Back to GetFilings.com

Use these links to rapidly review the document
EVERGREEN RESOURCES, INC. INDEX

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

Form 10-Q

Commission file number: 001-13171

EVERGREEN RESOURCES, INC.
(Exact name of registrant as specified in its charter)

Registrant's Telephone Number, Including Area Code: (303) 298-8100

        Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark whether the Registrant is an accelerated filer (as defined by Rule 12b-2 of the Act). Yes ý    No o

        As of April 30, 2004, 43,099,951 shares of the Registrant's Common Stock, no par value, were outstanding.

EVERGREEN RESOURCES, INC.

INDEX

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

EVERGREEN RESOURCES, INC.

CONSOLIDATED BALANCE SHEETS

See accompanying notes to consolidated financial statements.

EVERGREEN RESOURCES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

See accompanying notes to consolidated financial statements.

EVERGREEN RESOURCES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

See accompanying notes to consolidated financial statements.

EVERGREEN RESOURCES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

See accompanying notes to consolidated financial statements.

EVERGREEN RESOURCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of March 31, 2004

(Unaudited)

1.     Nature of Operations and Basis of Presentation

        Evergreen Resources, Inc. ("Evergreen" or "the Company") is a Colorado corporation organized on January 14, 1981. Evergreen is an independent energy company engaged primarily in the operation, development, production, exploration and acquisition of North American unconventional natural gas properties. Evergreen is one of the leading developers of coal bed methane reserves in the United States. Evergreen's current operations are principally focused on developing and expanding its coal bed methane project located in the Raton Basin in southern Colorado. The Company is also expanding its conventional and unconventional projects in the Piceance Basin in western Colorado, the Uintah Basin in eastern Utah and the Western Canada Sedimentary Basin in south-central Alberta. Evergreen has also initiated coal bed methane projects in the Cook Inlet-Susitna Basin in Alaska and the Forest City Basin in eastern Kansas. Evergreen's common stock is traded on the New York Stock Exchange under the symbol "EVG."

        In the opinion of management, the accompanying unaudited financial statements include all adjustments, consisting only of normal recurring items, necessary to present fairly the Company's financial position as of March 31, 2004 and 2003 and the results of its operations and cash flows for the three months then ended. Certain reclassifications have been made to prior periods to conform to the classifications used in the current period. These reclassifications did not have an impact on previously reported results of operations. The results of operations for interim periods are not necessarily indicative of results to be expected for a full year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in this Form 10-Q pursuant to the rules and regulations of the United States Securities and Exchange Commission ("SEC"). The accompanying financial statements should be read in conjunction with the Company's audited consolidated financial statements for the year ended December 31, 2003.

        All common stock and per-share amounts reported in the consolidated financial statements, and notes thereto, reflect the two-for-one split of Evergreen common stock which was effective as of September 16, 2003.

2.     Subsequent Event—Merger Agreement

        On May 3, 2004, Evergreen and Pioneer Natural Resources Company ("Pioneer") entered into an Agreement and Plan of Merger (the "Merger Agreement") providing, among other things, that holders of Evergreen common stock will have the right to receive an aggregate of 25 million shares of Pioneer common stock (with related stockholders rights) and a total of $850 million in cash. Holders of Evergreen common stock will have the option to elect among three types of consideration for a share of Evergreen common stock: (1) 1.1635 shares of Pioneer common stock; (2) $39.00 cash; or (3) 0.58175 shares of Pioneer common stock and $19.50 in cash. All holders of unvested restricted stock under Evergreen's stock-based employee plans will be deemed to have elected to receive Pioneer common stock. Holders who elect all stock consideration or all cash consideration (other than holders of unvested restricted stock) will be subject to allocation of the stock and cash so that the aggregate amounts of stock and cash will be as set forth above. The Merger Agreement provides for a merger by which Evergreen will become a subsidiary of Pioneer (the "Proposed Merger").

        In addition, Evergreen will seek to sell its Kansas assets before the closing date of the merger. The merger agreement provides for an additional cash payment to Evergreen shareholders equal to the greater of: (i) $0.35 per share (approximately $15 million) as consideration from Pioneer for the Kansas properties in the merger, or (ii) the gross proceeds less transaction costs from the sale of the Kansas properties to a third party that closes before the closing date of the Proposed Merger.

        The merger is subject to approval at meetings of the stockholders of Evergreen and Pioneer and other customary closing conditions. The merger was approved by the board of directors of Evergreen and Pioneer. The merger agreement may also be terminated in certain circumstances, including if Evergreen receives and decides to accept an unsolicited, superior offer. The merger is expected to be completed in the second half of 2004.

3.     Oil and Gas Properties

        The Company follows the full-cost method of accounting for oil and gas properties. Under this method, all productive and nonproductive costs incurred in connection with the exploration for and development of oil and gas reserves are capitalized. Such capitalized costs include lease acquisition, geological and geophysical work, delay rentals, drilling, completing and equipping oil and gas wells, including salaries, benefits and other internal costs directly attributable to these activities. For the quarters ended March 31, 2004 and 2003, Evergreen capitalized $1.5 million and $0.8 million of general and administrative costs, respectively. Costs associated with production and general corporate activities are expensed in the period incurred. Interest costs related to unproved properties and properties under development are also capitalized to oil and gas properties. Approximately $0.6 million and $0.2 million of interest was capitalized during the three months ended March 31, 2004 and 2003, respectively.

        If the net investment in oil and gas properties, as adjusted for asset retirement obligations, exceeds an amount equal to the sum of (1) the standardized measure of discounted future net cash flows from proved reserves and (2) the lower of cost or fair market value of properties in the process of development and unexplored acreage, the excess is charged to expense as additional depletion. The standardized measure is calculated using a 10% discount rate and is based on unescalated prices in effect at quarter-end with effect given to the Company's cash flow hedge positions. Normal dispositions of oil and gas properties are accounted for as adjustments of capitalized costs, with no gain or loss recognized.

        Depreciation and depletion of proved oil and gas properties is computed on the units-of-production method based upon estimates of proved reserves with oil and gas being converted to a common unit of measure based on the relative energy content. Unproved oil and gas properties, including any related capitalized interest expense, are not amortized, but are assessed for impairment either individually or on an aggregated basis. The costs of certain unevaluated leasehold acreage and wells drilled are not being amortized. Costs not being amortized are periodically assessed for possible impairments or reductions in value. If a reduction in value has occurred, costs being amortized are increased or a charge is made against earnings for those operations where a reserve base is not yet established.

        Gas collection and support equipment are stated at cost. Depreciation and amortization for the gas collection system, with the exception of the gas compressor facilities, is computed on the units-of-production method based upon total reserves of the field. Gas compressor facilities and other support equipment are depreciated using the straight-line method over the estimated useful lives of the assets of three to 30 years.

4.     Indebtedness

5.875% Senior Subordinated Notes

        In March 2004, the Company issued $200 million of 5.875% Senior Subordinated Notes for proceeds of $198.4 million, net of a $1.6 million discount. The notes are due on March 15, 2012 with interest payable on March 15 and September 15 of each year. The notes are unsecured senior subordinated indebtedness, are subordinated in right of payment to all of the Company's existing and future senior indebtedness, will rank equally in right of payment with all of the Company's future senior unsecured subordinated indebtedness and will be senior in right of payment to all of the Company's future subordinated obligations. The indenture contains covenants restricting the ability of the Company to, among other things, incur additional indebtedness, pay dividends or sell significant assets or subsidiaries. The Company was in compliance with all of these covenants at March 31, 2004.

        Prior to March 15, 2007, the Company may redeem up to 35% of the original principal amount of the notes with the net cash proceeds of one or more equity offerings at a redemption price of 105.875% of the principal amount of the notes, plus accrued and unpaid interest. On or after March 15, 2008, the Company may redeem all or a portion of the notes at redemption prices ranging from 102.938% to 100% of the principal amount, as provided by the indenture. The notes also contain provisions for mandatory redemption upon the occurrence of certain future events, including a change in control.

        The proceeds from the issuance of the Notes were utilized to completely discharge outstanding indebtedness under its $200 million revolving credit facility (described below) and to provide funding for future development expenditures and for general corporate purposes.

        At March 31, 2004, the carrying amount of the notes was $198.4 million net of an unamortized discount of $1.6 million.

        The Merger Agreement with Pioneer discussed in Note 2 provides that upon the request of Pioneer, and in exchange for Pioneer's agreement to cause the subordination provisions of the notes to be eliminated and to assume the notes, the Company will use its commercially reasonable efforts to solicit consents from the holders of the notes to amend the notes in order to eliminate or amend certain covenants of the notes, effective as of the effective time of the merger.

Senior Convertible Notes

        The Company also has $100 million in senior unsecured convertible notes which are due in 2021 and bear interest at a fixed annual rate of 4.75%, which is to be paid in cash on June 15 and December 15 of each year. In addition to the fixed interest, the Company will pay contingent interest to the holders of the notes if the average trading price of the notes for an established number of days exceeds 120% or more of the principal amount of the notes. The rate of contingent interest payable in respect to any six-month period will equal the greater of (1) a per annum rate equal to 5% of the Company's estimated per annum borrowing rate for senior non-convertible fixed-rate debt with a maturity date comparable to the notes or (2) 0.30% per annum. In no event may the contingent interest rate exceed 0.40% per annum. The Company will be required to pay $0.2 million in contingent interest on June 15, 2004.

        The notes are general unsecured obligations, ranking on a parity in right of payment with all of Evergreen's existing and future senior indebtedness, and senior in right of payment with all of Evergreen's future subordinated indebtedness. The notes are due on December 15, 2021 but are redeemable at either the Company's option or the holder's option on other specified dates. The Company may redeem the notes at its option in whole or in part beginning on December 20, 2006, at 100% of their principal amount plus accrued and unpaid interest (including contingent interest). Holders of the notes may require the Company to repurchase the notes if a change in control of the Company occurs. Holders may also require the Company to repurchase all or part of the notes on December 20, 2006, December 15, 2011 and December 15, 2016 at a repurchase price of 100% of the principal amount of the notes plus accrued and unpaid interest (including contingent interest). On December 20, 2006, the Company may pay the repurchase price in cash, in shares of common stock, or in any combination of cash and common stock. On December 15, 2011 and December 15, 2016, the Company must pay the repurchase price in cash.

        The notes are convertible into shares of common stock of Evergreen under certain circumstances as discussed below at a conversion price of $25 per share, subject to certain adjustments. The notes can be converted at the option of the holder if for a specified period of time, the closing price of the Company's common stock exceeds 110% of the $25 conversion price, which occurred in November 2003 and in January 2004, or if the average trading value of the notes for a specified period of time is less than 105% of an average conversion value as defined by the indenture governing the notes. The notes are eligible for conversion and are currently considered potential common shares in the computation of diluted shares outstanding. The notes may also be converted into shares of common stock of the Company at the election of the holder upon notice of redemption, or at any time the notes are rated by either Moody's Investors Service, Inc. or Standard & Poor's Rating Group and the credit rating initially assigned to the notes by either such rating agency is reduced by two or more ratings levels, or upon the occurrence of certain corporate transactions including a change in control or the distribution to current holders of the Company's common stock certain purchase rights or any other asset that has a value exceeding 10% of the sale price of the common stock on the day preceding the declaration date of the distribution of such assets.

Revolving Credit Facilities

        The Company currently has a $200 million revolving credit facility with a bank group. The credit facility is available through July 1, 2005. Advances pursuant to this credit facility are limited to a borrowing base, as defined by the credit facility, which was $200 million at March 31, 2004. The Company may elect to use either the LIBO rate plus a margin of 1.125% to 1.50% or the prime rate plus a margin of 0% to 0.25%, with margins on both rates determined by the average outstanding borrowings under the credit facility. The borrowing base is redetermined semi-annually by the bank group based upon reserve evaluations of Evergreen's oil and gas properties. An annual commitment fee of 0.375% is charged quarterly for any unused portion of the credit line. The agreement is collateralized by substantially all domestic oil and gas properties and guaranteed by substantially all of the Company's subsidiaries. The credit agreement also contains certain net worth, leverage and ratio requirements and limits the payment of dividends. At March 31, 2004, Evergreen had no outstanding borrowings under this credit facility. The Company was in compliance with all loan covenants at March 31, 2004.

        In connection with the purchase of Carbon Energy Corporation in 2003, the Company assumed a credit facility with Canadian Imperial Bank of Commerce. In March 2004, this credit facility was paid in full and cancelled.

5.     Earnings per Share

        The following table sets forth the computation of basic and diluted weighted average shares outstanding for the three months ended March 31, 2004 and 2003:

        As of and for the quarter ended March 31, 2004, the Company's $100 million senior convertible notes were convertible into four million shares of Evergreen common stock at $25 per share due to the average market price of the Company's common stock surpassing $27.50 for an established period of time as prescribed by the indenture. The notes were not convertible at any time during the first quarter of 2003. See Note 8 for discussion of stock based compensation.

6.     Derivatives and Hedging Activities

        The Company may use derivative instruments to manage exposures to commodity prices, foreign currency and interest rate risks. The Company's objectives for holding derivatives are to achieve a consistent level of cash flow to support its capital budgeting and expenditure plans and to maximize internal rates of return for capital projects including property acquisition investments.

        The Company periodically enters into fixed-price physical delivery contracts and commodity derivative contracts to manage price risk with regard to a portion of its natural gas production. The table below summarizes the natural gas swaps the Company had in place as of March 31, 2004 by region and contract period. The weighted average prices of the swaps have been adjusted for anticipated fuel use and regional price differentials.

        The net unrealized loss of $26.2 million as reflected in the table above is presented on the Consolidated Balance Sheet as a current liability of $26.3 million and a current asset of $0.1 million. During the quarters ended March 31, 2004 and 2003, the Company recognized $4.6 and $12.0 million of net losses related to its natural gas hedging activities, respectively. These net losses are included in oil and natural gas revenues in the Consolidated Statements of Income and are included in cash flows from operations in the Consolidated Statements of Cash Flows.

        As provided in the Merger Agreement with Pioneer, the Company was required to enter into financial swap agreements to hedge an additional 25,000 Mcf per day in November and December 2004 and 100,000 Mcf per day in 2005. Accordingly, subsequent to March 31, 2004, the Company entered into the following commodity swap agreements:

7.     Supplemental Disclosures of Cash Flow Information

        Cash paid during the three months ended March 31, 2004 and 2003 for interest was approximately $1.5 million and $1.2 million, respectively. The Company paid $0.6 million for income taxes during the three months ended March 31, 2004.

8.     Stock Based Compensation

        SFAS No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment to SFAS No. 123" requires the Company to provide pro forma information regarding net income as if the 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. The following table represents the pro forma effect on net income and earnings per share as if the Company had applied the fair value based method and recognition provisions of SFAS No. 123 to stock-based employee compensation: