
PROPERTY AND EQUIPMENT (Notes 2 and 15): Proved oil and gas properties, based on full-cost accounting 49,323,572 36,378,828 Unevaluated properties not subject to amortization 8,579,220 7,792,739 Gas gathering equipment 13,952,381 4,415,439 Support equipment 1,422,955 595,656 - ----------------------------------------------------------------------------- 73,278,128 49,182,662
Less accumulated depreciation, depletion and amortization 12,578,205 11,558,516 - ----------------------------------------------------------------------------- Net property and equipment 60,699,923 37,624,146
DESIGNATED CASH (Note 3) 1,493,114 770,076
OTHER ASSETS 1,386,376 808,218 - ----------------------------------------------------------------------------- $68,243,595 $44,171,717 - ----------------------------------------------------------------------------- - -----------------------------------------------------------------------------
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
EVERGREEN RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED) - ----------------------------------------------------------------------------- - -----------------------------------------------------------------------------
DECEMBER 31, March 31, 1996 1996 - -----------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES: Accounts payable $ 3,223,047 $ 1,204,378 Amounts payable to oil and gas property owners 1,068,532 1,123,465 Accrued expenses and other 691,096 162,127
Total current liabilities 4,982,675 2,489,970
PRODUCTION TAXES PAYABLE (Note 3) 1,493,114 770,076
OBLIGATION UNDER CAPITAL LEASE (Note 14) 1,173,500 191,956
LONG-TERM LIABILITIES (Note 10) 2,230,798 1,630,878 - -----------------------------------------------------------------------------
Total liabilities 9,880,087 5,082,880 - ----------------------------------------------------------------------------- REDEEMABLE PREFERRED STOCK (Note 5) 6,000,000 7,500,000
COMMITMENTS (Note 10)
STOCKHOLDERS' EQUITY (Notes 6 and 7): Common stock, $.01 stated value; shares authorized, 50,000,000; shares issued and outstanding, 9,336,320 and 5,899,736 93,636 58,998 Additional paid-in capital 61,369,368 41,822,026 Accumulated deficit (9,198,780) (9,873,715) Foreign currency translation adjustment 99,284 (418,472) - ----------------------------------------------------------------------------- Total stockholders' equity 52,363,508 31,588,837 - ----------------------------------------------------------------------------- $68,243,595 $44,171,717 - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
EVERGREEN RESOURCES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
NINE MONTHS ENDED DECEMBER 31 YEARS ENDED MARCH 31, ----------------- --------------------- 1996 1996 1995 - -------------------------------------------------------------------------------
REVENUES: Oil and gas production (Note 8) $3,502,385 $1,392,695 $1,916,262 Oil and gas services (Note 12) 545,079 779,146 858,298 Interest and dividends 142,521 206,769 116,320 Other (Note 11) 37,953 556,221 459,948 - -------------------------------------------------------------------------------
TOTAL REVENUES 4,227,938 2,934,831 3,350,828 - -------------------------------------------------------------------------------
COSTS AND EXPENSES: Cost of production and operations 700,875 656,899 993,838 Gas gathering costs 110,363 218,644 237,831 Cost of oil and gas services 621,521 727,121 789,778 Depreciation, depletion and amortization 965,794 589,936 709,008 General and administrative expenses 504,456 818,805 850,088 Interest expense 192,685 36,620 29,688 Other 17,309 (10,997) 351,158 - -------------------------------------------------------------------------------
Total costs and expenses 3,113,003 3,037,028 3,961,389 - -------------------------------------------------------------------------------
NET INCOME (LOSS) 1,114,935 (102,197) (610,561)
Preferred stock dividends (Note 5) 440,000 504,620 94,167 - -------------------------------------------------------------------------------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCK $ 674,935 $ (606,817) $ (704,728) - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
NET INCOME (LOSS) PER COMMON SHARE $ 0.10 $ (.10) $ (.13) - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 7,043,141 5,800,036 5,446,741 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
EVERGREEN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NINE MONTHS ENDED DECEMBER 31, 1996 AND FOR THE YEARS ENDED MARCH 31, 1996 AND 1995
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
EVERGREEN RESOURCES, INC.
SUMMARY OF ACCOUNTING PRINCIPLES
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CONSOLIDATION The financial statements include the accounts of Evergreen Resources, Inc. (ERI) and its wholly-owned subsidiaries (the "Company"); Evergreen Operating Corporation (EOC) and Evergreen Resources (UK) Ltd., Powerbridge, Inc., and Primero Gas Marketing Co., formerly known as Primero Gas Gathering Co., (Primero).
The companies are engaged in the operation, acquisition, exploration and development of oil and gas properties and also the marketing of natural gas. All significant intercompany balances and transactions have been eliminated in consolidation.
CHANGE IN FISCAL YEAR Effective with the period ended December 31, 1996, the Company elected to begin utilizing a December 31 year end. Therefore, the period ended December 31, 1996 represents a nine month short period and the years ended March 31, 1996 and 1995 represent twelve month periods.
CONCENTRATIONS OF The Company's financial instruments that are CREDIT RISK exposed to concentrations of credit risk consist primarily of cash equivalents.
The Company's cash equivalents are cash investment funds which are placed with a major financial institution.
USE OF The preparation of financial statements in ESTIMATES conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
OIL AND GAS The Company follows the full-cost method of PROPERTIES accounting for oil and gas properties. Under this method, all productive and nonproductive costs incurred in connection with the exploration for and development of oil and gas reserves are capitalized. Such capitalized costs include lease acquisition, geological and geophysical work, delay rentals, drilling, completing and equipping oil and gas wells and other related costs. If the net investment in oil and gas properties exceeds an amount equal to the sum of (1) the standardized measure of discounted future net cash flows from proved reserves (see Note 15), and (2) the lower of cost or fair market value of properties in process of development and unexplored acreage, the excess is charged to expense as
EVERGREEN RESOURCES, INC.
SUMMARY OF ACCOUNTING PRINCIPLES
- --------------------------------------------------------------------------------
additional depletion. Normal dispositions of oil and gas properties are accounted for as adjustments of capitalized costs, with no gain or loss recognized.
Depreciation and depletion of proved oil and gas properties is computed on the units-of-production method based upon estimates of proved reserves with oil and gas being converted to a common unit of measure based on their relative energy content. Unproved oil and gas properties, including any related capitalized interest expense, are not amortized, but are assessed for impairment either individually or on an aggregated basis.
GAS GATHERING AND Gas gathering and support equipment are stated SUPPORT EQUIPMENT at cost. Depreciation and amortization for the Raton Basin gas gathering system is computed on the units-of-production method based upon estimated gas production over a twenty-year life. Certain gas gathering system components and other support equipment are depreciated using the straight-line method over the estimated useful lives of the assets of 3 to 20 years.
AMOUNTS PAYABLE TO Amounts payable to oil and gas property owners OIL AND GAS consist of cash calls from working interest owners PROPERTY OWNERS to pay for development costs of properties being currently developed, production revenue that the Company, as operator, is collecting and distributing to revenue interest owners and production revenue taxes that the Company, as operator, has withheld for timely payment to the tax agencies.
INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" which requires the use of the "liability method". Accordingly, deferred tax liabilities and assets are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse.
OPERATOR FEES Income from operating wells for third parties is recognized pursuant to the applicable operating agreements when the services are performed.
NET INCOME (LOSS) Net income (loss) per common share has been PER SHARE computed by dividing net income (loss), after reduction for preferred stock dividends, by the weighted average number of common shares and common share equivalents outstanding during each of the
EVERGREEN RESOURCES, INC.
SUMMARY OF ACCOUNTING PRINCIPLES
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periods presented. Options and warrants to purchase stock are included as common stock equivalents when dilutive. Common stock equivalents are not utilized for the years ended March 31, 1996 and 1995 as their effect is antidilutive.
CASH EQUIVALENTS The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
FINANCIAL INSTRUMENTS The fair value of the production taxes payable and other non-current liabilities is not practical for management to estimate due to the nature of these transactions.
STOCK PLAN OPTIONS The Company applies APB Opinion 25, Accounting for Stock Issued to Employees, and related Interpretations in accounting for all stock option plans. Under APB Opinion 25, no compensation cost has been recognized for stock options granted as the option price equals or exceeds the market price of the underlying common stock on the date of grant.
SFAS No. 123, Accounting for Stock-Based Compensation, requires the Company to provide pro forma information regarding net income as if compensation cost for the Company's stock option plans had been determined in accordance with the fair value based method prescribed in SFAS No. 123. To provide the required pro forma information, the Company estimates the fair value of each stock option at the grant date by using the Black-Scholes option-pricing model.
FOREIGN CURRENCY The functional currency for the Company's foreign TRANSLATION operations is the applicable local currency. The translation of the applicable foreign currency into U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted average exchange rate during the period. The gains or losses resulting from such translation are included in stockholders' equity.
RECLASSIFICATIONS Certain items included in prior years financial statements have been reclassified to conform to current year presentation.
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
1. ACQUISITION Effective August 1, 1996, the Company acquired AGREEMENT the limited partnership interests of Energy Investors Fund, LP and Energy Investors Fund II, LP in PBI Fuels, LP and 100% of the common stock of Powerbridge Inc. for a purchase price of $11.3 million. The purchase price is comprised of 1,162,266 shares of restricted common stock valued at $7.7 million and the assumption of $3.6 million of long-term debt. The assets acquired included 37.0 billion cubic feet (BCF) of proved natural gas reserves, approximately 24 BCF of which are developed, together with 25% working interest in 120,000 gross acres and 50% interest in an associated gas gathering and marketing system. All of these assets are located on the Company's present acreage position in the Raton Basin, Las Animas County, Colorado. The acquisition has been accounted for under the purchase method of accounting.
Assuming the Company's acquisition as discussed above had been completed at the beginning of the periods below, pro forma results of operations for such periods would have been:
The pro forma information is not necessarily indicative of the combined results of operations that would have occurred had the acquisition been completed for such periods.
2. FINANCING The Company has a $15,000,000 revolving line of AGREEMENTS credit with a bank. Interest on any borrowings outstanding is at the bank's prime rate and is paid monthly. The line of credit matures in July 1998. There are no restrictions associated with advances under the line. An annual facility fee of one-half of one percent is charged quarterly for any unused portion of the credit line. The agreement is collateralized by oil and gas properties and also contains certain net worth and ratio requirements. No amounts were outstanding under the line of credit at December 31, 1996 and March 31, 1996.
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
3. DESIGNATED Designated cash represents the cash withheld CASH AND RELATED for payment of production taxes from the PRODUCTION TAXES Company and third party revenue interest PAYABLE owners. The non-current portion of production taxes payable relates to ad valorem taxes collected for production through December 1996 which is not payable until fiscal 1998 or later. The related cash collected from the Company and third party revenue interest owners designated for payment of non-current ad valorem taxes is reflected as a non-current asset.
4. INCOME TAXES Due primarily to the availability of net operating loss carryovers, the Company had no significant taxable income during the nine months ended December 31, 1996 and the years ended March 31, 1996 and 1995.
A reconciliation of the effective tax rates and the statutory U.S. federal income tax rates is as follows:
The components of the net deferred income tax in the accompanying balance sheets are as follows:
December 31, March 31, 1996 1996 ------------ ----------- Deferred tax assets $ 2,885,000 $ 2,064,000 Valuation allowance (2,885,000) (2,064,000)
Net deferred tax asset $ - $ - --------------------------------------------------- ---------------------------------------------------
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
The Company recorded a valuation allowance at December 31, 1996 equal to the excess of deferred tax assets over deferred tax liabilities as it is unable to determine that these tax benefits are more likely than not to be realized.
The components of the net deferred tax assets and liabilities are shown below:
As of December 31, 1996, the Company has net operating loss carryforwards for tax purposes of approximately $14,000,000. Issuances of common stock and common stock equivalents during 1988 and 1990 limits a portion of this amount to approximately $330,000 per year (additional amounts would be available to offset gains on the sale of assets) through 2003.
5. REDEEMABLE On December 8, 1994, the Company received $3.75 PREFERRED STOCK million through the private placement, with Institutional Investors, of 3,750,000 shares of ten year term 8% Convertible Preferred Stock, $1.00 par value ("the Preferred"). The Company received an additional $3.75 million on July 26, 1995, by issuing an additional 3,750,000 shares. All proceeds were used for development of the Company's oil and gas leases in the Raton Basin of Colorado.
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
As of December 1, 1996, 1,500,000 shares of the Preferred were converted to 230,770 shares of common stock and 250,000 five-year stock purchase warrants. 100,000 of the warrants are exercisable at $7.80 per share and 150,000 are exercisable at $7.00 per share.
The remaining Preferred is convertible into common stock at a conversion price of $6.50 per share. Annual cash dividends of 8% are payable quarterly. Evergreen may call the Preferred at any time in whole or in part prior to the mandatory redemption (minimum call being 20% of original issue), at par value, plus accrued dividends.
Evergreen can require the conversion of all of the Preferred into common stock provided the common stock has traded at not less than $16 per share for 30 consecutive days.
Mandatory repayments of $1,000,000 are due annually commencing in December 1999. All outstanding shares of Preferred must be redeemed by Evergreen in ten years (2005) at par value, plus accrued dividends.
Evergreen has issued warrants which will be triggered and will become exercisable for 10 years at $6.50 per share if Evergreen exercises all or part of its call option (up to 923,077 warrants).
The Preferred carries anti-dilution provisions, registration rights and, under certain circumstances, voting rights.
Cumulative annual cash dividends of 8% are payable quarterly. During the nine months ended December 31, 1996, and the year ended March 31, 1996, the Company paid $440,000 and $504,620 in dividends.
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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6. STOCKHOLDERS' On October 28, 1996, the Company completed a EQUITY public offering of its common shares, whereby it sold 2,000,000 shares at $5.75 per share. Proceeds, net of underwriters' commissions and their expenses of $1,253,220, were $10,246,780.
During the year ended March 31, 1996, pursuant to the exercise of certain stock purchase warrants, 71,250 shares of common stock were issued at $2.50 per share, in exchange for 30,941 shares of common stock currently issued and outstanding with a market value of approximately $5.50. In addition, 118,750 shares of common stock were issued under terms of warrants previously granted, resulting in proceeds to the Company of $303,907. During the nine months ended December 31, 1996 and the year ended March 31, 1996, the Company issued common stock valued at $86,400 and $117,390 as a bonus to certain employees.
During the year ended March 31, 1995, 31,250 shares of common stock were issued under terms of warrants previously granted, yielding proceeds to the Company of $78,126. Additionally, the Company issued common stock valued at $168,000 as a bonus to employees and $50,000 as payment in lieu of salary.
In August 1994, the Company issued 501,040 shares of common stock valued at $1,753,640 in exchange for certain working interests in wells in the San Juan Basin in a non-cash transaction.
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
7. STOCK OPTIONS Under the terms of its Key Employee Equity Plan, options and/or warrants are granted to key employees at not less than the market price of the Company's common stock on the date of grant. During the nine months ended December 31, 1996, the Company granted 170,500 warrants to officers and directors at exercise prices ranging from $5.75 to $7.00. In connection with the 1996 public offering, the Company issued 200,000 warrants to the underwriters at an exercise price of $6.90 per share. The presently outstanding warrants expire in 1997 to 2001.
FASB Statement 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), requires the Company to provide pro forma information regarding net income and net income per share as if compensation costs for the Company's stock option plans and other stock awards had been determined in accordance with the fair value based method prescribed in SFAS No. 123. The Company estimated the fair value of each stock award at the grant date by using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in the nine months ended December 31, 1996: dividend yield of 0 percent for all years; expected volatility of 9 percent; risk-free interest rate of 6.6 percent; and expected lives of five years for the warrants.
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
Under the accounting provisions for SFAS No. 123, the Company's net income and net income per share would have been adjusted to the following pro forma amounts:
8. MAJOR During the nine months ended December 31, 1996 and the CUSTOMERS years ended March 31, 1996 and 1995, the Company made sales to unrelated entities which individually comprised greater than 10% of total oil and gas sales. The following is a table summarizing the percentage provided by each customer:
-------------------------------------------------------- Customer A B C D E F -------------------------------------------------------- -------------------------------------------------------- Nine months ended -------------------------------------------------------- December 31, 1996 59% 12% 12% -% -% -%
Years Ended -------------------------------------------------------- March 31,1996 - - - 41 11 25 March 31,1995 - - - 35 10 -
9. SUPPLEMENTAL Cash paid during the nine months ended December 31, 1996, DISCLOSURES and for the years ended March 31, 1996 and 1995, for OF CASH FLOW interest were approximately $192,700, $37,000, and INFORMATION $22,000. During the nine months ended December 31, 1996, the Company incurred capital lease obligations of $841,000 in connection with the master lease agreement to acquire equipment. Included in accounts payable at December 31, 1996 is approximately $2,251,000 for gas gathering construction costs.
During the year ended March 31, 1995, approximately $1,978,000 of common stock was issued for services and acquisition of well interests. Also in 1995, the Company assumed approximately $267,000 in liabilities for the acquisition of certain equipment. See Notes 1, 6 and 10 for additional noncash transactions at December 31, 1996, and at March 31, 1996 and 1995.
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
10. COMMITMENTS The Company leases its primary office space for approximately $12,800 a month under a lease expiring in March 1998. The Company has the option to cancel the lease at any time subsequent to March 31, 1996. Rental expense, net of sublease income, for all facilities was approximately $99,900, $143,000, and $177,000 for the nine months ended December 31, 1996 and the years ended March 31, 1996 and 1995.
The Company had leased additional office space from an affiliated entity under a month-to-month operating lease which is now cancelled. Rent expense was approximately $2,300 and $28,000 for this facility for the years ended March 31, 1996 and 1995.
The Company has an Employee Stock Ownership Plan (ESOP), with contributions to the ESOP determined at the discretion of the Company. For nine months ended December 31, 1996 and the years ended March 31, 1996 and 1995, the Company contributed $28,800, $20,000, and $0 to the plan.
Under the terms of certain gas gathering and tie-in agreements, EOC is committed to meeting certain minimum volume levels during the term of the agreement. Through December 31, 1996 and March 31, 1996, volume levels have been below the required minimums and EOC has accrued approximately $2,231,000 and $1,831,000 for this shortfall, which is included with long-term liabilities. Such amount is refundable if future volumes exceed the minimums and EOC is currently having discussions with the owner of the system concerning obtaining additional volumes or other possible alternatives which includes the purchase of a portion of the system.
The Company and its subsidiaries are contingently liable individually and jointly with others as guarantors for an aggregate amount of a $2.5 million for a line of credit and an obligation related to leased equipment. The contingent obligations amount to $1.1 million at December 31, 1996.
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
11. OTHER INCOME Other income consisted of the following:
Nine Months Ended December 31, Year Ended March 31, 1996 1996 1995 ------------------------------------------------------------------ Gain on sales of subsidiaries/assets $ - $525,287 $330,856 Other 37,953 30,934 129,092 ------------------------------------------------------------------
$37,953 $556,221 $459,948 ------------------------------------------------------------------ ------------------------------------------------------------------
In September 1995, the Company sold its interest in ANGI Limited for $580,000 which resulted in a gain of approximately $525,000.
In December 1994, the Company sold certain assets and its 100% interest in JCI which had been acquired in March 1993. Prior to the consummation of the sale, oil and gas properties with a cost of approximately $300,000 were transferred into JCI. The sales price was $1,000,000 cash and a gain of approximately $331,000 was recognized from the transaction. Included in the group acquiring these properties and JCI, was an affiliate of the Company, which represented approximately 39% of the group.
12. RELATED EOC provides well services to a former affiliated entity for PARTIES which it receives fees pursuant to written operating agreements. For the nine months ended December 31, 1996 and the years ended March 31, 1996 and 1995, such fees totalled approximately $340,000, $575,600 and $316,000. Additionally, EOC provides non-operating services to the former affiliate, as requested by them for engineering, evaluation, acquisition and similar services for which EOC was compensated $24,000 and $229,000 during the years ended March 31, 1996 and 1995. As of December 31, 1996 and March 31, 1996, approximately $272,900 and $50,500 was payable to EOC from the former affiliate for fees and other services.
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
13. SECTION 29 Effective June 1, 1996, the Company sold its TAX CREDITS working interests in six producing wells in the San Juan Basin. The wells qualify for the Section 29 tax credit.
The Company received $53,000 cash and receives a volumetric production payment of 99% of the cash flow from the wells until approximately 1.1 billion cubic feet of gas have been produced and sold net to the well interests.
In addition to the production payment, Evergreen receives monthly payments based on production from the wells through 2002.
14. CAPITAL LEASE The Company has a $4.0 million equipment OBLIGATIONS lease line with Hibernia National Bank with interest at prime plus .25% (8.5% at December 31, 1996) for a term of five years, including options to purchase the equipment at a nominal amount at the end of the lease term. The Company primarily leases compressors for the Raton Basin gas gathering system and other related production equipment.
Future minimum lease payments are as follows:
Years ending December 31: 1997 $ 387,900 1998 387,900 1999 387,900 2000 387,900 2001 219,200 ---------- Total future minimum lease payments 1,770,800 Less amount representing interest 322,000 ---------- Present value of minimum lease payments 1,448,800 Less current portion 275,300 ---------- Capital lease obligation less current portion $1,173,500 ---------- ----------
EVERGREEN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
Included in fixed assets are the following assets under capital leases:
15. SUPPLEMENTAL The Company's oil and gas activities are INFORMATION OF conducted in the United States and the OIL AND GAS United Kingdom. The following costs were PRODUCING incurred in oil and gas acquisition, ACTIVITIES exploration, development, gas gathering and producing activities at:
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
Aggregate capitalized costs and related accumulated depreciation, depletion and amortization relating to oil and gas producing activities are as follows:
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
Costs of oil and gas properties excluded from the amortization base, at December 31 and March 31, are as follows:
Depreciation and depletion per equivalent MCF was $.33, $.39, and $.51 for the nine months ended December 31, 1996, and the years ended March 31, 1996 and 1995.
Results of operations from United States production activities for the nine months ended December 31, 1996 and the years ended March 31, 1996 and 1995 are presented in accordance with Financial Accounting Standards No. 69, "Disclosures About Oil and Gas Activities," which excludes consideration of general and administrative, and interest expense. There was no production activity in the United Kingdom.
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
OIL AND GAS RESERVE INFORMATION (UNAUDITED)
The estimates of the Company's proved reserves and related future net cash flows that are presented in the following tables are based upon estimates made by independent petroleum engineering consultants for the United States only. The Company is in the process of developing properties in the United Kingdom and is unable to prepare reserve information in this area. The Company's reserve information was prepared as of December 31, 1996 and March 31, 1996 and 1995. The Company cautions that there are many inherent uncertainties in estimating proved reserve quantities, projecting future production rates, and timing of development expenditures. Accordingly, these estimates are likely to change as future information becomes available.
Proved oil and gas reserves are the estimated quantities of crude oil, condensate, natural gas and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions.
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
The following table sets forth a standardized measure of the estimated discounted future net cash flows attributable to the Company's proved oil and gas reserves. Estimated future cash inflows were computed by applying period-end prices of oil and gas to the estimated future production of proved oil and gas reserves at December 31, 1996 and March 31, 1996 and 1995. The future production and development costs represent the estimated future expenditures to be incurred in developing and producing the proved reserves, assuming continuation of existing economic conditions. Future income tax expense was computed by applying statutory income tax rates to the difference between pretax net cash flows relating to the Company's proved oil and gas reserves and the tax basis of proved oil and gas properties and available operating loss and excess statutory depletion carryovers, reduced by investment tax and Section 29 credits.
At March 31, 1995, the Company determined that the likelihood of paying income tax in the future was minimal due to net operating losses and future drilling plans. As such, the effects of income taxes were excluded from this calculation.
During the nine months ended December 31, 1996 and the year ended March 31, 1996, future income taxes were included in the standardized measure of the future net cash flows due to the increase in future cash inflows which are the result of additional reserves.
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) See Index to Consolidated Financial Statements at Item 8. (a)(2) All other schedules have been omitted because the required information is inapplicable or is shown in the notes to the financial statements.
(a)(3) EXHIBITS: 22 Reserve Report prepared by Resource Services International, Inc. 27 Financial Data Schedule
(b) A report on Form 8-K was filed by the Company during the last quarter of the fiscal year ended December 31, 1996 - describing the change in the Company's fiscal year.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
EVERGREEN RESOURCES, INC.
Date: March 21, 1997 By: /s/ Mark S. Sexton ---------------------------------------- Mark S. Sexton, President and Chief Executive Officer
Date: March 21, 1997 By: /s/ Kevin R. Collins ---------------------------------------- Kevin R. Collins, Vice President - Finance CFO and Treasurer Principal Accounting Officer
SIGNATURES
Date: March 21, 1997 By: /s/ Alain Blanchard ---------------------------------------- Alain Blanchard, Director
Date: March 21, 1997 By: /s/ Dennis R. Carlton ---------------------------------------- Dennis R. Carlton, Director
Date: March 21, 1997 By: /s/ Larry D. Estridge ---------------------------------------- Larry D. Estridge, Director
Date: March 21, 1997 By: /s/ John J. Ryan III ---------------------------------------- John J. Ryan III, Director
Date: March 21, 1997 By: /s/ Mark S. Sexton ---------------------------------------- Mark S. Sexton, Director
Date: March 21, 1997 By: /s/ Scott D. Sheffield ---------------------------------------- Scott D. Sheffield, Director
Date: March 21, 1997 By: /s/ James S. Williams ---------------------------------------- James S. Williams, Director
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors Evergreen Resources, Inc. Denver, Colorado
We have audited the accompanying consolidated balance sheets of Evergreen Resources, Inc. and subsidiaries as of December 31, 1996 and March 31, 1996 and the related consolidated statements of operations, stockholders' equity, and cash flows for the nine month period ended December 31, 1996 and for each of the two years in the period ended March 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Evergreen Resources, Inc. and subsidiaries as of December 31, 1996 and March 31, 1996 and the results of their operations and their cash flows for the nine month period ended December 31, 1996 and for each of the two years in the period ended March 31, 1996, in conformity with generally accepted accounting principles.
BDO SEIDMAN, LLP
Denver, Colorado March 18, 1997
EVERGREEN RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS - ----------------------------------------------------------------------------- - -----------------------------------------------------------------------------
DECEMBER 31, March 31, 1996 1996 - -----------------------------------------------------------------------------
ASSETS
CURRENT: Cash and cash equivalents $ 2,640,300 $ 3,702,511 Accounts receivable: Oil and gas sales 1,182,635 237,178 Joint interest billings and other 727,283 897,142 Other current assets 113,964 132,446 - ----------------------------------------------------------------------------- Total current assets 4,664,182 4,969,277 - -----------------------------------------------------------------------------
PROPERTY AND EQUIPMENT (Notes 2 and 15): Proved oil and gas properties, based on full-cost accounting 49,323,572 36,378,828 Unevaluated properties not subject to amortization 8,579,220 7,792,739 Gas gathering equipment 13,952,381 4,415,439 Support equipment 1,422,955 595,656 - ----------------------------------------------------------------------------- 73,278,128 49,182,662
Less accumulated depreciation, depletion and amortization 12,578,205 11,558,516 - ----------------------------------------------------------------------------- Net property and equipment 60,699,923 37,624,146
DESIGNATED CASH (Note 3) 1,493,114 770,076
OTHER ASSETS 1,386,376 808,218 - ----------------------------------------------------------------------------- $68,243,595 $44,171,717 - ----------------------------------------------------------------------------- - -----------------------------------------------------------------------------
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
EVERGREEN RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED) - ----------------------------------------------------------------------------- - -----------------------------------------------------------------------------
DECEMBER 31, March 31, 1996 1996 - -----------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES: Accounts payable $ 3,223,047 $ 1,204,378 Amounts payable to oil and gas property owners 1,068,532 1,123,465 Accrued expenses and other 691,096 162,127
Total current liabilities 4,982,675 2,489,970
PRODUCTION TAXES PAYABLE (Note 3) 1,493,114 770,076
OBLIGATION UNDER CAPITAL LEASE (Note 14) 1,173,500 191,956
LONG-TERM LIABILITIES (Note 10) 2,230,798 1,630,878 - -----------------------------------------------------------------------------
Total liabilities 9,880,087 5,082,880 - ----------------------------------------------------------------------------- REDEEMABLE PREFERRED STOCK (Note 5) 6,000,000 7,500,000
COMMITMENTS (Note 10)
STOCKHOLDERS' EQUITY (Notes 6 and 7): Common stock, $.01 stated value; shares authorized, 50,000,000; shares issued and outstanding, 9,336,320 and 5,899,736 93,636 58,998 Additional paid-in capital 61,369,368 41,822,026 Accumulated deficit (9,198,780) (9,873,715) Foreign currency translation adjustment 99,284 (418,472) - ----------------------------------------------------------------------------- Total stockholders' equity 52,363,508 31,588,837 - ----------------------------------------------------------------------------- $68,243,595 $44,171,717 - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
EVERGREEN RESOURCES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
NINE MONTHS ENDED DECEMBER 31 YEARS ENDED MARCH 31, ----------------- --------------------- 1996 1996 1995 - -------------------------------------------------------------------------------
REVENUES: Oil and gas production (Note 8) $3,502,385 $1,392,695 $1,916,262 Oil and gas services (Note 12) 545,079 779,146 858,298 Interest and dividends 142,521 206,769 116,320 Other (Note 11) 37,953 556,221 459,948 - -------------------------------------------------------------------------------
TOTAL REVENUES 4,227,938 2,934,831 3,350,828 - -------------------------------------------------------------------------------
COSTS AND EXPENSES: Cost of production and operations 700,875 656,899 993,838 Gas gathering costs 110,363 218,644 237,831 Cost of oil and gas services 621,521 727,121 789,778 Depreciation, depletion and amortization 965,794 589,936 709,008 General and administrative expenses 504,456 818,805 850,088 Interest expense 192,685 36,620 29,688 Other 17,309 (10,997) 351,158 - -------------------------------------------------------------------------------
Total costs and expenses 3,113,003 3,037,028 3,961,389 - -------------------------------------------------------------------------------
NET INCOME (LOSS) 1,114,935 (102,197) (610,561)
Preferred stock dividends (Note 5) 440,000 504,620 94,167 - -------------------------------------------------------------------------------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCK $ 674,935 $ (606,817) $ (704,728) - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
NET INCOME (LOSS) PER COMMON SHARE $ 0.10 $ (.10) $ (.13) - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 7,043,141 5,800,036 5,446,741 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
EVERGREEN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NINE MONTHS ENDED DECEMBER 31, 1996 AND FOR THE YEARS ENDED MARCH 31, 1996 AND 1995
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
EVERGREEN RESOURCES, INC.
SUMMARY OF ACCOUNTING PRINCIPLES
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CONSOLIDATION The financial statements include the accounts of Evergreen Resources, Inc. (ERI) and its wholly-owned subsidiaries (the "Company"); Evergreen Operating Corporation (EOC) and Evergreen Resources (UK) Ltd., Powerbridge, Inc., and Primero Gas Marketing Co., formerly known as Primero Gas Gathering Co., (Primero).
The companies are engaged in the operation, acquisition, exploration and development of oil and gas properties and also the marketing of natural gas. All significant intercompany balances and transactions have been eliminated in consolidation.
CHANGE IN FISCAL YEAR Effective with the period ended December 31, 1996, the Company elected to begin utilizing a December 31 year end. Therefore, the period ended December 31, 1996 represents a nine month short period and the years ended March 31, 1996 and 1995 represent twelve month periods.
CONCENTRATIONS OF The Company's financial instruments that are CREDIT RISK exposed to concentrations of credit risk consist primarily of cash equivalents.
The Company's cash equivalents are cash investment funds which are placed with a major financial institution.
USE OF The preparation of financial statements in ESTIMATES conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
OIL AND GAS The Company follows the full-cost method of PROPERTIES accounting for oil and gas properties. Under this method, all productive and nonproductive costs incurred in connection with the exploration for and development of oil and gas reserves are capitalized. Such capitalized costs include lease acquisition, geological and geophysical work, delay rentals, drilling, completing and equipping oil and gas wells and other related costs. If the net investment in oil and gas properties exceeds an amount equal to the sum of (1) the standardized measure of discounted future net cash flows from proved reserves (see Note 15), and (2) the lower of cost or fair market value of properties in process of development and unexplored acreage, the excess is charged to expense as
EVERGREEN RESOURCES, INC.
SUMMARY OF ACCOUNTING PRINCIPLES
- --------------------------------------------------------------------------------
additional depletion. Normal dispositions of oil and gas properties are accounted for as adjustments of capitalized costs, with no gain or loss recognized.
Depreciation and depletion of proved oil and gas properties is computed on the units-of-production method based upon estimates of proved reserves with oil and gas being converted to a common unit of measure based on their relative energy content. Unproved oil and gas properties, including any related capitalized interest expense, are not amortized, but are assessed for impairment either individually or on an aggregated basis.
GAS GATHERING AND Gas gathering and support equipment are stated SUPPORT EQUIPMENT at cost. Depreciation and amortization for the Raton Basin gas gathering system is computed on the units-of-production method based upon estimated gas production over a twenty-year life. Certain gas gathering system components and other support equipment are depreciated using the straight-line method over the estimated useful lives of the assets of 3 to 20 years.
AMOUNTS PAYABLE TO Amounts payable to oil and gas property owners OIL AND GAS consist of cash calls from working interest owners PROPERTY OWNERS to pay for development costs of properties being currently developed, production revenue that the Company, as operator, is collecting and distributing to revenue interest owners and production revenue taxes that the Company, as operator, has withheld for timely payment to the tax agencies.
INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" which requires the use of the "liability method". Accordingly, deferred tax liabilities and assets are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse.
OPERATOR FEES Income from operating wells for third parties is recognized pursuant to the applicable operating agreements when the services are performed.
NET INCOME (LOSS) Net income (loss) per common share has been PER SHARE computed by dividing net income (loss), after reduction for preferred stock dividends, by the weighted average number of common shares and common share equivalents outstanding during each of the
EVERGREEN RESOURCES, INC.
SUMMARY OF ACCOUNTING PRINCIPLES
- --------------------------------------------------------------------------------
periods presented. Options and warrants to purchase stock are included as common stock equivalents when dilutive. Common stock equivalents are not utilized for the years ended March 31, 1996 and 1995 as their effect is antidilutive.
CASH EQUIVALENTS The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
FINANCIAL INSTRUMENTS The fair value of the production taxes payable and other non-current liabilities is not practical for management to estimate due to the nature of these transactions.
STOCK PLAN OPTIONS The Company applies APB Opinion 25, Accounting for Stock Issued to Employees, and related Interpretations in accounting for all stock option plans. Under APB Opinion 25, no compensation cost has been recognized for stock options granted as the option price equals or exceeds the market price of the underlying common stock on the date of grant.
SFAS No. 123, Accounting for Stock-Based Compensation, requires the Company to provide pro forma information regarding net income as if compensation cost for the Company's stock option plans had been determined in accordance with the fair value based method prescribed in SFAS No. 123. To provide the required pro forma information, the Company estimates the fair value of each stock option at the grant date by using the Black-Scholes option-pricing model.
FOREIGN CURRENCY The functional currency for the Company's foreign TRANSLATION operations is the applicable local currency. The translation of the applicable foreign currency into U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted average exchange rate during the period. The gains or losses resulting from such translation are included in stockholders' equity.
RECLASSIFICATIONS Certain items included in prior years financial statements have been reclassified to conform to current year presentation.
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
1. ACQUISITION Effective August 1, 1996, the Company acquired AGREEMENT the limited partnership interests of Energy Investors Fund, LP and Energy Investors Fund II, LP in PBI Fuels, LP and 100% of the common stock of Powerbridge Inc. for a purchase price of $11.3 million. The purchase price is comprised of 1,162,266 shares of restricted common stock valued at $7.7 million and the assumption of $3.6 million of long-term debt. The assets acquired included 37.0 billion cubic feet (BCF) of proved natural gas reserves, approximately 24 BCF of which are developed, together with 25% working interest in 120,000 gross acres and 50% interest in an associated gas gathering and marketing system. All of these assets are located on the Company's present acreage position in the Raton Basin, Las Animas County, Colorado. The acquisition has been accounted for under the purchase method of accounting.
Assuming the Company's acquisition as discussed above had been completed at the beginning of the periods below, pro forma results of operations for such periods would have been:
The pro forma information is not necessarily indicative of the combined results of operations that would have occurred had the acquisition been completed for such periods.
2. FINANCING The Company has a $15,000,000 revolving line of AGREEMENTS credit with a bank. Interest on any borrowings outstanding is at the bank's prime rate and is paid monthly. The line of credit matures in July 1998. There are no restrictions associated with advances under the line. An annual facility fee of one-half of one percent is charged quarterly for any unused portion of the credit line. The agreement is collateralized by oil and gas properties and also contains certain net worth and ratio requirements. No amounts were outstanding under the line of credit at December 31, 1996 and March 31, 1996.
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
3. DESIGNATED Designated cash represents the cash withheld CASH AND RELATED for payment of production taxes from the PRODUCTION TAXES Company and third party revenue interest PAYABLE owners. The non-current portion of production taxes payable relates to ad valorem taxes collected for production through December 1996 which is not payable until fiscal 1998 or later. The related cash collected from the Company and third party revenue interest owners designated for payment of non-current ad valorem taxes is reflected as a non-current asset.
4. INCOME TAXES Due primarily to the availability of net operating loss carryovers, the Company had no significant taxable income during the nine months ended December 31, 1996 and the years ended March 31, 1996 and 1995.
A reconciliation of the effective tax rates and the statutory U.S. federal income tax rates is as follows:
The components of the net deferred income tax in the accompanying balance sheets are as follows:
December 31, March 31, 1996 1996 ------------ ----------- Deferred tax assets $ 2,885,000 $ 2,064,000 Valuation allowance (2,885,000) (2,064,000)
Net deferred tax asset $ - $ - --------------------------------------------------- ---------------------------------------------------
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
The Company recorded a valuation allowance at December 31, 1996 equal to the excess of deferred tax assets over deferred tax liabilities as it is unable to determine that these tax benefits are more likely than not to be realized.
The components of the net deferred tax assets and liabilities are shown below:
As of December 31, 1996, the Company has net operating loss carryforwards for tax purposes of approximately $14,000,000. Issuances of common stock and common stock equivalents during 1988 and 1990 limits a portion of this amount to approximately $330,000 per year (additional amounts would be available to offset gains on the sale of assets) through 2003.
5. REDEEMABLE On December 8, 1994, the Company received $3.75 PREFERRED STOCK million through the private placement, with Institutional Investors, of 3,750,000 shares of ten year term 8% Convertible Preferred Stock, $1.00 par value ("the Preferred"). The Company received an additional $3.75 million on July 26, 1995, by issuing an additional 3,750,000 shares. All proceeds were used for development of the Company's oil and gas leases in the Raton Basin of Colorado.
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
As of December 1, 1996, 1,500,000 shares of the Preferred were converted to 230,770 shares of common stock and 250,000 five-year stock purchase warrants. 100,000 of the warrants are exercisable at $7.80 per share and 150,000 are exercisable at $7.00 per share.
The remaining Preferred is convertible into common stock at a conversion price of $6.50 per share. Annual cash dividends of 8% are payable quarterly. Evergreen may call the Preferred at any time in whole or in part prior to the mandatory redemption (minimum call being 20% of original issue), at par value, plus accrued dividends.
Evergreen can require the conversion of all of the Preferred into common stock provided the common stock has traded at not less than $16 per share for 30 consecutive days.
Mandatory repayments of $1,000,000 are due annually commencing in December 1999. All outstanding shares of Preferred must be redeemed by Evergreen in ten years (2005) at par value, plus accrued dividends.
Evergreen has issued warrants which will be triggered and will become exercisable for 10 years at $6.50 per share if Evergreen exercises all or part of its call option (up to 923,077 warrants).
The Preferred carries anti-dilution provisions, registration rights and, under certain circumstances, voting rights.
Cumulative annual cash dividends of 8% are payable quarterly. During the nine months ended December 31, 1996, and the year ended March 31, 1996, the Company paid $440,000 and $504,620 in dividends.
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
6. STOCKHOLDERS' On October 28, 1996, the Company completed a EQUITY public offering of its common shares, whereby it sold 2,000,000 shares at $5.75 per share. Proceeds, net of underwriters' commissions and their expenses of $1,253,220, were $10,246,780.
During the year ended March 31, 1996, pursuant to the exercise of certain stock purchase warrants, 71,250 shares of common stock were issued at $2.50 per share, in exchange for 30,941 shares of common stock currently issued and outstanding with a market value of approximately $5.50. In addition, 118,750 shares of common stock were issued under terms of warrants previously granted, resulting in proceeds to the Company of $303,907. During the nine months ended December 31, 1996 and the year ended March 31, 1996, the Company issued common stock valued at $86,400 and $117,390 as a bonus to certain employees.
During the year ended March 31, 1995, 31,250 shares of common stock were issued under terms of warrants previously granted, yielding proceeds to the Company of $78,126. Additionally, the Company issued common stock valued at $168,000 as a bonus to employees and $50,000 as payment in lieu of salary.
In August 1994, the Company issued 501,040 shares of common stock valued at $1,753,640 in exchange for certain working interests in wells in the San Juan Basin in a non-cash transaction.
EVERGREEN RESOURCES, INC.
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7. STOCK OPTIONS Under the terms of its Key Employee Equity Plan, options and/or warrants are granted to key employees at not less than the market price of the Company's common stock on the date of grant. During the nine months ended December 31, 1996, the Company granted 170,500 warrants to officers and directors at exercise prices ranging from $5.75 to $7.00. In connection with the 1996 public offering, the Company issued 200,000 warrants to the underwriters at an exercise price of $6.90 per share. The presently outstanding warrants expire in 1997 to 2001.
FASB Statement 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), requires the Company to provide pro forma information regarding net income and net income per share as if compensation costs for the Company's stock option plans and other stock awards had been determined in accordance with the fair value based method prescribed in SFAS No. 123. The Company estimated the fair value of each stock award at the grant date by using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in the nine months ended December 31, 1996: dividend yield of 0 percent for all years; expected volatility of 9 percent; risk-free interest rate of 6.6 percent; and expected lives of five years for the warrants.
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Under the accounting provisions for SFAS No. 123, the Company's net income and net income per share would have been adjusted to the following pro forma amounts:
8. MAJOR During the nine months ended December 31, 1996 and the CUSTOMERS years ended March 31, 1996 and 1995, the Company made sales to unrelated entities which individually comprised greater than 10% of total oil and gas sales. The following is a table summarizing the percentage provided by each customer:
-------------------------------------------------------- Customer A B C D E F -------------------------------------------------------- -------------------------------------------------------- Nine months ended -------------------------------------------------------- December 31, 1996 59% 12% 12% -% -% -%
Years Ended -------------------------------------------------------- March 31,1996 - - - 41 11 25 March 31,1995 - - - 35 10 -
9. SUPPLEMENTAL Cash paid during the nine months ended December 31, 1996, DISCLOSURES and for the years ended March 31, 1996 and 1995, for OF CASH FLOW interest were approximately $192,700, $37,000, and INFORMATION $22,000. During the nine months ended December 31, 1996, the Company incurred capital lease obligations of $841,000 in connection with the master lease agreement to acquire equipment. Included in accounts payable at December 31, 1996 is approximately $2,251,000 for gas gathering construction costs.
During the year ended March 31, 1995, approximately $1,978,000 of common stock was issued for services and acquisition of well interests. Also in 1995, the Company assumed approximately $267,000 in liabilities for the acquisition of certain equipment. See Notes 1, 6 and 10 for additional noncash transactions at December 31, 1996, and at March 31, 1996 and 1995.
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10. COMMITMENTS The Company leases its primary office space for approximately $12,800 a month under a lease expiring in March 1998. The Company has the option to cancel the lease at any time subsequent to March 31, 1996. Rental expense, net of sublease income, for all facilities was approximately $99,900, $143,000, and $177,000 for the nine months ended December 31, 1996 and the years ended March 31, 1996 and 1995.
The Company had leased additional office space from an affiliated entity under a month-to-month operating lease which is now cancelled. Rent expense was approximately $2,300 and $28,000 for this facility for the years ended March 31, 1996 and 1995.
The Company has an Employee Stock Ownership Plan (ESOP), with contributions to the ESOP determined at the discretion of the Company. For nine months ended December 31, 1996 and the years ended March 31, 1996 and 1995, the Company contributed $28,800, $20,000, and $0 to the plan.
Under the terms of certain gas gathering and tie-in agreements, EOC is committed to meeting certain minimum volume levels during the term of the agreement. Through December 31, 1996 and March 31, 1996, volume levels have been below the required minimums and EOC has accrued approximately $2,231,000 and $1,831,000 for this shortfall, which is included with long-term liabilities. Such amount is refundable if future volumes exceed the minimums and EOC is currently having discussions with the owner of the system concerning obtaining additional volumes or other possible alternatives which includes the purchase of a portion of the system.
The Company and its subsidiaries are contingently liable individually and jointly with others as guarantors for an aggregate amount of a $2.5 million for a line of credit and an obligation related to leased equipment. The contingent obligations amount to $1.1 million at December 31, 1996.
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11. OTHER INCOME Other income consisted of the following:
Nine Months Ended December 31, Year Ended March 31, 1996 1996 1995 ------------------------------------------------------------------ Gain on sales of subsidiaries/assets $ - $525,287 $330,856 Other 37,953 30,934 129,092 ------------------------------------------------------------------
$37,953 $556,221 $459,948 ------------------------------------------------------------------ ------------------------------------------------------------------
In September 1995, the Company sold its interest in ANGI Limited for $580,000 which resulted in a gain of approximately $525,000.
In December 1994, the Company sold certain assets and its 100% interest in JCI which had been acquired in March 1993. Prior to the consummation of the sale, oil and gas properties with a cost of approximately $300,000 were transferred into JCI. The sales price was $1,000,000 cash and a gain of approximately $331,000 was recognized from the transaction. Included in the group acquiring these properties and JCI, was an affiliate of the Company, which represented approximately 39% of the group.
12. RELATED EOC provides well services to a former affiliated entity for PARTIES which it receives fees pursuant to written operating agreements. For the nine months ended December 31, 1996 and the years ended March 31, 1996 and 1995, such fees totalled approximately $340,000, $575,600 and $316,000. Additionally, EOC provides non-operating services to the former affiliate, as requested by them for engineering, evaluation, acquisition and similar services for which EOC was compensated $24,000 and $229,000 during the years ended March 31, 1996 and 1995. As of December 31, 1996 and March 31, 1996, approximately $272,900 and $50,500 was payable to EOC from the former affiliate for fees and other services.
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13. SECTION 29 Effective June 1, 1996, the Company sold its TAX CREDITS working interests in six producing wells in the San Juan Basin. The wells qualify for the Section 29 tax credit.
The Company received $53,000 cash and receives a volumetric production payment of 99% of the cash flow from the wells until approximately 1.1 billion cubic feet of gas have been produced and sold net to the well interests.
In addition to the production payment, Evergreen receives monthly payments based on production from the wells through 2002.
14. CAPITAL LEASE The Company has a $4.0 million equipment OBLIGATIONS lease line with Hibernia National Bank with interest at prime plus .25% (8.5% at December 31, 1996) for a term of five years, including options to purchase the equipment at a nominal amount at the end of the lease term. The Company primarily leases compressors for the Raton Basin gas gathering system and other related production equipment.
Future minimum lease payments are as follows:
Years ending December 31: 1997 $ 387,900 1998 387,900 1999 387,900 2000 387,900 2001 219,200 ---------- Total future minimum lease payments 1,770,800 Less amount representing interest 322,000 ---------- Present value of minimum lease payments 1,448,800 Less current portion 275,300 ---------- Capital lease obligation less current portion $1,173,500 ---------- ----------
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Included in fixed assets are the following assets under capital leases:
15. SUPPLEMENTAL The Company's oil and gas activities are INFORMATION OF conducted in the United States and the OIL AND GAS United Kingdom. The following costs were PRODUCING incurred in oil and gas acquisition, ACTIVITIES exploration, development, gas gathering and producing activities at:
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Aggregate capitalized costs and related accumulated depreciation, depletion and amortization relating to oil and gas producing activities are as follows:
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Costs of oil and gas properties excluded from the amortization base, at December 31 and March 31, are as follows:
Depreciation and depletion per equivalent MCF was $.33, $.39, and $.51 for the nine months ended December 31, 1996, and the years ended March 31, 1996 and 1995.
Results of operations from United States production activities for the nine months ended December 31, 1996 and the years ended March 31, 1996 and 1995 are presented in accordance with Financial Accounting Standards No. 69, "Disclosures About Oil and Gas Activities," which excludes consideration of general and administrative, and interest expense. There was no production activity in the United Kingdom.
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OIL AND GAS RESERVE INFORMATION (UNAUDITED)
The estimates of the Company's proved reserves and related future net cash flows that are presented in the following tables are based upon estimates made by independent petroleum engineering consultants for the United States only. The Company is in the process of developing properties in the United Kingdom and is unable to prepare reserve information in this area. The Company's reserve information was prepared as of December 31, 1996 and March 31, 1996 and 1995. The Company cautions that there are many inherent uncertainties in estimating proved reserve quantities, projecting future production rates, and timing of development expenditures. Accordingly, these estimates are likely to change as future information becomes available.
Proved oil and gas reserves are the estimated quantities of crude oil, condensate, natural gas and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions.
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The following table sets forth a standardized measure of the estimated discounted future net cash flows attributable to the Company's proved oil and gas reserves. Estimated future cash inflows were computed by applying period-end prices of oil and gas to the estimated future production of proved oil and gas reserves at December 31, 1996 and March 31, 1996 and 1995. The future production and development costs represent the estimated future expenditures to be incurred in developing and producing the proved reserves, assuming continuation of existing economic conditions. Future income tax expense was computed by applying statutory income tax rates to the difference between pretax net cash flows relating to the Company's proved oil and gas reserves and the tax basis of proved oil and gas properties and available operating loss and excess statutory depletion carryovers, reduced by investment tax and Section 29 credits.
At March 31, 1995, the Company determined that the likelihood of paying income tax in the future was minimal due to net operating losses and future drilling plans. As such, the effects of income taxes were excluded from this calculation.
During the nine months ended December 31, 1996 and the year ended March 31, 1996, future income taxes were included in the standardized measure of the future net cash flows due to the increase in future cash inflows which are the result of additional reserves.
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