<PAGE>
THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT IS NOT COMPLETE AND MAY BE
CHANGED. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED
AND IS EFFECTIVE. THIS PROSPECTUS SUPPLEMENT IS NOT AN OFFER TO SELL THESE
SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY
STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
FILED PURSUANT TO RULE 424(b)(2)
REGISTRATION NO. 333-78203
SUBJECT TO COMPLETION - MAY 28, 1999
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MAY 24, 1999)
- --------------------------------------------------------------------------------
2,500,000 Shares
[LOGO]
Common Stock
- ----------------------------------------------------------------------
Evergreen Resources, Inc. is offering 2,500,000 shares of its common stock. The
shares of Evergreen are quoted in the Nasdaq National Market under the symbol
"EVER." On May 27, 1999, the last reported sale price in the Nasdaq National
Market was $22.75 per share.
Evergreen is an independent exploration and production company principally
focused on developing and expanding its coal bed methane project located in the
Raton Basin in southern Colorado.
<TABLE>
<CAPTION>
Per Share Total
<S> <C> <C>
Public offering price...................................... $ $
Underwriting discounts and commissions..................... $ $
Proceeds, before expenses, to Evergreen.................... $ $
</TABLE>
SEE "RISK FACTORS" ON PAGES S-8 TO S-14 FOR FACTORS THAT SHOULD BE CONSIDERED
BEFORE
INVESTING IN THE SHARES OF EVERGREEN.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
- --------------------------------------------------------------------------------
The underwriters may, under certain circumstances, purchase up to 375,000
additional shares from Evergreen at the public offering price, less underwriting
discounts and commissions. Delivery and payment for the shares will be on
, 1999.
PRUDENTIAL SECURITIES
A.G. EDWARDS & SONS, INC.
HOWARD, WEIL, LABOUISSE, FRIEDRICHS
INCORPORATED
<PAGE>
HANIFEN, IMHOFF INC.
, 1999
<PAGE>
[Included immediately following the cover page of the prospectus supplement
is a map entitled "Raton Basin Coal Bed Methane Project," which identifies the
location of our acreage, completed gas wells and compressor stations and the
Colorado Interstate Gas Co. pipeline.]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PROSPECTUS SUPPLEMENT PAGE
- ---------------------------------- ----
<S> <C>
Summary........................... S-1
Risk Factors...................... S-7
Forward-Looking Statements........ S-14
Use of Proceeds................... S-15
Price Range of Common Stock....... S-15
Dividend Policy................... S-15
Capitalization.................... S-16
Selected Consolidated Financial
Data............................ S-17
Management's Discussion and
Analysis of Financial Condition
and Results of Operations....... S-19
Business and Properties........... S-26
Management........................ S-41
Shares Eligible for Future Sale... S-42
Underwriting...................... S-44
Legal Matters..................... S-45
Experts........................... S-45
Glossary of Certain Oil and Gas
Terms........................... S-46
Index to Financial Statements..... F-1
Report of Independent Petroleum
Engineers....................... A-1
Report of Independent Petroleum
Engineers....................... B-1
<CAPTION>
PROSPECTUS PAGE
- ---------------------------------- ----
<S> <C>
Forward-Looking Statements........ 2
The Company....................... 3
Use of Proceeds................... 3
Ratios of Earnings to Fixed
Charges......................... 4
Description of Debt Securities.... 4
Description of Preferred Stock.... 15
Description of Depositary
Shares.......................... 15
Description of Common Stock....... 17
Description of Warrants........... 19
Description of Subscription
Rights.......................... 20
Plan of Distribution.............. 21
Experts........................... 23
Legal Matters..................... 23
Where You Can Find More
Information..................... 23
Incorporation of Certain Documents
by Reference.................... 24
</TABLE>
- --------------------------------------------------------------------------------
The terms "Evergreen," "Company," "we," "our" and "us" refer to Evergreen
Resources, Inc. and its subsidiaries unless the context suggests otherwise. The
term "you" refers to a prospective investor. We have included technical terms
important to an understanding of our busines under "Glossary of Certain Oil and
Gas Terms" on page S-46.
- --------------------------------------------------------------------------------
You should rely on the information contained or incorporated by reference in
this prospectus supplement and the accompanying prospectus. We have not
authorized anyone to provide you with different information. We are not making
an offer of these securities in any jurisdiction where the offer or sale is not
permitted. You should not assume that the information contained in this
prospectus supplement and the accompanying prospectus is accurate as of any date
other than the date on the front cover of this prospectus supplement.
<PAGE>
SUMMARY
This summary highlights information contained elsewhere in this prospectus
supplement. This summary is not complete and may not contain all of the
information that investors should consider before investing in the common stock
of Evergreen. You should read the entire prospectus supplement and the
accompanying prospectus carefully.
EVERGREEN
Evergreen Resources, Inc. is an independent energy company engaged in the
exploration, production, development and acquisition of oil and gas properties.
Our current operations are principally focused on developing and expanding our
coal bed methane project located in the Raton Basin in southern Colorado. We
also own interests in other areas including the United Kingdom and northern
Chile.
We are one of the largest holders of oil and gas leases in the Raton Basin,
with approximately 200,000 gross acres of coal bed methane properties and almost
200 producing gas wells. Our daily gas sales represent approximately 65% of the
gas currently sold from the Raton Basin. Our Raton Basin drilling program has
enabled us to build an extensive inventory of additional drilling locations. We
have identified over 800 additional drilling locations on our Raton Basin
acreage, of which 132 were included in our estimated proved reserve base at
December 31, 1998.
At December 31, 1998, we had estimated net proved reserves of 405 Bcf with a
PV-10 of approximately $215 million. All of our estimated net proved reserves
are natural gas from coal bed methane and are located in the Raton Basin.
Approximately 60% of these net proved reserves are classified as proved
developed. We have a 100% working interest in the majority of our Raton Basin
acreage and wells, and also own the gas collection systems and related equipment
associated with these wells. We operate all of our Raton Basin producing
properties.
We have an established track record for discovering new reserves and
significantly growing our reserve base. From March 31, 1995 through December 31,
1998, we added a net 342 Bcfe of estimated proved reserves principally through
our drilling in the Raton Basin. This represents a compound annual growth rate
of approximately 64%. Since we began our drilling efforts in the Raton Basin, we
have drilled and tested approximately 150 producing wells and achieved a 98%
success rate. In addition, we acquired 43 producing wells through property
acquisitions in 1998. Since early 1995, our average gross daily production has
increased from 1.5 MMcf to 45.5 MMcf.
We believe that we have gained significant experience in coal bed methane
exploration and development, including the use of enhanced drilling, completion
and production techniques developed over a number of years. This has enabled us
to become one of the lowest-cost finders, developers and producers among U.S.
publicly-traded independent oil and gas companies. From the beginning of our
Raton Basin project through December 31, 1998, we have spent approximately $93
million on the drilling and completion of our wells, pipelines, gas collection
systems, compression equipment and the acquisition of additional working
interests. This represents a total finding and development cost of $0.22 per
Mcf. In addition, our lease operating expenses per Mcf have declined
significantly since Raton Basin gas sales began in early 1995. Over the
three-year period ended March 31, 1999, our LOE per Mcf averaged $0.34.
S-1
<PAGE>
BUSINESS STRATEGY
Our objective is to enhance shareholder value by increasing reserves,
production, cash flow, earnings and net asset value per share. To accomplish
this objective, we intend to capitalize on our experience and operating
expertise in coal bed methane properties and on our other competitive strengths,
which include:
- our inventory of drilling locations in the Raton Basin,
- our track record for discovering new reserves and significantly growing
our reserve base, and
- our position as a low-cost finder, developer and producer of natural gas.
To implement our strategy, we seek to:
- ACCELERATE DEVELOPMENT OF THE RATON BASIN. We have an extensive inventory
of drilling locations in the Raton Basin. During 1998, we drilled 50 wells
in the Raton Basin. During 1999, we intend to drill a total of 80 wells,
of which approximately 32 have already been drilled. During 2000, we
intend to drill up to 100 wells. To accommodate this accelerated
development, we also plan to expand our gas collection systems and
compression facilities.
- EXPLOIT THE RATON FORMATION. The Raton Basin contains two coal bearing
formations, the Vermejo formation coals located at depths of between 450
and 3,500 feet, and the shallower Raton formation coals located at depths
from the surface to approximately 2,000 feet. To date, all of our
production and reserves have been attributable to the Vermejo formation
coals. To further exploit the Raton Basin, we have drilled and are
evaluating approximately 12 wells in the Raton formation. Based on our
preliminary evaluation, we believe that we can profitably develop the
Raton formation coal seams. Of the 80 wells we plan to drill in 1999,
approximately 50% are scheduled to be in the Raton formation.
- MAINTAIN CONTROL OF OPERATIONS. We have a 100% working interest in the
majority of our Raton Basin acreage and wells, and we operate all of our
producing properties within the basin, thereby controlling all phases of
drilling, completion and well stimulation. We also construct, own and
operate all of our gas collection systems, which we have specifically
designed to optimize production from coal bed methane wells. By operating
our producing properties, we believe we have greater control over our
expenses and the timing of exploration and development of our properties.
We are also the designated operator for our United Kingdom and Chilean
projects.
- LOWER OPERATING COSTS THROUGH VERTICAL INTEGRATION. We have developed the
internal capabilities both in personnel and equipment to perform key well
services, such as drilling, gas collection, wellbore cementing, fracture
stimulation and gas marketing. We believe these internal capabilities will
allow us to enhance our low-cost position.
- PURSUE INTERNATIONAL OPPORTUNITIES. We seek to identify attractive
international oil and gas projects that require relatively small capital
investments but that have potential for favorable returns. Since 1992, we
have obtained onshore exploration licenses covering approximately 513,000
acres in the United Kingdom and an oil and gas exploration license on
approximately 2.4 million acres in northern Chile. We expect to spend
approximately $3 million in 1999 for the development of our international
projects, substantially all of which is budgeted for the United Kingdom.
We will seek partners to help minimize our additional upfront capital
requirements.
- ACQUIRE ADDITIONAL PROPERTY INTERESTS. Over the last three years, we
acquired additional property interests in the Raton Basin totaling
approximately 97 Bcf of estimated net proved reserves at an average
acquisition cost of $0.34 per Mcf. We will continue to pursue acquisitions
of oil and gas properties located in our principal areas of operation and
in other areas that provide attractive investment opportunities,
particularly where we can add value through our technical and operational
expertise.
S-2
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Shares offered by Evergreen................. 2,500,000 shares(1)
Total shares outstanding after this
offering.................................. 13,752,009 shares(1)(2)
Use of proceeds............................. To repay indebtedness under our existing
revolving credit facility, to fund the
continued development of our Raton Basin
properties and for general corporate purposes.
Nasdaq National Market symbol............... EVER
</TABLE>
- ------------
(1) Does not include up to 375,000 shares that the underwriters may purchase if
they exercise their over-allotment option.
(2) Excludes 1,357,255 shares of common stock issuable upon exercise of
outstanding options and warrants.
RISK FACTORS
You should consider the risk factors before investing in our common stock
and the impact from various events which could adversely affect our business.
See "Risk Factors."
S-3
<PAGE>
SUMMARY FINANCIAL DATA
You should read the following summary consolidated financial data along with
the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations," our consolidated financial statements and
the related notes and other information included elsewhere in this prospectus
supplement. Effective with the period ended December 31, 1996, we began using a
December 31 fiscal year end. All prior historical data was prepared on a March
31 fiscal year end.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED DECEMBER THREE MONTHS
DECEMBER 31, 31, ENDED MARCH 31,
------------- -------------------- --------------------
1996 1997 1998 1998 1999
------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Revenues:
Natural gas revenues...................................... $ 3,502 $ 12,138 $ 19,063 $ 4,312 $ 4,572
Interest and other........................................ 181 136 178 45 51
------------- --------- --------- --------- ---------
Total revenues.......................................... 3,683 12,274 19,241 4,357 4,623
Expenses:
Lease operating expenses.................................. 701 2,007 3,356 554 1,200
Depreciation, depletion and amortization.................. 966 2,794 3,860 843 1,161
General and administrative................................ 581 1,286 1,933 402 595
Interest.................................................. 193 777 1,870 344 790
Other..................................................... 127 259 286 38 --
------------- --------- --------- --------- ---------
Total expenses.......................................... 2,568 7,123 11,305 2,181 3,746
------------- --------- --------- --------- ---------
Income from continuing operations before income taxes....... 1,115 5,151 7,936 2,176 877
Income tax provision -- deferred............................ -- -- 3,064 838 342
------------- --------- --------- --------- ---------
Income from continuing operations........................... 1,115 5,151 4,872 1,338 535
Discontinued operations:
Gain from disposal of discontinued operations, net........ -- -- -- -- 452
Equity in earnings of discontinued operations, net........ -- 313 340 62 --
------------- --------- --------- --------- ---------
Net income.................................................. 1,115 5,464 5,212 1,400 987
Preferred stock dividends................................... 440 400 -- -- --
------------- --------- --------- --------- ---------
Net income attributable to common stock..................... $ 675 $ 5,064 $ 5,212 $ 1,400 $ 987
------------- --------- --------- --------- ---------
------------- --------- --------- --------- ---------
BASIC INCOME PER COMMON SHARE:
From continuing operations................................ $ 0.10 $ 0.50 $ 0.47 $ 0.13 $ 0.05
From discontinued operations.............................. -- 0.03 0.03 -- 0.04
------------- --------- --------- --------- ---------
Basic income per common share............................... $ 0.10 $ 0.53 $ 0.50 $ 0.13 $ 0.09
------------- --------- --------- --------- ---------
------------- --------- --------- --------- ---------
DILUTED INCOME PER COMMON SHARE:
From continuing operations................................ $ 0.10 $ 0.48 $ 0.44 $ 0.12 $ 0.04
From discontinued operations.............................. -- 0.03 0.03 -- 0.04
------------- --------- --------- --------- ---------
Diluted income per common share............................. $ 0.10 $ 0.51 $ 0.47 $ 0.12 $ 0.08
------------- --------- --------- --------- ---------
------------- --------- --------- --------- ---------
STATEMENT OF CASH FLOWS DATA:
Net cash provided by (used by):
Operating activities...................................... $ 1,524 $ 6,457 $ 12,147 $ 3,350 $ 2,176
Investing activities...................................... (8,559) (19,259) (47,202) (7,158) (13,405)
Financing activities...................................... 5,978 12,253 34,260 4,189 12,020
OTHER FINANCIAL DATA:
Capital expenditures(1)................................... $ 24,095 $ 18,847 $ 55,050 $ 6,727 $ 12,969
EBITDA(2)................................................. 1,833 8,635 14,006 3,425 3,279
Cash flow(3).............................................. 2,167 8,129 12,523 3,156 2,234
</TABLE>
S-4
<PAGE>
<TABLE>
<CAPTION>
MARCH 31, 1999
---------------------------
<S> <C> <C>
ACTUAL AS ADJUSTED(4)
----------- --------------
BALANCE SHEET DATA:
Cash and cash equivalents............................................................ $ 2,139 $ 2,139
Working capital...................................................................... 4,409 4,409
Total assets......................................................................... 151,822 151,822
Total long-term debt................................................................. 60,313 7,141
Total stockholders' equity........................................................... 81,566 134,738
</TABLE>
- ---------------
(1) Capital expenditures include all cash and non-cash expenditures.
(2) EBITDA is defined as net income attributable to common stock, plus interest,
income taxes, depreciation, depletion and amortization. EBITDA is a
financial measure commonly used in our industry and should not be considered
in isolation or as a substitute for net income, net cash provided by
operating activities or other income or cash flow data prepared in
accordance with generally accepted accounting principles or as a measure of
a company's profitability or liquidity. Because EBITDA excludes some, but
not all, items that affect net income and may vary among companies, the
EBITDA presented above may not be comparable to similarly titled measures of
other companies.
(3) Cash flow represents cash flow from operating activities prior to changes in
assets and liabilities.
(4) Adjusted to give effect to the sale of 2,500,000 shares of common stock in
this offering and the application of the estimated net proceeds as described
in "Use of Proceeds."
S-5
<PAGE>
SUMMARY OPERATING DATA
The following table sets forth summary data with respect to our production
and sales of natural gas for the periods indicated. Effective with the period
ended December 31, 1996, we began using a December 31 fiscal year end. All prior
historical operating data was prepared on a March 31 fiscal year end.
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS ENDED
ENDED YEAR ENDED DECEMBER
DECEMBER 31, 31, MARCH 31,
------------- -------------------- --------------------
1996 1997 1998 1998 1999
------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
PRODUCTION DATA
Natural gas (MMcf)....................................... 2,104 6,402 10,021 2,090 3,044
AVERAGE SALES PRICE PER UNIT
Natural gas (per Mcf).................................... $ 1.66 $ 1.90 $ 1.90 $ 2.06 $ 1.50
COSTS PER MCF:
Lease operating expenses................................. $ 0.33 $ 0.31 $ 0.34 $ 0.27 $ 0.39
General and administrative............................... 0.28 0.20 0.19 0.19 0.20
Depreciation, depletion and amortization................. 0.46 0.44 0.39 0.40 0.38
</TABLE>
The following table sets forth finding and development costs with respect to
our United States properties for the periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED DECEMBER YEAR ENDED DECEMBER
31, 31,
--------------- --------------------
1996 1997 1998
--------------- --------- ---------
<S> <C> <C> <C>
Finding and Development Costs (per Mcf)........................................ $ 0.29 $ 0.25 $ 0.24
</TABLE>
S-6
<PAGE>
SUMMARY RESERVE AND ACREAGE DATA
The reserve estimates and present value data at December 31, 1998 and 1997
for our properties were audited by both Netherland, Sewell & Associates, Inc.
and Resource Services International, Inc., independent petroleum engineering
consultants. Resource Services International, Inc. also prepared the reserve
estimates at December 31, 1996. The summaries of the reports with respect to our
reserves at December 31, 1998 of Netherland, Sewell & Associates, Inc. and
Resource Services International, Inc. are included as Appendix A and Appendix B,
respectively, to this prospectus supplement. You should read the following table
along with the sections entitled "Risk Factors," "Business and Properties -- Oil
and Gas Reserves" and note 16 to our consolidated financial statements.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
ESTIMATED PROVED RESERVES:
Natural gas (MMcf)....................................................... 150,720 224,414 404,936
Oil (MBbls).............................................................. 3 -- --
MMcfe.................................................................... 150,735 224,414 404,936
Percent proved developed................................................. 59% 64% 60%
PV-10(1)(2) (in thousands)............................................... $ 70,499 $ 159,326 $ 214,675
ACREAGE:
Gross acres:
Developed.............................................................. 26,800 23,300 51,600
Undeveloped............................................................ 3,546,600 3,277,600 3,334,500
Net acres:
Developed.............................................................. 20,000 16,800 47,200
Undeveloped............................................................ 2,531,900 2,267,900 2,320,300
</TABLE>
- ------------
(1) These amounts reflect the future effects of our year end prices and/or open
hedging contracts at the end of the periods presented. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Hedging Transactions."
(2) Weighted average natural gas prices used in the estimation of net proved
reserves and the calculation of PV-10 were $1.61, $1.87 and $1.60 per Mcf at
December 31, 1996, 1997 and 1998, respectively. The weighted average oil
price used in the estimation of net proved reserves and the calculation of
PV-10 was $18.00 per Bbl at December 31, 1996.
S-7
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors, in addition to the
other information set forth in this prospectus supplement and the accompanying
prospectus, before purchasing shares of our common stock. Each of these risk
factors could adversely affect our business, operating results and financial
condition, as well as adversely affect the value of an investment in our common
stock. This investment involves a high degree of risk.
OIL AND GAS PRICES ARE VOLATILE, AND AN EXTENDED DECLINE IN PRICES WOULD
HURT OUR PROFITABILITY AND FINANCIAL CONDITION.
Our revenues, operating results, profitability, future rate of growth and
the carrying value of our oil and gas properties depend heavily on prevailing
market prices for oil and gas. We expect the markets for oil and gas to continue
to be volatile. Any substantial or extended decline in the price of oil or gas
would have a material adverse effect on our financial condition and results of
operations. It could reduce our cash flow and borrowing capacity, as well as the
value and the amount of our gas reserves. All of our proved reserves are natural
gas. Therefore, we are more directly impacted by volatility in the price of
natural gas. Various factors beyond our control will affect prices of oil and
gas, including:
- worldwide and domestic supplies of oil and gas,
- the ability of the members of the Organization of Petroleum Exporting
Countries to agree to and maintain oil price and production controls,
- political instability or armed conflict in oil or gas producing regions,
- the price and level of foreign imports,
- worldwide economic conditions,
- marketability of production,
- the level of consumer demand,
- the price, availability and acceptance of alternative fuels,
- the availability of pipeline capacity,
- weather conditions, and
- actions of federal, state, local and foreign authorities.
These external factors and the volatile nature of the energy markets make it
difficult to estimate future prices of oil and gas.
We periodically review the carrying value of our oil and gas properties
under the full cost accounting rules of the Securities and Exchange Commission.
Under these rules, capitalized costs of proved oil and gas properties may not
exceed the present value of estimated future net revenues from proved reserves,
discounted at 10%. Application of the ceiling test generally requires pricing
future revenue at the unescalated prices in effect as of the end of each fiscal
quarter and requires a write-down for accounting purposes if the ceiling is
exceeded, even if prices were depressed for only a short period of time. We may
be required to write down the carrying value of our oil and gas properties when
oil and gas prices are depressed or unusually volatile. If a write-down is
required, it would result in a charge to earnings, but would not impact cash
flow from operating activities. Once incurred, a write-down of oil and gas
properties is not reversible at a later date.
OUR OPERATIONS REQUIRE LARGE AMOUNTS OF CAPITAL.
Our current development plans will require us to make large capital
expenditures for the exploration and development of our natural gas properties.
Also, we must secure substantial capital to explore
S-8
<PAGE>
and develop our international projects. Historically, we have funded our capital
expenditures through a combination of funds generated internally from sales of
production or properties, equity contributions, long-term debt financing and
short-term financing arrangements. We currently do not have any sources of
additional financing other than our credit facility and our equipment leases. We
cannot be sure that any additional financing will be available to us on
acceptable terms. Future cash flows and the availability of financing will be
subject to a number of variables, such as:
- the level of production from existing wells,
- prices of oil and natural gas, and
- our success in locating and producing new reserves and the success of our
coal bed methane project in the Raton Basin.
Issuing equity securities to satisfy our financing requirements could cause
substantial dilution to our existing shareholders. Debt financing could lead to:
- a substantial portion of our operating cash flow being dedicated to the
payment of principal and interest,
- our being more vulnerable to competitive pressures and economic downturns,
and
- restrictions on our operations.
If our revenues were to decrease due to lower oil and natural gas prices,
decreased production or other reasons, and if we could not obtain capital
through our credit facility or otherwise, our ability to execute our development
plans, replace our reserves or maintain production levels could be greatly
limited.
INFORMATION IN THIS PROSPECTUS SUPPLEMENT CONCERNING OUR RESERVES AND FUTURE
NET REVENUE ESTIMATES IS UNCERTAIN.
There are numerous uncertainties inherent in estimating quantities of proved
oil and natural gas reserves and their values, including many factors beyond our
control. Estimates of proved undeveloped reserves, which comprise a significant
portion of our reserves, are by their nature uncertain. The reserve information
included or incorporated by reference in this prospectus supplement and the
accompanying prospectus are only estimates. Although we believe they are
reasonable, actual production, revenues and reserve expenditures will likely
vary from estimates, and these variances may be material.
Estimates of oil and natural gas reserves, by necessity, are projections
based on geologic and engineering data, and there are uncertainties inherent in
the interpretation of such data as well as the projection of future rates of
production and the timing of development expenditures. Reserve engineering is a
subjective process of estimating underground accumulations of oil and natural
gas that are difficult to measure. The accuracy of any reserve estimate is a
function of the quality of available data, engineering and geological
interpretation and judgment. Estimates of economically recoverable oil and
natural gas reserves and future net cash flows necessarily depend upon a number
of variable factors and assumptions, such as historical production from the area
compared with production from other producing areas, the assumed effects of
regulations by governmental agencies and assumptions governing future oil and
natural gas prices, future operating costs, severance and excise taxes,
development costs and workover and remedial costs, all of which may in fact vary
considerably from actual results. For these reasons, estimates of the
economically recoverable quantities of oil and natural gas attributable to any
particular group of properties, classifications of such reserves based on risk
of recovery, and estimates of the future net cash flows expected therefrom may
vary substantially. Any significant variance in the assumptions could materially
affect the estimated quantity and value of the reserves. Actual production,
revenues and expenditures with respect to our reserves will likely vary from
estimates, and such variances may be material. See "Business and Properties--Oil
and Gas Reserves."
S-9
<PAGE>
In addition, you should not construe PV-10 as the current market value of
the estimated oil and natural gas reserves attributable to our properties. We
have based the estimated discounted future net cash flows from proved reserves
on prices and costs as of the date of the estimate, in accordance with
applicable regulations, whereas actual future prices and costs may be materially
higher or lower. Many factors will affect actual future net cash flows,
including:
- the amount and timing of actual production,
- supply and demand for natural gas,
- curtailments or increases in consumption by natural gas purchasers, and
- changes in governmental regulations or taxation.
The timing of the production of oil and natural gas properties and of the
related expenses affect the timing of actual future net cash flows from proved
reserves and, thus, their actual present value. In addition, the 10% discount
factor, which we are required to use to calculate PV-10 for reporting purposes,
is not necessarily the most appropriate discount factor given actual interest
rates and risks to which our business or the oil and natural gas industry in
general are subject.
WE DEPEND HEAVILY ON EXPANSION AND DEVELOPMENT OF THE RATON BASIN.
Our future success depends on our ability to find, develop and acquire
additional natural gas reserves in the Raton Basin that are economically
recoverable. All of our proved reserves are in the Raton Basin, and our
development plans make our future growth highly dependent on increasing
production and reserves in the Raton Basin. Our proved reserves will decline as
reserves are depleted, except to the extent we conduct successful exploration or
development activities or acquire other properties containing proved reserves.
At December 31, 1998, we had estimated net proved undeveloped reserves of
approximately 162 Bcf, which constituted approximately 40% of our total
estimated net proved reserves. Our development plan includes increasing our
reserve base through continued drilling and development of our existing
properties in the Raton Basin. We cannot be sure, though, that our planned
projects in the Raton Basin will lead to significant additional reserves or that
we will be able to continue drilling productive wells at anticipated finding and
development costs. In particular, to date our entire production has been from
the Vermejo coal bearing formation, which is one of two formations in the Raton
Basin. We recently began to exploit the Raton formation, which is the second
coal bearing formation in the Raton Basin. Our results from the limited drilling
to the Raton Formation are not sufficient to evaluate whether such exploitation
will develop significant additional reserves.
THE OIL AND GAS EXPLORATION BUSINESS INVOLVES A HIGH DEGREE OF BUSINESS AND
FINANCIAL RISK.
The business of exploring for and, to a lesser extent, developing oil and
gas properties is an activity that involves a high degree of business and
financial risk. Property acquisition decisions generally are based on various
assumptions and subjective judgments that are speculative. Although available
geological and geophysical information can provide information about the
potential of a property, it is impossible to predict accurately the ultimate
production potential, if any, of a particular property or well. Moreover, the
successful completion of an oil or gas well does not ensure a profit on
investment. A variety of factors, both geological and market-related, can cause
a well to become uneconomic or only marginally economic.
OUR BUSINESS IS SUBJECT TO OPERATING HAZARDS THAT COULD RESULT IN
SUBSTANTIAL LOSSES.
The oil and natural gas business involves operating hazards such as well
blowouts, craterings, explosions, uncontrollable flows of oil, natural gas or
well fluids, fires, formations with abnormal pressures, pipeline ruptures or
spills, pollution, releases of toxic gas and other environmental hazards and
risks, any of which could cause us substantial losses. In addition, we may be
liable for environmental
S-10
<PAGE>
damage caused by previous owners of property we own or lease. As a result, we
may face substantial liabilities to third parties or governmental entities,
which could reduce or eliminate funds available for exploration, development or
acquisitions or cause us to incur losses. An event that is not fully covered by
insurance -- for instance, losses resulting from pollution and environmental
risks, which are not fully insurable -- could have a material adverse effect on
our financial condition and results of operations.
EXPLORATORY DRILLING IS AN UNCERTAIN PROCESS WITH MANY RISKS.
Exploratory drilling involves numerous risks, including the risk that we
will not find any commercially productive natural gas or oil reservoirs. The
cost of drilling, completing and operating wells is often uncertain, and a
number of factors can delay or prevent drilling operations, including:
- unexpected drilling conditions,
- pressure or irregularities in formations,
- equipment failures or accidents,
- adverse weather conditions,
- compliance with governmental requirements, and
- shortages or delays in the availability of drilling rigs and the delivery
of equipment.
Our future drilling activities may not be successful, nor can we be sure that
our overall drilling success rate or our drilling success rate for activity
within a particular area will not decline. Unsuccessful drilling activities
could have a material adverse effect on our results of operations and financial
condition. Also, we may not be able to obtain any options or lease rights in
potential drilling locations that we identify. Although we have identified
numerous potential drilling locations, we cannot be sure that we will ever drill
them or that we will produce natural gas from them or any other potential
drilling locations.
WE MAY FACE UNANTICIPATED WATER DISPOSAL COSTS.
Based on our previous experience with coal bed methane gas production in the
Raton Basin, we believe that the water produced from the Raton Basin coal seams
will not exceed certain levels and will continue to be low in total dissolved
solids, in many cases meeting state and federal potable water standards. This
means that we can lawfully discharge the water into well-site pits and
evaporation ponds using permits obtained from the State of Colorado. If water of
lesser quality is discovered or our wells produce water in excess of the limits
of our permitted facilities, we may have to drill additional disposal wells to
re-inject the produced water back into the underground rock formations next to
the coal seams or to lower sandstone horizons. If we cannot obtain permits from
the State of Colorado in the future, water of lesser quality is discovered, our
wells produce excess water or new laws or regulations require water to be
disposed of in a different manner, the costs to dispose of this produced water
will increase, which could have a material adverse effect on our operations in
this area.
We are the defendant in a lawsuit under the federal Clean Water Act relating
to regulatory requirements for our water disposal from certain of our Raton
Basin wells. We cannot assure you as to the outcome of this litigation. See
"Business and Properties--Legal Proceedings" for additional information with
respect to this lawsuit.
WE HAVE LIMITED PROTECTION FOR OUR TECHNOLOGY AND DEPEND ON TECHNOLOGY OWNED
BY OTHERS.
We use operating practices that we believe are of significant value in
developing coal bed methane resources. In most cases, patent or other
intellectual property protection is unavailable for this technology. Our use of
independent contractors in most aspects of our drilling and completion
operations makes the protection of such technology more difficult. Moreover, we
rely on technological know-how of the independent contractors that we retain for
our oil and gas operations. We have no long-term
S-11
<PAGE>
agreements with these contractors and we cannot be sure that we will continue to
have access to this know-how.
OUR BUSINESS DEPENDS ON TRANSPORTATION FACILITIES OWNED BY OTHERS.
The marketability of our gas production depends in part on the availability,
proximity and capacity of pipeline systems owned by third parties. Although we
have some contractual control over the transportation of our product, material
changes in these business relationships could materially affect our operations.
Federal and state regulation of gas and oil production and transportation, tax
and energy policies, changes in supply and demand and general economic
conditions could adversely affect our ability to produce, gather and transport
natural gas.
MARKET CONDITIONS COULD CAUSE US TO INCUR LOSSES ON OUR TRANSPORTATION
CONTRACTS.
We have gas transportation contracts that require us to transport minimum
volumes of natural gas. If we ship smaller volumes, we may be liable for the
shortfall. Unforeseen events, including production problems or substantial
decreases in the price for natural gas, could cause us to ship less than the
required volumes, resulting in losses on these contracts.
OUR INDUSTRY IS HEAVILY REGULATED.
Federal, state and local authorities extensively regulate the oil and gas
industry. Legislation and regulations 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.
Noncompliance with statutes and regulations may lead to substantial penalties,
and the overall regulatory burden on the industry increases the cost of doing
business and, in turn, decreases profitability. 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.
OUR INTERNATIONAL OPERATIONS ARE SUBJECT TO RISKS OF DOING BUSINESS ABROAD.
We hold exploration licenses onshore in the United Kingdom and in northern
Chile and an interest in a consortium exploring offshore in the Falkland
Islands. International operations are subject to political, economic and other
uncertainties, including, among others, risk of war, revolution, border
disputes, expropriation, re-negotiation or modification of existing contracts,
import, export and transportation regulations and tariffs, taxation policies,
including royalty and tax increases and retroactive tax claims, exchange
controls, limits on allowable levels of production, currency fluctuations, labor
disputes and other uncertainties arising out of foreign government sovereignty
over our international operations.
WE MUST COMPLY WITH COMPLEX ENVIRONMENTAL REGULATIONS.
Our operations are subject to complex and constantly changing environmental
laws and regulations adopted by federal, state and local governmental
authorities. New laws or regulations, or changes to current requirements, could
have a material adverse effect on our business. We could face significant
liabilities to the government and third parties for discharging oil, natural gas
or other pollutants into the air, soil or water, and we could have to spend
substantial amounts on investigations, litigation and remediation. We cannot be
sure that existing environmental laws or regulations, as currently interpreted
or reinterpreted in the future, or future laws or regulations will not
materially adversely affect our results of operations and financial condition or
that we will not face material indemnity claims with respect to properties we
own or have owned.
S-12
<PAGE>
OUR INDUSTRY IS HIGHLY COMPETITIVE.
Major oil companies, independent producers, institutional and individual
investors are actively seeking oil and gas properties throughout the world,
along with the equipment, labor and materials required to operate properties.
Many of our competitors have financial and technological resources vastly
exceeding those available to us. Many oil and gas properties are sold in a
competitive bidding process in which we may lack technological information or
expertise available to other bidders. We cannot be sure that we will be
successful in acquiring and developing profitable properties in the face of this
competition.
WE DEPEND ON KEY PERSONNEL.
Our success will continue to depend on the continued services of our
executive officers and a limited number of other senior management and technical
personnel. Loss of the services of any of these people could have a material
adverse effect on our operations. We maintain "key man" insurance on the lives
of Mark S. Sexton and Dennis R. Carlton in the amount of $1,000,000 each. We do
not have employment agreements with any of our executive officers.
OUR HEDGING ARRANGEMENTS MIGHT LIMIT THE BENEFIT OF INCREASES IN NATURAL GAS
PRICES.
To reduce our exposure to short-term fluctuations in the price of natural
gas, we enter into hedging arrangements from time to time with regard to a
portion of our natural gas production. These hedging arrangements limit the
benefit of increases in the price of natural gas while providing only partial
protection against declines in natural gas prices.
OUR SHARES THAT ARE ELIGIBLE FOR FUTURE SALE MAY HAVE AN ADVERSE EFFECT ON
THE PRICE OF OUR STOCK.
After this offering, 13,752,009 shares of common stock will be outstanding
(14,127,009 shares if the underwriters' over-allotment option is exercised in
full). In addition, options and warrants to purchase 1,357,255 shares are
outstanding, of which 812,505 are exercisable. These options and warrants are
exercisable at prices ranging from $4.25 to $14.625 per share. Of the shares to
be outstanding after this offering, approximately 10,101,584 shares (10,476,584
shares if the underwriters' over-allotment option is exercised in full) will be
freely tradeable without substantial restriction or the requirement of future
registration under the Securities Act. In addition, various shareholders have
registration rights with respect to a total of 1,355,660 shares of common stock.
Our officers and directors and certain other shareholders have entered into
lock-up agreements under which they have agreed not to offer or sell any shares
of common stock or similar securities for a period of 120 days from the date of
this prospectus supplement without the prior written consent of Prudential
Securities, on behalf of the underwriters (except that we may issue or grant
additional shares, warrants or options under our employee benefit plans). Also,
Prudential Securities may at any time waive the terms of these lock-up
agreements as specified in the underwriting agreement. Sales of substantial
amounts of common stock, or a perception that such sales could occur, and the
existence of options or warrants to purchase shares of common stock at prices
that may be below the then current market price of the common stock could
adversely affect the market price of the common stock and could impair our
ability to raise capital through the sale of our equity securities.
WE DO NOT PAY DIVIDENDS.
We have never declared or paid any cash dividends on our common stock and
have no intention to do so in the near future.
OUR ARTICLES OF INCORPORATION AND BYLAWS HAVE PROVISIONS THAT DISCOURAGE
CORPORATE TAKEOVERS AND COULD PREVENT SHAREHOLDERS FROM REALIZING A PREMIUM
ON THEIR INVESTMENT.
Our articles of incorporation and bylaws contain provisions that may have
the effect of delaying or preventing a change in control. These provisions,
among other things, provide for noncumulative voting
S-13
<PAGE>
in the election of the board and impose procedural requirements on shareholders
who wish to make nominations for the election of directors or propose other
actions at shareholders' meetings. Also, our articles of incorporation authorize
the board to issue up to 25,000,000 shares of preferred stock without
shareholder approval and to set the rights, preferences and other designations,
including voting rights, of those shares as the board may determine. These
provisions, alone or in combination with each other and with the rights plan
described below, may discourage transactions involving actual or potential
changes of control, including transactions that otherwise could involve payment
of a premium over prevailing market prices to shareholders for their common
stock.
On July 7, 1997 our board of directors adopted a shareholder rights
agreement, pursuant to which uncertificated stock purchase rights were
distributed to our shareholders at a rate of one right for each share of common
stock held of record as of July 22, 1997. The rights plan is designed to enhance
the board's ability to prevent an acquirer from depriving shareholders of the
long-term value of their investment and to protect shareholders against attempts
to acquire Evergreen by means of unfair or abusive takeover tactics. However,
the existence of the rights plan may impede a takeover of Evergreen not
supported by the board, including a takeover that may be desired by a majority
of our shareholders or involving a premium over the prevailing stock price.
FORWARD-LOOKING STATEMENTS
This prospectus supplement and the accompanying prospectus contain
forward-looking statements within meaning of section 27A of the Securities Act
of 1933 and section 21E of the Securities Exchange Act of 1934, including
statements regarding, among other items, our growth strategies, anticipated
trends in our business and our future results of operations, market conditions
in the oil and gas industry, our ability to make and integrate acquisitions and
the outcome of litigation and the impact of governmental regulation. These
forward-looking statements are based largely on our expectations and are subject
to a number of risks and uncertainties, many of which are beyond our control.
Actual results could differ materially from these forward-looking statements as
a result of, among other things:
- a decline in natural gas production or natural gas prices,
- incorrect estimates of required capital expenditures,
- increases in the cost of drilling, completion and gas collection or other
costs of production and operations,
- an inability to meet growth projections, and
- other risk factors set forth under "Risk Factors" in this prospectus
supplement.
In addition, the words "believe," "may," "will," "estimate," "continue,"
"anticipate," "intend," "expect" and similar expressions, as they relate to
Evergreen, our business or our management, are intended to identify
forward-looking statements.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise
after the date of this prospectus supplement. In light of these risks and
uncertainties, the forward-looking events and circumstances discussed in this
prospectus supplement and the accompanying prospectus may not occur and actual
results could differ materially from those anticipated or implied in the
forward-looking statements.
S-14
<PAGE>
USE OF PROCEEDS
The net proceeds to Evergreen from the sale of the 2,500,000 shares of
common stock in this offering are estimated to be approximately $53.2 million
($61.2 million if the underwriters' over-allotment option is exercised in full),
assuming a public offering price of $22.75 per share and after deducting
underwriting discounts and commissions and estimated offering expenses of
$575,000.
Evergreen will use the net proceeds of this offering to repay outstanding
indebtedness under its credit facility, thereby creating additional borrowing
capacity that will be used to fund Evergreen's planned exploration and
development activities in the Raton Basin, as well as other general corporate
purposes. Pending such uses, the net proceeds of this offering will be invested
in short-term, investment-grade, interest-bearing securities or guaranteed
obligations of the U.S. government.
At March 31, 1999, Evergreen had $57.8 million of borrowings outstanding
under its credit facility bearing interest at an average rate of 7.28%. This
indebtedness was incurred primarily to fund the development of Evergreen's Raton
Basin properties. The credit facility is available through June 2001.
PRICE RANGE OF COMMON STOCK
Evergreen's common stock is included for quotation in the Nasdaq National
Market under the market symbol "EVER." The following table sets forth the range
of high and low sales prices per share of common stock for the periods
indicated, as reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
Year Ended December 31, 1997
First Quarter.............................................................................. $ 8.50 $ 7.38
Second Quarter............................................................................. 10.50 6.75
Third Quarter.............................................................................. 16.13 9.75
Fourth Quarter............................................................................. 21.25 12.50
Year Ended December 31, 1998
First Quarter.............................................................................. $ 18.75 $ 12.88
Second Quarter............................................................................. 20.00 16.25
Third Quarter.............................................................................. 22.88 13.25
Fourth Quarter............................................................................. 26.25 16.38
Year Ending December 31, 1999
First Quarter.............................................................................. $ 21.63 $ 14.50
Second Quarter (through May 27)............................................................ 24.50 19.00
</TABLE>
On May 27, 1999, the last reported sale price of the common stock on the
Nasdaq National Market was $22.75 per share. As of May 19, 1999, there were
3,965 record owners of the common stock.
DIVIDEND POLICY
We have not declared or paid and do not anticipate declaring or paying any
dividends on Evergreen's common stock in the near future. Any future
determination as to the declaration and payment of dividends will be at the
discretion of our board of directors and will depend on then existing
conditions, including our financial condition, results of operations,
contractual restrictions, capital requirements, business prospects, and such
other factors as the board deems relevant.
S-15
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of Evergreen as of March
31, 1999 and as adjusted to reflect this offering and the application of the
estimated net proceeds. See "Use of Proceeds." The following table should be
read in conjunction with the consolidated financial statements and related notes
elsewhere in this prospectus supplement.
<TABLE>
<CAPTION>
MARCH 31, 1999
----------------------
AS
ACTUAL ADJUSTED(1)
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt:
Notes payable..................................................... $ 57,756 $ 4,584
Obligations under capital lease................................... 2,557 2,557
--------- -----------
Total long-term debt............................................ 60,313 7,141
Stockholders' equity:
Common stock, $0.01 stated value; 50,000,000 shares authorized;
11,238,646 shares issued and outstanding, actual; 13,738,646
issued and outstanding, as adjusted(2).......................... 113 138
Additional paid-in capital........................................ 79,567 132,714
Retained earnings................................................. 2,064 2,064
Foreign currency translation adjustment........................... (178) (178)
--------- -----------
Total stockholders' equity.......................................... 81,566 134,738
--------- -----------
Total capitalization................................................ $ 141,879 $ 141,879
--------- -----------
--------- -----------
</TABLE>
- ------------
(1) Gives effect to the sale of 2,500,000 shares of common stock at an assumed
public offering price of $22.75 and the application of the estimated net
proceeds.
(2) Does not include 1,357,255 shares of common stock issuable upon exercise of
outstanding options and warrants. See "Shares Eligible for Future Sale."
S-16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below is derived from the
consolidated financial statements of the Company. The selected financial
information presented below for the three month periods ended March 31, 1998 and
1999 is derived from the Company's unaudited consolidated financial statements
and includes, in the opinion of management, all normal and recurring adjustments
necessary to present fairly the data for such periods. This information should
be read in conjunction with the consolidated financial statements and the notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this prospectus supplement. The
selected consolidated financial data provided below is not necessarily
indicative of the future results of operations or financial performance of the
Company. Effective with the period ended December 31, 1996, the Company began
utilizing a December 31 year end.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED THREE MONTHS
MARCH 31, DECEMBER 31, DECEMBER 31, ENDED MARCH 31,
-------------------- ------------ ---------------------- ---------------------
1995 1996 1996 1997 1998 1998 1999
--------- --------- ------------ ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Revenues:
Natural gas and oil revenues............. $ 1,916 $ 1,393 $ 3,502 $ 12,138 $ 19,063 $ 4,312 $ 4,572
Interest and other....................... 577 763 181 136 178 45 51
--------- --------- ------------ ---------- ---------- --------- ----------
Total revenues......................... 2,493 2,156 3,683 12,274 19,241 4,357 4,623
Expenses:
Lease operating expenses................. 994 657 701 2,007 3,356 554 1,200
Depreciation, depletion and
amortization........................... 709 590 966 2,794 3,860 843 1,161
General and administrative............... 782 767 581 1,286 1,933 402 595
Interest................................. 29 36 193 777 1,870 344 790
Other.................................... 589 208 127 259 286 38 --
--------- --------- ------------ ---------- ---------- --------- ----------
Total expenses......................... 3,103 2,258 2,568 7,123 11,305 2,181 3,746
--------- --------- ------------ ---------- ---------- --------- ----------
Income (loss) from continuing operations
before income taxes...................... (610) (102) 1,115 5,151 7,936 2,176 877
Income tax provision -- deferred........... -- -- -- -- 3,064 838 342
--------- --------- ------------ ---------- ---------- --------- ----------
Income (loss) from continuing operations... (610) (102) 1,115 5,151 4,872 1,338 535
Discontinued operations:
Gain from disposal of discontinued
operations, net........................ -- -- -- -- -- -- 452
Equity in earnings of discontinued
operations, net........................ -- -- -- 313 340 62 --
--------- --------- ------------ ---------- ---------- --------- ----------
Net income (loss).......................... (610) (102) 1,115 5,464 5,212 1,400 987
Preferred stock dividends.................. 94 505 440 400 -- -- --
--------- --------- ------------ ---------- ---------- --------- ----------
Net income (loss) attributable to common
stock.................................... $ (704) $ (607) $ 675 $ 5,064 $ 5,212 $ 1,400 $ 987
--------- --------- ------------ ---------- ---------- --------- ----------
--------- --------- ------------ ---------- ---------- --------- ----------
BASIC INCOME (LOSS) PER COMMON SHARE:
From continuing operations............... $ (0.13) $ (0.10) $ 0.10 $ 0.50 $ 0.47 $ 0.13 $ 0.05
From discontinued operations............. -- -- -- 0.03 0.03 -- 0.04
--------- --------- ------------ ---------- ---------- --------- ----------
Basic income (loss) per common share....... $ (0.13) $ (0.10) $ 0.10 $ 0.53 $ 0.50 $ 0.13 $ 0.09
--------- --------- ------------ ---------- ---------- --------- ----------
--------- --------- ------------ ---------- ---------- --------- ----------
DILUTED INCOME (LOSS) PER COMMON SHARE:
From continuing operations............... $ (0.13) $ (0.10) $ 0.10 $ 0.48 $ 0.44 $ 0.12 $ 0.04
From discontinued operations............. -- -- -- 0.03 0.03 -- 0.04
--------- --------- ------------ ---------- ---------- --------- ----------
Diluted income (loss) per common share..... $ (0.13) $ (0.10) $ 0.10 $ 0.51 $ 0.47 $ 0.12 $ 0.08
--------- --------- ------------ ---------- ---------- --------- ----------
--------- --------- ------------ ---------- ---------- --------- ----------
</TABLE>
S-17
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED THREE MONTHS
MARCH 31, DECEMBER 31, DECEMBER 31, ENDED MARCH 31,
-------------------- ------------ ---------------------- ---------------------
1995 1996 1996 1997 1998 1998 1999
--------- --------- ------------ ---------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF CASH FLOWS DATA:
Net cash provided by (used in):
Operating activities..................... $ 408 $ 1,130 $ 1,524 $ 6,457 $ 12,147 $ 3,350 $ 2,176
Investing activities..................... (2,958) (2,764) (8,559) (19,259) (47,202) (7,158) (13,405)
Financing activities..................... 3,635 3,329 5,978 12,253 34,260 4,189 12,020
OTHER FINANCIAL DATA:
Capital expenditures(1).................. $ 8,040 $ 4,371 $ 24,095 $ 18,847 $ 55,050 $ 6,727 $ 12,969
EBITDA(2)................................ 34 19 1,833 8,635 14,006 3,425 3,279
Cash flow(3)............................. 149 (38) 2,167 8,129 12,523 3,156 2,234
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998 MARCH 31, 1999
----------------- --------------------------
ACTUAL ACTUAL AS ADJUSTED(4)
----------------- ---------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................................................... $ 1,334 $ 2,139 $ 2,139
Working capital.............................................................. (468) 4,409 4,409
Total assets................................................................. 139,626 151,822 151,822
Total long-term debt......................................................... 47,045 60,313 7,141
Total stockholders' equity................................................... 79,679 81,566 134,738
</TABLE>
- ------------
(1) Capital expenditures include all cash and non-cash expenditures.
(2) EBITDA is defined as net income attributable to common stock, plus interest,
income taxes, depreciation, depletion and amortization. EBITDA is a
financial measure commonly used in our industry and should not be considered
in isolation or as a substitute for net income, net cash provided by
operating activities or other income or cash flow data prepared in
accordance with generally accepted accounting principles or as a measure of
a company's profitability or liquidity. Because EBITDA excludes some, but
not all, items that affect net income and may vary among companies, the
EBITDA presented above may not be comparable to similarly titled measures of
other companies.
(3) Cash flow represents cash flows from operating activities prior to changes
in assets and liabilities.
(4) Adjusted to give effect to the sale of 2,500,000 shares of common stock in
this offering and the application of the estimated net proceeds as described
in "Use of Proceeds."
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with the
consolidated financial statements and notes included elsewhere in this
prospectus supplement.
GENERAL
Evergreen is an independent energy company engaged in the exploration,
production, development and acquisition of oil and gas properties. 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
also holds exploration licenses in the United Kingdom, the Falkland Islands and
northern Chile.
Evergreen has almost 200 producing gas wells. Average gross daily production
has continued to improve since sales began in January 1995 to a current level of
45.5 MMcf.
The Company enters into contractual obligations that require future physical
delivery to attempt to manage price risk with regard to a portion of its natural
gas production. As of May 1, 1999, the Company had entered into contracts to
sell amounts equal to substantially all of its current sales at $1.57 per Mcf
for the period May 1, 1999 through October 31, 1999.
The following table sets forth certain operating data of the Company for the
periods presented.
<TABLE>
<CAPTION>
NINE
MONTHS
ENDED YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
------------ ---------------------- --------------------
1996 1997 1998 1998 1999
------------ --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
PRODUCTION DATA
Natural gas (Mcf)........................................ 2,104,400 6,401,500 10,021,400 2,089,900 3,044,400
AVERAGE SALES PRICE PER UNIT
Natural gas (per Mcf).................................... $ 1.66 $ 1.90 $ 1.90 $ 2.06 $ 1.50
COST PER MCF:
Lease operating expenses................................. $ 0.33 $ 0.31 $ 0.34 $ 0.27 $ 0.39
General and administrative............................... 0.28 0.20 0.19 0.19 0.20
Depreciation, depletion and amortization................. 0.46 0.44 0.39 0.40 0.38
</TABLE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31,
1998
The Company reported net income of $987,000 or $0.08 per diluted share for
the three months ended March 31, 1999, compared to net income of $1,400,000 or
$0.12 per diluted share for the same period in 1998. The Company had net income
from continuing operations of $535,000 or $0.04 per diluted share for the three
months ended March 31, 1999 as compared to $1,338,000 or $0.12 per diluted share
in the same period in 1998. The first quarter earnings included a one-time,
after tax gain of $452,000 or $0.04 per diluted share, resulting from the sale
of Evergreen's 49% interest in Maverick Stimulation Company ("Maverick"). The
decrease in net income during the three months ended March 31, 1999 as compared
to the prior year was attributable to a decrease in gas prices, an increase in
lease operating expense and an increase in interest expense.
Natural gas revenues increased to $4,572,000 during the three months ended
March 31, 1999, from $4,312,000 for the same period in the prior year. The
increase in natural gas revenues for the three month period was due to a 46%
increase in sales volumes, which was significantly offset by a 27% decrease in
natural gas prices. At March 31, 1999 the number of producing Raton Basin wells
increased to 178 from 96 producing wells at March 31, 1998, which was the
primary factor for the increase in
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<PAGE>
production volumes. The average gas price decreased to $1.50 for the three month
period in 1999 as compared to $2.06 in the corresponding 1998 period.
LOE for the three months ended March 31, 1999, were $1,201,000 compared to
$554,000 for the same period in 1998. LOE increased to $0.39 per Mcf in the
three months ended March 31, 1999, as compared to $0.27 per Mcf in the prior
period. The increase in LOE was due primarily to an increase in water management
costs and maintenance costs. The Company anticipates that water management costs
will start to decline in the second quarter of 1999 and will continue to decline
through the year due to the approval of discharge permits and the drilling of
additional disposal wells in 1999.
Depreciation, depletion and amortization expense for the three months ended
March 31, 1999, was $1,161,000 compared to $843,000 for the same period in 1998.
The increase of $318,000 for the three months ended March 31, 1999 as compared
to 1998 was due to the increase in gas production in the Raton Basin. In 1999
the cost per Mcf was $0.38 as compared to $0.40 in 1998. The decrease in cost
per Mcf in 1999 is due to amortizing capital costs over an increased number of
proved reserves.
General and administrative expenses were $596,000 during the three months
ended March 31, 1999 as compared to $402,000 during the same period in 1998. The
increase in general and administrative expenses of $194,000 in 1999 as compared
to 1998 was due to the expected increase in overall corporate activity and an
increase in personnel and related salaries, and reduced overhead charges
received from third party working interest owners and other operating expenses.
Interest expense for the three months ended March 31, 1999 was $790,000
versus $344,000 during the same period in 1998. The $446,000 increase for the
three months over the same period in the prior year was due to increased
borrowings under the Company's line of credit to $57.8 million at March 31, 1999
from $15.3 million at March 31, 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
The Company reported net income of $5,212,000 or $0.47 per diluted share for
the year ended December 31, 1998, compared to net income of $5,064,000 or $0.51
per diluted share for the same period in 1997. Pretax net income increased
significantly to $7,936,000 in 1998, versus $5,151,000 in 1997. As a result of a
deferred income tax provision of $3,063,000 in 1998 as compared to no deferred
income tax provision in 1997, the Company's 1998 net income increased slightly
as compared to 1997.
Natural gas revenues increased to $19,063,000 during the year ended December
31, 1998 from $12,138,000 for the same period in the prior year. The significant
increase of $6,925,000 in 1998 compared to 1997 or 57% was due to the increase
in production and the acquisition of certain properties in the Raton Basin. The
Company had 159 net producing wells in 1998, versus 89 in 1997. The number of
producing wells in the Spanish Peaks Unit increased to 127 in 1998, versus 89 in
1997. The Company acquired approximately 32 net producing wells in two separate
transactions in 1998. Gas production volumes in the Spanish Peaks Unit increased
to 9,458,000 Mcf in 1998 versus 6,402,000 Mcf in 1997, or 48%. Gas production
volumes from the acquired properties were 563,000 Mcf in 1998. The average gas
price for 1998 and 1997 was $1.90 per Mcf.
Equity in earnings of discontinued operations, net of income taxes increased
to $340,000 during the year ended December 31, 1998 as compared to $313,000 in
1997. Effective in February 1999, the Company sold its 49% ownership in
Maverick, an oil and gas well servicing company. The Company accounted for the
investment in Maverick under the equity method of accounting. The year to year
increase was offset by deferred income taxes of $216,000 in 1998, as compared to
no deferred income taxes in 1997. The pre-tax increase was due to Maverick's
increase in sales volume and profitability in 1998 as compared to 1997.
Subsequent to year-end, the Company sold its 49% interest in Maverick to the
managing members of Maverick for cash of approximately $2.3 million. As a result
of the sale of Maverick, the Company will not have future earnings from its
investment for 1999. However, any loss
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of projected income in 1999 from Maverick will be more than offset by the gain
on the sale of Evergreen's interest.
Interest and other income increased to $178,000 during the year ended
December 31, 1998 as compared to $137,000 in 1997. The increase was due to
changes in cash management in 1998.
LOE for the year ended December 31, 1998 were $3,356,000 as compared to
$2,007,000 for the same period in 1997. LOE were $0.34 per Mcf in 1998 versus
$0.31 per Mcf in 1997. The $0.03 increase for 1998 over the prior year was
primarily due to an increase in water management costs. The increase in water
management costs was due to drilling wells where there was a significant
increase in water production.
Depreciation, depletion and amortization expense for the year ended December
31, 1998 was $3,860,000 versus $2,794,000 in 1997. Depreciation, depletion and
amortization expense declined to $0.39 per Mcf in 1998 as compared to $0.44 per
Mcf in 1997. The decrease in cost per Mcf in 1998 as compared to 1997 was due to
amortizing capital costs over a significantly greater number of units of proved
reserves.
General and administrative expenses were $1,933,000 during the year ended
December 31, 1998 versus $1,286,000 in 1997. The increase in 1998 of $647,000
was due to the expected increase in the overall growth in corporate activity.
During 1998, personnel costs increased due to the addition of new staff, salary
increases and related benefits, insurance costs, office rent and other
miscellaneous operating expense items. Although the overall general and
administrative expenses increased for the year ended December 31, 1998, the cost
per Mcf decreased to $0.19 in 1998 from $0.20 in 1997. The oil and gas service
income and the related cost of service have been reclassified and included with
general and administrative expenses for the year ended December 31, 1998 and for
all periods presented. Through March 1999, Evergreen Operating Corporation
("EOC"), a wholly owned subsidiary of the Company, operated properties for
various third party working interest owners. In January 1999, the working
interest owners sold those properties. As EOC will no longer receive overhead
charges for the operation of those properties, the Company's general and
administrative expenses will increase in future periods.
Interest expense was $1,870,000 during the year ended December 31, 1998 as
compared to $777,000 in 1997. The $1,093,000 increase for 1998 over the same
period in the prior year was due to increased borrowings under the Company's
line of credit to $44,139,000 from $10,812,000 in 1997. The increase in
borrowings was due to the continuing development in the Raton Basin along with
the acquisition of the Cottontail Pass Unit on July 2, 1998 at a cost of $13.1
million. On July 1, 1998, the Company increased its line of credit to $50
million and also changed the interest rate from a prime rate based loan to a
London Interbank Offer Rate ("LIBOR") based rate. The change in interest rates
decreased the Company's effective interest rate in the last half of 1998 by 142
basis points to 7.25%.
Prior to 1998, the Company was not required to record income tax expense,
primarily due to the availability of net operating loss carryforwards. However,
as a result of the recently reported profitability and the significant
difference between the book and tax basis of assets, the Company is required to
provide for deferred income taxes in the statements of income in 1998 and
subsequent years. The Company estimates that it will not be required to pay
current income tax in the near future due to the availability of net operating
loss carryforwards of approximately $30 million and current deductions for
intangible drilling costs. For the year ended December 31, 1998, the Company
recorded a deferred tax provision of $3,063,000.
Other expenses were $286,000 for the year ended December 31, 1998 as
compared to $259,000 in 1997. Other expenses in 1998 included a write-off of
offering expenses of $220,000 related to the withdrawal of a registration on
file with the Securities and Exchange Commission due to unfavorable market
conditions. Other expenses in 1997 included a write-off of a receivable in the
amount of approximately $150,000 that was deemed uncollectible and gas
collection costs of $112,000.
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YEAR ENDED DECEMBER 31, 1997 COMPARED TO NINE MONTHS ENDED DECEMBER 31, 1996
Net income for the year ended December 31, 1997 was $5,064,000 or $0.51 per
diluted share, as compared to $675,000 or $0.10 per diluted share, for the nine
months ended December 31, 1996. The increase in net income was primarily the
result of the increase in natural gas net revenues resulting from an increase in
gas production and gas prices and a twelve month reporting period as compared to
a nine month reporting period.
Natural gas revenues were $12,138,000 during the year ended December 31,
1997 as compared to $3,502,000 for the nine months ended December 31, 1996. The
significant increase in oil and gas revenue during 1997, as compared to 1996,
was attributable to substantially higher Raton Basin production volumes and
higher natural gas prices, as well as a twelve month reporting period as
compared to a nine month reporting period. At December 31, 1997 there were 89
producing Raton Basin wells compared to 42 producing wells at December 31, 1996.
The average gas prices were $1.90 per Mcf for the year ended December 31, 1997
as compared to $1.66 per Mcf in 1996. Natural gas production increased to
6,401,500 Mcf for the year ended December 31, 1997 as compared to 2,104,400 Mcf
for 1996.
Equity in earnings of discontinued operations was $313,000 for the year
ended December 31, 1997. Effective in February 1999, the Company sold its 49%
ownership in Maverick, an oil and gas well servicing company. The Company
accounted for the investment in Maverick under the equity method of accounting.
Prior to the year ended December 31, 1997, the Company's share of Maverick
profits after intercompany elimination was not material. The increase in
Maverick's net income in 1997 was due to the increase in its oil and gas
stimulation services for third-party entities.
Interest income and other decreased to $137,000 for the year ended December
31, 1997 from $180,000 for the nine months ended December 31, 1996. This
decrease was due to less cash to invest as a result of the continued Raton Basin
development.
LOE for the year ended December 31, 1997 were $2,007,000 compared to
$701,000 for the nine months ended December 31, 1996. LOE per Mcf declined to
$0.31 during the year ended December 31, 1997 from $0.33 in 1996. The decrease
in the average lease operating expense per Mcf was due to the economies of scale
resulting from the increase in producing wells in the Raton Basin.
Depreciation, depletion, and amortization expenses for the year ended
December 31, 1997 increased to $2,794,000 as compared to $966,000 for the nine
months ended December 31, 1996. The increase of $1,828,000 was due to the
substantial increase in natural gas production and a twelve month reporting
period as compared to a nine month reporting period.
General and administrative expenses increased to $1,286,000 for the year
ended December 31, 1997 as compared to $581,000 for the nine months ended
December 31, 1996. The $705,000 increase was due to the general increase in
overall corporate activity, including salaries and professional services and a
twelve month reporting period as compared to a nine month reporting period.
Although the overall expense increased for the twelve months ended December 31,
1997, the cost per Mcf decreased to $0.20 from the prior year cost per Mcf of
$0.28. The oil and gas service income and related cost of service have been
reclassified and included with general and administrative for all periods
presented.
Interest expense increased to $777,000 for the year ended December 31, 1997
from $193,000 for the nine months ended December 31, 1996. This $584,000
increase was due to increased borrowings under the Company's line of credit and
an increase in the capital equipment lease. The increased borrowings were made
to fund the Raton Basin development.
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Other expenses increased to $259,000 for the year ended December 31, 1997
from $128,000 for the nine months ended December 31, 1996. The increase in other
expenses was due primarily to the write-off of a receivable that was deemed
uncollectible.
LIQUIDITY AND CAPITAL RESOURCES
The Company has a $75 million revolving credit facility with a bank group
consisting of Hibernia National Bank, as agent, Chase Bank of Texas and Paribas
("the Banks"). The credit facility is available through June 2001. Advances
pursuant to the credit facility are limited to a borrowing base, which is $75
million. At the Company's election, it may use either LIBOR plus a margin of
1.38% to 1.75% or the prime rate plus a margin of 0% to 0.25%, with margins on
both rates determined on the average outstanding borrowings under the credit
facility. The borrowing base is redetermined semi-annually by the Banks based
upon reserve evaluations of the Company's oil and gas properties. An average
annual facility fee of 0.375% is charged quarterly for any unused portion of the
credit facility. The credit facility is secured by all of the Company's
producing oil and gas properties and also contains certain net worth and ratio
requirements. At March 31, 1999, $57.8 million of borrowings were outstanding
under the credit facility.
The Company has a capital equipment lease with a lender with interest at
8.5% as of March 31, 1999 for a term of five years ending April 2002, with an
option to purchase the equipment at nominal amounts at the end of the lease
term. The Company primarily leases compressors for the Raton Basin gas
collection systems and other related production equipment. At March 31, 1999,
the Company had approximately $3.7 million under the capital lease obligation.
In February 1999, the Company sold its 49% interest in Maverick Stimulation
Company ("Maverick") for approximately $2.3 million and formed a new well
service company, Evergreen Well Service ("EWS"). The well service company will
provide fracture stimulation services, cement work, drilling and workovers.
Evergreen anticipates an increase in quality control and cost savings from the
services performed by EWS.
During 1999, the Company plans to spend approximately $45 million on its
total exploration and development program. Approximately $35 million of this
total is scheduled to be spent on drilling and gas collection systems, $5
million on well service equipment and $5 million on its international and other
projects. During the quarter ended March 31, 1999, the Company spent
approximately $9 million on drilling and recompletion and gas collection systems
while $2.9 million was spent on well service equipment.
Cash flows provided by operating activities were $2,176,000 for the three
months ended March 31, 1999 as compared to cash flows provided by operating
activities of $3,350,000 in the prior year. The decrease in cash flows in 1999
as compared to 1998 is primarily due to the decrease in net income as a result
of lower gas prices, increased lease operating expenses and increased interest
costs associated with increased financing levels outstanding in 1999.
Cash flows used in investing activities were $13,405,000 during the three
months ended March 31, 1999 compared to $7,158,000 during the same period in
1998. The increase was due to the continued development of the Raton Basin,
including an upgrade of the gas collection system.
Cash flows provided by financing activities were $12,020,000 during the
three months ended March 31, 1999 as compared to cash flows provided by
financing activities of $4,189,000 in the prior period. The increase was due
primarily to increased borrowings to fund the development of the drilling and
gas collection system in the Raton Basin.
Cash flows provided by operating activities were $12,147,000 for the year
ended December 31, 1998 as compared to cash flows provided by operating
activities of $6,457,000 for the year ended December 31, 1997. The significant
increase in the cash flows provided by operating activities was due primarily to
improved operating results as a result of increased gas production. The
increased gas
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production was due to the drilling of additional wells and the acquisition of
certain producing properties.
Cash flows used in investing activities were $47,202,000 during the year
ended December 31, 1998, compared to $19,259,000 in 1997. The increase in 1998
was due to the continued development of the Raton Basin, investments in
international projects and the acquisition of the Cottontail Pass Unit for
$13,100,000.
Cash flows provided by financing activities were $34,260,000 during the year
ended December 31, 1998, as compared to cash flows provided by financing
activities of $12,253,000 in 1997. The increase was due primarily to increased
borrowings to fund the development of the drilling and gas collection systems in
the Raton Basin as well as the acquisition of the Cottontail Pass Unit. In
addition, the Company received proceeds from the exercise of stock purchase
warrants of approximately $2,158,000. These borrowings and exercise of stock
purchase warrants were offset by principal payments on capital leases of
$1,061,000.
HEDGING TRANSACTIONS
The Company enters into contractual obligations that require future physical
delivery to attempt to manage price risk with regard to a portion of its natural
gas production. As of May 1, 1999, the Company had entered into contracts to
sell amounts equal to substantially all of its current sales at $1.57 per Mcf
for the period May 1, 1999 through October 31, 1999.
The Company identifies minimum internal price targets and, assuming other
market conditions are deemed favorable, the Company will enter into hedging
contracts to manage price risk. See "Quantitative and Qualitative Disclosure
About Market Risk."
INCOME TAXES AND NET OPERATING LOSSES
As discussed in note 7 of the notes to the Company's consolidated financial
statements, the Company has net operating loss carryforwards for income tax
purposes of approximately $30 million which expire beginning in 1999.
The Company recorded a valuation allowance at December 31, 1996 equal to the
excess of deferred tax assets over deferred tax liabilities as it was unable to
determine that the deferred tax assets were more likely than not to be realized.
As of December 31, 1997, the Company did not record a valuation allowance since
management was able to determine that it was more likely than not that the
deferred tax asset would be realized. Manangement expects to fully utilize its
net operating loss carryforwards against reversing temporary differences.
Prior to 1998, the Company has not been required to record income tax
expense, primarily due to the availability of net operating loss carryforwards.
However, as a result of the recently reported profitability and the significant
difference between the book and tax basis of assets, the Company will be
required to provide for deferred income taxes in the statements of income in
1998 and subsequent years. The Company estimates that it will not be required to
pay current income tax in the near future due to the availability of net
operating loss carryforwards of approximately $30 million and current deductions
for intangible drilling costs.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
Management believes the adoption of this statement will not have a material
impact on the Company's financial statements.
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YEAR 2000
The Company has conducted a review of its computer systems to identify the
systems that could be affected by the "Year 2000" issue. The Year 2000 problem
is the result of computer programs being written using two digits rather than
four to define the applicable year. Any of the Company's programs that have
time-sensitive software may recognize a date using `00' as the year 1900 rather
than the year 2000. This could result in a major system failure or
miscalculations.
The Company believes that the Year 2000 problem will not pose material
operational problems for the Company and that it is adequately prepared for the
Year 2000. The Company's computer software provider has assured the Company that
all of the Company's software is Year 2000 compliant (i.e. will function
properly in the year 2000 and beyond). The Company's software provider provides
written assurance that its products are Year 2000 compliant. To the Company's
knowledge, after investigation, no "imbedded technology" (such as microchips in
an electronic control system) of the Company poses a material Year 2000 problem.
Because the Company believes that it has no material internal Year 2000
problems, the Company has not expended and does not expect to expend a
significant amount of funds to address Year 2000 issues. It is Company policy to
continue to review its suppliers' Year 2000 compliance and require assurance of
Year 2000 compliance from new suppliers; however, such monitoring does not
involve a significant cost to the Company.
In addition to the foregoing, the Company has contacted its major vendors
and received either oral or written assurances from its major vendors or viewed
assurances contained on vendors' web sites that they have no material Year 2000
problems. The Company believes that its vendors are largely fungible; therefore,
in the event a vendor's representations regarding its Year 2000 compliance were
untrue for any reason, the Company believes that it could find adequate Year
2000 compliant vendors as substitutes.
The Company is materially dependent on Colorado Interstate Gas Co. ("CIG")
for the delivery of the Company's gas. CIG has provided the Company with written
assurances that a CIG internal task force has examined CIG's Year 2000
compliance and that CIG has no material Year 2000 problem.
In the event that one or more of the Company's vendors were to have a
material Year 2000 problem, the Company believes that the foreseeable
consequences would be a temporary delay in revenue collection caused by an
interruption in computerized billing (and not an interruption in the actual flow
of the Company's coal bed methane), which would not have a substantial long-term
impact on the Company's ability to conduct operations. The Company does not
believe that any contingency planning is necessary to address this possibility.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company measures its exposure to market risk at any point in time by
comparing the open positions to a market risk of fair value. The market prices
the Company uses to determine fair value are based on management's best
estimates, which consider various factors including closing exchange prices,
volatility factors and the time value of money. At March 31, 1999, the Company
was exposed to some market risk through interest rates on its long-term debt,
foreign currency and natural gas prices.
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BUSINESS AND PROPERTIES
GENERAL
Evergreen is an independent energy company engaged in the exploration,
production, development and acquisition of oil and gas properties. Evergreen's
current operations are principally focused on developing and expanding its coal
bed methane project located in the Raton Basin in southern Colorado. Evergreen
also owns interests in other areas including the United Kingdom and northern
Chile.
Evergreen is one of the largest holders of oil and gas leases in the Raton
Basin, with approximately 200,000 gross acres of coal bed methane properties and
almost 200 producing gas wells. The Company's daily gas sales represent
approximately 65% of the gas currently sold from the Raton Basin. The Company's
Raton Basin drilling program has enabled it to build an extensive inventory of
additional drilling locations. Evergreen has identified over 800 additional
drilling locations on its Raton Basin acreage, of which 132 were included in the
Company's estimated proved reserve base at December 31, 1998.
At December 31, 1998, Evergreen had estimated net proved reserves of 405 Bcf
with a PV-10 of approximately $215 million. All of the Company's estimated net
proved reserves are natural gas from coal bed methane and are located in the
Raton Basin. Approximately 60% of these net proved reserves are classified as
proved developed. Evergreen has a 100% working interest in the majority of its
Raton Basin acreage and wells, and also owns the gas collection systems and
related equipment associated with these wells. The Company operates all of its
Raton Basin producing properties.
Evergreen has an established track record for discovering new reserves and
significantly growing its reserve base. From March 31, 1995 through December 31,
1998, the Company added a net 342 Bcfe of estimated proved reserves principally
through its drilling in the Raton Basin. This represents a compound annual
growth rate of approximately 64%. Since Evergreen began its drilling efforts in
the Raton Basin, the Company has drilled and tested approximately 150 producing
wells and achieved a 98% success rate. In addition, the Company acquired 43
producing wells through property acquisitions in 1998. Since early 1995, the
Company's average gross daily production has increased from 1.5 MMcf to 45.5
MMcf.
The Company believes that it has gained significant experience in coal bed
methane exploration and development, including the use of enhanced drilling,
completion and production techniques developed over a number of years. This has
enabled Evergreen to become one of the lowest-cost finders, developers and
producers among U.S. publicly-traded independent oil and gas companies. From the
beginning of its Raton Basin project through December 31, 1998, Evergreen has
spent approximately $93 million on the drilling and completion of its wells,
pipelines, gas collection systems, compression equipment and the acquisition of
additional working interests. This represents a total finding and development
cost of $0.22 per Mcf. In addition, the Company's lease operating expenses per
Mcf have declined significantly since Raton Basin gas sales began in early 1995.
Over the three year period ended March 31, 1999, the Company's LOE per Mcf
averaged $0.34.
BUSINESS STRATEGY
Evergreen's objective is to enhance shareholder value by increasing
reserves, production, cash flow, earnings and net asset value per share. To
accomplish this objective, Evergreen intends to capitalize on its experience and
operating expertise in coal bed methane properties and on its other competitive
strengths, which include:
- its inventory of drilling locations in the Raton Basin,
- its track record for discovering new reserves and significantly growing
its reserve base, and
- its position as a low-cost finder, developer and producer of natural gas.
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To implement its strategy, Evergreen seeks to:
- ACCELERATE DEVELOPMENT OF THE RATON BASIN. Evergreen has an extensive
inventory of drilling locations in the Raton Basin. During 1998, the
Company drilled 50 wells in the Raton Basin. During 1999, the Company
intends to drill a total of 80 wells, of which approximately 32 have
already been drilled. During 2000, the Company intends to drill up to 100
wells. To accommodate this accelerated development, Evergreen also plans
to expand its gas collection systems and compression facilities.
- EXPLOIT THE RATON FORMATION. The Raton Basin contains two coal bearing
formations, the Vermejo formation coals located at depths of between 450
and 3,500 feet, and the shallower Raton formation coals located at depths
from the surface to approximately 2,000 feet. To date, all of Evergreen's
production and reserves have been attributable to the Vermejo formation
coals. To further exploit the Raton Basin, the Company has drilled and is
evaluating approximately 12 wells in the Raton formation. Based on its
preliminary evaluation, the Company believes that it can profitably
develop the Raton formation coal seams. Of the 80 wells the Company plans
to drill in 1999, approximately 50% are scheduled to be in the Raton
formation.
- MAINTAIN CONTROL OF OPERATIONS. Evergreen has a 100% working interest in
the majority of its Raton Basin acreage and wells, and it operates all of
its producing properties within the basin, thereby controlling all phases
of drilling, completion and well stimulation. The Company also constructs,
owns and operates all of its gas collection systems, which it has
specifically designed to optimize production from coal bed methane wells.
By operating its producing properties, Evergreen believes it has greater
control over its expenses and the timing of exploration and development of
its properties. The Company is also the designated operator for its United
Kingdom and Chilean projects.
- LOWER OPERATING COSTS THROUGH VERTICAL INTEGRATION. Evergreen has
developed the internal capabilities both in personnel and equipment to
perform key well services, such as drilling, gas collection, wellbore
cementing, fracture stimulation and gas marketing. The Company believes
these internal capabilities will allow it to enhance its low-cost
position.
- PURSUE INTERNATIONAL OPPORTUNITIES. Evergreen seeks to identify attractive
international oil and gas projects that require relatively small capital
investments but that have potential for favorable returns. Since 1992, the
Company has obtained onshore exploration licenses covering approximately
513,000 acres in the United Kingdom and an oil and gas exploration license
on approximately 2.4 million acres in northern Chile. The Company expects
to spend approximately $3 million in 1999 for the development of its
international projects, substantially all of which is budgeted for the
United Kingdom. The Company will seek partners to help minimize its
additional upfront capital requirements.
- ACQUIRE ADDITIONAL PROPERTY INTERESTS. Over the last three years,
Evergreen acquired additional property interests in the Raton Basin
totaling approximately 97 Bcf of estimated net proved reserves at an
average acquisition cost of $0.34 per Mcf. The Company will continue to
pursue acquisitions of oil and gas properties located in its principal
areas of operation and in other areas that provide attractive investment
opportunities, particularly where the Company can add value through its
technical and operational expertise.
COAL BED METHANE VERSUS TRADITIONAL NATURAL GAS
Methane is the primary commercial component of the natural gas stream
produced from traditional gas wells. Methane also exists in its natural state in
coal seams. Natural gas produced from traditional wells also contains, in
varying amounts, other hydrocarbons. However, the natural gas produced from coal
beds generally contains only methane and, after simple water dehydration, is
pipeline-quality gas.
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Coal bed methane production is similar to traditional natural gas production
in terms of the physical producing facilities and the product produced. However,
the subsurface mechanisms that allow the gas to move to the wellbore and the
producing characteristics of coal bed methane wells are very different from
traditional natural gas production. Unlike conventional gas wells, which require
a porous and permeable reservoir, hydrocarbon migration and a natural structural
or stratigraphic trap, the coal bed methane gas is trapped in the molecular
structure of the coal itself until released by pressure changes resulting from
the removal of insitu water.
Methane is a common component of coal since methane is created as part of
the coalification process, though coals vary in their methane content per ton.
In addition to being in open spaces in the coal structure, methane is absorbed
onto the inner coal surfaces. When the coal is hydraulically fracture stimulated
and exposed to lower pressures through the de-watering process, the gas leaves
(desorbs from) the coal. Whether a coal bed will produce commercial quantities
of methane gas depends on the coal quality, its original content of gas per ton
of coal, the thickness of the coal beds, the reservoir pressure and the
existence of natural fractures (permeability) through which the released gas can
flow to the wellbore. Frequently, coal beds are partly or completely saturated
with water. As the water is produced, internal pressures on the coal are
decreased, allowing the gas to desorb from the coal and flow to the wellbore.
Contrary to traditional gas wells, new coal bed methane wells often produce
water for several months and then, as the water production decreases, natural
gas production increases because the coal seams are being de-watered and the
resultant pressure on the coal decreases.
In order to establish commercial gas production rates, a permanent conduit
between the individual coal seams and the wellbore must be created. This is
accomplished by hydraulically creating and propping open with special quality
sand, artificial fractures within the coal seams (known as "fracing" in the
industry) so the pathway for gas migration to the wellbore is enhanced. These
fractures are filled (propped) with uniform sized sand and become the conduits
for methane to reach the well. The ability of gas to move through the coal or
rocks to the wellbore from its place of origination in the formation is the key
determinant of the rate at which a well will produce.
RATON BASIN PROPERTIES AND OPERATIONS
The Raton Basin is an onshore depositional and structural basin that is
approximately 80 miles long and 50 miles wide, located in southern Colorado and
northern New Mexico. The Raton Basin contains two coal bearing formations, the
Vermejo formation coals located at depths of between 450 and 3,500 feet and the
shallower Raton formation coals, located at depths from the surface to
approximately 2,000 feet. To date, Evergreen's primary production has been from
the Vermejo formation coal seams; however, Evergreen believes that the Raton
formation coal seams may be profitably exploited as well.
Approximately 133,900 acres of the Company's 200,000 acres in the Raton
Basin are included in three federal units, which simplifies lease maintenance
for the Company. Formation of these federal units allows Evergreen, as unit
operator, to base development decisions within the unit on technical, geologic
and geophysical data rather than on the fulfillment of lease term obligations.
DEVELOPMENT HISTORY AND EXPECTED FUTURE DEVELOPMENT. Exploration for coal
bed methane began in the Raton Basin in the late 1970s and continued through the
late 1980s, with several companies drilling and testing over 100 wells during
this period. The absence of a pipeline to transport gas out of the Raton Basin
prevented full-scale development until January 1995, when CIG's Picketwire
Lateral became operational.
Since December 1991, Evergreen has acquired oil and gas leases covering
approximately 200,000 gross acres in the Raton Basin. The initial 70,000 acres
were acquired from Amoco Production Company ("Amoco") in 1991 by direct purchase
without overriding royalties. The majority of the acreage remaining was
purchased during 1992 and 1993 from individual owners under various lease terms.
Generally, the lease terms provide for a 12.5% royalty interest to the owner of
the mineral rights. In
S-28
<PAGE>
August 1993, a four well evaluation program was conducted by the Company. Based
on positive results from the initial four wells, the Company made the decision,
in August 1994, to focus all domestic efforts on development of the Raton Basin.
Evergreen currently has almost 200 net producing gas wells on its Raton Basin
properties.
In March 1995, the Federal Bureau of Land Management ("BLM") designated
approximately 67,000 acres of Evergreen's leases in the Raton Basin as a federal
unit called the Spanish Peaks Unit. In December 1997, the BLM approved an
additional 6,300 acres of leases to be included in the Spanish Peaks Unit, for a
total of 73,300 acres. In January 1997, the BLM designated an additional 33,000
acres of Evergreen's leases as a federal unit called the Sangre de Cristo Unit.
Additionally, in July 1998, the Company acquired a 100% working interest in
27,590 gross acres in the Cottontail Pass Federal Unit from Amoco. The
Cottontail Pass Unit is situated between Evergreen's Spanish Peaks and Sangre de
Cristo Units. Included in the acquisition were 28 producing wells and gas
collection systems. Total daily production is currently approximately 5 MMcf per
day. The Company estimates that there are approximately 100 additional drilling
locations in the Cottontail Pass Unit. Evergreen has been named the operator for
all three of these units.
Because of the inclusion of federal leases in these units, operation and
production within a federal unit is governed by federal rules. Production from
any well in a unit area will maintain all of the leases beyond their primary
terms. In October 1997, the first "participating area" was designated by the BLM
under the Unit Agreement. Gas production in the participating area will be
pooled and shared by the royalty owners, overriding royalty owners and working
interest owners in that area in proportion to their acreage ownership of the
mineral estate in the area. The participating area will be adjusted annually to
encompass additional acreage as additional wells are completed.
Effective December 31, 1998, the Company acquired 41,000 gross acres in the
Long Canyon and Lorencito areas located in the southern Colorado portion of the
Raton Basin. The properties include 19 currently producing wells with daily
production of approximately 1.7 MMcf per day. Evergreen has identified 160
potential drilling locations on the acreage, in which it will hold working
interests of between 53% and 75% and serve as operator.
Prior to the acquisitions of the Cottontail Pass Unit and acreage in the
Long Canyon and Lorencito areas, the Company's principal development activities
in the Raton Basin had been in the Spanish Peaks Unit. The Company currently has
150 producing wells in this Unit and expects to drill approximately 80 wells
there in 1999. Current production from the Spanish Peaks Unit is approximately
39 MMcf per day. The Company has identified approximately 250 drilling locations
in its Spanish Peaks Unit, of which 60 were included in the Company's proved
reserve base at December 31, 1998.
The Company's development activities in the Sangre de Cristo Unit have
consisted solely of the drilling of four exploratory wells. These exploratory
wells will test production levels, provide additional geologic control and
fulfill unit obligations. The Company will be required to construct a
compression facility and a gas collection system to enable gas production and
sales from this unit. No reserves from wells in the Sangre de Cristo Unit are
included in the Company's reserve base.
RATON BASIN GEOLOGY. In the Raton Basin, Evergreen produces methane almost
entirely from the Vermejo coals, consisting of several individual seams ranging
in thickness between 1 and 12 feet, and at drilling depths between 450 and 3,500
feet below the surface. The entire Vermejo coal interval ranges from 5 to 50
feet thick through the Raton Basin, being thickest in the center of the Basin,
which the Company's acreage surrounds. The coal beds and surrounding sedimentary
rocks formed during the late Cretaceous to early Tertiary period, between 40 and
65 million years ago. The Raton Basin is a highly asymmetric downward fold in
the earth's crust that is approximately 80 miles long north to south and about
50 miles wide east to west. Plant material accumulated in thick layers within
coastal swamps in the Raton Basin and was subsequently buried and subjected to
heat and pressure which formed the
S-29
<PAGE>
coals. Since these coals were buried, continued mountain building in combination
with basin downwarping, created an extensive series of faults and fractures in
the coals and surrounding rocks. Later, the area was intruded by hot liquid rock
or "magma" from lower in the earth's crust, which cooled to form two large
mountain structures in the center of the Raton Basin known as the Spanish Peaks.
The magma moved up through existing faults and fractures and created additional
fractures that radiate outward from the Spanish Peaks. As the magma cooled, its
heat altered the surrounding rocks, including the Vermejo and Raton coal beds.
The Company believes that the simultaneous downwarping of the Raton trough and
Larimide age mountain building with subsequent relaxation (extension) and the
subsequent magmatic intrusions into the Raton Basin have matured the coals and
enhanced the ability of the Vermejo and Raton coals to yield coal bed methane
gas.
In the Raton Basin, the Company has found some coal seams to be continuous
between wells over distances of several miles, though the thickness of these
beds are variable. Individual wells are often completed to produce gas from 5 to
15 individual coal beds with individual thickness between 1 and 12 feet.
COAL BED METHANE TECHNOLOGY. The Company, working in conjunction with its
contractors, has developed what it believes to be effective procedures for
fracing in its Raton Basin wells. In addition, the Company has developed well
completion and specialized drilling techniques that are suited to its Raton
Basin wells. Traditional gas wells are drilled with the use of rotary drill bits
cooled and lubricated by drilling fluids or "mud." Coal bed methane production
is particularly sensitive to the natural permeability of the coals. Exposing the
Raton Basin coals to drilling mud appears to significantly reduce the
permeability of the coals by plugging the cleat system and natural fractures in
the coals. The Company, therefore, uses percussion air drilling (similar to a
jackhammer) without traditional drilling muds in drilling its wells.
WATER PRODUCTION AND DISPOSAL. To date, the majority of the water produced
from the Company's Raton Basin coal seams has been low in total dissolved
solids, allowing the Company, operating under permits issued by the State of
Colorado, to discharge the water into well-site pits and off well-site
evaporation ponds and disposal wells. If non-potable water is encountered in
subsequent wells, it may be necessary to drill additional disposal wells to
re-inject the produced water back into the underground rock formations. See
"Risk Factors--We May Face Unanticipated Water Disposal Costs." The Company is
involved in certain litigation concerning the Company's water disposal. See
"--Legal Proceedings."
RATON BASIN PRODUCTION. Evergreen's natural gas sales from the Raton Basin
did not commence until the completion of a pipeline system in January 1995,
which connected the Company's Raton Basin wells to the CIG pipelines. From
January 1995 through March 1999, Evergreen sold an aggregate of approximately
21.5 Bcf of coal bed methane gas from the Raton Basin. Gross daily production
from the field currently exceeds 45.5 MMcf per day. Because of the importance of
removing water from the coal seams to enhance gas production, Evergreen expects
to continue production from more modest wells because of the beneficial ambient
effect of pressure reduction in adjacent, more productive wells. Each well
creates its own "cone of depression" in the water saturation around the
wellbore. The Company believes that some of its Raton Basin wells on adjacent
160-acre drill sites have already created overlapping cones of depression,
enhancing gas production in each well.
The Raton Basin gas does not contain significant amounts of contaminants,
such as hydrogen sulfide, carbon dioxide or nitrogen, that are sometimes present
in traditional natural gas production. Therefore, the properties of the Raton
Basin gas, such as heat content per unit volume, are very close to the average
properties of pipeline gas from conventional gas wells.
S-30
<PAGE>
INTERNATIONAL PROPERTIES AND OPERATIONS
UNITED KINGDOM
In 1991 and 1992, the Company's wholly-owned subsidiary, Evergreen Resources
(U.K.) Ltd. ("ERUK"), was awarded seven onshore United Kingdom hydrocarbon
exploration licenses for the development of coal bed methane gas and
conventional hydrocarbons (the "Original Licenses"). The Original Licenses
provided ERUK with the largest onshore acreage position in the United Kingdom,
covering substantially all of six distinct onshore United Kingdom basins.
Selection of the licensed areas was made after evaluating 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, which shared relevant available data
on the six basins and granted use of this data to ERUK. ERUK has augmented this
data with proprietary seismic and coal bed methane well data, as well as
geologic data from the British Geologic Survey and other sources.
During the period from 1992 to 1994, Evergreen conducted seismic work and
drilled three wells under two of the Original Licenses. The wells encountered 30
feet to 80 feet 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.
In 1997, under a new onshore licensing regime implemented by the U.K.
Department of Trade and Industry, Evergreen converted its Original Licenses to
new onshore Licenses, called Petroleum Exploration and Development Licenses (the
"Licenses"). In connection with such conversion, the Company relinquished rights
to approximately 259,000 acres, which were not considered highly prospective for
coal bed methane development. Under the Licenses, the Company retains
approximately 377,000 acres, which were high-graded for coal bed methane and
conventional hydrocarbon potential. Subsequent to year-end, the Company acquired
an additional 136,000 acres. The Licenses 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 these Licenses.
Work commitments for acreage retained will include the drilling of three wells
in 1999.
Evergreen believes that a major coal bed methane resource exists within the
areas subject to the Licenses. However, further evaluation will be required to
confirm such belief and determine the economic viability of extracting any such
reserves. Evaluation is expected to occur on a License-by-License basis, since
success or lack of success on one License may not be translated to similar
results on other Licenses or separate geologic basins. Evergreen will spend
approximately $3 million in 1999 to drill a multi-well pilot program and gob gas
wells, thereby maintaining the Licenses.
The Company has recently completed a 3D seismic program in the United
Kingdom in an area in which Evergreen plans to drill a multi-well pilot coal bed
methane project. Evergreen is holding discussions with potential industry
partners for the purpose of evaluating and developing the Licenses. The Company
has recently purchased a drilling rig for this project. This rig is currently
being tested in the Raton Basin and is scheduled to be shipped to the United
Kingdom for the drilling of the multi-well pilot program in the second half of
1999. The Company's goal is to apply to its United Kingdom properties the
technologies for coal bed methane extraction that it has developed in the Raton
Basin.
In addition to the pilot program, the Company will drill approximately 4-5
gob gas wells. Evergreen plans to establish marketing arrangements for its
future gas production by first supplying this gob gas to local electric power
plants. The Company plans to start the gob gas drilling and production in the
second half of 1999.
S-31
<PAGE>
FALKLAND ISLANDS
The Falkland Islands consortium, in which Evergreen has a net 2% interest,
completed drilling its second well (and the industry's fifth well) in the North
Falklands Basin. Well 14/9-2 reached a total depth of approximately 8,000 feet
on October 28, 1998 and was plugged and abandoned as a dry hole with oil shows.
The abandonment of well 14/9-2 completed the initial drilling campaign on
Tranche A. The two wells on Tranche A have established good source rocks and
potential reservoir rocks. The consortium will assess the data gathered from the
two wells to determine the future strategy for the acreage.
CHILE
In March 1997, the Government of Chile awarded an oil and gas exploration
license to Evergreen on two 5,000 square kilometer (approximately 1.2 million
acres) blocks in northern Chile. Evergreen has a 75% working interest in the
blocks and will serve as operator. ENAP, the Chilean-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, which
increases up to a maximum of 35% on production in excess of 100,000 barrels per
day.
Evergreen and ENAP are sharing work commitments proportionately for the
periods of time stated as Exploration Periods for each block as set forth in the
table below:
<TABLE>
<CAPTION>
EXPLORATION
PERIOD TERM WORK COMMITMENT
- -------------- ---------- -----------------------------------------------------------
<C> <S> <C>
1* 1 year Geologic mapping, land based magnetic and gravity surveys
2** 2 years 200 km seismic data
3 2 years 1 exploratory well
1 year 1 exploratory well
4-9 each
</TABLE>
- ------------
* Commenced June, 1997 -- fulfilled
** Committed
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. Evergreen expects that the foregoing activities will require capital
expenditures over the next two years of approximately $2.2 million.
CUSTOMERS AND MARKETS
GAS MARKETING
Primero Gas Marketing Company ("Primero") is a wholly-owned subsidiary of
the Company that was formed to market and sell natural gas for the Company and
third parties. To date, Primero has only marketed and sold gas on behalf of the
Company and working interest partners. Primero also operates the Company's gas
collection systems and purchases all the Company's production from its Raton
Basin wells.
The expanding production in the Raton Basin led CIG to file with the Federal
Energy Regulatory Commission (the "FERC") for approval to construct a new,
115-mile, 16-inch pipeline connecting CIG's Picketwire Lateral pipeline near
Trinidad, Colorado to its mainline compressor station at Campo, Colorado (the
"Campo Lateral"). Now completed, the Campo Lateral has initial capacity of up to
approximately 100 MMcf per day, which more than doubles the pipeline capacity
previously available from the Raton Basin. The pipeline capacity may be further
expanded through the use of additional compression facilities. In August 1997,
the Company entered into a new agreement with CIG having a term of 15 years
which entitles the Company to firm transportation of its Raton Basin gas through
the Campo Lateral. The Company committed to transport natural gas from the Raton
Basin through this
S-32
<PAGE>
new pipeline commencing in September 1998. The initial commitment was 25 MMcf
per day, increasing every six months to 41 MMcf per day, 18 months after the
commencement. In 1998, the Company acquired certain properties in the Raton
Basin and additionally assumed firm transportation commitment of 12 MMcf per
day. As of March 1, 1999, the Company had total firm commitments of 42 MMcf per
day. Subject to available capacity in the pipeline, the Company has the first
right to increase its volumes up to 100 MMcf per day. Evergreen believes that
the CIG agreement has expanded the range of customers to which it can market its
gas, thereby potentially increasing the prices Evergreen will receive for its
gas. The CIG contract provides for delivery of the Company's gas into interstate
pipelines in Texas, from which it can be transported to Midwest and East Coast
markets. Absent the Campo Lateral, the Company would be restricted in the total
production that could be transported from the Raton Basin.
MAJOR CUSTOMERS
Evergreen has two major customers, Aquila Energy Corporation and Natural Gas
Transmission Services, Inc., which purchased approximately 45%, and 44%,
respectively, of the Company's gas production for the year ended December 31,
1998. Based on the general demand for gas, the loss of either or both of these
customers would not be expected to have a material adverse effect on Evergreen's
business. As the Company's base of production grows in the Raton Basin, the
Company hopes to be able to enter into long-term contracts with end users at
favorable prices. Generally, the Company's gas is sold at spot market prices or
under contracts for terms of one year or less.
OIL AND GAS RESERVES
The table below sets forth the Company's quantities of proved reserves, as
audited by independent petroleum engineers, Netherland, Sewell & Associates,
Inc. and Resource Services International, Inc., 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 at 10 percent per year as of
periods indicated.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
ESTIMATED PROVED DEVELOPED:
Natural gas (MMcf).......................................... 88,751 143,554 242,987
Oil (MBbls)................................................. 3 -- --
ESTIMATED PROVED UNDEVELOPED:
Natural gas (MMcf).......................................... 61,969 80,860 161,949
Oil (MBbls)................................................. -- -- --
--------- --------- ---------
TOTAL PROVED (MMCFE).......................................... 150,735 224,414 404,936
</TABLE>
The following table sets forth the future net cash flows from the Company's
estimated proved reserves:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------
1996 1997 1998
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Future net cash flows before income taxes.................................... $ 172,428 $ 345,410 $ 493,146
Future net cash flows before income taxes, discounted at 10%................. 70,499 159,326 214,675
</TABLE>
Summaries of the reports with respect to Evergreen's reserves at December 31,
1998 of Netherland, Sewell & Associates, Inc. and Resource Services
International, Inc. are included as Appendix A and Appendix B, respectively, to
this prospectus supplement. See also note 16 to the consolidated financial
statements.
S-33
<PAGE>
DRILLING ACTIVITIES
The following table sets forth the Company's drilling activities for the
periods indicated.
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED MARCH
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, 31,
DECEMBER 31, -------------------------------------------------- -----------
1996 1997 1998 1999
------------------------ ------------------------ ------------------------ -----------
GROSS NET GROSS NET GROSS NET GROSS
----------- --- ----------- --- ----------- --- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Exploratory wells:
Productive.......................... 0 0 4 4 0 0 0
Dry................................. 0 0 0 0 0 0 0
-- -- -- -- -- -- --
0 0 4 4 0 0 0
Development wells:
Productive.......................... 28 28 56 56 50 50 21
Dry................................. 0 0 0 0 0 0 0
-- -- -- -- -- -- --
28 28 56 56 50 50 21
-- -- -- -- -- -- --
Total................................. 28 28 60 60 50 50 21
-- -- -- -- -- -- --
-- -- -- -- -- -- --
<CAPTION>
NET
---
<S> <C>
Exploratory wells:
Productive.......................... 0
Dry................................. 0
--
0
Development wells:
Productive.......................... 21
Dry................................. 0
--
21
--
Total................................. 21
--
--
</TABLE>
As of May 24, 1999, an additional 11 wells had been drilled.
PRODUCTION
The following table sets forth the Company's net gas production for the
periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED DECEMBER THREE MONTHS ENDED
DECEMBER 31, 31, MARCH 31,
--------------- -------------------- --------------------
1996 1997 1998 1998 1999
--------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Natural gas (MMcf)..................................... 2,104 6,401 10,021 2,090 3,044
</TABLE>
AVERAGE SALES PRICES AND LOE
The following table sets forth the average sales price and the average LOE
per Mcf, for the periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED DECEMBER THREE MONTHS ENDED
DECEMBER 31, 31, MARCH 31,
--------------- -------------------- --------------------
1996 1997 1998 1998 1999
--------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Average sales price of natural gas (per Mcf)............ $ 1.66 $ 1.90 $ 1.90 $ 2.06 $ 1.50
Average LOE (per Mcf)................................... 0.33 0.31 0.34 0.27 0.39
</TABLE>
PRODUCTIVE WELLS
As of March 31, 1999, the Company had 178 gross and 173 net productive gas
wells. The Company had no productive oil wells as of such date. Productive wells
are producing wells and wells capable of production, including shut-in wells.
S-34
<PAGE>
ACREAGE
At March 31, 1999, Evergreen held developed and undeveloped acreage as set
forth below:
<TABLE>
<CAPTION>
DEVELOPED ACRES UNDEVELOPED ACRES TOTAL
-------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
LOCATION GROSS NET GROSS NET GROSS NET
- ---------------------------------------- --------- --------- ---------- ---------- ---------- ----------
Colorado................................ 52,400 49,300 153,500 132,200 205,900 181,500
Utah.................................... 700 400 1,900 1,600 2,600 2,000
United Kingdom.......................... -- -- 513,000 513,000 513,000 513,000
Falkland Islands........................ -- -- 400,600 8,000 400,600 8,000
Chile................................... -- -- 2,400,000 1,800,000 2,400,000 1,800,000
--------- --------- ---------- ---------- ---------- ----------
Total............................... 53,100 49,700 3,469,000 2,454,800 3,522,100 2,504,500
--------- --------- ---------- ---------- ---------- ----------
--------- --------- ---------- ---------- ---------- ----------
</TABLE>
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.
<TABLE>
<CAPTION>
ACRES EXPIRING
--------------------
<S> <C> <C>
GROSS NET
--------- ---------
Twelve Months Ended:
December 31, 1999............................................................ 4,500 2,400
December 31, 2000 and later.................................................. 1,100 1,100
</TABLE>
COMPETITION
The Company competes with numerous other companies in virtually all facets
of its business, including many that have significantly greater resources. 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.
GOVERNMENT REGULATION OF THE OIL AND GAS INDUSTRY
GENERAL
The Company's business is affected by numerous governmental laws and
regulations, including energy, environmental, conservation, tax and other laws
and regulations relating to the energy industry. Failure to comply with these
laws and regulations may result in the assessment of administrative, civil and
criminal penalties and/or injunctive relief. Moreover, changes in any of these
laws and regulations could have a material adverse effect on the Company's
business. In view of the many uncertainties with respect to current and future
laws and regulations, including their applicability to the Company, the Company
cannot predict the overall effect of such laws and regulations on its future
operations.
The Company believes that its operations comply in all material respects
with all applicable laws and regulations and that the existence and enforcement
of such laws and regulations have no more restrictive effect on the Company's
method of operations than on other similar companies in the energy industry.
The following discussion contains summaries of certain laws and regulations
and is qualified in its entirety by the foregoing.
S-35
<PAGE>
FEDERAL REGULATION OF THE SALE AND TRANSPORTATION OF OIL AND GAS
Various aspects of the Company's oil and natural gas operations are
regulated by agencies of the Federal government. The FERC regulates the
transportation and sale for resale of natural gas in interstate commerce
pursuant to the Natural Gas Act of 1938 ("NGA") and the Natural Gas Policy Act
of 1978 ("NGPA"). In the past, the Federal government has regulated the prices
at which oil and gas could be sold. While "first sales" by producers of natural
gas, and all sales of crude oil, condensate and natural gas liquids can
currently be made at uncontrolled market prices, Congress could reenact price
controls in the future. Deregulation of wellhead sales in the natural gas
industry began with the enactment of the NGPA in 1978. In 1989, Congress enacted
the Natural Gas Wellhead Decontrol Act (the "Decontrol Act"). The Decontrol Act
removed all NGA and NGPA price and nonprice controls affecting wellhead sales of
natural gas effective January 1, 1993.
Commencing in April 1992, the FERC issued Order Nos. 636, 636-A, 636-B,
636-C and 636-D ("Order No. 636"), which require interstate pipelines to provide
transportation services separate, or "unbundled," from the pipelines' sales of
gas. Also, Order No. 636 requires pipelines to provide open access
transportation on a nondiscriminatory basis that is equal for all natural gas
shippers. Although Order No. 636 does not directly regulate the Company's
production activities, the FERC has stated that it intends for Order No. 636 to
foster increased competition within all phases of the natural gas industry. It
is unclear what impact, if any, increased competition within the natural gas
industry under Order No. 636 will have on the Company's activities.
The courts have largely affirmed the significant features of Order No. 636
and numerous related orders pertaining to the individual pipelines, although
certain appeals remain pending and the FERC continues to review and modify its
open access regulations. In particular, the FERC has recently begun a broad
review of its transportation regulations, including how they operate in
conjunction with state proposals for retail gas marketing restructuring, whether
to eliminate cost-of-service rates for short-term transportation, whether to
allocate all short-term capacity on the basis of competitive auctions, and
whether changes to its long-term transportation policies may also be appropriate
to avoid a market bias toward short-term contracts. The Company cannot predict
what action the FERC will take on these matters, nor can it accurately predict
whether the FERC's actions will, over the long term, achieve the goal of
increasing competition in markets in which the Company's natural gas is sold.
However, the Company does not believe that it will be affected by any action
taken materially differently than other natural gas producers and marketers with
which it competes.
Commencing in October 1993, the FERC issued a series of rules (Order Nos.
561 and 561-A) establishing an indexing system under which oil pipelines will be
able to change their transportation rates, subject to prescribed ceiling levels.
The indexing system, which allows or may require pipelines to make rate changes
to track changes in the Producer Price Index for Finished Goods, minus one
percent, became effective January 1, 1995. The Company does not believe that
these rules affect it any differently than other oil producers and marketers
with which it competes.
The FERC has also issued numerous orders confirming the sale and abandonment
of natural gas gathering facilities previously owned by interstate pipelines and
acknowledging that if the FERC does not have jurisdiction over services provided
thereon, then such facilities and services may be subject to regulation by state
authorities in accordance with state law. A number of states have either enacted
new laws or are considering the adequacy of existing laws affecting gathering
rates and/or services. Other state regulation of gathering facilities generally
includes various safety, environmental, and in some circumstances,
nondiscriminatory take requirements, but does not generally entail rate
regulation. Thus, natural gas gathering may receive greater regulatory scrutiny
of state agencies in the future. The Company's gathering operations could be
adversely affected should they be subject in the future to increased state
regulation of rates or services, although the Company does not believe that it
would be affected by such regulation any differently than other natural gas
producers or gatherers. In addition, the FERC's approval of transfers of
previously-regulated gathering systems to independent or pipeline affiliated
gathering companies that are not subject to FERC regulation may affect
competition for
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<PAGE>
gathering or natural gas marketing services in areas served by those systems and
thus may affect both the costs and the nature of gathering services that will be
available to interested producers or shippers in the future.
The Company owns certain natural gas pipeline facilities that it believes
meet the traditional tests the FERC has used to establish a pipeline's status as
a gatherer not subject to the FERC jurisdiction. Whether on state or federal
land, natural gas gathering may receive greater regulatory scrutiny in the
post-Order No. 636 environment.
The Company conducts certain operations on federal oil and gas leases, which
are administered by the Minerals Management Service (the "MMS"). Federal leases
contain relatively standard terms and require compliance with detailed MMS
regulations and orders, which are subject to change. In addition to permits
required by other federal agencies (such as the Coast Guard, the Army Corps of
Engineers and the Environmental Protection Agency), lessees must obtain a permit
from the MMS prior to commencement of drilling. Among other restrictions, the
MMS has regulations restricting the flaring or venting of natural gas, and has
proposed to amend such regulations to prohibit the flaring of liquid
hydrocarbons and oil without prior authorization. Under certain circumstances,
the MMS may require any Company operations on federal leases to be suspended or
terminated. Any such suspension or termination could materially and adversely
affect the Company's financial condition, cash flows and operations. The MMS has
issued a notice of proposed rulemaking in which it proposes to amend its
regulations governing the calculation of royalties and the valuation of crude
oil produced from federal leases. This proposed rule would modify the valuation
of procedures for both arm's length and non-arm's length crude oil transactions
to decrease reliance on oil posted prices and assign a value to crude oil that
better reflects market value, establish a new MMS form for collecting value
differential data, and amend the valuation procedure for the sale of federal
royalty oil. The Company cannot predict what action the MMS will take on this
matter, nor can it predict at this stage of the rulemaking proceeding how the
Company might be affected by this amendment to the MMS' regulations.
Additional proposals and proceedings that might affect the oil and gas
industry are pending before Congress, the FERC, the MMS, state commissions and
the courts. The Company cannot predict when or whether any such proposals may
become effective. In the past, the natural gas industry has been heavily
regulated. There is no assurance that the regulatory approach currently pursued
by various agencies will continue indefinitely. Notwithstanding the foregoing,
the Company does not anticipate that compliance with existing federal, state and
local laws, rules and regulations will have a material or significantly adverse
effect upon the capital expenditures, earnings or competitive position of the
Company or its subsidiaries. No material portion of Evergreen's business is
subject to re-negotiation of profits or termination of contracts or subcontracts
at the election of the Federal government.
STATE REGULATION -- UNITED STATES
The Company's operations are also subject to regulation at the state and in
some cases, county, municipal and local governmental levels. Such regulation
includes requiring permits for the drilling of wells, maintaining bonding
requirements in order to drill or operate wells and regulating the location of
wells, the method of drilling and casing wells, the surface use and restoration
of properties upon which wells are drilled, the plugging and abandoning of wells
and the disposal of fluids used in connection with operations. The Company's
operations are also subject to various conservation laws and regulations. These
include the size of drilling and spacing units or proration units and the
density of wells which may be drilled and the unitization or pooling of oil and
gas properties. In addition, state conservation laws establish maximum rates of
production from oil and gas wells, generally prohibit the venting or flaring of
gas and impose certain requirements regarding the ratability of production.
State regulation of gathering facilities generally includes various safety,
environmental and, in some circumstances, nondiscriminatory take requirements,
but does not generally entail rate regulation. These regulatory burdens may
affect profitability, and the Company is unable to predict the future cost or
impact of complying with such regulations.
S-37
<PAGE>
ENVIRONMENTAL MATTERS
Extensive federal, state and local environmental laws affecting oil and
natural gas operations, including those carried on by the Company, regulate the
discharge of materials into the environment or otherwise protect the
environment. Numerous governmental agencies issue rules and regulations to
implement and enforce such laws which are often difficult and costly to comply
with and which carry substantial administrative, civil and/or criminal penalties
and in some cases injunctive relief for failure to comply. Some laws, rules and
regulations relating to the protection of the environment may, in certain
circumstances, impose "strict liability" for environmental contamination,
rendering a person liable for environmental and natural resource damages,
cleanup costs and, in the case of oil spills in certain states, consequential
damages without regard to negligence or fault on the part of such person. Other
laws, rules and regulations may restrict the rate of oil and natural gas
production below the rate that would otherwise exist or even prohibit
exploration or production activities in environmentally sensitive areas. In
addition, state laws often require some form of remedial action to prevent
pollution from former or suspended operations, such as closure of inactive pits
and plugging of abandoned wells. Legislation has been and continues to be
proposed in Congress from time to time that would reclassify certain exempt oil
and gas exploration and production wastes as "hazardous wastes." This
reclassification would make such wastes subject to much more stringent storage,
treatment, disposal and clean-up requirements. If such legislation were to be
enacted, it could have a significant adverse impact on the operating costs of
the Company, as well as the oil and gas industry in general. Initiatives to
further regulate the disposal of oil and gas wastes are also proposed in certain
states from time to time and may include initiatives at county, municipal and
local government levels. These various initiatives could have a similar adverse
impact on the Company. The regulatory burden on the oil and natural gas industry
increases its cost and risk of doing business and consequently affects its
profitability.
Compliance with these environmental requirements, including financial
assurance requirements and the costs associated with the cleanup of any spill,
could have a material adverse effect upon the capital expenditures, earnings or
competitive position of the Company and its subsidiaries. The Company believes
that it is in substantial compliance with current applicable environmental laws
and regulations and that continued compliance with existing requirements will
not have a material adverse impact on the Company. Nevertheless, changes in
environmental law have the potential to adversely affect the Company's
operations. For example, the U.S. Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"), also known as the "Superfund" law,
imposes liability, without regard to fault or the legality of the original
conduct, on certain classes of persons with respect to the release of a
"hazardous substance" into the environment. These persons include the current or
prior owner or operator of the disposal site or sites where the release occurred
and companies that transported, disposed or arranged for the transport or
disposal of the hazardous substances found at the site. Persons who are or were
responsible for releases of hazardous substances under CERCLA may be subject to
joint and several liability for the costs of cleaning up the hazardous
substances that have been released into the environment and for damages to
natural resources, and it is not uncommon for neighboring landowners and other
third parties to file claims for personal injury or property or natural resource
damages allegedly caused by the hazardous substances released into the
environment. Under CERCLA, certain oil and gas materials and products are, by
definition, excluded from the term "hazardous substances." At least two federal
courts have held that certain wastes associated with the production of crude oil
may be classified as hazardous substances under CERCLA. Similarly, under the
federal Resource, Conservation and Recovery Act ("RCRA"), which governs the
generation and disposal of "hazardous wastes," certain oil and gas materials and
wastes are exempt from the definition of "hazardous wastes." This exemption
continues to be subject to judicial interpretation and increasingly stringent
state regulation. During the normal course of its operations, the Company
generates or has generated in the past exempt and non-exempt wastes, including
hazardous wastes, that are subject to the RCRA and comparable state statutes.
The U.S. Environmental Protection Agency ("EPA") and various state agencies
continue to promulgate regulations that limit the disposal and permitting
options for certain hazardous and non-hazardous wastes.
S-38
<PAGE>
The Company currently owns or leases, and has in the past owned or leased,
several properties that for many years have been used to store and maintain
equipment that was regularly used to explore for and produce oil and gas. In
particular, current and prior operations of the Company included oil and gas
production in the Rocky Mountain states and the portion of the Permian Basin
within the State of New Mexico. Although the Company utilized operating and
disposal practices that were standard for the industry at the time,
hydrocarbons, materials or other wastes may have been disposed of or released on
or under the properties owned or leased by the Company or on or under other
locations where such wastes have been taken for disposal. In addition, many of
these properties have from time to time been operated by third parties whose
treatment and disposal or release of hydrocarbons, materials or other wastes was
not under the Company's control. These properties and the waste disposed thereon
may be subject to CERCLA, RCRA, and analogous state laws. Under such laws, the
Company could be required to remove or remediate previously disposed wastes
(including wastes disposed of or released by prior owners or operators) or
property contamination (including groundwater contamination).
In connection with its coal bed methane gas production, the Company from
time to time conducts production enhancement techniques, including various
activities designed to fracture the coal bed formation. While production
enhancement techniques are performed by the Company in substantial compliance
with the requirements set forth by the State of Colorado, neither Colorado nor
the EPA regulates this coal bed formation fracturing as a form of underground
injection. On August 7, 1997, the U.S. Court of Appeals for the Eleventh Circuit
held, in a case brought by a citizens environmental organization, that hydraulic
fracturing performed in coal bed methane gas production in Alabama falls within
the definition of "underground injection" as defined in the federal Safe
Drinking Water Act and, therefore, EPA is required to regulate this activity. As
a consequence of this holding, the Eleventh Circuit also granted a petition
filed by the plaintiff in the case to review EPA's refusal to initiate
proceedings that would withdraw federal approval of Alabama's Underground
Injection Control program. It is not known whether EPA will apply the court's
ruling in this decision outside of the Eleventh Circuit (Alabama, Georgia, and
Florida). Nevertheless, it is possible that hydraulic fracturing of coal beds
for methane gas production will become regulated within the United States as a
form of underground injection, resulting in the imposition of stricter
performance standards (which, if not met, could result in diminished
opportunities for methane gas production enhancement) and increased
administrative and operating costs for the Company. Management of the Company
cannot predict at this time whether regulation of hydraulic fracturing as a form
of underground injection will have an adverse material effect on the Company's
operations or financial position. However, such regulation is not expected to be
any more burdensome to the Company than it would be to other similarly situated
companies involved in coal bed methane gas production or tight gas sands
production within the United States.
Also in connection with its coal bed methane gas production, the Company may
produce naturally occurring groundwater as a by-product of the production of
methane gas. This produced groundwater is either re-injected into the subsurface
or stored or disposed of in evaporation ponds or natural collection features
located on the surface at or near the well-site pursuant to federal, state and
local statutes and regulations. In some cases, the produced groundwater is used
for stock watering, agricultural or dust suppression purposes, also pursuant to
federal, state and local regulation. The legal and regulatory classification of
this produced groundwater under the environmental laws discussed above as well
as under the federal Clean Water Act ("CWA"), a strict liability statute, which
governs the permitted and unpermitted discharge of "pollutants" to "waters of
the United States" is a source of dispute as discussed below and in the section
entitled "--Legal Proceedings." Under the CWA and various other state
regulations, EPA, the State of Colorado Department of Public Health and the
Environment and the Colorado Oil and Gas Conservation Commission each continue
to assert administrative and regulatory enforcement authority over the storage
and disposal of such produced groundwater. These agencies' classification or
characterization of either: (1) such produced groundwater as a "pollutant," or
(2) the storage, use and disposal of such water on the surface as a "discharge
to waters of the United
S-39
<PAGE>
States" could have a significant impact on the regulatory treatment of this
groundwater management practice and Evergreen's understanding of its past
compliance in connection with the CWA.
Operations of the Company involve the use of gas fired compressors to
transport collected gas, which compressors are subject to federal, state, and
local laws, rules and regulations for the control of emissions. The Company has
submitted Title V permit applications for its gas fired compressors. The Company
is presently in discussions with the permitting and enforcement sections of this
state agency regarding the timeliness of these applications even though it has
received written notice from the permitting section that such applications were
timely made. In any event, the Company believes it can adequately demonstrate
that these applications were timely made. The Company believes that it is in
substantial compliance with these applicable laws, rules and regulations
relating to the control of emissions. The Company has encountered a few
exceedances of carbon monoxide during stack testing of certain of its
compressors in advance of these compressors becoming operational but does not
expect these exceedances to have a material adverse effect on the Company's
operations.
Although the Company maintains insurance against some, but not all, of the
risks described above, including insuring the costs of clean-up operations,
public liability and physical damage, there is no assurance that such insurance
will be adequate to cover all such costs, that such insurance will continue to
be available in the future or that such insurance will be available at premium
levels that justify its purchase. The occurrence of a significant event not
fully insured or indemnified against could have a material adverse effect on the
Company's financial condition and operations.
The Company's oil and gas operations outside of the United States are
potentially subject to similar foreign governmental controls and restrictions
pertaining to the environment. The Company believes that compliance with
existing requirements of such governmental bodies has not had a material adverse
effect on the Company's operations.
At this time, the Company has no plans to make any material capital
expenditures for environmental control facilities.
LEGAL PROCEEDINGS
On July 13, 1998, Southern Colorado C.U.R.E. filed a lawsuit under the
citizen suit provision of the CWA in the U.S. District Court for the District of
Colorado against Evergreen Operating Corporation, a subsidiary of the Company
("EOC"), related to EOC's coal bed methane drilling operations in the Raton
Basin near Trinidad, Colorado. The Company's gas production produces naturally
occurring groundwater as a by-product of its coal bed methane gas production
operations. The storage, use and disposal of the produced groundwater in
evaporative ponds and natural collection features located on the surface at or
near the wellsite, and the legal and regulatory treatment of this practice,
underlie the lawsuit. The Company believes the lawsuit to be without merit and
responded by filing a motion to dismiss all of Southern Colorado C.U.R.E.'s
alleged claims. The motion to dismiss is currently pending before the court,
although a magistrate to whom the judge presiding over the matter referred the
motion has indicated that she will recommend to the judge that the motion to
dismiss be denied with respect to certain of the allegations. EOC is also
subject to federal, state and local environmental laws and regulations, and is
currently participating with the EPA and the State of Colorado in the
investigation of certain practices in connection with these operations. An
evaluation of costs of potential liabilities associated with this investigation
cannot be reasonably determined at this time. The Company does not expect that
the lawsuit or the investigation, or the environmental costs or contingent
liabilities of either, if any, will have a material adverse effect on its
consolidated financial position or its results of operations. See "--Government
Regulation of the Oil and Gas Industry--Environmental Matters."
EMPLOYEES
At May 15, 1999, the Company had 68 full time employees.
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<PAGE>
MANAGEMENT
The executive officers and directors of the Company and their respective
positions and ages are set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Mark S. Sexton....................................... 43 President, Chief Executive Officer and Director
Dennis R. Carlton.................................... 47 Senior Vice President Exploration & Operations and
Director
Kevin R. Collins..................................... 42 Vice President Finance, Chief Financial Officer and
Treasurer
Alain G. Blanchard................................... 57 Director
Larry D. Estridge.................................... 55 Director
John J. Ryan III..................................... 71 Director
Scott D. Sheffield................................... 46 Director
</TABLE>
MARK S. SEXTON joined Evergreen in 1989, and initially managed the daily
operating activities of EOC, Evergreen's operating subsidiary. Mr. Sexton is a
registered professional engineer in Colorado. In 1978 he was awarded a B.S.
degree in Mechanical Engineering from Stanford University. He was previously
employed in various technical, financial, and management positions with Amoco,
Norwest Bank, and Sound Energy Development Company. He resides in Evergreen,
Colorado. He has been a director of Evergreen since March 1995.
DENNIS R. CARLTON joined Evergreen in 1981 and was named a director in March
1995. Mr. Carlton was named Executive Vice President of EOC, Evergreen's
operating subsidiary, in 1989, and was named President of EOC in 1995. He
received a B.S. in Geology in 1972 and a Masters of Science Degree in Geology in
1975 from Wichita State University. He resides in Littleton, Colorado. Mr.
Carlton was also a director of Evergreen from 1985 to 1989.
KEVIN R. COLLINS joined Evergreen as Vice President and Treasurer in June
1995. He has over 13 years of public accounting experience. Mr. Collins received
a B.S. in Business Administration and Accounting from the University of Arizona
in 1980, and, before working with Evergreen, was employed by BDO Seidman, LLP,
where he was a senior manager. He resides in Littleton, Colorado.
ALAIN G. BLANCHARD was named director of Evergreen in May 1989. From 1983
until 1988 Mr. Blanchard was an associate and shareholder of the investment firm
Laidlaw Adams and Peck. A resident of Cannes, France, he has managed
discretionary funds for private and institutional clients for over 20 years and
continues to do so. Mr. Blanchard graduated from the University of Paris with a
doctorate in economics and a degree in political science.
LARRY D. ESTRIDGE was named a director of Evergreen in May 1989. He received
an A.B. degree from Furman University in 1966 and a J.D. from Harvard University
School of Law in 1969. He resides in Greenville, South Carolina, and is a
partner in the law firm Womble Carlyle Sandridge & Rice, PLLC. Mr. Estridge
joined Womble Carlyle in January 1999. Prior to January 1999, he was a partner
with Wyche, Burgess, Freeman & Parham, P.A. from July 1972 through December 31,
1998. He has represented Evergreen and a number of affiliated companies for over
13 years.
JOHN J. RYAN III was named a director of Evergreen in May 1989. Since 1982
he has been engaged in international tax and investment activities through
Corporate Investment Services, of which he is a principal. Mr. Ryan, a resident
of Geneva, Switzerland, is also Chairman of Evergreen Resources (U.K.) Ltd., a
wholly owned subsidiary of the Company. Mr. Ryan serves as a director of Vail
Resorts, Inc., and Converse, Inc.
S-41
<PAGE>
SCOTT D. SHEFFIELD was named a director of Evergreen in September 1996.
Since April 1985, Mr. Sheffield has served as President and Chief Executive
Officer of Pioneer Natural Resources Company, an energy company traded on the
New York Stock Exchange, and its predecessor company, Parker & Parsley Petroleum
Company. From 1979 to April 1985 he was employed by Parker & Parsley in various
engineering positions, including serving from 1981-1985 as Vice President of
Engineering. Mr. Sheffield obtained a Bachelor of Science Degree in Petroleum
Engineering from the University of Texas in 1975. He resides in Dallas, Texas.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Evergreen's common stock, or a perception
that such sales could occur, and the existence of options or warrants to
purchase shares of common stock at prices that may be below the then current
market price of the common stock could adversely affect the market price of the
common stock and could impair the Company's ability to raise capital through the
sale of equity securities. After this offering, 13,752,009 shares of common
stock will be outstanding (14,127,009 shares if the underwriters exercise their
over-allotment option in full). The 2,500,000 shares sold in this offering
(2,875,000 shares if the underwriters exercise their over-allotment option) will
be freely tradeable without restriction under the Securities Act, except for any
shares purchased by "affiliates" of the Company as defined in Rule 144 under the
Securities Act. Of the remaining 11,252,009 shares to be outstanding after this
offering (11,627,009 if the underwriters exercise their over-allotment option),
approximately 3,650,425 shares are "restricted securities" within the meaning of
Rule 144, or are held by affiliates of the Company, and in each case generally
may not be sold except in transactions registered under the Securities Act or
pursuant to an exemption from regulation, such as the exemption provided by Rule
144.
Evergreen's officers and directors and certain shareholders have entered
into lock-up agreements pursuant to which they have agreed not to offer or sell
any shares of common stock for a period of 120 days after the date of this
prospectus without the prior written consent of Prudential Securities, on behalf
of the underwriters. See "Underwriting." Prudential Securities may, at any time
and without notice, waive any of the terms of these lock-up agreements specified
in the underwriting agreement. Following the lock-up period, these shares will
not be eligible for sale in the public market without registration under the
Securities Act unless such sales meet the conditions and restrictions of Rule
144 as described below.
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated), including an affiliate, which has beneficially
owned shares for a period of at least one year is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of (1)
1% of the then-outstanding shares of common stock and (ii) the average weekly
trading volume in the common stock during the four calendar weeks immediately
preceding the date on which the notice of such sale on Form 144 is filed with
the Securities and Exchange Commission. Sales under Rule 144 are also subject to
certain provisions relating to notice and manner of sale and the availability of
current public information about the Company. In addition, a person (or persons
whose shares are aggregated) who has not been an affiliate of the Company at any
time during the 90 days immediately preceding a sale, and who has beneficially
owned the shares for at least two years, would be entitled to sell such shares
under Rule 144(k) without regard to the volume limitation and other conditions
described above. The foregoing summary of Rule 144 is not intended to be a
complete description.
WARRANTS AND OPTIONS
As of the date of this prospectus supplement, the Company had outstanding
options and warrants to purchase a total of 1,357,255 shares of common stock. Of
this total, unexercised warrants covering 167,029 shares having an exercise
price of $6.90 per share and which expire October 22, 2001 were issued to the
underwriters who participated in the Company's public offering of common stock
in October 1996. Additional unexercised warrants covering 244,586 shares are
held by Energy Investors
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<PAGE>
Fund II, LP, of which 94,586 are exercisable at $7.80 per share and 150,000 are
exercisable at $7.00 per share, and all of which expire on December 1, 2001. The
Company's outstanding options also include options covering 805,640 shares
granted to its executive officers and directors, of which 392,140 are
exercisable. These vested and unvested options are exercisable at prices ranging
from $4.25 to $14.625 per share and expire between December 22, 2000 and January
2, 2008. Options covering 140,000 shares have been issued to Company employees
pursuant to the Company's Initial Stock Option Plan. These options are
exercisable at prices ranging from $8.75 to $14.625 per share and expire between
December 22, 2000 and January 1, 2009.
REGISTRATION RIGHTS AGREEMENTS
Certain shareholders of the Company have registration rights with respect to
shares of the Company's common stock that they hold.
The Company granted registration rights in connection with the issuance of
450,000 shares of common stock in December 1998. The Company issued these shares
as consideration for the Company's purchase of certain properties in the Raton
Basin. The Company agreed to use commercially reasonable efforts to effect the
registration of such shares in connection with any future firm commitment
underwriting, subject to certain limitations.
The Company granted registration rights in connection with the issuance of
its 8% Convertible Preferred Stock, all of which was converted on November 1,
1997 into 905,660 shares of Common Stock. Such holders have the right to one
demand registration right (and in certain cases an additional demand right) and
unlimited piggyback rights.
In connection with the issuance of common stock in October 1996, the Company
entered into a registration rights agreement which required that the Company
file a registration statement in 1997 and keep it continuously effective for a
five-year period with respect to the 200,000 shares of common stock issuable
pursuant to warrants granted to the underwriters for that issuance. This
registration statement has been filed and is effective.
The Company granted certain registration rights in connection with the
issuance of an aggregate of 1,162,266 shares of Common Stock issued to Energy
Investors Fund I, L.P., Energy Investors Fund II, L.P. and Powerbridge, Inc.
(the "EIF/Powerbridge Shareholders") issued under acquisition agreements
executed in August 1996. The EIF/Powerbridge Shareholders have exercised these
registration rights, and such shares have been registered for resale.
All shareholders with registration rights have waived such rights in
connection with this offering.
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<PAGE>
UNDERWRITING
We have entered into an underwriting agreement with the underwriters named
below, for whom Prudential Securities Incorporated, A.G. Edwards & Sons, Inc.,
Howard, Weil, Labouisse, Friedrichs Incorporated and Hanifen, Imhoff Inc. are
acting as representatives. We are obligated to sell, and the underwriters are
obligated to purchase, all of the shares offered on the cover page of this
prospectus supplement, if any are purchased. Subject to certain conditions of
the underwriting agreement, each underwriter has severally agreed to purchase
the shares indicated opposite its name:
<TABLE>
<S> <C>
NUMBER
UNDERWRITERS OF SHARES
- ----------------------------------------------------------------------------------------------------- ----------
Prudential Securities Incorporated...................................................................
A.G. Edwards & Sons, Inc.............................................................................
Howard, Weil, Labouisse, Friedrichs Incorporated.....................................................
Hanifen, Imhoff Inc..................................................................................
----------
Total............................................................................................ 2,500,000
----------
----------
</TABLE>
The underwriters may sell more shares than the total number of shares
offered on the cover page of this prospectus and they have, for a period of 30
days from the date of this prospectus supplement, an over-allotment option to
purchase up to 375,000 additional shares from us. If any additional shares are
purchased, the underwriters will severally purchase the shares in the same
proportion as per the table above.
The representatives of the underwriters have advised us that the shares will
be offered to the public at the offering price indicated on the cover page of
this prospectus supplement. The underwriters may allow to selected dealers a
concession not in excess of $ per share and such dealers may reallow a
concession not in excess of $ per share to certain other dealers. After the
shares are released for sale to the public, the representatives may change the
offering price and the concessions.
We have agreed to pay to the underwriters the following fees, assuming both
no exercise and full exercise of the underwriters' over-allotment option to
purchase additional shares:
<TABLE>
<CAPTION>
TOTAL FEES
--------------------------------------------
WITHOUT EXERCISE OF FULL EXERCISE OF
FEE PER SHARE OVER-ALLOTMENT OPTION OVER-ALLOTMENT OPTION
------------- --------------------- ---------------------
<S> <C> <C> <C>
Fees paid by us...................................... $ $ $
</TABLE>
In addition, we estimate that we will spend approximately $575,000 in
expenses for this offering. We have agreed to indemnify the underwriters against
certain liabilities, including liabilities under the Securities Act, or
contribute to payments that the underwriters may be required to make in respect
of these liabilities.
We, our officers and directors, and certain shareholders of Evergreen have
entered into lock-up agreements pursuant to which we and they have agreed not to
offer or sell any shares of common stock or securities convertible into or
exchangeable or exercisable for shares of common stock for a period of 120 days
from the date of this prospectus without the prior written consent of Prudential
Securities, on behalf of the underwriters. Prudential Securities may, at any
time and without notice, waive the terms of these lock-up agreements specified
in the underwriting agreement.
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<PAGE>
Prudential Securities, on behalf of the underwriters, may engage in the
following activities in accordance with applicable securities rules:
- Over-allotments involving sales in excess of the offering size, creating a
short position. Prudential Securities may elect to reduce this short
position by exercising some or all of the over-allotment option.
- Stabilizing and short covering; stabilizing bids to purchase the shares
are permitted if they do not exceed a specified maximum price. After the
distribution of shares has been completed, short covering purchases in the
open market may also reduce the short position. These activities may cause
the price of the shares to be higher than would otherwise exist in the
open market.
- Penalty bids permitting the representatives to reclaim concessions from a
syndicate member for the shares purchased in the stabilizing or short
covering transactions.
Such activities, which may be commenced and discontinued at any time, may be
effected on the Nasdaq National Market, in the over-the-counter market or
otherwise. Also and prior to the pricing of the shares, and until such time when
a stabilizing bid may have been made, some of the underwriters who are market
makers in the shares may make bids for or purchases of shares subject to certain
restrictions, known as passive market making activities.
Each underwriter has represented that it has complied and will comply with
all applicable laws and regulations in connection with the offer, sale or
delivery of the shares and related offering materials in the United Kingdom,
including:
- the Public Offers of Securities Regulations 1995,
- the Financial Services Act 1986, and
- the Financial Services Act 1986, (Investment Advertisement) (Exemptions)
Order 1996 (as amended).
Prudential Securities has, from time to time, performed various investment
banking and financial advisory services on a fee for services basis for
Evergreen.
We may ask the underwriters to reserve shares for sale at the same offering
price directly to our officers, directors, employees and other business
affiliates or related third parties. If so, the number of shares available for
sale to the general public in the offering would be reduced to the extent such
persons purchase the reserved shares.
LEGAL MATTERS
Berenbaum, Weinshienk & Eason, P.C., Denver, Colorado has provided the
Company with a legal opinion on the validity of the common stock offered by this
prospectus supplement. Certain other matters will be passed upon for the Company
by Womble Carlyle Sandridge & Rice, PLLC, Washington, D.C. Certain matters will
be passed upon for the underwriters by Vinson & Elkins L.L.P., Houston, Texas.
EXPERTS
The financial statements included in this prospectus supplement have been
audited by BDO Seidman, LLP, independent certified public accountants, to the
extent and for the periods set forth in their report included herein, and are
included herein in reliance upon such report given upon the authority of said
firm as experts in auditing and accounting.
The estimated reserve evaluations and related calculations of Netherland,
Sewell & Associates, Inc., independent petroleum engineering consultants,
included in this prospectus supplement have been included herein in reliance
upon the authority of said firm as experts in petroleum engineering.
The estimated reserve evaluations and related calculations of Resource
Services International, Inc., independent petroleum engineering consultants,
included in this prospectus supplement have been included herein in reliance
upon the authority of said firm as experts in petroleum engineering.
S-45
<PAGE>
GLOSSARY OF CERTAIN OIL AND GAS TERMS
The following are definitions of terms commonly used in the oil and natural
gas industry and this document.
Unless otherwise indicated in this document, natural gas volumes are stated
at the legal pressure base of the state or area in which the reserves are
located at 60 (degrees) Fahrenheit. Natural gas equivalents are determined using
the ratio of six Mcf of natural gas to one barrel of crude oil, condensate or
natural gas liquids so that one barrel of oil is referred to as six Mcf of
natural gas equivalent or "Mcfe." As used in this document, the following terms
have the following specific meanings: "Mcf" means thousand cubic feet, "MMcf"
means million cubic feet, "Bcf" means billion cubic feet, "Bbl" means barrel,
"Btu" means British Thermal Unit, or the quantity of heat required to raise the
temperature of one pound of water by one Degree Fahrenheit, "MBbl" means
thousand barrels, "Mcfe" means thousand cubic feet equivalent, "Bcfe" means
billion cubic feet equivalent, "MMcfe" means million cubic feet equivalent, and
"MMBtu" means million British thermal units.
CAPITAL EXPENDITURES. Costs associated with exploratory and development
drilling (including exploratory dry holes); leasehold acquisitions; seismic data
acquisitions; geological, geophysical and land related overhead expenditures;
delay rentals; producing property acquisitions; other miscellaneous capital
expenditures; compression equipment and pipeline costs.
DEVELOPED ACREAGE. The number of acres which are allocated or assignable to
producing wells or wells capable of production.
DEVELOPMENT WELL. A well drilled within the proved area of an oil or
natural gas reservoir to the depth of a stratigraphic horizon known to be
productive.
EXPLORATORY WELL. A well drilled to find and produce oil or natural gas in
an unproved area, to find a new reservoir in a field previously found to be
productive of oil or natural gas in another reservoir, or to extend a known
reservoir.
FINDING AND DEVELOPMENT COST. The total capital expenditures, including
acquisition costs, and exploration and abandonment costs, for oil and natural
gas activities divided by the amount of proved reserves added in the specified
period.
GOB GAS. Gob gas is methane gas that has collected in abandoned underground
coal mines.
GROSS ACRES OR GROSS WELLS. The total acres or wells, as the case may be,
in which the Company has a working interest.
LOE. Lease operating expenses, which includes, among other things,
extraction costs and production and property taxes.
OPERATOR. The individual or company responsible to the working interest
owners for the exploration, development and production of an oil or natural gas
well or lease.
PRESENT VALUE OF FUTURE NET REVENUES OR PV-10. The present value of
estimated future net revenues to be generated from the production of proved
reserves, net of estimated production and ad valorem taxes, future capital costs
and operating expenses, using prices and costs in effect as of the date
indicated, without giving effect to federal income taxes. The future net
revenues have been discounted at an annual rate of 10% to determine their
"present value." The present value is shown to indicate the effect of time on
the value of the revenue stream and should not be construed as being the fair
market value of the properties.
RECOMPLETION. The completion of an existing well for production from a
formation that exists behind the casing of the well.
S-46
<PAGE>
RESERVES. Natural gas and crude oil, condensate and natural gas liquids on
a net revenue interest basis, found to be commercially recoverable. "Proved
developed reserves" includes proved developed producing reserves and proved
developed behind-pipe reserves. "Proved developed producing reserves" includes
only those reserves expected to be recovered from existing completion intervals
in existing wells. "Proved undeveloped reserves" includes those reserves
expected to be recovered from new wells on proved undrilled acreage or from
existing wells where a relatively major expenditure is required for
recompletion.
UNDEVELOPED ACREAGE. Lease acres on which wells have not been drilled or
completed to a point that would permit the production of commercial quantities
of oil and natural gas regardless of whether or not such acreage contains proved
reserves.
WORKING INTEREST. An interest in an oil and natural gas lease that gives
the owner of the interest the right to drill and produce oil and natural gas on
the leased acreage and requires the owner to pay a share of the costs of
drilling and production operations. The share of production to which a working
interest owner is entitled will always be smaller than the share of costs that
the working interest owner is required to bear, with the balance of the
production accruing to the owners of royalties.
S-47
<PAGE>
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS OF EVERGREEN RESOURCES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Certified Public Accountants......................................................... F-2
Consolidated Balance Sheets, March 31, 1999 (Unaudited), December 31, 1998 and 1997........................ F-3
Consolidated Statements of Income for the Three Months Ended March 31, 1999 and 1998 (Unaudited), the Years
Ended December 31, 1998 and 1997 and the Nine Months Ended December 31, 1996............................. F-4
Consolidated Statements of Stockholders' Equity for the Three Months Ended March 31, 1999 (Unaudited), the
Years Ended December 31, 1998 and 1997 and the Nine Months Ended December 31, 1996....................... F-5
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1999 and 1998 (Unaudited), the
Years Ended December 31, 1998 and 1997 and the Nine Months Ended December 31, 1996....................... F-6
Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 1999 and 1998
(Unaudited), the Years Ended December 31, 1998 and 1997 and the Nine Months Ended December 31, 1996...... F-7
Notes to Consolidated Financial Statements................................................................. F-8
</TABLE>
F-1
<PAGE>
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, 1998 and 1997, and the
related consolidated statements of income, stockholders' equity, cash flows, and
comprehensive income for years ended December 31, 1998 and 1997, and the nine
month period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Evergreen
Resources, Inc. and subsidiaries at December 31, 1998 and 1997 and the results
of their operations and their cash flows for the years ended December 31, 1998
and 1997, and the nine month period ended December 31, 1996 in conformity with
generally accepted accounting principles.
BDO SEIDMAN, LLP
Denver, Colorado
February 18, 1999
F-2
<PAGE>
EVERGREEN RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
-------------- -----------------------------
1999 1998 1997
-------------- -------------- -------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current:
Cash and cash equivalents...................................... $ 2,138,923 $ 1,333,733 $ 2,103,168
Accounts receivable (Note 2)................................... 5,838,455 4,728,722 3,610,448
Other current assets........................................... 530,653 295,011 321,764
-------------- -------------- -------------
Total current assets......................................... 8,508,031 6,357,466 6,035,380
Property and equipment, at cost (Notes 3, 4, 5, and 16):
based on the full cost method of accounting for oil and gas
properties................................................... 160,145,080 147,176,068 92,125,584
Less accumulated depreciation, depletion and amortization...... 20,644,437 19,400,469 15,361,174
-------------- -------------- -------------
Net property and equipment..................................... 139,500,643 127,775,599 76,764,410
Designated cash (Note 6)......................................... 1,918,780 2,781,716 2,142,883
Other assets (Note 14)........................................... 1,894,727 2,711,536 2,362,829
-------------- -------------- -------------
$ 151,822,181 $ 139,626,317 $ 87,305,502
-------------- -------------- -------------
-------------- -------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................... $ 693,818 $ 1,240,110 $ 1,645,467
Amounts payable to oil and gas property owners................. 1,382,601 2,947,345 2,968,827
Accrued expenses and other..................................... 924,644 1,515,427 478,252
Current portion -- capital lease (Note 5)...................... 1,097,785 1,122,499 1,061,090
-------------- -------------- -------------
Total current liabilities.................................... 4,098,848 6,825,381 6,153,636
Production taxes payable (Note 6)................................ 1,918,780 2,781,716 2,142,883
Note payable (Note 4)............................................ 57,755,769 44,138,700 10,812,000
Obligations under capital lease, less current
portion (Note 5)................................................ 2,556,975 2,906,374 4,028,872
Deferred income taxes (Note 7)................................... 3,925,900 3,295,000 16,000
-------------- -------------- -------------
Total liabilities............................................ 70,256,272 59,947,171 23,153,391
-------------- -------------- -------------
Commitments and contingencies (Notes 3, 4, 5 and 13)
Stockholders' equity (Notes 8, 9 and 10):
Common stock, $.01 stated value; shares authorized, 50,000,000;
shares issued and outstanding 11,238,646, 11,142,613 and
10,395,266................................................... 112,386 111,426 103,953
Additional paid-in capital..................................... 79,567,179 78,379,816 67,948,743
Retained earnings (deficit).................................... 2,064,421 1,077,582 (4,134,705)
Foreign currency translation adjustment........................ (178,077) 110,322 234,120
-------------- -------------- -------------
Total stockholders' equity................................... 81,565,909 79,679,146 64,152,111
-------------- -------------- -------------
$ 151,822,181 $ 139,626,317 $ 87,305,502
-------------- -------------- -------------
-------------- -------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
EVERGREEN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED YEARS ENDED ENDED
MARCH 31, DECEMBER 31, DECEMBER 31,
------------------------ -------------------------- ------------
1999 1998 1998 1997 1996
----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Revenues:
Natural gas revenues (Note 11)............. $ 4,572,196 $ 4,312,415 $ 19,062,968 $ 12,137,869 $3,502,385
Interest and other......................... 51,022 44,900 178,327 136,532 180,474
----------- ----------- ------------ ------------ ------------
Total revenues............................... 4,623,218 4,357,315 19,241,295 12,274,401 3,682,859
Expenses:
Lease operating expense.................... 1,200,546 554,357 3,356,412 2,007,388 700,875
Depreciation, depletion and amortization... 1,160,864 842,835 3,860,128 2,793,946 965,794
General and administrative expenses........ 595,604 401,578 1,932,865 1,286,287 580,898
Interest expense........................... 789,722 343,873 1,869,743 777,373 192,685
Other...................................... -- 38,150 286,260 258,511 127,672
----------- ----------- ------------ ------------ ------------
Total expenses............................... 3,746,736 2,180,793 11,305,408 7,123,505 2,567,924
----------- ----------- ------------ ------------ ------------
Income from continuing operations before
income taxes............................... 876,482 2,176,522 7,935,887 5,150,896 1,114,935
Income tax provision -- deferred (Note 7).... 341,800 838,350 3,063,300 -- --
----------- ----------- ------------ ------------ ------------
Income from continuing operations............ 534,682 1,338,172 4,872,587 5,150,896 1,114,935
Discontinued operations (Note 14)
Gain from disposal of discontinued
operations, net.......................... 452,157 -- -- -- --
Equity in earnings of discontinued
operations, net.......................... -- 61,740 339,700 313,179 --
----------- ----------- ------------ ------------ ------------
Net income................................... 986,839 1,399,912 5,212,287 5,464,075 1,114,935
Preferred stock dividends (Notes 8 and 9).... -- -- -- 400,000 440,000
----------- ----------- ------------ ------------ ------------
Net income attributable to common stock...... $ 986,839 $ 1,399,912 $ 5,212,287 $ 5,064,075 $ 674,935
----------- ----------- ------------ ------------ ------------
----------- ----------- ------------ ------------ ------------
BASIC INCOME PER COMMON SHARE:
From continuing operations................. $ 0.05 $ 0.13 $ 0.47 $ 0.50 $ 0.10
From discontinued operations............... 0.04 -- 0.03 0.03 --
----------- ----------- ------------ ------------ ------------
Basic income per common share................ $ 0.09 $ 0.13 $ 0.50 $ 0.53 $ 0.10
----------- ----------- ------------ ------------ ------------
----------- ----------- ------------ ------------ ------------
DILUTED INCOME PER COMMON SHARE:
From continuing operations................. $ 0.04 $ 0.12 $ 0.44 $ 0.48 $ 0.10
From discontinued operations............... 0.04 -- 0.03 0.03 --
----------- ----------- ------------ ------------ ------------
Diluted income per common share.............. $ 0.08 $ 0.12 $ 0.47 $ 0.51 $ 0.10
----------- ----------- ------------ ------------ ------------
----------- ----------- ------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
EVERGREEN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1999 (UNAUDITED), THE
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND
THE NINE MONTHS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMMON STOCK FOREIGN
$.01 STATED VALUE ADDITIONAL RETAINED CURRENCY TOTAL
---------------------- PAID-IN EARNINGS TRANSLATION STOCKHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) ADJUSTMENT EQUITY
----------- --------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance April 1, 1996......................... $ 5,899,736 $ 58,998 $41,822,026 $(9,873,715) $ (418,472) $31,588,837
Issuance of common stock pursuant to public
offering (Note 9)........................... 2,000,000 20,000 10,226,780 -- -- 10,246,780
Issuance of common stock for acquisition of
PBI and limited partnership interests (Note
9).......................................... 1,162,266 11,623 7,688,377 -- -- 7,700,000
Issuance of common stock in exchange for
redeemable preferred stock (Note 8)......... 230,770 2,308 1,497,692 -- -- 1,500,000
Issuance of common stock for preferred stock
dividend payment (Note 8)................... 3,077 307 19,693 -- -- 20,000
Common stock issued to ESOP (Note 13)......... 10,000 100 28,700 -- -- 28,800
Issuance of common stock for services (Note
9).......................................... 30,000 300 86,100 -- -- 86,400
Other......................................... 471 -- -- -- -- --
Preferred stock dividends..................... -- -- -- (440,000) (440,000)
Foreign currency translation.................. -- -- -- -- 517,756 517,756
Net income.................................... -- -- -- 1,114,935 -- 1,114,935
----------- --------- ----------- ----------- ----------- ------------
Balance, December 31, 1996.................... 9,336,320 93,636 61,369,368 (9,198,780) 99,284 52,363,508
Issuance of common stock in exchange for
redeemable preferred stock (Note 8)......... 905,660 9,057 5,973,443 -- -- 5,982,500
Issuance of common stock for services (Note
9).......................................... 63,940 639 239,226 -- -- 239,865
Exercise of stock purchase warrants (Note
9).......................................... 89,346 621 366,706 -- -- 367,327
Preferred stock dividends..................... -- -- -- (400,000) -- (400,000)
Foreign currency translation.................. -- -- -- -- 134,836 134,836
Net income.................................... -- -- -- 5,464,075 -- 5,464,075
----------- --------- ----------- ----------- ----------- ------------
Balance December 31, 1997..................... 10,395,266 103,953 67,948,743 (4,134,705) 234,120 64,152,111
Issuance of common stock for services (Note
9).......................................... 14,620 146 189,914 -- -- 190,060
Exercise of stock purchase warrants (Note
9).......................................... 276,555 2,766 2,181,515 -- -- 2,184,281
Issuance of common stock for property
interests (Note 9).......................... 450,000 4,500 7,495,500 -- -- 7,500,000
Warrants issued (Note 10)..................... -- -- 478,764 -- -- 478,764
Issuances of common stock for acquisitions and
other....................................... 6,172 61 85,380 -- -- 85,441
Foreign currency translation.................. -- -- -- -- (123,798) (123,798)
Net income.................................... -- -- -- 5,212,287 -- 5,212,287
----------- --------- ----------- ----------- ----------- ------------
Balance, December 31, 1998.................... $11,142,613 $ 111,426 $78,379,816 $ 1,077,582 $ 110,322 $79,679,146
Issuance of common stock for services
(unaudited) (Note 9)........................ 40,843 408 606,020 -- -- 606,428
Exercise of stock purchase warrants
(unaudited) (Note 9)........................ 40,000 400 341,495 -- -- 341,895
Issuance of common stock for property
interests (unaudited) (Note 9).............. 15,190 152 239,848 -- -- 240,000
Foreign currency translation (unaudited)...... -- -- -- -- (288,399) (288,399)
Net income (unaudited)........................ -- -- -- 986,839 -- 986,839
----------- --------- ----------- ----------- ----------- ------------
Balance, March 31, 1999 (unaudited)........... $11,238,646 $ 112,386 $79,567,179 $ 2,064,421 $ (178,077) $81,565,909
----------- --------- ----------- ----------- ----------- ------------
----------- --------- ----------- ----------- ----------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
EVERGREEN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED YEARS ENDED ENDED
MARCH 31, DECEMBER 31, DECEMBER 31,
------------------------ -------------------------- ------------
1999 1998 1998 1997 1996
------------ ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Operating activities:
Net income............................................ $ 986,839 $1,399,912 $ 5,212,287 $ 5,464,075 $1,114,935
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation, depletion and amortization.......... 1,229,704 891,018 4,185,975 2,793,946 965,794
Deferred income taxes............................. 341,800 838,350 3,063,300 -- --
Gain on disposal of discontinued operations,
net............................................. (452,157) -- -- -- --
Equity in earnings of discontinued operations,
net............................................. -- (61,740) (339,700) (313,179) --
Other............................................. 128,074 88,638 401,215 184,463 86,400
Changes in operating assets and liabilities:
Accounts receivable............................. 1,124,855 (400,734) (1,118,334) (1,120,476) (184,957)
Other current assets............................ (167,068) (91,912) 105,404 (207,784) 82,712
Accounts payable................................ (541,604) 450,466 690,642 (422,188) (645,908)
Accrued expenses and other...................... (474,895) 235,791 (53,641) 78,505 105,012
------------ ---------- ------------ ------------ ------------
Net cash provided by operating activities............. 2,175,548 3,349,789 12,147,148 6,457,362 1,523,988
------------ ---------- ------------ ------------ ------------
Cash flow from investing activities:
Investment in property and equipment.............. (12,849,175) (7,146,861) (46,959,541) (18,603,065) (8,342,545)
Proceeds from sale of oil and gas assets.......... -- -- -- -- 420,549
Designated cash................................... 862,936 (283,436) (638,833) (649,769) (723,038)
Change in production taxes payable................ (862,936) 283,436 638,833 649,769 723,038
Increase in other assets.......................... (555,758) (11,061) (242,915) (656,097) (636,868)
------------ ---------- ------------ ------------ ------------
Net cash used in investing activities................. (13,404,933) (7,157,922) (47,202,456) (19,259,162) (8,558,864)
------------ ---------- ------------ ------------ ------------
Cash flow from financing activities:
Net proceeds from notes payable and long-term
debt............................................ 13,617,069 4,437,000 33,326,700 11,189,120 --
Principal payments on long-term debt.............. -- -- -- -- (3,596,000)
Principal payments on capital lease obligations... (374,142) (256,909) (1,061,089) (636,875) (118,705)
Proceeds from issuance of common stock, net....... 341,473 374,784 2,158,193 348,982 10,246,780
Dividends paid on preferred stock................. -- -- (400,000) (420,000)
Debt issue costs.................................. -- -- (142,488) (148,515) (79,149)
Cash held from operating oil and gas properties... (1,564,744) (365,397) (21,482) 1,900,295 (54,933)
------------ ---------- ------------ ------------ ------------
Net cash provided in financing activities............. 12,019,656 4,189,478 34,259,834 12,253,007 5,977,993
------------ ---------- ------------ ------------ ------------
Effect of exchange rate changes on cash............... 14,919 9,378 26,039 11,661 (5,328)
------------ ---------- ------------ ------------ ------------
Increase (Decrease) in cash and cash equivalents...... 805,190 390,723 (769,435) (537,132) (1,062,211)
Cash and cash equivalents, beginning of period........ 1,333,733 2,103,168 2,103,168 2,640,300 3,702,511
------------ ---------- ------------ ------------ ------------
Cash and cash equivalents, end of period.............. $ 2,138,923 $2,493,891 $ 1,333,733 $ 2,103,168 $2,640,300
------------ ---------- ------------ ------------ ------------
------------ ---------- ------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
EVERGREEN RESOURCES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED YEARS ENDED ENDED
MARCH 31, DECEMBER 31, DECEMBER 31,
------------------------- -------------------------- ------------
1999 1998 1998 1997 1996
----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Net income.................................. $ 986,839 $ 1,399,912 $ 5,212,287 $ 5,464,075 $1,114,935
Foreign currency translation adjustments.... (288,399) 62,282 (123,798) 134,836 517,756
----------- ------------ ------------ ------------ ------------
Comprehensive income........................ $ 698,440 $ 1,462,194 $ 5,088,489 $ 5,598,911 $1,632,691
----------- ------------ ------------ ------------ ------------
----------- ------------ ------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE NINE MONTHS ENDED DECEMBER 31,
1996
(UNAUDITED AS TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998)
(1) SUMMARY OF ACCOUNTING POLICIES
BUSINESS
Evergreen Resources, Inc. ("Evergreen" or the "Company") is an independent
energy company engaged in the exploration, development, production and
acquisition of oil and gas properties. Evergreen's primary focus is on
developing coalbed methane properties located on approximately 200,000 gross
acres in the Raton Basin in southern Colorado. The Company also holds
exploration licenses on approximately 500,000 acres onshore in the United
Kingdom and an oil and gas exploration contract on approximately 2.4 million
acres in northern Chile.
CONSOLIDATION
The financial statements include the accounts of Evergreen and its
wholly-owned subsidiaries Evergreen Well Service Company ("EWS"), Evergreen
Operating Corporation ("EOC"), Evergreen Resources (UK) Ltd., Powerbridge, Inc.,
and Primero Gas Marketing Company ("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.
The Company has a 40% ownership in Argos Evergreen Limited ("AEL"), a
Falkland Islands Company which holds a 5% interest in Tranche A in the Falkland
Islands Basin. This investment is accounted for by the equity method of
accounting. Effective February 1999, the Company sold its 49% interest in
Maverick Stimulation Company, LLC ("Maverick") which had previously been
accounted for using the equity method of accounting. See Note 14 for further
discussion.
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 December 31, 1998
and 1997 represent twelve month periods.
FINANCIAL INSTRUMENTS
The Company's financial instruments that are 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.
The Company manages and controls market and credit risk through established
formal internal control procedures which are reviewed on an ongoing basis. The
Company attempts to minimize credit risk exposure to purchasers of the Company's
natural gas through formal credit policies, monitoring procedures and letters of
credit.
Unless otherwise specified, the Company believes the book value of the
financial instruments approximates their fair value.
F-8
<PAGE>
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE NINE MONTHS ENDED DECEMBER 31,
1996
(UNAUDITED AS TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998)
(1) SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
USES OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Significant estimates with regard to these financial statements include the
estimate of proved oil and gas reserve volumes and the related present value of
estimated future net cash flows (see supplemental oil and gas disclosures).
PROPERTY AND EQUIPMENT
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. Evergreen capitalized $710,800, $542,200 and
$243,600 of internal costs in 1998, 1997 and 1996. 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. 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 16),
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
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.
The costs of certain unevaluated leasehold acreage, wells drilled and
international concession rights 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 international operations where a
reserve base is not yet established.
Gas gathering and support equipment are stated at cost. Depreciation and
amortization for the Raton Basin gas gathering system is computed on the
units-of-production method based upon total reserves of the field. 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
15 years.
The Company applies Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets." Under SFAS No. 121,
long-lived assets and certain intangibles are reported at the lower of the
carrying amount or their estimated recoverable amounts.
F-9
<PAGE>
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE NINE MONTHS ENDED DECEMBER 31,
1996
(UNAUDITED AS TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998)
(1) SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
AMOUNTS PAYABLE TO OIL AND GAS PROPERTY OWNERS
Amounts payable to oil and gas property owners consist of cash calls from
working interest 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 follows the liability method of accounting for income taxes
under which deferred tax assets and liabilities are recognized for the future
tax consequences. 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.
ENVIRONMENTAL MATTERS
Environmental costs are expensed or capitalized depending on their future
economic benefit. Costs that relate to an existing condition caused by past
operations and have no future economic benefit are expensed. Liabilities for
future expenditures of a noncapital nature are recorded when future
environmental expenditures and/or remediation is deemed probable, and the costs
can be reasonably estimated. Costs of future expenditures for environmental
remediation obligations are not discounted to their present value.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses are reported net of amounts allocated to
working interest owners of the oil and gas properties operated by Evergreen, net
amounts charged for administrative and overhead costs, and net of amounts
capitalized pursuant to the full cost method of accounting.
NET INCOME PER SHARE
The Company applies SFAS No. 128, "Earnings Per Share" for the calculation
of "Basic" and "Diluted" earnings per share. Basic earnings per share includes
no dilution and is computed by dividing income available to common stockholders
by the weighted average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution of securities that
could share in the earnings of an entity.
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
MARKET RISK
The Company measures its exposure to market risk at any point in time by
comparing the open positions to a market risk of fair value. The market prices
the Company uses to determine fair value
F-10
<PAGE>
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE NINE MONTHS ENDED DECEMBER 31,
1996
(UNAUDITED AS TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998)
(1) SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
are based on management's best estimates, which consider various factors
including: Closing exchange prices, volatility factors and the time value of
money. At March 31, 1999, the Company was exposed to some market risk through
interest rates on its long term debt, foreign currency and natural gas prices.
At March 31, 1999, the Company's exposure to market risk was not considered
significant.
HEDGING TRANSACTIONS
The Company enters into contractual obligations that require future physical
delivery of its natural gas production to attempt to manage price risk with
regard to a portion of its natural gas production. The Company identifies
minimum internal price targets and, assuming other market conditions are deemed
favorable, the Company will enter in hedging contracts to manage price risk.
STOCK 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, compensation cost has been recognized for stock
options granted in situations where the option price is less than 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 TRANSLATION
The functional currency for the Company's foreign 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.
COMPREHENSIVE INCOME
During 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income." The implementation of SFAS No. 130 required comparative information for
earlier years to be restated. The Company has elected to report comprehensive
income in a consolidated statement of comprehensive income. Comprehensive income
is comprised of net income and all changes to stockholders' equity, except those
due to investments by stockholders, changes in paid-in capital and distributions
to stockholders.
F-11
<PAGE>
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE NINE MONTHS ENDED DECEMBER 31,
1996
(UNAUDITED AS TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998)
(1) SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
DEFERRED OFFERING COSTS
Costs incurred in connection with the Company's anticipated public offering
are deferred and will be charged against stockholders' equity upon the
successful completion of the offering or charged to expense if the offering is
not consumated.
UNAUDITED PERIODS
The financial information with respect to the three months ended March 31,
1999 and 1998 is unaudited. In the opinion of management, the accompanying
unaudited financial statements contain all adjustments necessary to present
fairly the Company's financial position as of March 31, 1999 and the results of
its operations and cash flows for the three months then ended. Management
believes all such adjustments are of a normal recurring nature. The results of
operations for interim periods are not necessarily indicative of results to be
expected for a full year.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. SFAS No. 133 is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. Management believes the adoption of this
statement will not have a material impact on the Company's financial statements.
(2) ACCOUNTS RECEIVABLE
The components of accounts receivable include the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
------------ --------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
(UNAUDITED)
Natural gas sales............................................. $ 2,370,643 $ 3,364,975 $ 2,298,861
Joint interest billings....................................... 1,209,312 1,363,747 1,311,587
Sale of investment in Maverick (Note 14)...................... 2,258,500 -- --
------------ ------------ ------------
$ 5,838,455 $ 4,728,722 $ 3,610,448
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-12
<PAGE>
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE NINE MONTHS ENDED DECEMBER 31,
1996
(UNAUDITED AS TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998)
(3) PROPERTY AND EQUIPMENT
Property and equipment includes the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
-------------- -----------------------------
1999 1998 1997
-------------- -------------- -------------
<S> <C> <C> <C>
(UNAUDITED)
Oil and Gas Properties:
Proved oil and gas properties.................................. $ 84,864,033 $ 79,302,588 $ 58,937,182
Unevaluated properties not subject to amortization............. 26,016,027 25,567,370 9,700,838
Accumulated depreciation, depletion and amortization........... (17,135,242) (16,348,102) (13,668,286)
-------------- -------------- -------------
Net oil and gas properties....................................... 93,744,818 88,521,856 54,969,734
Gas gathering equipment.......................................... 33,051,444 31,364,608 20,801,818
Construction in progress......................................... 14,288,253 9,227,117 1,685,813
Support equipment................................................ 1,925,325 1,714,385 999,933
Accumulated depreciation and amortization........................ (3,509,197) (3,052,367) (1,692,888)
-------------- -------------- -------------
Net other property and equipment................................. 45,755,825 39,253,743 21,794,676
-------------- -------------- -------------
Property and equipment, net of accumulated depreciation,
depletion and amortization..................................... $ 139,500,643 $ 127,775,599 $ 76,764,410
-------------- -------------- -------------
-------------- -------------- -------------
</TABLE>
Oil and gas property costs of $25,567,400 were not being amortized at
December 31, 1998. These costs consisted of $14,947,500 for domestic properties,
$8,504,700 for the United Kingdom ("U.K."), $1,520,200 for the Falkland Islands
and $595,000 for Chile. The Company will classify the unevaluated costs for the
U.K., Falkland Islands and Chile as evaluated costs when future development of
the Current Licenses determines the viability of the underlying reserves. The
Company anticipates that substantially all of the unevaluated costs related to
domestic properties will be classified as evaluated costs within the next three
to five years.
On July 2, 1998, Evergreen completed the acquisition of approximately 27,000
acres in the Raton Basin and 28 existing wells and related gathering facilities
for cash of $13 million. Effective December 31, 1998, the Company acquired an
additional 41,000 gross acres in the Raton Basin and 17 producing wells for
stock valued at $7.5 million, the assumption of $750,000 in debt and $250,000 in
cash. The aggregate amount of the purchase price allocated to proved properties
was $9 million, unproved properties was $11.6 million and gas gathering
equipment $1 million.
The Company is in the process of developing properties in the U.K. and is
unable to prepare reserve information in this area. In 1997, under a new onshore
licensing regime implemented by the U.K. Department of Trade and Industry,
Evergreen converted its Original Licenses to new onshore Licenses, called
Petroleum Exploration and Development Licenses (the "Current Licenses"). In
connection with such conversion, the Company relinquished rights to
approximately 259,000 acres, which were not considered highly prospective for
coalbed methane development. Under the Current Licenses, the Company retains
approximately 377,000 acres, which were high-graded for coalbed methane and
conventional hydrocarbon potential. Subsequent to year-end, the Company acquired
an additional 136,000 acres. The total acreage in the U.K. is approximately
513,000 acres. The Current Licenses provide up to a 30 year term with optional
periodic relinquishment of portions of the license, subject to future
F-13
<PAGE>
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE NINE MONTHS ENDED DECEMBER 31,
1996
(UNAUDITED AS TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998)
(3) PROPERTY AND EQUIPMENT (CONTINUED)
development plans. There are no royalties or burdens encumbering these Current
Licenses. Work commitments for acreage retained will include remote sensing
studies, additional seismic studies and the drilling of three wells in 1999.
Work commitments on the Current Licenses have been fulfilled through 1998 as a
result of ERI's prior U.K. activity. The Company has completed a new seismic
program to identify a new seven-well drilling project. The drilling project is
scheduled for mid to late 1999.
Evergreen has a net 2% interest in a Falkland Islands consortium, which has
drilled two wells in the North Falklands Basin. Both wells have been plugged and
abandoned as dry holes with oil shows. The abandonment of the wells completes
the initial drilling campaign on Tranche A. The two wells on Tranche A have
established good source rocks and potential reservoir rocks. The consortium will
assess the data gathered from the two wells to determine the future strategy for
the acreage. See Note 13 regarding the Chilean oil and gas exploration contract.
Included in construction in progress at March 31, 1999, are costs for a new
compressor station, gas gathering laterals, costs for well equipment and well
service equipment. The Company estimates that it will spend an additional $2.0
million to complete these projects.
(4) FINANCING AGREEMENT
Effective March 1, 1999, the Company increased it revolving line of credit
from $50 million to $75 million with a bank group consisting of Hibernia
National Bank, as agent, Chase Bank of Texas and Paribas (the "Banks"). The line
is available through June 2001. Advances pursuant to this line of credit are
limited to a borrowing base, which is presently $75 million. At the Company's
election, it may use either the London interbank offered rate ("Libor") plus a
margin of 1.38% to 1.75% or the prime rate plus a margin of 0% to .25%, with
margins on both rates determined on the average outstanding borrowings under the
credit facility. The Company's average interest rate at March 31, 1999 and
December 31, 1998, was 7.28% and 6.87%. The borrowing base is redetermined
semi-annually by the Banks based upon reserve evaluations of the Company's oil
and gas properties. The current borrowing base is less than the total borrowing
base that could have been requested under the terms of the agreement. An average
annual facility fee of .375% is charged quarterly for any unused portion of the
credit line. The agreement is collateralized by oil and gas properties and also
contains certain net worth and ratio requirements. At December 31, 1998 and
1997, and March 31, 1999, $44,138,700, $10,812,000 and $57,755,800 was
outstanding under the line of credit.
(5) CAPITAL LEASE OBLIGATIONS
The Company has capital equipment leases with a bank with interest at 8.5%
at December 31, 1998 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.
F-14
<PAGE>
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE NINE MONTHS ENDED DECEMBER 31,
1996
(UNAUDITED AS TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998)
(5) CAPITAL LEASE OBLIGATIONS (CONTINUED)
Future minimum lease payments at December 31, 1998 are as follows:
<TABLE>
<S> <C> <C>
Years ending December 31:
1999..................................................... $1,453,000
2000..................................................... 1,453,000
2001..................................................... 1,264,000
2002..................................................... 461,000
---------
Total future minimum lease payments.......................... 4,631,000
Less amount representing interest............................ 602,100
---------
Present value of minimum lease payments...................... 4,028,900
Less current portion......................................... 1,122,500
---------
Capital lease obligations, less current portion.............. $2,906,400
---------
---------
</TABLE>
Included in fixed assets are the following assets under capital leases:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
------------- --------------------------
1999 1998 1997
------------- ------------ ------------
<S> <C> <C> <C>
(UNAUDITED)
Gas gathering equipment..................................... $ 7,911,000 $ 7,911,000 $ 5,742,500
Less accumulated amortization............................... 1,005,800 911,500 434,300
------------- ------------ ------------
$ 6,905,200 $ 6,999,500 $ 5,308,200
------------- ------------ ------------
------------- ------------ ------------
</TABLE>
(6) DESIGNATED CASH AND RELATED PRODUCTION TAXES PAYABLE
Designated cash represents the cash withheld for payment of production taxes
from the Company and third party revenue interest owners. The production taxes
payable relates to ad valorem taxes collected for production through December
1998 which are not payable until fiscal 2000 or later. The related cash
collected from the Company and third party revenue interest owners designated
for payment of ad valorem taxes is reflected as a non-current asset.
F-15
<PAGE>
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE NINE MONTHS ENDED DECEMBER 31,
1996
(UNAUDITED AS TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998)
(7) INCOME TAXES
A reconciliation between the income tax provision computed at the statutory
rate on income before taxes and the income tax provision is as follows:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED YEARS ENDED ENDED
MARCH 31, DECEMBER 31, DECEMBER 31,
-------------------------- -------------------------- ------------
1999 1998 1998 1997 1996
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Federal income tax provision at statutory
rate..................................... $ 577,000 $ 797,000 $ 2,887,000 $ 1,858,000 $ 379,000
State income taxes......................... 56,000 74,000 280,000 180,000 37,000
Reduction in valuation allowance........... -- -- -- (1,788,000) (374,000)
Other...................................... (2,100) 6,000 112,000 (250,000) (42,000)
------------ ------------ ------------ ------------ ------------
Total income tax expense................. $ 630,900 $ 877,000 $ 3,279,000 $ -- $ --
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Continuing operations...................... $ 341,800 $ 838,350 3,063,300 $ -- $ --
Discontinued operations.................... 289,100 38,650 215,700 -- --
------------ ------------ ------------ ------------ ------------
Total income tax expense................. $ 630,900 $ 877,000 $ 3,279,000 $ -- $ --
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
The components of the net deferred tax assets and liabilities are shown
below:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1998 1997
MARCH 31, -------------- --------------
-------------
1999
-------------
(UNAUDITED)
<S> <C> <C> <C>
Net operating loss carryforwards.................................. $ 10,874,000 $ 10,392,000 $ 11,221,000
Other............................................................. 738,100 735,000 501,000
------------- -------------- --------------
Net deferred tax assets........................................... 11,612,100 11,127,000 11,722,000
Deferred tax liability -- depreciation, depletion and
amortization.................................................... (15,538,000) (14,422,000) (11,738,000)
------------- -------------- --------------
Net deferred tax liability........................................ $ (3,925,900) $ (3,295,000) $ (16,000)
------------- -------------- --------------
------------- -------------- --------------
</TABLE>
As of December 31, 1998, the Company has net operating loss carryforwards
for tax purposes of approximately $30 million which expire beginning in 1999
through 2017.
(8) REDEEMABLE PREFERRED STOCK
The Company has 25,000,000 authorized shares of preferred stock, par value
$1.00 per share. As of December 31, 1998 and 1997, none of the preferred stock
was outstanding.
Effective November 1, 1997, all of the Company's outstanding 8% Convertible
Preferred Stock, $1.00 per value, ("Preferred") was converted into 905,660
shares of common stock. Under the terms of the Preferred Stock Agreement, the
Company had the right to convert all of the preferred stock into
F-16
<PAGE>
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE NINE MONTHS ENDED DECEMBER 31,
1996
(UNAUDITED AS TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998)
(8) REDEEMABLE PREFERRED STOCK (CONTINUED)
common stock provided the common stock closing price was not less than $16 per
share for 30 consecutive days. The closing price of the Company's common stock
as reported by NASDAQ was above $16 per share for the 30 consecutive days ending
November 1, 1997.
On 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. As of December 31, 1998, all warrants issued are
still outstanding.
Cumulative annual cash dividends of 8% were payable quarterly. During the
year ended December 31, 1997, and the nine months ended December 31, 1996, the
Company paid $400,000 and $440,000 in dividends.
F-17
<PAGE>
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE NINE MONTHS ENDED DECEMBER 31,
1996
(UNAUDITED AS TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998)
(9) STOCKHOLDERS' EQUITY
EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED YEARS ENDED ENDED
MARCH 31, DECEMBER 31, DECEMBER 31,
---------------------- -------------------- -----------------
1999 1998 1998 1997 1996
---------- ---------- --------- --------- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator:
Net income from continuing operations............ $ 534,682 $1,338,172 $4,872,587 $5,150,896 $ 1,114,935
Gain on disposal of discontinued operations,
net............................................ 452,157 -- -- -- --
Equity in earnings of discontinued operations,
net............................................ -- 61,740 339,700 313,179 --
Preferred stock dividends........................ -- -- -- (400,000) (440,000)
---------- ---------- --------- --------- -----------------
Numerator for basic earnings per share -- income
available to common stockholders............... 986,839 1,399,912 5,212,287 5,064,075 674,935
---------- ---------- --------- --------- -----------------
Effect of dilutive securities:
Preferred stock dividends -- -- -- 400,000 --
---------- ---------- --------- --------- -----------------
Numerator for dilutive earnings per share --
income available to common stockholders after
assumed conversions............................ $ 986,839 $1,399,912 $5,212,287 $5,464,075 $ 674,935
---------- ---------- --------- --------- -----------------
---------- ---------- --------- --------- -----------------
Denominator:
Denominator for basic earnings per share --
weighted average shares........................ 11,203,424 10,425,881 10,521,650 9,574,889 7,043,141
Effect of dilutive securities:
Stock warrants................................. 571,823 688,713 647,001 335,032 46,133
8% Convertible preferred stock................. -- -- -- 754,717 --
---------- ---------- --------- --------- -----------------
Dilutive potential common shares................. 571,823 688,713 647,001 1,089,749 46,133
---------- ---------- --------- --------- -----------------
Denominator for diluted earnings per share --
adjusted weighted average shares and assumed
conversions.................................... 11,775,247 11,114,594 11,168,651 10,664,638 7,089,274
---------- ---------- --------- --------- -----------------
---------- ---------- --------- --------- -----------------
BASIC INCOME PER COMMON SHARE:
From continuing operations....................... $ 0.05 $ 0.13 $ 0.47 $ 0.50 $ 0.10
From discontinued operations..................... 0.04 -- 0.03 0.03 --
---------- ---------- --------- --------- -----------------
Basic income per common share...................... $ 0.09 $ 0.13 $ 0.50 $ 0.53 $ 0.10
---------- ---------- --------- --------- -----------------
---------- ---------- --------- --------- -----------------
DILUTED INCOME PER COMMON SHARE:
From continuing operations....................... $ 0.04 $ 0.12 $ 0.44 $ 0.48 $ 0.10
From discontinued operations..................... 0.04 -- 0.03 0.03 --
---------- ---------- --------- --------- -----------------
Diluted income per common share.................... $ 0.08 $ 0.12 $ 0.47 $ 0.51 $ 0.10
---------- ---------- --------- --------- -----------------
---------- ---------- --------- --------- -----------------
</TABLE>
F-18
<PAGE>
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE NINE MONTHS ENDED DECEMBER 31,
1996
(UNAUDITED AS TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998)
(9) STOCKHOLDERS' EQUITY (CONTINUED)
For the nine months ended December 31, 1996, common stock equivalents of
1,136,430 were not included in the computation of diluted earnings per share
because their effect was antidilutive. For the years ended December 31, 1998 and
1997 and the three months ended March 31, 1999 and 1998, all common stock
equivalents were included in the computation of diluted earnings per share.
OTHER EQUITY TRANSACTIONS
On August 1, 1996, the Company acquired 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 was 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.
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. Proceeds, net of
underwriters' commissions and their expenses of $1,253,200, were $10,246,800.
During the year and nine months ended December 31, 1997 and 1996, the
Company issued common stock valued at $239,900 and $86,400 as a bonus to certain
employees.
On July 7, 1997, the Board of Directors adopted a Shareholder Rights Plan
("Rights Plan"), pursuant to which stock purchase rights (the "Rights") were
distributed as a dividend to the Company's common stockholders at a rate of one
Right for each share of common stock held of record as of July 22, 1997. The
Rights Plan is designed to enhance the Board's ability to prevent an acquirer
from depriving stockholders of the long-term value of their investment and to
protect shareholders against attempts to acquire the Company by means of unfair
or abusive takeover tactics that have been prevalent in many unsolicited
takeover attempts. Under the Rights Plan, the Rights will become exercisable
only if a person or a group (except for existing 20% shareholders) acquires or
commences a tender offer for 20% or more of the Company's common stock. Until
they become exercisable, the Rights attach to and trade with the Company's
common stock. The Rights will expire July 22, 2007. The Rights may be redeemed
by the continuing members of the Board at $.001 per Right prior to the day after
a person or group has accumulated 20% or more of the Company's common stock.
During the year ended December 31, 1997, pursuant to the exercise of stock
purchase warrants, 30,900 shares of common stock were issued at $3.63, in
exchange for 7,677 shares of common stock currently issued and outstanding at
various market values. In addition, 58,446 shares of common stock were issued
under terms of warrants previously granted, resulting in proceeds to the Company
of $367,300.
For the year ended December 31, 1998, the Company issued common stock to
directors for directors fees and stock to certain employees for compensation
valued at $190,000.
During 1998, pursuant to the exercise of stock purchase warrants, 276,555
shares of common stock were issued under terms of warrants previously granted,
resulting in net proceeds to the Company of $2,184,300.
F-19
<PAGE>
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE NINE MONTHS ENDED DECEMBER 31,
1996
(UNAUDITED AS TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998)
(9) STOCKHOLDERS' EQUITY (CONTINUED)
Effective December 31, 1998, the Company purchased 41,000 acres of coalbed
methane gas interests and 17 producing wells from a company for $8.5 million.
The purchase price consisted of 450,000 shares of Evergreen common stock valued
at $16.67 per share for a total of $7.5 million and the assumption of $750,000
in debt and cash of $250,000. This acquisition is discussed further in Note 3.
During the three months ended March 31, 1999, the Company issued 40,843
shares of common stock valued at $606,400 as compensation and consulting
services. In addition, pursuant to the exercise of stock purchase warrants,
40,000 shares of common stock were issued under terms of warrants previously
granted, resulting in net proceeds to the Company of $341,900.
In January 1999, the Company issued 15,190 shares of common stock valued at
$240,000 for obligations incurred in the acquisition of the coalbed methane gas
interests in December 1998.
(10) STOCK OPTIONS
On May 12, 1997, the Board of Directors adopted, and the Company's
shareholders subsequently approved, an Initial Stock Option Plan (the "Plan"),
whereby employees may be granted incentive options to purchase up to 500,000
shares of the common stock of the Company. The exercise price of incentive
options must be equal to at least the fair market value of the common stock as
of the date of grant. In January 1998, the Company granted 185,000 options under
the Plan. During the three months ended March 31, 1999, the Company granted the
remaining 315,000 options under the Plan.
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. However, during 1998, the Board of Directors
and the shareholders approved the issuance of warrants for 79,990 shares of the
Company's common stock to officers and directors at an exercise price of $7.00.
The market price for the stock was $13.00 at the time of the grant. The value of
these options was $478,764 of which $224,600 was recorded as current year
compensation expense. The purpose of the warrants was to reward directors and
key personnel for past performance and to give them an incentive to remain with
the Company and to induce directors to take all or part of their non-executive
directors' compensation in the form of common stock. For the three months ended
March 31, 1999, 11,400 warrants valued at $90,000 were granted to directors as
compensation. During the year ended December 31, 1997, the Company granted
145,000 warrants at exercise prices ranging from $8.75 to $9.88. During the nine
months ended December 31, 1996, the Company granted 405,001 warrants to officers
and directors at exercise prices ranging from $5.75 to $7.00. In connection with
the 1996 public
F-20
<PAGE>
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE NINE MONTHS ENDED DECEMBER 31,
1996
(UNAUDITED AS TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998)
(10) STOCK OPTIONS (CONTINUED)
offering, the Company issued 200,000 warrants to the underwriters at an exercise
price of $6.90 per share. The presently outstanding options and warrants expire
in 2000 to 2005.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- ----------- --------- ----------- --------- -----------
Outstanding,
Beginning of period......................... 1,094,783 $ 7.41 1,182,301 $ 7.21 327,300 $ 7.47
Granted..................................... 264,990 11.18 145,000 8.83 855,001 7.06
Exercised................................... (276,555) 8.06 (97,518) 4.81 -- --
Expired................................. -- -- (135,000) 8.75 -- --
--------- ----------- --------- ----- --------- -----
Outstanding, end of period.................... 1,083,218 $ 8.17 1,094,783 $ 7.41 1,182,301 $ 7.21
--------- ----------- --------- ----- --------- -----
Options and warrants exercisable, end of
period...................................... 853,468 $ 7.51 956,086 $ 7.47 947,800 $ 7.21
--------- ----------- --------- ----- --------- -----
Weighted average fair value of options and
warrants granted during the period.......... $ 7.80 $ 4.58 $ 1.51
--------- --------- ---------
--------- --------- ---------
</TABLE>
SFAS No. 123, "Accounting for Stock-Based Compensation," 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. The assumptions used for grants in the
year ended December 31, 1997: dividend yield at 0 percent; expected volatility
of approximately 45 percent; risk free interest rate of 6 percent; and expected
lives of between two and five years for the warrants. Assumptions used for the
year ending December 31, 1998: dividend yield at 0 percent; expected volatility
of approximately 58 percent; risk free interest rate of 5.6% and expected lives
of five years for the warrants and options.
F-21
<PAGE>
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE NINE MONTHS ENDED DECEMBER 31,
1996
(UNAUDITED AS TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998)
(10) STOCK OPTIONS (CONTINUED)
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:
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED ENDED
DECEMBER 31, DECEMBER 31,
-------------------------- ------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net income
Basic
As reported.................................... $ 5,212,287 $ 5,064,075 $ 674,935
Pro forma...................................... 4,754,670 4,430,445 597,935
Diluted
As reported.................................... $ 5,212,287 $ 5,464,075 $ 674,935
Pro forma...................................... 4,754,670 4,830,445 597,935
Net income per share
Basic
As reported.................................... $ 0.50 $ 0.53 $ .10
Pro forma...................................... 0.45 0.46 .08
Diluted
As reported.................................... $ 0.47 $ 0.51 $ .10
Pro forma...................................... 0.43 0.45 .08
</TABLE>
The following table summarizes information about stock options and warrants
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
EXERCISABLE
OUTSTANDING --------------------------
---------------------------------------------------- WEIGHTED
RANGE OF NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER AVERAGE
EXERCISE OUTSTANDING AT REMAINING AVERAGE EXERCISABLE EXERCISE
PRICES 12/31/98 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/98 PRICE
- ------------- -------------- ------------------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
$ 4.25 10,000 2.00 $ 4.25 10,000 $ 4.25
6.90 180,392 2.83 6.90 180,392 6.90
7.00 544,240 3.61 7.00 453,240 7.00
7.80 94,586 2.91 7.80 94,586 7.80
8.75-9.50 69,000 0.08 8.80 69,000 8.80
13.00 185,000 9.00 13.00 46,250 13.00
- ------------- ---------------------------------------------------- --------------------------
$ 4.25-13.00 1,083,218 4.10 $ 8.17 853,468 $ 7.51
- ------------- ---------------------------------------------------- --------------------------
</TABLE>
F-22
<PAGE>
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE NINE MONTHS ENDED DECEMBER 31,
1996
(UNAUDITED AS TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998)
(11) MAJOR CUSTOMERS
During the three months ended March 31, 1999 and 1998, the years ended
December 31, 1998 and 1997 and the nine months ended December 31, 1996, 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:
<TABLE>
<CAPTION>
A B C D E F
CUSTOMER -- -- -- -- -- --
- ------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Three months ended March 31, 1999 (unaudited)......... 43% --% 28% --% --% 27%
Three months ended March 31, 1998 (unaudited)......... 47% --% 42% --% 12% --%
Year ended December 31, 1998.......................... 44% --% 45% --% --% --%
Year ended December 31, 1997.......................... 48% --% 17% 17% --% --%
Nine months ended December 31, 1996................... 59% 12% 12% --% --% --%
</TABLE>
(12) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the three months ended March 31, 1999 and 1998 and the
years ended December 31, 1998 and 1997 and nine months ended December 31, 1996,
for interest was approximately $965,400, $343,900, $2,317,200, $817,000 and
$193,000. During the three months ended March 31, 1999 and the years ended
December 31, 1998 and 1997, approximately $175,600, $447,500 and $40,000 of
interest paid was capitalized. During the year and nine months ended December
31, 1997 and 1996, the Company incurred capital lease obligations of $3,900,000
and $841,000 in connection with a master lease agreement to acquire equipment.
Included in accounts payable at December 31, 1997 and 1996 is approximately
$1,095,700 and $2,251,000 for drilling and completion and gas gathering
construction costs.
See Notes 1, 3, 5, 8, 9, 10, 13 and 14 for additional noncash transactions
during the years ended December 31, 1998 and 1997 and the nine months ended
December 31, 1996 and the three months ended March 31, 1999 and 1998.
(13) COMMITMENTS AND CONTINGENCIES
In August 1997, the Company entered into an agreement with Colorado
Interstate Gas ("CIG") pursuant to which CIG built a new, 115-mile, 16-inch
pipeline (the "Campo Lateral"). This agreement has a term of 15 years and
entitles the Company to firm transportation of its Raton Basin gas from the
field to the CIG interconnection with other interstate pipelines in Texas. The
Company committed to transport natural gas from the Raton Basin through CIG's
pipelines commencing September 1998. The initial commitment is 25 MMcf per day,
increasing every six months to a maximum of 41 MMcf per day 18 months after
commencement. Subject to available capacity in the pipeline, the Company has the
first right to increase its volumes up to 100 MMcf per day. The Company expects
to meet its volume obligations with respect to the Raton Basin transportation
agreement. If the Company is unable to meet its firm transportation commitments,
the commitment must be paid for but can be deferred and utilized at a later
date.
F-23
<PAGE>
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE NINE MONTHS ENDED DECEMBER 31,
1996
(UNAUDITED AS TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998)
(13) COMMITMENTS AND CONTINGENCIES (CONTINUED)
During 1998, the Company acquired certain properties in the Raton Basin. In
addition to the properties, the Company assumed firm transportation commitments
with CIG. The total transportation commitments are 12 MMcf per day, with 6 MMcf
per day expiring in 2004 and 6 MMcf per day expiring 2012.
Under terms of the transportation agreements, the Company has committed to
pay the following transportation reservation charges with CIG to provide firm
transportation capacity rights:
<TABLE>
<CAPTION>
RESERVATION
YEARS ENDING DECEMBER 31, CHARGES
- ------------------------------------------------------------------------------- -------------
<S> <C>
1999........................................................................... $ 4,577,000
2000........................................................................... 5,539,000
2001........................................................................... 5,644,000
2002........................................................................... 5,644,000
2003........................................................................... 5,644,000
Thereafter..................................................................... 48,576,000
-------------
$ 75,624,000
-------------
-------------
</TABLE>
In May 1998, the Company entered into a new ten-year office lease for
approximately $267,500 per year. Rental expense, net of sublease income, was
approximately $64,300, $38,700, $234,000, $138,000, and $99,900, for the three
months ended March 31, 1999, 1998 and for the years and nine months ended
December 31, 1998, 1997 and 1996.
On January 19, 1998, the Company submitted an application to the Internal
Revenue Service to terminate the Employee Stock Ownership Plan ("ESOP"). For the
nine months ended December 31, 1996, the Company contributed $28,000 to the
plan. There were no contributions to the plan for the years ended December 31,
1998 and 1997.
Effective January 1, 1997, the Company implemented a 401(k) plan ("the
"Plan") for all eligible employees. The Company provides a matching contribution
up to a certain percentage of the employees contributions. The Plan also
provides for a profit sharing contribution determined at the discretion of the
Company. The total matching contributions and profit sharing contribution for
the years ended December 31, 1998 and 1997 were approximately $33,600 and
$134,000.
In August 1992, the Company entered into a series of agreements with El Paso
Field Services Company ("El Paso Services") concerning the connection of
Evergreen's San Juan Basin wells to El Paso's non-jurisdictional gathering
system. Under the terms of certain gas gathering and tie-in agreements, EOC was
committed to meeting certain minimum volume levels during the term of the
agreement. As of September 30, 1997 and December 31, 1996, the volume levels
were below the required minimums and EOC accrued approximately $2,431,000 and
$2,231,000 for this shortfall, which was included with long-term liabilities.
The Company's cumulative delivery shortfall through September 30, 1997 was
approximately 12.1 million MMbtu. Effective October 1, 1997, the Company sold
all of its San Juan Basin properties for $580,000 along with the assumption of
EOC's volume commitment to El Paso Services. As of October 1, 1997, the Company
eliminated the obligation to El Paso Services.
F-24
<PAGE>
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE NINE MONTHS ENDED DECEMBER 31,
1996
(UNAUDITED AS TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998)
(13) COMMITMENTS AND CONTINGENCIES (CONTINUED)
In connection with the Chilean oil and gas exploration contract, the Company
will be required to spend approximately $1.5 million for a seismic program
during the years 1999 and 2000. In connection with the 1999 and 2000
commitments, the Company has issued letters of credit totaling $1.5 million
which expire in June 2000.
On July 13, 1998, Southern Colorado C.U.R.E. filed a lawsuit under the
citizen suit provision of the CWA in the U.S. District Court for the District of
Colorado against Evergreen Operating Corporation, a subsidiary of the Company
("EOC"), related to its coal bed methane drilling operations in the Raton Basin
near Trinidad, Colorado. The Company's gas production produces naturally
occurring groundwater as a by-product of its coal bed methane gas production
operations. The storage, use and disposal of the produced groundwater in
evaporative ponds and natural collection features located on the surface at or
near the wellsite, and the legal and regulatory treatment of this practice,
underlie the lawsuit. The Company believes the lawsuit to be without merit and
responded by filing a motion to dismiss all of Southern Colorado C.U.R.E.'s
alleged claims. The motion to dismiss is currently pending before the court,
although a magistrate to whom the judge presiding over the matter referred the
motion has indicated that she will recommend to the judge that the motion to
dismiss be denied with respect to certain of the allegations. EOC is also
subject to federal, state and local environmental laws and regulations, and is
currently participating with the EPA and the State of Colorado in the
investigation of certain practices in connection with these operations. An
evaluation of costs of potential liabilities associated with this investigation
cannot be reasonably determined at this time. The Company does not expect that
the lawsuit or the investigation, or the environmental costs or contingent
liabilities of either, if any, will have a material adverse effect on its
consolidated financial position or its results of operations.
As of May 1, 1999, the Company had entered into contracts to sell amounts
equal to substantially all of its current daily sales of 37 MMcf at $1.57 per
thousand cubic feet ("Mcf") for the period May 1, 1999 through October 31, 1999.
Through March 1999, EOC operated properties for various third party working
interest owners. In January 1999, the working interest owners sold those
properties. As of April 1, 1999, EOC will no longer receive overhead charges for
the operation of those properties.
(14) DISCONTINUED OPERATIONS
Effective February 18, 1999, Evergreen sold its 49% interest in Maverick
Stimulation Company, LLC ("Maverick") to the managing members of Maverick for
$2.26 million. The cash was received in April 1999. The sale resulted in a gain
net of tax of approximately $452,200 or $0.04 per diluted share. The Company was
also released from its guarantee of certain debt obligations of Maverick. This
transaction has been accounted for as a discontinued operation and the results
of operations have been excluded from continuing operations in the consolidated
statements of income for all periods presented.
Maverick provides pressure pumping and other oilfield services to the
petroleum industry in the Rocky Mountain region. Maverick provides certain well
stimulation services to the Company and during 1998 and 1997 such services
amounted to $2,381,400 and $2,636,400, of which $347,100 and $302,000 was unpaid
at year-end. The Company guaranteed approximately $560,000 of Maverick's
outstanding
F-25
<PAGE>
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE NINE MONTHS ENDED DECEMBER 31,
1996
(UNAUDITED AS TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998)
(14) DISCONTINUED OPERATIONS (CONTINUED)
debt at December 31, 1998. The investment in Maverick, including equity in
earnings, was $1,458,500 and $1,002,300 at December 31, 1998 and 1997. The
investment in Maverick is included in other assets in the accompanying
consolidated financial statements as of December 31, 1998 and 1997.
(15) SHELF REGISTRATION STATEMENT
In May 1999, the Company filed a shelf registration statement with the
Securities and Exchange Commission providing for the offering to the public from
time to time of debt securities, common or preferred stock or other securities
with an aggregate offering amount of up to $150 million. The Company plans to
use the proceeds from possible sales of securities for general corporate
purposes, which could include debt repayment, working capital, capital
expenditures or acquisitions.
(16) SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED)
COSTS INCURRED IN OIL AND GAS EXPLORATION AND DEVELOPMENT ACTIVITIES
The Company's oil and gas activities are conducted in the United States,
United Kingdom, Chile and the Falkland Islands. See Note 3 for additional
information regarding the Company's oil and gas properties. The following costs
were incurred in oil and gas acquisition, exploration, development, gas
gathering and producing activities during the following periods:
<TABLE>
<CAPTION>
UNITED UNITED FALKLAND
STATES KINGDOM ISLANDS CHILE TOTAL
------------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Acquisition costs:
Proved.............................................. $ 9,000,000 $ -- $ -- $ -- $ 9,000,000
Unproved............................................ 11,600,000 -- -- -- 11,600,000
Gas gathering....................................... 1,000,000 -- -- -- 1,000,000
Development........................................... 11,365,400 -- -- -- 11,365,400
Gas gathering......................................... 8,729,000 -- -- -- 8,729,000
Exploration........................................... 1,762,200 724,300 971,600 432,200 3,890,300
------------- ---------- ---------- ---------- -------------
$ 43,456,600 $ 724,300 $ 971,600 $ 432,200 $ 45,584,700
------------- ---------- ---------- ---------- -------------
YEAR ENDED DECEMBER 31, 1997
Development........................................... $ 10,193,600 $ -- $ -- $ -- $ 10,193,600
Gas gathering......................................... 9,914,800 -- -- -- 9,914,800
Exploration........................................... 603,500 384,800 140,500 133,300 1,262,100
------------- ---------- ---------- ---------- -------------
$ 20,711,900 $ 384,800 $ 140,500 $ 133,300 $ 21,370,500
------------- ---------- ---------- ---------- -------------
NINE MONTHS ENDED DECEMBER 31, 1996
Acquisition costs:
Proved.............................................. $ 7,215,400 $ -- $ -- $ -- $ 7,215,400
Unproved............................................ 600,000 -- -- -- 600,000
Gas gathering....................................... 3,484,600 -- -- -- 3,484,600
Development........................................... 4,229,900 -- -- -- 4,229,900
Gas gathering......................................... 5,452,400 -- -- -- 5,452,400
Exploration........................................... -- 96,000 97,000 -- 193,000
------------- ---------- ---------- ---------- -------------
$ 20,982,300 $ 96,000 $ 97,000 $ -- $ 21,175,300
------------- ---------- ---------- ---------- -------------
</TABLE>
F-26
<PAGE>
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE NINE MONTHS ENDED DECEMBER 31,
1996
(UNAUDITED AS TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998)
(16) SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED) (CONTINUED)
OIL AND GAS RESERVES (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's reserve information was prepared as of December 31, 1998, 1997
and 1996. 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. Proved developed reserves are those reserves
expected to be recovered through existing wells, with existing equipment and
operating methods.
Estimated quantities of proved reserves and proved developed reserves of
crude oil and natural gas (all of which are located within the United States),
as well as the changes in proved reserves, are as follows:
<TABLE>
<CAPTION>
PROVED RESERVES NATURAL GAS OIL
- ----------------------------------------------------------------------------------- ------------- -------------
<S> <C> <C>
(MCF) (BBLS)
At April 1, 1996................................................................... 80,926,000 4,800
Revisions of previous estimates.................................................. 4,625,400 (2,200)
Extensions and discoveries....................................................... 30,109,100 --
Purchases of reserves............................................................ 37,163,600 --
Production....................................................................... (2,104,400) --
------------- -------------
At December 31, 1996............................................................... 150,719,700 2,600
Revisions of previous estimates.................................................. (3,987,900) --
Extensions and discoveries....................................................... 89,720,600 --
Sales of reserves................................................................ (5,637,100) (2,600)
Production....................................................................... (6,401,500) --
------------- -------------
At December 31, 1997............................................................... 224,413,800 --
Revisions of previous estimates.................................................. (25,045,500) --
Extensions and discoveries....................................................... 155,204,700 --
Purchases of reserves............................................................ 60,384,600 --
Production....................................................................... (10,021,400) --
------------- -------------
At December 31, 1998............................................................... 404,936,200 --
------------- -------------
------------- -------------
Proved Developed Reserves as of:
December 31, 1996.................................................................. 88,751,500 2,600
December 31, 1997.................................................................. 143,553,500 --
December 31, 1998.................................................................. 242,986,600 --
</TABLE>
F-27
<PAGE>
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE NINE MONTHS ENDED DECEMBER 31,
1996
(UNAUDITED AS TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998)
(16) SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED) (CONTINUED)
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. Gas prices have fluctuated widely in recent years. The calculated
weighted average sales prices utilized for the purposes of estimating the
Company's proved reserves and future net revenues were $1.60, $1.87 and $1.61
per Mcf of gas at December 31, 1998, 1997 and 1996. 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.
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED ENDED
DECEMBER 31, DECEMBER 31,
------------------------------ --------------
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Future cash inflows............................................. $ 647,897,900 $ 418,531,800 $ 242,761,200
Future production costs..................................... (109,217,400) (55,331,800) (58,542,800)
Future development costs.................................... (45,535,000) (17,790,000) (11,790,300)
Future income taxes......................................... (163,664,600) (90,128,100) (34,865,300)
-------------- -------------- --------------
Future net cash flows........................................... 329,480,900 255,281,900 137,562,800
10% discount to reflect timing of cash flows.................... (186,052,300) (137,529,000) (81,319,200)
-------------- -------------- --------------
Standardized measure of discounted future net cash
flows......................................................... $ 143,428,600 $ 117,752,900 $ 56,243,600
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
F-28
<PAGE>
EVERGREEN RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE NINE MONTHS ENDED DECEMBER 31,
1996
(UNAUDITED AS TO THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998)
(16) SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED) (CONTINUED)
The following summarizes the principal factors comprising the changes in the
standardized measure of discounted future net cash flows for the years ended
December 31, 1998 and 1997 and for the nine months ended December 31, 1996.
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED ENDED
DECEMBER 31, DECEMBER 31,
------------------------------ -------------
1998 1997 1996
-------------- -------------- -------------
<S> <C> <C> <C>
Standardized measure, beginning of period........................ $ 117,752,900 $ 56,243,600 $ 25,153,300
Sales of oil and gas, net of production costs.................... (15,706,600) (10,018,100) (2,691,200)
Extensions and discoveries....................................... 60,403,100 52,587,400 10,546,000
Net change in sales prices, net of production costs.............. (38,366,300) 30,171,200 4,434,700
Purchase of reserves............................................. 31,164,600 -- 20,122,700
Sale of reserves................................................. -- (2,150,300) --
Revisions of quantity estimates.................................. (15,837,000) (3,131,000) 2,478,000
Accretion of discount............................................ 15,932,600 7,049,900 3,016,300
Net change in income taxes....................................... (29,673,000) (27,318,000) (9,244,800)
Changes in future development costs.............................. 10,198,500 8,596,100 4,212,800
Changes in rates of production and other......................... 7,559,800 5,722,100 (1,784,200)
-------------- -------------- -------------
Standardized measure, end of period.............................. $ 143,428,600 $ 117,752,900 $ 56,243,600
-------------- -------------- -------------
-------------- -------------- -------------
</TABLE>
(17) SUMMARIZED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
REVENUES FROM
REVENUES FROM DISCONTINUED BASIC DILUTED
CONTINUING OPERATIONS, EARNINGS EARNINGS
1998 OPERATIONS NET (NOTE 14) EXPENSES NET INCOME PER SHARE PER SHARE
- ----------------------------------- ------------- ------------- ------------- ------------ --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
First quarter...................... $ 4,357,000 $ 62,000 $ 3,019,000 $ 1,400,000 $ 0.13 $ 0.13
Second quarter..................... 4,504,000 73,000 3,245,000 1,332,000 0.13 0.12
Third quarter...................... 5,460,000 127,000 4,138,000 1,449,000 0.14 0.13
Fourth quarter..................... 4,920,000 78,000 3,967,000 1,031,000 0.10 0.09
------------- ------------- ------------- ------------ ----- -----
$ 19,241,000 $ 340,000 $ 14,369,000 $ 5,212,000 $ 0.50 $ 0.47
------------- ------------- ------------- ------------ ----- -----
------------- ------------- ------------- ------------ ----- -----
</TABLE>
F-29
<PAGE>
[LETTERHEAD]
February 16, 1999
Mr. Mark S. Sexton
Evergreen Resources, Inc.
1401 Seventeenth Street, Suite 1200
Denver, Colorado 80202
Dear Mr. Sexton:
In accordance with your request, we have audited the estimates prepared
by Evergreen Resources, Inc. (Evergreen), as of December 31, 1998, of the proved
reserves and future net revenue to the Evergreen interest in certain oil and gas
properties located in Las Animas County, Colorado. These estimates are based on
constant prices and costs. The following table sets forth Evergreen's estimates
of the proved reserves and future net revenue, as of December 31, 1998, for the
audited properties:
<TABLE>
<CAPTION>
Net Reserves Future Net Revenue (M$)
------------------------- -------------------------------
Oil Gas Present Worth
Category (MBBL) (MMCF) Total at 10%
- -------------------- -------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Proved Developed
Producing 0.0 209,175.9 276,350.1 140,838.2
Non-Producing 0.0 33,810.7 39,810.6 16,406.6
Proved Undeveloped 0.0 161,949.6 176,984.7 57,429.8
- -------------------- -------- ---------- ----------- -------------
Total Proved 0.0 404,936.2 493,145.4 214,674.6
</TABLE>
Gas volumes are expressed in millions of standard cubic feet (MMCF) at the
contract temperature and pressure bases. These properties have never produced
commercial volumes of condensate.
When compared on a property-by-property basis, some of the estimates of
Evergreen are greater and some are lesser than the estimates of Netherland,
Sewell & Associates, Inc.; however, in our opinion, Evergreen's estimates of net
proved oil and gas reserves and future net revenue, as shown herein and in
certain computer printouts on file in our office, are in the aggregate
reasonable and have been prepared in accordance with generally accepted
petroleum engineering and evaluation principles. These principles are set forth
in the Standards Pertaining to the Estimating and Auditing of Oil and Gas
Reserve Information promulgated by the Society of Petroleum Engineers. We are
satisfied with the methods and procedures utilized by Evergreen in preparing the
December 31, 1998 net reserve and future net revenue estimates, and we saw
nothing of an unusual nature that would cause us to take exception with the
estimates, in the aggregate, as prepared by Evergreen.
The estimated reserves and future revenue shown herein are for proved
developed producing, proved developed non-producing, and proved undeveloped
reserves. Evergreen's estimates do not
A-1
<PAGE>
[LOGO]
include value for probable or possible reserves which may exist for these
properties, nor do they include any consideration of undeveloped acreage beyond
those tracts for which undeveloped reserves have been estimated.
The gas price used by Evergreen is $1.60 per MCF and is held constant
throughout the life of the properties. Evergreen's estimates of lease and well
operating costs are based on historical operating expense records. These costs
include direct lease and field level costs, but do not include overhead expenses
above the field level. Evergreen used direct lease and field level costs of
$1,025 per well per month for the first year of production, $725 per well per
month for the next 3 years, and $425 per well per month for the remaining well
life. The reductions account for the declining water production during the life
of the wells. A gathering fee of $0.055 per MCF is also included. Headquarters
general and administrative overhead expenses of Evergreen are not included.
Lease and well operating costs are held constant throughout the remaining life
of the properties. Evergreen's estimates of capital costs are included as
required for workovers, new development wells, and production equipment.
It should be understood that our audit does not constitute a complete
reserve study of Evergreen's oil and gas properties. Our audit consisted of a
detailed review of properties making up 80 percent of the present worth for the
total proved reserves. In our audit, we accepted without independent
verification the accuracy and completeness of the historical information and
data furnished by Evergreen with respect to ownership interest, oil and gas
production, well test data, oil and gas prices, operating and development costs,
and any agreements relating to current and future operations of the properties
and sales of production. However, if in the course of our examination something
came to our attention which brought into question the validity or sufficiency of
any such information or data, we did not rely on such information or data until
we had satisfactorily resolved our questions relating thereto or had
independently verified such information or data.
We are independent petroleum engineers, geologists, and geophysicists with
respect to Evergreen Resources, Inc. as provided in the Standards Pertaining to
the Estimating and Auditing of Oil and Gas Reserve Information promulgated by
the Society of Petroleum Engineers. We do not own an interest in these
properties and are not employed on a contingent basis.
Very truly yours,
/s/ Netherland, Sewell & Associates, Inc.
A-2
<PAGE>
Feb 12, 1999 [LOGO]
[PHOTO]
l580 Lincoln Street #1110
Evergreen Resources, Inc. Denver, Colorado 80203
1401 17th St., Suite 1200 Telephone
Denver, Colorado 80202 (303)830-9377
Fax (303)830-9427
[email protected]
Gentlemen:
We have audited the estimates, prepared by Evergreen Resources, Inc.
("Evergreen"), of the extent and value of the proved reserves of crude oil,
natural gas, and natural gas liquids for certain leases owned by Evergreen, as
of December 31, 1998. The appraised properties are located in Colorado. The
reserve estimates are prepared according to applicable SEC rules and utilize
conventional and generally accepted engineering methods.
Our review of Evergreen's reserve estimates is based upon a study of
Evergreen's properties. During this investigation, we consulted with the
officers and employees of Evergreen and were given access to such accounts,
records, geological and engineering reports, and other data as were desired for
examination. We previously have prepared studies of oil and gas properties in
areas where Evergreen's properties are located. Property interests owned,
production from such properties, current prices for production, agreements
relating to current and future operations and sale of production, gas tax credit
sales agreements, and various other information and data were furnished to
RSII by Evergreen and are accepted as factual without independent
verification of such facts. We did not make a field examination of the
operations or physical condition of the appraised properties.
Natural gas reserves included in this report are classified as proved and
are judged to be economically producible in future years from known reservoirs
under existing economic and operating conditions, assuming continuation of the
current regulatory practices, and using conventional production methods and
equipment.
Definitions of proved reserves used in this evaluation are those set forth
in Rule 4-10(a) of Regulation S-X, as adopted by the SEC:
"PROVED OIL AND GAS RESERVES. Proved oil and gas reserves are the
estimated quantities of crude oil, 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, i.e., prices and costs as of the date
the estimate is made. Prices include consideration of changes in existing
prices provided only by contractual arrangements, but not on escalations
based upon future conditions.
B-1
<PAGE>
Evergreen Resources, Inc.
Feb 12, 1999
Page 2
"(i) Reserves are considered proved if economic producibility is
supported by either actual production or conclusive formation tests. The
area of a reservoir considered proved includes (A) that portion delineated
by drilling and defined by gas-oil and/or oil-water contacts, if any, and
(B) the immediately adjoining portions not yet drilled, but which can be
reasonably judged as economically productive on the basis of available
geological and engineering data. In the absence of information on fluid
contacts, the lowest known structural occurrence of hydrocarbons controls
the lower proved limit of the reservoir.
"(ii) Reserves which can be produced economically through application
of improved recovery techniques (such as fluid injection) are included in
the 'proved' classification when successful testing by a pilot project, or
the operation of an installed program in the reservoir, provides support
for the engineering analysis on which the project or program was based.
"(iii) Estimates of proved reserves do not include the following: (A)
oil that may become available from known reservoirs but is classified
separately as 'indicated additional reserves'; (B) crude oil, natural gas,
and natural gas liquids, the recovery of which is subject to reasonable
doubt because of uncertainty as to geology, reservoir characteristics, or
economic factors; (C) crude oil, natural gas, and natural gas liquids, that
may occur in undrilled prospects; and (D) crude oil, natural gas, and
natural gas liquids, that may be recovered from oil shales, gilsonite and
other such sources.
"PROVED DEVELOPED OIL AND GAS RESERVES. Proved developed oil and gas
reserves are reserves that can be expected to be recovered through existing
wells with existing equipment and operating methods. Additional oil and gas
expected to be obtained through the application of fluid injection or other
improved recovery techniques for supplementing the natural forces and
mechanisms of primary recovery should be included as 'proved developed
reserves' only after testing by a pilot project or after the operation of
an installed program has confirmed through production response that
increased recovery will be achieved."
"PROVED UNDEVELOPED AND GAS RESERVES. Proved undeveloped oil and gas
reserves are reserves that are expected to be recovered from new wells on
undrilled acreage, or from existing wells where a relatively major
expenditure is required for recompletion. Reserves on undrilled acreage
shall be limited to those drilling units offsetting productive units that
are reasonably certain of production when drilled. Proved reserves for
other undrilled units can be claimed only where it can be demonstrated with
certainty that there is continuity of production from the existing
productive formation. Under no circumstances should estimates for proved
B-2
<PAGE>
Evergreen Resources, Inc.
Feb 12, 1999
Page 3
undeveloped reserves be attributable to any acreage for which an
application of fluid injection or other improved recovery technique is
contemplated unless such techniques have been proved effective by actual
tests in the area and in the same reservoir."
Natural gas volumes are expressed at standard conditions of temperature and
pressure applicable in the area the gas is purchased. Condensate reserves
estimated are those obtained from normal separator recovery. Crude oil is stated
as standard barrels of 42 U.S. gallons per barrel.
Estimated net proved reserves of natural gas as of December 31, 1998
follow:
<TABLE>
<CAPTION>
NATURAL GAS
-----------
MMCF
<S> <C>
Total Proved Developed Producing Reserves 209,176
Total Proved Developed Non-Producing Reserves 33,810
Total Proved Undeveloped Reserves 161,950
-------
TOTAL PROVED RESERVES 404,936
-------
-------
</TABLE>
Value of net proved reserves is expressed in terms of estimated future net
revenue and present value of future net revenue. Future net revenue is
calculated by deducting estimated operating expenses, future development costs,
and severance and ad valorem taxes from the future gross revenue.
Present value of future net revenue is calculated by discounting the future
net revenue at the arbitrary rate of 10 percent per year compounded monthly over
the expected period of realization. Present value, as expressed herein, should
not be construed as fair market value since no consideration has been given to
many factors which influence the prices at which petroleum properties are
traded, such as taxes on operating profits, allowance for return on the
investment, and normal risks incident to the oil business.
B-3
<PAGE>
Evergreen Resources, Inc.
Feb 12, 1999
Page 4
Estimated future net revenue and net present value of future net revenue
from proved natural gas, as of December 31, 1998 follow:
<TABLE>
<CAPTION>
10% DISC.
FUTURE NET FUTURE NET
REVENUE MS REVENUE MS
<S> <C> <C>
Total Proved Developed Producing Reserves 276,350 140,838
Total Proved Developed Non-Producing Reserves 39,810 16,407
Total Proved Undeveloped Reserves 176,985 57,430
------- -------
TOTAL PROVED RESERVES 493,145 214,675
------- -------
------- -------
</TABLE>
Evergreen has increased proven reserves from the August 31, 1998 report by
ongoing drilling which continues to prove additional locations. Remedial work on
wells, gathering system, and additional compression, must be completed to
produce the volumes forecast in this report. This work is in progress and should
be completed during the next 15 months. The capital investment for this work is
reflected in this report.
Evergreen's gas reserves are coal gas located in the Raton Basin, Colorado.
Projection of coalbed methane gas reserves is generally more complicated than
projection of conventional hydrocarbon reservoirs due to complex reservoir
properties and the dewatering process required to develop producible natural gas
reservoirs. Therefore, reserve estimates and gas production rates for coalbed
methane wells are modified frequently as gas and water production data becomes
available.
Resource Services International, Inc. and its principals are unrelated to
Evergreen, its officers, shareholders, and properties evaluated in this report.
Submitted,
RESOURCE SERVICES INTERNATIONAL, INC.
RESOURCE SERVICES INTERNATIONAL, INC.
B-4
<PAGE>
PROSPECTUS
- --------------------------------------------------------------------------------
$150,000,000
[LOGO]
Debt Securities, Common Stock, Preferred Stock, Depositary
Shares, Warrants, Subscription Rights and Guarantees
- ----------------------------------------------------------------------
By this prospectus, we may offer from time to time, in one or more series or
classes, the following securities:
- unsecured debt securities consisting of senior notes and debentures and
subordinated notes and debentures, and other unsecured evidences of
indebtedness in one or more series, including guarantees of our debt
securities by certain of our subsidiaries,
- shares of common stock,
- shares of preferred stock, in one or more series, which may be convertible
into or exchangeable for common stock or debt securities,
- warrants to purchase debt securities, preferred stock or common stock,
- depositary shares representing fractional interests in preferred stock,
and
- subscription rights evidencing the right to purchase any of the above
securities.
The aggregate initial offering price of the securities that we offer will not
exceed $150,000,000. We will offer the securities in amounts, at prices and on
terms to be determined by market conditions at the time of our offering.
We will provide the specific terms of the securities in supplements to this
prospectus. You should read this prospectus and the prospectus supplements
carefully before you invest in the securities. This prospectus may not be used
to consummate sales of securities unless accompanied by a prospectus supplement.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
- --------------------------------------------------------------------------------
The date of this prospectus is May 24, 1999.
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus, including the information incorporated by reference,
contains forward-looking statements within meaning of section 27A of the
Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934,
including statements regarding, among other items, our growth strategies,
anticipated trends in our business and our future results of operations, market
conditions in the oil and gas industry, our ability to make and integrate
acquisitions and the outcome of litigation and the impact of governmental
regulation. These forward-looking statements are based largely on our
expectations and are subject to a number of risks and uncertainties, many of
which are beyond our control, including those described in the applicable
prospectus supplement under "Risk Factors." Actual results could differ
materially from these forward-looking statements as a result of, among other
things:
- A decline in natural gas production or natural gas prices.
- Incorrect estimates of required capital expenditures.
- Increases in the cost of drilling, completion and gas collection or other
costs of production and operations.
- An inability to meet growth projections.
- Changes in general economic conditions.
In light of these risks and uncertainties, there can be no assurance that actual
results will be as projected in the forward-looking statements.
2
<PAGE>
THE COMPANY
Evergreen Resources, Inc. is an independent energy company engaged in the
exploration, production, development and acquisition of oil and gas properties.
Our current operations are principally focused on developing and expanding our
coalbed methane project located in the Raton Basin in southern Colorado. We also
hold exploration licenses onshore in the United Kingdom, a net 2% interest in a
group exploring offshore in the Falkland Islands, and an oil and gas license on
approximately 2.4 million acres in northern Chile.
We are one of the largest holders of oil and gas leases in the Raton Basin
with approximately 200,000 gross acres of coal bed methane properties and almost
200 producing gas wells. Our daily gas sales represent approximately 65% of the
gas currently sold from the Raton Basin. As of December 31, 1998, we had 173 net
producing gas wells on our Raton Basin properties. We have identified over 800
drilling locations on our Raton Basin acreage, of which 132 were included in our
proved reserve base at December 31, 1998. We intend to spend approximately $35
million during 1999 on drilling and gas collection systems, $5 million on well
service equipment and $5 million on international and other projects.
Evergreen Operating Corporation, a wholly owned subsidiary, operates
approximately 196 oil and gas wells on behalf of its parent company. Evergreen
Operating Corporation is primarily responsible for drilling, evaluation,
production and sales activities associated with the Company's properties.
Primero Gas Marketing Company constructs and operates the Company's gas
collection systems and markets and sells the Company's gas.
Evergreen Well Service Company provides fracture stimulation services,
cement work, drilling and workovers to the Company.
We were incorporated in Colorado on January 14, 1981. Our principal
executive offices are at 1401 17th Street, Suite 1200, Denver, Colorado 80202,
and our telephone number is (303) 298-8100.
USE OF PROCEEDS
Except as otherwise described in any prospectus supplement, the net proceeds
from the sale of securities offered from time to time using this prospectus (the
"Securities") will be used for general corporate purposes, which may include
repayment or refinancing of indebtedness, working capital, capital expenditures,
acquisitions and repurchases and redemptions of securities.
3
<PAGE>
RATIOS OF EARNINGS TO FIXED CHARGES
The following table sets forth the computation of ratio of earnings to fixed
charges for the periods shown.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS
YEARS ENDED DECEMBER ENDED DECEMBER YEARS ENDED MARCH 31,
MARCH 31, 31, 31,
-------------------- -------------------- --------------- ------------------------
1999 1998 1998 1997 1996 1996 1995
--------- --------- --------- --------- --------------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
a) 1.71 7.10 4.23 6.76 4.50 (c) (c)
b) 1.71 7.10 4.23 4.87 2.07 (c) (c)
</TABLE>
- ------------
(a) The ratio of earnings to fixed charges has been computed by dividing
earnings available for fixed charges (earnings from continuing operations
before income taxes plus fixed charges less capitalized interest) by fixed
charges (interest expense plus capitalized interest).
(b) The ratio of earnings to fixed charges has been computed by dividing
earnings available for fixed charges (earnings from continuing operations
before income taxes plus fixed charges less capitalized interest) by fixed
charges (interest expense plus capitalized interest and preferred stock
dividends).
(c) Earnings did not cover fixed charges for the years ended March 31, 1996 and
1995, by $607,000 and $704,000 respectively.
DESCRIPTION OF DEBT SECURITIES
The following description of Evergreen Resources' unsecured Debt Securities
sets forth certain general terms and provisions of the Debt Securities to which
any prospectus supplement may relate. The particular terms of the Debt
Securities and the extent to which such general provisions may apply will be
described in a prospectus supplement relating to the Debt Securities.
Capitalized terms not otherwise defined in this prospectus or any prospectus
supplement will have the meanings given to them in the applicable indenture
described below. Evergreen is referred to in this description as the "Company."
The Debt Securities will be general unsecured obligations of the Company and
will constitute either Senior Debt Securities or Subordinated Debt Securities.
Senior Debt Securities will be issued under an indenture (the "Senior
Indenture") among the Company, the Subsidiary Guarantors and a trustee under the
Senior Indenture (the "Senior Trustee"). Subordinated Debt Securities will be
issued under an indenture (the "Subordinated Indenture") among the Company, the
Subsidiary Guarantors and a trustee under the Subordinated Indenture (the
"Subordinated Trustee"). The Senior Trustee and the Subordinated Trustee, as the
case may be, will be identified in the applicable prospectus supplement. The
Senior Indenture and the Subordinated Indenture are sometimes hereinafter
referred to herein individually as an "Indenture" and collectively as the
"Indentures," and the Senior Trustee and the Subordinated Trustee are sometimes
referred to as the "Trustee." The statements under this caption relating to the
Debt Securities and the Indentures are summaries only and do not purport to be
complete. Wherever such terms are used herein or particular provisions of the
Indentures are referred to, such terms or provisions, as the case may be, are
incorporated by reference as part of the statements made herein, and such
statements are qualified in their entirety by such reference.
PROVISIONS APPLICABLE TO BOTH SENIOR AND SUBORDINATED DEBT SECURITIES
GENERAL
The Indentures do not limit the aggregate principal amount of Debt
Securities which can be issued thereunder and provide that Debt Securities may
be issued from time to time thereunder in one or more series, each in an
aggregate principal amount authorized by the Company prior to issuance. The
4
<PAGE>
Indentures do not currently limit the amount of other unsecured indebtedness or
securities which may be issued by the Company. Unless otherwise indicated in a
prospectus supplement, the Debt Securities will not benefit from any covenant or
other provision that would afford Holders of such Debt Securities special
protection in the event of a highly leveraged transaction involving the Company.
If specified in the prospectus supplement, certain of the Company's
subsidiaries (the "Subsidiary Guarantors") will unconditionally guarantee on a
joint and several basis the Debt Securities as described under "Subsidiary
Guarantees" and in the prospectus supplement (the "Subsidiary Guarantees"). The
Subsidiary Guarantees will be unsecured obligations of each Subsidiary
Guarantor.
The applicable prospectus supplement will set forth the price or prices at
which the Debt Securities of a particular series will be issued and will
describe the following terms of the Debt Securities:
(1) the title of the Debt Securities, whether the Debt Securities are Senior
Debt Securities or Subordinated Debt Securities and, if Subordinated Debt
Securities, the subordination terms relating thereto;
(2) any limit on the aggregate principal amount of the Debt Securities;
(3) whether the Subsidiary Guarantors will provide Subsidiary Guarantees;
(4) whether such Debt Securities will be issued in the form of one or more
global securities and whether such global securities are to be issuable in
temporary global form or permanent global form;
(5) the date or dates on which the principal of and premium, if any, on the
Debt Securities are payable or the method of determination thereof;
(6) the rate or rates, or the method of determination thereof, at which the
Debt Securities will bear interest, if any;
(7) whether and under what circumstances Additional Amounts with respect to
the Debt Securities will be payable;
(8) the date or dates from which such interest will accrue;
(9) the interest payment dates on which such interest will be payable and
the record date for the interest payable on any Debt Securities on any interest
payment date;
(10) the place or places where the principal of, premium and interest, if
any, on and any Additional Amounts with respect to the Debt Securities will be
payable;
(11) the period or periods within which, the price or prices at which and the
terms and conditions upon which Debt Securities may be redeemed, in whole or in
part, at the option of the Company, if the Company is to have that option;
(12) the obligation, if any, of the Company to redeem or purchase Debt
Securities pursuant to any sinking fund or analogous provisions or at the option
of a holder thereof and the period or periods within which, the price or prices
at which and the terms and conditions upon which Debt Securities will be
redeemed or purchased in whole or in part pursuant to such obligation;
(13) the denomination in which any Debt Securities shall be issuable, if
other than denominations of $1,000 and any integral multiple thereof;
(14) the currency or currencies (including composite currencies), if other
than U.S. dollars, or the form, including equity securities, other debt
securities (including Debt Securities), warrants or any other securities or
property of the Company or any other Person, in which payment of principal of,
premium (if any) and interest on and any Additional Amounts with respect to the
Debt Securities will be payable;
5
<PAGE>
(15) if such payments are to be payable, at the election of the Company or a
holder thereof, in a currency or currencies other than that in which the Debt
Securities are stated to be payable, the currency or currencies in which such
payments as to which such election is made will be payable, and the periods
within which and the terms and conditions upon which such election is to be
made;
(16) if the amount of such payments may be determined with reference to any
commodities, currencies or indices, values, rates or prices or any other index
or formula, the manner in which such amounts will be determined;
(17) if other than the entire principal amount thereof, the portion of the
principal amount of Debt Securities that will be payable upon declaration of
acceleration of the maturity thereof;
(18) whether the Debt Securities are defeasible, and any additional means of
and conditions to satisfaction and discharge of the applicable Indenture with
respect to the Debt Securities;
(19) any deletions or modifications of or additions to the definitions,
Events of Default or covenants of the Company pertaining to the Debt Securities;
(20) if the Debt Securities are to be convertible into or exchangeable for
equity securities, other debt securities (including Debt Securities), warrants
or any other securities or property of the Company or any other Person, at the
option of the Company or the Holder or upon the occurrence of any condition or
event, the terms and conditions for such conversion or exchange;
(21) whether any of the Debt Securities will be subject to certain optional
interest rate reset provisions;
(22) the additions or changes, if any, to the Indenture with respect to the
Debt Securities as shall be necessary to permit or facilitate the issuance of
the Debt Securities in bearer form, registered or not registrable as to
principal, and with or without interest coupons; and
(23) any other terms of the Debt Securities.
Reference is also made to the prospectus supplement for information with respect
to any material United States federal income tax consequences with respect to
the ownership and disposition of Debt Securities.
No service charge will be made for any registration of transfer or exchange
of the Debt Securities, but the Company may require payment of a sum sufficient
to cover any tax or other governmental charge payable in connection therewith.
The Company conducts some of its operations through Subsidiaries. The
Holders of Debt Securities will have a junior position to any creditors of
Subsidiaries, unless such Subsidiaries are Subsidiary Guarantors of the Debt
Securities.
Debt Securities may be sold at a discount (which may be substantial) below
their stated principal amount bearing no interest or interest at a rate that at
the time of issuance is below market rates. Any material United States federal
income tax consequences and other special considerations applicable thereto will
be described in the prospectus supplement relating to any such Debt Securities.
If any of the Debt Securities are sold for any foreign currency or currency
unit or if the principal of, or premium or interest, if any, on, or any
Additional Amounts with respect to any of the Debt Securities is payable in any
foreign currency or foreign currency unit, the restrictions, elections, tax
consequences, specific terms and other information with respect to such Debt
Securities and such foreign currency or foreign currency unit will be set forth
in the prospectus supplement relating thereto.
6
<PAGE>
SUBSIDIARY GUARANTEES
If specified in the prospectus supplement, the Subsidiary Guarantors will
guarantee the Debt Securities of a series. Unless otherwise indicated in the
prospectus supplement, the following provisions will apply to the Subsidiary
Guarantees of the Subsidiary Guarantors.
Subject to the limitations described below and in the prospectus supplement,
the Subsidiary Guarantors will, jointly and severally, unconditionally guarantee
the performance and punctual payment when due, whether at Stated Maturity, by
acceleration or otherwise, of all the Company's obligations under the Indentures
and the Debt Securities of a series, whether for principal of, premium, if any,
or interest on the Debt Securities or otherwise (all such obligations guaranteed
by a Subsidiary Guarantor being herein called the "Guaranteed Obligations"). The
Subsidiary Guarantors will also pay, in addition to the amount stated above, any
and all expenses (including reasonable counsel fees and expenses) incurred by
the applicable Trustee in enforcing any rights under a Subsidiary Guarantee with
respect to a Subsidiary Guarantor.
In the case of Subordinated Debt Securities, the Subsidiary Guarantee will
be subordinated in right of payment to the Senior Indebtedness of the Subsidiary
Guarantor on the same basis as the Subordinated Debt Securities are subordinated
to the Company's Senior Indebtedness. No payment will be made by any Subsidiary
Guarantor under its Subsidiary Guarantee during any period in which payments by
the Company on the Subordinated Debt Securities are suspended by the
subordination provisions of the Subordinated Indenture.
Each Subsidiary Guarantee will be limited in amount to an amount not to
exceed the maximum amount that can be guaranteed by the relevant Subsidiary
Guarantor without rendering such Subsidiary Guarantee voidable under applicable
law relating to fraudulent conveyance or fraudulent transfer or similar laws
affecting the rights of creditors generally. Each Subsidiary Guarantee will be a
continuing guarantee and will:
(1) remain in full force and effect until either (a) payment in full of all
the Guaranteed Obligations (or the applicable Debt Securities are defeased and
discharged in accordance with the defeasance provisions of the Indentures) or
(b) released as described in the following paragraph,
(2) be binding upon each Subsidiary Guarantor, and
(3) inure to the benefit of and be enforceable by the applicable Trustee,
the Holders and their successors, transferees and assigns.
In the event that a Subsidiary Guarantor ceases to be a Restricted
Subsidiary, whether as a result of a disposition of all of the assets or all the
Capital Stock of such Subsidiary Guarantor, by way of sale, merger,
consolidation or otherwise, such Subsidiary Guarantor will be deemed released
and relieved of its obligations under its Subsidiary Guarantee without any
further action required on the part of the Trustee or any Holder and no other
Person acquiring or owning the assets or Capital Stock of such Subsidiary
Guarantor (if not otherwise a Restricted Subsidiary) will be required to enter
into a Subsidiary Guarantee; provided, in each case, that the transaction or
transactions resulting in such Subsidiary Guarantor's ceasing to be a Restricted
Subsidiary are carried out pursuant to and in compliance with all of the
applicable covenants in the Indenture. In addition, the prospectus supplement
may specify additional circumstances under which a Subsidiary Guarantor can be
released from its Subsidiary Guarantee.
EVENTS OF DEFAULT
Unless otherwise provided with respect to any series of Debt Securities, the
following are or will be Events of Default under each Indenture with respect to
the Debt Securities of such series issued under such Indenture:
(1) failure to pay principal of or premium, if any, on any Debt Security of
such series when due;
7
<PAGE>
(2) failure to pay any interest on or any Additional Amounts with respect to
any Debt Security of such series when due, continued for 30 days;
(3) failure to deposit any sinking fund payment, when due, in respect of the
Debt Securities of such series, continued for 30 days;
(4) failure to perform any other covenant of the Company in the applicable
Indenture (other than a covenant included in such Indenture for the benefit of a
series of Debt Securities other than such series), continued for 90 days after
written notice as provided in such Indenture;
(5) default under the terms of any instrument evidencing or securing any
Indebtedness of the Company or any Restricted Subsidiary having an outstanding
principal amount of $10 million individually or in the aggregate which default
results in the acceleration of the payment of all or any portion of such
Indebtedness (which acceleration is not rescinded within a period of 10 days
from the occurrence of such acceleration) or constitutes the failure to pay all
or any portion of the principal amount of such Indebtedness when due;
(6) the rendering of a final judgment or judgments (not subject to appeal)
against the Company or any Restricted Subsidiary in an amount in excess of $10
million which remains undischarged or unstayed for a period of 60 days after the
date on which the right to appeal has expired;
(7) certain events of bankruptcy, insolvency or reorganization with respect
to the Company or any Significant Restricted Subsidiary or any group of
Restricted Subsidiaries that together would constitute a Significant Restricted
Subsidiary;
(8) in the case of Debt Securities guaranteed by any Subsidiary Guarantor,
the Subsidiary Guarantee of any Subsidiary Guarantor is held by a final
non-appealable order or judgment of a court of competent jurisdiction to be
unenforceable or invalid or ceases for any reason to be in full force and effect
(other than in accordance with the terms of the applicable Indenture) or any
Subsidiary Guarantor or any Person acting on behalf of any Subsidiary Guarantor
denies or disaffirms such Subsidiary Guarantor's obligations under its
Subsidiary Guarantee (other than by reason of a release of such Subsidiary
Guarantor from its Subsidiary Guarantee in accordance with the applicable
Indenture); and
(9) any other Event of Default as may be specified with respect to Debt
Securities of such series.
If an Event of Default with respect to any outstanding series of Debt
Securities occurs and is continuing, either the Trustee or the Holders of at
least 25% in principal amount of the outstanding Debt Securities of such series
(in the case of an Event of Default described in clause (1), (2), (3), (8) or
(9) above) or at least 25% in principal amount of all outstanding Debt
Securities under the applicable Indenture (in the case of an Event of Default
described in clause (4), (5) or (6) above) may declare the principal amount of
all the Debt Securities of the applicable series (or of all outstanding Debt
Securities under the applicable Indenture, as the case may be) to be due and
payable immediately. If an Event of Default described in clause (7) above
occurs, the principal amount of the outstanding Debt Securities of all series
ipso facto shall become immediately due and payable without any declaration or
other act on the part of the Trustee or any Holder. At any time after a
declaration of acceleration has been made, but before a judgment has been
obtained, the Holders of a majority in principal amount of the outstanding Debt
Securities of such series (or of all outstanding Debt Securities under the
applicable Indenture, as the case may be) may, under certain circumstances,
rescind and annul such acceleration. Depending on the terms of other
indebtedness of the Company outstanding from time to time, an Event of Default
under the Indentures may give rise to cross defaults on such other indebtedness
of the Company.
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Each Indenture provides that, within 90 days after the occurrence of a
default with respect to any series of Debt Securities, the Trustee will give to
the Holders of the Debt Securities of such series notice of all uncured and
unwaived defaults known to it; provided, however, that, except in the case of a
default in the payment of the principal of or premium, if any, or any interest
on, or any Additional Amounts with respect to, any Debt Securities of such
series, the Trustee will be protected in withholding such notice if it in good
faith determines that the withholding of such notice is in the interest of the
Holders of the Debt Securities of such series; and provided, further, that such
notice shall not be given until at least 30 days after the occurrence of a
default in the performance or breach of any covenant of the Company under such
Indenture other than for the payment of the principal of or premium, if any, or
any interest on, or any Additional Amounts with respect to, any Debt Securities
of such series. For the purpose of this provision, "default" with respect to
Debt Securities of any series means any event that is, or after notice or lapse
of time, or both, would become, an Event of Default with respect to the Debt
Securities of such series.
The Holders of a majority in principal amount of the outstanding Debt
Securities of any series (or, in certain cases, all outstanding Debt Securities
under the applicable Indenture) have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Trustee or
exercising any trust or power conferred on the Trustee with respect to the Debt
Securities of such series (or of all outstanding Debt Securities under the
applicable Indenture), subject to certain limitations specified in the
applicable Indenture. Each Indenture provides that in case an Event of Default
shall occur and be continuing, the Trustee shall exercise such of its rights and
powers under the applicable Indenture and use the same degree of care and skill
in its exercise as a prudent man would exercise or use under the circumstances
in the conduct of his own affairs. Subject to such provisions, the Trustee will
not be under an obligation to exercise any of its rights or powers under the
respective Indenture at the request of any of the Holders of the Debt Securities
unless they have offered to the Trustee reasonable security or indemnity against
the costs, expenses and liabilities that might be incurred by it in compliance
with such request.
The Holders of a majority in principal amount of the outstanding Debt
Securities of any series (or, in certain cases, all outstanding Debt Securities
under the applicable Indenture) may on behalf of the Holders of all Debt
Securities of such series (or of all outstanding Debt Securities under the
applicable Indenture) waive any past default under the applicable Indenture,
except (1) a default in the payment of the principal of or premium, if any, or
interest on or any Additional Amounts with respect to any Debt Security or (2)
in respect of a provision that under the applicable Indenture cannot be modified
or amended without the consent of the Holder of each outstanding Debt Security
affected. The Holders of a majority in principal amount of the outstanding Debt
Securities affected thereby may on behalf of the Holders of all such Debt
Securities waive compliance by the Company with certain restrictive provisions
of the Indentures.
The Company is required to furnish to the Trustee annually a statement as to
the performance by the Company of certain of its obligations under the
applicable Indenture and as to any default in such performance.
REMEDIES
The Indentures provide that no Holder of any Debt Security of any series
will have any right to institute any proceeding, judicial or otherwise, with
respect to the respective Indenture, or for the appointment of a receiver or
trustee, or for any other remedy thereunder, unless
(1) an Event of Default with respect to Debt Securities of that series has
occurred and continues and such Holder has previously given written notice to
the Trustee of the continuing Event of Default,
(2) the Holders of not less than 25% in principal amount of the outstanding
Debt Securities of that series have made written request to the Trustee to
institute proceedings in respect of such Event of Default in its own name as
Trustee,
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(3) such Holder or Holders have offered to the Trustee reasonable indemnity
against the costs, expenses and liabilities to be incurred in compliance with
such request,
(4) the Trustee for 60 days after its receipt of such notice, request and
offer of indemnity has failed to institute any such proceeding, and
(5) no direction inconsistent with such written request has been given to
the Trustee during such 60-day period by the Holders of a majority in principal
amount of the outstanding Debt Securities of that series.
MODIFICATION
Modifications and amendments of each Indenture may be made by the Company,
the Subsidiary Guarantors and the Trustee with the consent of the Holders of a
majority in principal amount of the outstanding Debt Securities under the
applicable Indenture affected thereby; provided, however, that no such
modification or amendment may, without the consent of the Holder of each
outstanding Debt Security affected thereby,
(1) change the stated maturity date of the principal of, or any installment
of principal of or interest on, or any Additional Amounts with respect to any
Debt Security,
(2) reduce the principal amount of, or the premium (if any) or interest on,
or any Additional Amounts with respect to any Debt Security,
(3) change the place or currency, currencies, or currency unit or units of
payment of principal of, or premium (if any) or interest on, or any Additional
Amounts with respect to any Debt Security,
(4) impair the right to institute suit for the enforcement of any payment on
or with respect to any Debt Security,
(5) reduce the percentage in principal amount of outstanding Debt
Securities, the consent of the Holders of which is required for modification or
amendment of the Indenture or for waiver of compliance with certain provisions
of the Indentures or for waiver of certain defaults,
(6) in the case of Subordinated Debt Securities, modify the subordination
provisions in a manner adverse to the Holders of the Subordinated Debt
Securities, or
(7) except as provided in the applicable Indenture, release the Subsidiary
Guarantee of a Subsidiary Guarantor.
Each Indenture provides that the Company and the Trustee may, without the
consent of any Holders of Debt Securities, enter into supplemental indentures
for the purposes, among other things, of adding to the Company's covenants,
adding additional Events of Default, establishing the form or terms of Debt
Securities or curing ambiguities or inconsistencies in the applicable Indenture,
provided that such action to cure ambiguities or inconsistencies shall not
adversely affect the interests of the Holders of the Debt Securities in any
material respect.
CONSOLIDATION, MERGER AND SALE OF ASSETS
Without the consent of any Holders of outstanding Debt Securities, the
Company may consolidate with or merge into, or convey, transfer or lease its
properties and assets substantially as an entirety to, any Person, provided
that:
(1) the Person formed by such consolidation or into which the Company is
merged or that acquires or leases the properties and assets of the Company
substantially as an entirety is a corporation, partnership or other Person
organized and existing under the laws of any domestic jurisdiction that assumes
by supplemental indenture the Company's obligations on the Debt Securities and
under each Indenture,
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(2) after giving effect to the transaction, no Event of Default and no event
that, after notice or lapse of time or both, would become an Event of Default
has occurred and is continuing, and
(3) certain other conditions are met, including any additional conditions
with respect to any particular Debt Securities specified in the applicable
prospectus supplement.
Upon compliance with these provisions by a successor Person, the Company
will (except in the case of a lease) be relieved of its obligations under each
Indenture and the Debt Securities.
DEFEASANCE AND COVENANT DEFEASANCE
If and to the extent indicated in the applicable prospectus supplement, the
Company may elect, at its option at any time, to have the provisions of Section
16.02 relating to defeasance and discharge of indebtedness, or Section 16.03
relating to defeasance of certain restrictive covenants, applied to the Debt
Securities of any series, or to any specified part of a series.
DEFEASANCE AND DISCHARGE. The Indentures provide that, upon the Company's
exercise of its option (if any) to have Section 16.02 applied to any Debt
Securities, the Company and, if applicable, each Subsidiary Guarantor will be
discharged from all of their obligations, and, if such Debt Securities are
Subordinated Debt Securities, the provisions of the Subordinated Indenture
relating to subordination will cease to be effective, with respect to such Debt
Securities (except for certain obligations to exchange or register the transfer
of Debt Securities, to replace stolen, lost or mutilated Debt Securities, to
maintain paying agencies and to hold moneys for payment in trust) upon the
deposit in trust for the benefit of the Holders of such Debt Securities of money
or U.S. Government Obligations, or both, which, through the payment of principal
and interest in respect thereof in accordance with their terms, will provide
money in an amount sufficient to pay the principal of and any premium and
interest on such Debt Securities or the respective Stated Maturities in
accordance with the terms of the applicable Indenture and such Debt Securities.
Such defeasance or discharge may occur only if, among other things,
(1) the Company has delivered to the applicable Trustee an Opinion of
Counsel to the effect that the Company has received from, or there has been
published by, the United State Internal Revenue Service a ruling, or there has
been a change in tax law, in either case to the effect that Holders of such Debt
Securities will not recognize gain or loss for federal income tax purposes as a
result of such deposit, defeasance and discharge and will be subject to federal
income tax on the same amount, in the same manner and at the same time as would
have been the case if such deposit, defeasance and discharge were not to occur;
(2) no Event of Default or event that with the passing of time or the giving
of notice, or both, shall constitute an Event of Default shall have occurred or
be continuing;
(3) such deposit, defeasance and discharge will not result in a breach or
violation of, or constitute a default under, any agreement or instrument to
which the Company or any Restricted Subsidiary is a party or by which the
Company or any Restricted Subsidiary is bound;
(4) in the case of Subordinated Debt Securities, at the time of such
deposit, no default in the payment of all or a portion of principal of (or
premium, if any) or interest on or other obligations in respect of any Senior
Indebtedness shall have occurred and be continuing and no other event of default
with respect to any Senior Indebtedness permitting, after notice or the lapse of
time, or both, the acceleration thereof shall have occurred and be continuing;
and
(5) the Company has delivered to the Trustee an Opinion of Counsel to the
effect that such deposit shall not cause the Trustee or the trust so created to
be subject to the Investment Company Act of 1940.
DEFEASANCE OF CERTAIN COVENANTS. The Indentures provide that, upon the
Company's exercise of its option (if any) to have Section 16.03 applied to any
Debt Securities, the Company may omit to comply
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with certain restrictive covenants, including those that may be described in the
applicable prospectus supplement, the occurrence of certain Events of Default,
which are described above in clause (4) (with respect to such restrictive
covenants ) and clauses (5) and (6) under "Events of Default" and any that may
be described in the applicable prospectus supplement will not be deemed to
either be or result in an Event of Default and, if such Debt Securities are
Subordinated Debt Securities, the provisions of the Subordinated Indenture
relating to subordination will cease to be effective, in each case with respect
to such Debt Securities. In order to exercise such option, the Company must
deposit, in trust for the benefit of the Holders of such Debt Securities, money
or U.S. Government Obligations, or both, which, through the payment of principal
and interest in respect thereof in accordance with their terms, will provide
money in an amount sufficient to pay the principal of and any premium and
interest on such Debt Securities on the respective Stated Maturities in
accordance with the terms of the applicable Indenture and such Debt Securities.
Such covenant defeasance may occur only if the Company has delivered to the
applicable Trustee an Opinion of Counsel that in effect says that Holders of
such Debt Securities will not recognize gain or loss for federal income tax
purposes as a result of such deposit and defeasance of certain obligations and
will be subject to federal income tax on the same amount, in the same manner and
at the same time as would have been the case if such deposit and defeasance were
not to occur and the requirements set forth in clauses (2), (3), (4) and (5)
above are satisfied. If the Company exercises this option with respect to any
Debt Securities and such Debt Securities were declared due and payable because
of the occurrence of any Event of Default, the amount of money and U.S.
Government Obligations so deposited in trust would be sufficient to pay amounts
due on such Debt Securities at the time of their respective Stated Maturities
but may not be sufficient to pay amounts due on such Debt Securities upon any
acceleration resulting from such Event of Default. In such case, the Company
would remain liable for such payments.
FORM, EXCHANGE, REGISTRATION AND TRANSFER
Debt Securities of any series will be exchangeable for other Debt Securities
of the same series and of a like aggregate principal amount and tenor of
different authorized denominations. Debt Securities may be presented for
registration of transfer (with the form of transfer endorsed thereon duly
executed), at the office of the Security Registrar or at the office of any
transfer agent designated by the Company for such purpose with respect to any
series of Debt Securities and referred to in an applicable prospectus
supplement, without service charge and upon payment of any taxes and other
governmental charges as described in the applicable Indenture. Such transfer or
exchange will be effected upon the Security Registrar or such transfer agent, as
the case may be, being satisfied with the documents of title and identity of the
Person making the request. The Company will appoint the Trustee under each
Indenture as Security Registrar for Debt Securities issued thereunder. If a
prospectus supplement refers to any transfer agents (in addition to the Security
Registrar) initially designated by the Company with respect to any series of
Debt Securities, the Company may at any time rescind the designation of any such
transfer agent or approve a change in the location through which any such
transfer agent acts. The Company is required to maintain an office or agency for
registration of transfer or exchange in each Place of Payment for such series.
The Company may at any time designate additional offices or agencies for
registration of transfer or exchange with respect to any series of Debt
Securities.
In the event of any redemption in part, the Company shall not be required to
(1) issue, register the transfer of or exchange Debt Securities of any series
during a period beginning at the opening of business 15 days prior to the
selection of Debt Securities of that series for redemption and ending on the
close of business on the day of mailing of the relevant notice of redemption or
(2) register the transfer of or exchange any Debt Security, or portion thereof,
called for redemption, except the unredeemed portion of any Debt Security being
redeemed in part.
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PAYMENT AND PAYING AGENTS
Unless otherwise indicated in an applicable prospectus supplement, payment
of principal of, premium, if any, and interest on and any Additional Amounts
with respect to Debt Securities will be made in the designated currency or
currency unit at the office of such Paying Agent or Paying Agents as the Company
may designate from time to time, except that, at the option of the Company,
payment of any interest may be made by check mailed to the address of the Person
entitled thereto as such address appears in the Security Register. Unless
otherwise indicated in an applicable prospectus supplement, payment of any
installment of interest on Debt Securities will be made to the Person in whose
name such Debt Security is registered at the close of business on the Regular
Record Date for such interest.
Unless otherwise indicated in an applicable prospectus supplement, the
Corporate Trust Office of the Trustee in New York, New York will be designated
as a Paying Agent for the Company for payments with respect to Debt Securities
issued under the applicable Indenture. The Company may at any time designate
additional Paying Agents or rescind the designation of any Paying Agent or
approve a change in the office through which any Paying Agent acts, except that
the Company will be required to maintain a Paying Agent in each Place of Payment
for such series.
All moneys paid by the Company to a Paying Agent for the payment of
principal of, premium, if any, or interest on and any Additional Amounts with
respect to any Debt Security that remain unclaimed at the end of three years
after such principal, premium, interest or Additional Amounts have become due
and payable will (subject to applicable escheat laws) be repaid to the Company,
and the Holder of such Debt Security or any coupon will thereafter look only to
the Company for payment thereof.
SECURITIES IN GLOBAL FORM
The Debt Securities of a series may be issued, in whole or in part, in the
form of one or more global Debt Securities that would be deposited with a
depositary or its nominee identified in the applicable prospectus supplement.
Global Debt Securities may be issued in either temporary or permanent form. The
specific terms of any depositary arrangement with respect to any portion of a
series of Debt Securities and the rights of, and limitations on, owners of
beneficial interests in any such global Debt Security representing all or a
portion of a series of Debt Securities will be described in the applicable
prospectus supplement.
MEETINGS
Each Indenture contains provisions for convening meetings of the Holders of
Debt Securities of a series. A meeting may be called at any time by the Trustee,
and also, upon request, by the Company or the Holders of at least 10% in
principal amount of the Outstanding Debt Securities of such series, in any such
case upon notice given as described under "-- Notices" below. Except for any
consent that must be given by the Holder of each Outstanding Debt Security
affected thereby, as described under "-- Modification" above, any resolution
presented at a meeting or adjourned meeting at which a quorum is present may be
adopted by the affirmative vote of the Holders of a majority in principal amount
of the Outstanding Debt Securities of that series; provided, however, that,
except for any consent that must be given by the Holder of each Outstanding Debt
Security affected thereby, as described under "-- Modification" above, any
resolution with respect to any request, demand, authorization, direction,
notice, consent, waiver or other action that may be made, given or taken by the
Holders of a specified percentage, which is less than a majority in principal
amount of the Outstanding Debt Securities of a series, may be adopted at a
meeting or adjourned meeting duly reconvened at which a quorum is present by the
affirmative vote of the Holders of such specified percentage in principal amount
of the Outstanding Debt Securities of that series. Subject to the proviso set
forth above, any resolution passed or decision taken at any meeting of Holders
of Debt Securities of any series duly held in accordance with the applicable
Indenture will be binding on all Holders of Debt
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Securities of that series and any related coupons. The quorum at any meeting
called to adopt a resolution, and at any reconvened meeting, will be Persons
holding or representing a majority in principal amount of the Outstanding Debt
Securities of a series.
GOVERNING LAW
Each Indenture and the Debt Securities will be governed by and construed in
accordance with the laws of the State of New York.
NOTICES
Notices to Holders of Debt Securities will be given by mail to the addresses
of such Holders as they appear in the Security Register.
TRUSTEE
Each Indenture contains certain limitations on the right of the Trustee, as
a creditor of the Company, to obtain payment of claims in certain cases and to
realize on certain property received with respect to any such claims, as
security or otherwise. The Trustee is or will be permitted to engage in other
transactions, except that, if it acquires any conflicting interest (as defined),
it must eliminate such conflict or resign.
The Trustee may make loans to the Company and its subsidiaries and
affiliates from time to time in the ordinary course of business and at
prevailing interest rates under agreements with commercial bank groups. In
addition, the Trustee may from time to time serve as a depositary of funds of,
and perform other services for, the Company.
PROVISIONS APPLICABLE SOLELY TO SUBORDINATED DEBT SECURITIES
The indebtedness evidenced by the Subordinated Debt Securities will, to the
extent set forth in the Subordinated Indenture with respect to each series of
Subordinated Debt Securities, be subordinate in right of payment to the prior
payment in full of the Company's Senior Indebtedness, including the Senior Debt
Securities. The prospectus supplement relating to any Subordinated Debt
Securities will summarize the subordination provisions of the Subordinated
Indenture applicable to that series including:
(1) the applicability and effect of such provisions upon any payment or
distribution of the Company's assets to creditors upon any liquidation,
dissolution, winding-up, reorganization, assignment for the benefit of creditors
or marshaling of assets or any bankruptcy, insolvency and similar proceedings;
(2) the applicability and effect of such provisions in the event of
specified defaults with respect to any or certain Senior Indebtedness, including
the circumstances under which and the periods in which the Company will be
prohibited from making payments on the Subordinated Debt Securities; and
(3) the definition of Senior Indebtedness applicable to the Subordinated
Debt Securities of that series.
The prospectus supplement will also describe as of a recent date the
approximate amount of Senior Indebtedness to which the Subordinated Debt
Securities of that series will be subordinated.
The failure to make any payment of any of the Subordinated Debt Securities
by reason of the subordination provisions of the Subordinated Indenture
described in the prospectus supplement will not be construed as preventing the
occurrence of an Event of Default with respect to the Subordinated Debt
Securities arising from any such failure to make payment.
The subordination provisions described above will not be applicable to
payments in respect of the Subordinated Debt Securities from a defeasance trust
established in connection with any defeasance or
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covenant defeasance of the Subordinated Debt Securities as described under "--
Defeasance and Covenant Defeasance."
DESCRIPTION OF PREFERRED STOCK
Our board of directors is authorized to issue up to 25,000,000 shares of
preferred stock in one or more series and has the authority to fix the voting,
conversion, dividend, redemption, liquidation and other rights, preferences,
privileges and qualifications of the preferred stock, all without any further
vote or action by the stockholders. The issuance of preferred stock could
decrease the amount of earnings and assets available for distribution to holders
of common stock, and adversely affect the rights and powers, including voting
rights, of such holders. The particular terms of any series of preferred stock
will be described in the applicable prospectus supplement. No shares of
preferred stock are currently outstanding. When issued, the shares of preferred
stock will be fully paid and nonassessable.
Although we have no present intention to issue shares of preferred stock,
the issuance of shares of the preferred stock, or the issuance of rights to
purchase such shares, could be used to discourage an unsolicited acquisition
proposal. For instance, the issuance of a series of preferred stock might impede
a business combination by including class voting rights that would enable the
holders to block such a transaction; or such issuance might facilitate a
business combination by including voting rights that would provide a required
percentage vote of the stockholders. In addition, under certain circumstances,
the issuance of preferred stock could adversely affect the voting power of the
holders of the common stock. Although the board of directors is required to make
any determination to issue such stock based on its judgment as to the best
interests of our stockholders, the board could act in a manner that would
discourage an acquisition attempt or other transaction that some or even a
majority of the stockholders might believe to be in their best interests or in
which stockholders might receive a premium for their stock over the then market
price of such stock. The board of directors does not at present intend to seek
stockholder approval prior to any issuance of currently authorized stock, unless
otherwise required by law or the rules of any market on which our securities are
traded.
DESCRIPTION OF DEPOSITARY SHARES
The description set forth below and in any prospectus supplement of certain
provisions of the deposit agreement and of the depositary shares and depositary
receipts does not purport to be complete and is subject to and qualified in its
entirety by reference to the forms of deposit agreement and depositary receipts
relating to each series of preferred stock which have been or will be filed with
the SEC in connection with the offering of such series of preferred stock.
GENERAL
At our option, we may elect to offer fractional interests in shares of
preferred stock, rather than shares of preferred stock. If we exercise this
option, we will provide for the issuance by a depositary to the public of
receipts for depositary shares. Each depositary share will represent fractional
interests of a particular series of preferred stock (which will be set forth in
the prospectus supplement relating to a particular series of preferred stock).
The shares of any series of preferred stock underlying the depositary shares
will be deposited under a separate deposit agreement between us and a bank or
trust company selected by us having its principal office in the United States
and having a combined capital and surplus of at least $50,000,000. The
prospectus supplement relating to a series of depositary shares will set forth
the name and address of the depositary. Subject to the terms of the deposit
agreement, each owner of depositary shares will be entitled, in proportion to
the applicable fractional interests in shares of preferred stock underlying such
depositary shares, to all the rights and preferences of the preferred stock
underlying such depositary shares including dividend, voting, redemption,
conversion and liquidation rights.
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The depositary shares will be evidenced by depositary receipts issued
pursuant to the deposit agreement. Depositary receipts will be distributed to
those persons purchasing the fractional interests in shares of the related
series of preferred stock in accordance with the terms of the offering described
in the related prospectus supplement.
DIVIDENDS AND OTHER DISTRIBUTIONS
The depositary will distribute all cash dividends or other cash
distributions received in respect of preferred stock to the record holders of
depositary shares relating to such preferred stock in proportion to the numbers
of such depositary shares owned by such holders on the relevant record date. The
depositary shall distribute only such amount, however, as can be distributed
without attributing to any holder of depositary shares a fraction of one cent,
and any balance not so distributed shall be added to and treated as part of the
next sum received by the depositary for distribution to record holders of
depositary shares.
In the event of a distribution other than in cash, the depositary will
distribute property received by it to the record holders of depositary shares
entitled thereto, unless the depositary determines that it is not feasible to
make such distribution. If this happens, the depositary may, with our approval,
sell the property and distribute the net sale proceeds to the holders.
The deposit agreement will also contain provisions relating to the manner in
which any subscription or similar rights offered by us to holders of the
preferred stock shall be made available to the holders of depositary shares.
REDEMPTION OF DEPOSITARY SHARES
If a series of the preferred stock underlying the depositary shares is
subject to redemption, the depositary shares will be redeemed from the proceeds
received by the depositary resulting from the redemption, in whole or in part,
of such series of the preferred stock held by the depositary. The depositary
shall mail notice of redemption not less than 30 and not more than 60 days prior
to the date fixed for redemption to the record holders of the depositary shares
to be so redeemed at their respective addresses appearing in the depositary's
books. The redemption price per depositary share will be equal to the applicable
fraction of the redemption price per share payable with respect to such series
of the preferred stock. Whenever we redeem shares of preferred stock held by the
depositary, the depositary will redeem as of the same redemption date the number
of depositary shares relating to shares of preferred stock so redeemed. If less
than all of the depositary shares are to be redeemed, the depositary shares to
be redeemed will be selected by lot or pro rata as may be determined by the
depositary.
After the date fixed for redemption, the depositary shares called for
redemption will no longer be deemed to be outstanding and all rights of the
holders of the depositary shares will cease, except the right to receive the
moneys, securities or other property payable upon such redemption and any money,
securities or other property to which the holders of such depositary shares were
entitled upon such redemption upon surrender to the depositary of the depositary
receipts evidencing such depositary shares.
VOTING THE PREFERRED STOCK
Upon receipt of notice of any meeting at which the holders of the preferred
stock are entitled to vote, the depositary will mail the information contained
in such notice of meeting to the record holders of the depositary shares
relating to such preferred stock. Each record holder of depositary shares on the
record date, which will be the same date as the record date for the preferred
stock, will be entitled to instruct the depositary as to the exercise of the
voting rights pertaining to the number of shares of preferred stock underlying
such holder's depositary shares. The depositary will endeavor, insofar as
practicable, to vote the number of shares of preferred stock underlying such
depositary shares in
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accordance with such instructions, and we will agree to take all action which
may be deemed necessary by the depositary in order to enable the depositary to
do so.
AMENDMENT AND TERMINATION OF DEPOSITARY AGREEMENT
We may enter into an agreement with the depositary at any time to amend the
form of depositary receipt evidencing the depositary shares and any provision of
the deposit agreement. However, the holders of a majority of the depositary
shares must approve any amendment which materially and adversely alters the
rights of the existing holders of depositary shares. A deposit agreement may be
terminated by us or by the depositary only if (1) all outstanding depositary
shares relating thereto have been redeemed or (2) there has been a final
distribution in respect of the preferred stock of the relevant series in
connection with any liquidation, dissolution or winding up and such distribution
has been distributed to the holders of the related depositary shares.
CHARGES OF DEPOSITARY
We will pay all transfer and other taxes and governmental charges arising
solely from the existence of the depositary arrangements. We will also pay
charges of the depositary in connection with the initial deposit of the
preferred stock and any redemption of the preferred stock. Holders of depositary
shares will pay transfer and other taxes and governmental charges and such other
charges as are expressly provided in the deposit agreement to be for their
accounts.
RESIGNATION AND REMOVAL OF DEPOSITARY
The depositary may resign at any time by delivering to us notice of its
election to do so, and we may at any time remove the depositary, any such
resignation or removal to take effect upon the appointment of a successor
depositary and its acceptance of such appointment. Such successor depositary
must be appointed within 60 days after delivery of the notice of resignation or
removal and must be a bank or trust company having its principal office in the
United States and having a combined capital and surplus of at least $50,000,000.
MISCELLANEOUS
The depositary will forward to the holders of depositary shares all reports
and communications from us which are delivered to the depositary and which we
are required to furnish to the holders of the preferred stock.
Neither the depositary nor Evergreen will be liable if it is prevented or
delayed by law or any circumstance beyond its control in performing its
obligations under the deposit agreement. The obligations of Evergreen and the
depositary under the deposit agreement will be limited to performance in good
faith of their duties thereunder and they will not be obligated to prosecute or
defend any legal proceeding in respect of any depositary shares or preferred
stock unless satisfactory indemnity is furnished. They may rely upon written
advice of counsel or accountants, or information provided by persons presenting
preferred stock for deposit, holders of depositary shares or other persons
believed to be competent and on documents believed to be genuine.
DESCRIPTION OF COMMON STOCK
GENERAL
We are authorized to issue 50,000,000 shares of common stock, no par value.
As of May 7, 1999, 11,252,009 shares of common stock were outstanding.
Holders of shares of common stock are entitled to one vote for each share
held of record on all matters submitted to a vote of stockholders. There are no
cumulative voting rights with respect to the election of directors. Accordingly,
the holder or holders of a majority of the outstanding shares of common stock
will be able to elect our entire board of directors. Holders of common stock
have no
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preemptive rights and are entitled to such dividends as may be declared by the
board of directors out of legally available funds. The common stock is not
entitled to any sinking fund, redemption or conversion provisions. If Evergreen
liquidates, dissolves or winds up its business, the holders of common stock will
be entitled to share ratably in our net assets remaining after the payment of
all creditors, if any, and the liquidation preferences of any preferred
stockholders. When issued, the shares of common stock will be fully paid and
nonassessable. The common stock is quoted on the Nasdaq National Market. The
transfer agent and registrar for the common stock is American Securities
Transfer & Trust, Inc.
ANTI-TAKEOVER MATTERS
Our articles of incorporation and bylaws contain provisions that may have
the effect of delaying, deferring or preventing a change in control of
Evergreen. These provisions, among other things, provide for a board of
directors with staggered terms and noncumulative voting in the election of
directors and impose certain procedural requirements on shareholders who wish to
make nominations for the election of directors or propose other actions at
shareholders' meetings.
In addition, our articles of incorporation authorize the board to issue up
to 25,000,000 shares of preferred stock without shareholder approval and to set
the rights, preferences and other designations, including voting rights, of
those shares as the board of directors may determine. These provisions, alone or
in combination with each other and with the shareholder rights plan described
below, may discourage transactions involving actual or potential changes of
control of Evergreen, including transactions that otherwise could involve
payment of a premium over prevailing market prices to holders of common stock.
On July 7, 1997, the board of directors adopted a shareholder rights plan
pursuant to which stock purchase rights were distributed as a dividend to our
common shareholders at a rate of one right for each share of common stock held
of record as of July 22, 1997 and for each share of stock issued thereafter.
The rights plan is designed to enhance the board's ability to prevent an
acquiror from depriving shareholders of the long-term value of their investment
and to protect shareholders against attempts to acquire Evergreen by means of
unfair or abusive takeover tactics that have been prevalent in many unsolicited
takeover attempts.
Under the rights plan, the rights will become exercisable only if a person
or a group (except for existing 20% shareholders) acquires or commences a tender
offer for 20% or more of our common stock. Until they become exercisable, the
rights attach to and trade with the common stock. The rights will expire July
22, 2007. The rights may be redeemed by the continuing members of the board at
$.001 per right prior to the day after a person or group has accumulated 20% or
more of the common stock.
If a person or group acquired 20% of our common stock, the rights would then
be modified to represent the right to receive, for the exercise price, common
stock having a value worth twice the exercise price.
If Evergreen were involved in a merger or other business combination at any
time after a person or group has acquired 20% or more of our common stock, the
rights would be modified so as to entitle a holder to buy a number of shares of
common stock of the acquiring entity having a market value of twice the exercise
price of each right.
All rights held or acquired by a person or group holding 20% or more of our
shares are void. The rights are not triggered by continued stock ownership of
our existing 20% shareholders, unless these shareholders increase their holdings
in Evergreen above 30%.
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DESCRIPTION OF WARRANTS
We may issue warrants including warrants to purchase debt securities,
warrants to purchase common stock or preferred stock, and warrants to purchase
equity securities issued by an unaffiliated corporation or other entity and held
by us. Warrants may be issued independently of or together with any other
Securities and may be attached to or separate from such Securities. Each series
of warrants will be issued under a separate warrant agreement to be entered into
between us and a warrant agent. The warrant agent will act solely as our agent
in connection with the warrant of such series and will not assume any obligation
or relationship of agency for or with holders or beneficial owners of warrants.
The following sets forth certain general terms and provisions of the warrants
offered hereby. Further terms of the warrants and the applicable warrant
agreement will be set forth in the applicable prospectus supplement.
DEBT WARRANTS
The applicable prospectus supplement will describe the terms of any debt
warrants, including the following:
(1) the title of such debt warrants;
(2) the offering price for such debt warrants, if any;
(3) the aggregate number of such debt warrants;
(4) the designation and terms of such debt securities purchasable upon
exercise of such debt warrants;
(5) if applicable, the designation and terms of the Securities with which
such debt warrants are issued and the number of such debt warrants issued with
each such Security;
(6) if applicable, the date from and after which such debt warrants and any
Securities issued therewith will be separately transferable;
(7) the principal amount of debt securities purchasable upon exercise of a
debt warrant and the price at which such principal amount of debt securities may
be purchased upon exercise;
(8) the date on which the right to exercise such debt warrants shall
commence and the date on which such right shall expire;
(9) if applicable, the minimum or maximum amount of such debt warrants which
may be exercised at any one time;
(10) whether the debt warrants represented by the debt warrant certificates
or debt securities that may be issued upon exercise of the debt warrants will be
issued in registered or bearer form;
(11) information with respect to book-entry procedures, if any;
(12) the currency, currencies or currency units in which the offering price,
if any, and the exercise price are payable;
(13) if applicable, a discussion of certain United States federal income tax
considerations;
(14) the antidilution provisions of such debt warrants, if any;
(15) the redemption or call provisions, if any, applicable to such debt
warrants; and
(16) any additional terms of the debt warrants, including terms, procedures
and limitations relating to the exchange and exercise of such debt warrants.
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STOCK AND OTHER WARRANTS
The applicable prospectus supplement will describe the terms of any stock
warrants or other warrants to purchase equity securities issued by an
unaffiliated corporation or other entity and held by us, including the
following:
(1) the title of such stock warrants or other warrants;
(2) the offering price of such stock warrants or other warrants, if any;
(3) the aggregate number of such stock warrants or other warrants;
(4) the designation and terms of the common stock, preferred stock or equity
securities issued by an unaffiliated corporation or other entity and held by us
purchasable upon exercise of such stock warrants or other warrants;
(5) if applicable, the designation and terms of the Securities with which
such stock warrants or other warrants are issued and the number of such stock
warrants or other warrants issued with each such Security;
(6) if applicable, the date from and after which such stock warrants or
other warrants and any Securities issued therewith will be separately
transferrable;
(7) the number of shares of common stock, preferred stock or equity
securities issued by an unaffiliated corporation or other entity and held by us
purchasable upon exercise of a stock warrant or other warrant and the price at
which such shares may be purchased upon exercise;
(8) the date on which the right to exercise such stock warrants or other
warrants shall commence and the date on which such right shall expire;
(9) if applicable, the minimum or maximum amount of such stock warrants or
other warrants which may be exercised at any one time;
(10) the currency, currencies or currency units in which the offering price,
if, any, and the exercise price are payable;
(11) if applicable, a discussion of certain United States federal income tax
considerations;
(12) the antidilution provisions of such stock warrants or other warrants, if
any;
(13) the redemption or call provisions, if any, applicable to such stock
warrants or other warrants; and
(14) any additional terms of such stock warrants or other warrants, including
terms, procedures and limitations relating to the exchange and exercise of such
stock warrants or other warrants.
DESCRIPTION OF SUBSCRIPTION RIGHTS
GENERAL
We may issue subscription rights to purchase our debt securities, common
stock, preferred stock, depositary shares or warrants to purchase debt
securities, preferred stock or common stock. We may issue subscription rights
independently or together with any other offered security. The subscription
rights may or may not be transferable by the purchaser receiving the
subscription rights. In connection with any subscription rights offering to our
shareholders, we may enter into a standby underwriting arrangement with one or
more underwriters pursuant to which the underwriter(s) will purchase any offered
securities remaining unsubscribed for after the subscription rights offering.
Certificates evidencing such subscription rights and a prospectus supplement
will be distributed to our shareholders on the record date for receiving
subscription rights in the subscription rights offering.
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The applicable prospectus supplement will describe the following terms of
the subscription rights:
(1) the title of the subscription rights;
(2) the securities for which the subscription rights are exercisable;
(3) the exercise price for the subscription rights;
(4) the number of subscription rights issued to each shareholder;
(5) the extent to which the subscription rights are transferable;
(6) if applicable, a discussion of the material United States income tax
considerations applicable to the issuance or exercise of the subscription
rights;
(7) any other terms of the subscription rights, including terms, procedures
and limitations relating to the exchange and exercise of the subscription
rights;
(8) the date on which the right to exercise the subscription rights shall
commence and the date on which the right shall expire;
(9) the extent to which the subscription rights include an over-subscription
privilege with respect to unsubscribed securities; and
(10) if applicable, the material terms of any standby underwriting
arrangement between us and our stand-by underwriters.
EXERCISE OF SUBSCRIPTION RIGHTS
Each subscription right will entitle the holder to purchase for cash the
principal amount of debt securities, shares of preferred stock, depositary
shares, shares of shares of common stock, warrants, or any combination thereof,
at the exercise price as shall in each case be set forth in, or be determinable
as set forth in, the prospectus supplement relating to the subscription rights
offered thereby. Subscription rights may be exercised at any time up to the
close of business on the expiration date for such subscription rights set forth
in the prospectus supplement. After the close of business on the expiration
date, all unexercised subscription rights will become void.
Subscription rights may be exercised as set forth in the prospectus
supplement relating to the subscription rights offered thereby. Upon receipt of
payment and the subscription rights certificate properly completed and duly
executed at the corporate trust office of the subscription rights agent or any
other office indicated in the prospectus supplement, the Company will, as soon a
practicable, forward the debt securities, shares of preferred stock or common
stock, depositary shares or warrants purchasable upon such exercise. In the
event that not all of the subscription rights issued in any offering are
exercised, the Company may determine to offer any unsubscribed offered
securities directly to persons other than shareholders, to or through agents,
underwriters or dealers or through a combination of such methods, including
pursuant to standby underwriting arrangements, as set forth in the applicable
prospectus supplement.
PLAN OF DISTRIBUTION
We may offer and sell the Securities (i) through underwriters or dealers,
(ii) through agents, (iii) directly to purchasers, including existing
shareholders in an offering of subscription rights, or (iv) through a
combination of any such methods of sale. Any such underwriter, dealer or agent
may be deemed to be an underwriter within the meaning of the Securities Act.
Each prospectus supplement will set forth the terms of the offering of the
particular series of Securities to which the prospectus supplement relates,
including the name or names of any underwriters, dealers or agents, the purchase
price or prices of the Securities, the proceeds to Evergreen from the sale of
such series of Securities, the use of such proceeds, any initial public offering
price or
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purchase price of such series of Securities, any underwriting discount or
commission, any discounts, concessions or commissions allowed or reallowed or
paid by any underwriters to other dealers, any commissions paid to any agents
and the securities exchanges, if any, on which such Securities will be listed.
Any initial public offering price or purchase price and any discounts,
concessions or commissions allowed or reallowed or paid by any underwriter to
other dealers may be changed from time to time.
Sales of common stock offered pursuant to any prospectus supplement may be
effected from time to time in one or more transactions through Nasdaq, or in
negotiated transactions or any combination of such methods of sale, at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices, or at other negotiated prices.
Any underwriter may engage in stabilizing and syndicate covering
transactions in accordance with Rule 104 of Regulation M under the Securities
Exchange Act. Rule 104 permits stabilizing bids to purchase the underlying
security so long as the stabilizing bids do not exceed a specified maximum. The
underwriters may over-allot shares of the common stock in connection an offering
of common stock, thereby creating a short position in the underwriters' account.
Syndicate covering transactions involve purchases of the debt securities in the
open market after the distribution has been completed in order to cover
syndicate short positions. Stabilizing and syndicate covering transactions may
cause the price of the debt securities to be higher than it would otherwise be
in the absence of such transactions. These transactions, if commenced, may be
discontinued at any time.
In connection with the sale of Securities, underwriters or agents may
receive compensation from Evergreen, or from purchasers of Securities for whom
they may act as agents in the form of discounts, concessions or commissions.
Underwriters may sell Securities to or through dealers, and such dealers may
receive compensation in the form of discounts, concessions or commissions from
the underwriters and/or commissions from the purchasers for whom they may act as
agents. Underwriters, dealers and agents that participate in the distribution of
Securities may be deemed to be underwriters, and any discounts or commissions
received by them from us and any profit on the resale of Securities by them may
be deemed to be underwriting discounts and commissions under the Securities Act.
Any such underwriter or agent will be identified, and any such compensation
received from Evergreen will be described, in the applicable prospectus
supplement.
Securities may be sold directly by Evergreen or through agents designated by
us from time to time. Any agent involved in the offer or sale of the Securities
in respect of which this prospectus is delivered will be named, and any
commissions payable by us to such agent will be set forth, in the prospectus
supplement. Unless otherwise indicated in the prospectus supplement, any such
agent will be acting on a best efforts basis for the period of its appointment.
Under agreements which we may enter into, underwriters and agents who
participate in the distribution of Securities may be entitled to indemnification
by us against certain liabilities, including liabilities under the Securities
Act. The terms and conditions of such indemnification will be described in an
applicable prospectus supplement. Underwriters, dealers and agents may be
customers of, engage in transactions with, or perform services for, Evergreen in
the ordinary course of business.
If so indicated in the applicable prospectus supplement, we will authorize
underwriters or other persons acting as our agent to solicit offers by certain
institutions to purchase debt securities, preferred stock or common stock from
us pursuant to contracts providing for payment and delivery on a future date.
Institutions with which such contracts may be made include commercial and
savings banks, insurance companies, pension funds, investment companies,
educational and charitable institutions and others, but in all cases we must
approve such institutions. The obligations of any purchaser under any such
contract will be subject to the condition that the purchase of the Debt
Securities, preferred stock, depositary shares or common stock shall not at the
time of delivery be prohibited under the laws of the jurisdiction to which such
purchaser is subject. The underwriters and such other agents will not have any
responsibility in respect of the validity or performance of such contracts.
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We also may sell Securities directly to purchasers, in which event no
underwriters or agents would be involved. We may sell Securities upon the
exercise of subscription rights issued to our securityholders.
The place and date of delivery for the Securities in respect of which this
prospectus is being delivered will be set forth in the applicable prospectus
supplement.
Unless otherwise indicated in the applicable prospectus supplement, the
Securities in respect of which this prospectus is being delivered (other than
common stock) will be a new issue of securities, will not have an established
trading market when issued and will not be listed on any securities exchange.
Any underwriters or agents to or through whom such Securities are sold by us for
public offering and sale may make a market in such Securities, but such
underwriters or agents will not be obligated to do so and may discontinue any
market making at any time without notice. No assurance can be given as to the
liquidity of the trading market for any such Securities.
Certain of the underwriters and their affiliates may from time to time
perform various commercial banking and investment banking services for us, for
which customary compensation is received.
EXPERTS
The financial statements incorporated by reference in this prospectus have
been audited by BDO Seidman, LLP, independent certified public accountants, to
the extent and for the periods set forth in their report incorporated herein by
reference, and are incorporated herein in reliance upon such report given upon
the authority of said firm as experts in auditing and accounting.
The estimated reserve evaluations and related calculations of Resource
Services International, Inc., independent petroleum engineering consultants,
incorporated by reference in this prospectus have been included herein in
reliance upon the authority of said firm as experts in petroleum engineering.
The estimated reserve evaluations and related calculations of Netherland,
Sewell & Associates, Inc., independent petroleum engineering consultants,
incorporated by reference in this prospectus have been included herein in
reliance upon the authority of said firm as experts in petroleum engineering.
LEGAL MATTERS
John B. Wills, Esq., Denver, Colorado has provided us with a legal opinion
on the validity of the Securities offered by this prospectus. The validity of
the Securities offered hereby will be passed upon for any agents, dealers or
underwriters by counsel named in the applicable prospectus supplement.
WHERE YOU CAN FIND MORE INFORMATION
We file reports, proxy statements and other information with the Securities
and Exchange Commission. You may read and copy any document we have filed at the
SEC's public reference rooms located at 450 Fifth Street, N.W., Judiciary Plaza,
Room 1024, Washington, D.C. 20549, and at regional offices of the SEC at the
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511 and at 7 World Trade Center, New York, New York 10048. For
further information on the SEC's public reference rooms, please call
1-800-SEC-0330. Our filings are also available to the public from the SEC's
Internet web site at http://www.sec.gov. Information about us also may be
inspected at the offices of the National Association of Securities Dealers,
Inc., 1735 K Street, N.W., Washington, D.C. 20006.
This prospectus is part of a registration statement that we filed with the
SEC utilizing a "shelf" registration process. Under this shelf registration
process, we may sell any combination of the Securities described in this
prospectus in one or more offerings up to a total dollar amount of $150 million.
This prospectus provides you with a general description of the Securities we may
offer. Each time we sell
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Securities, we will provide a prospectus supplement that will contain specific
information about the terms of the offering and the Securities. The prospectus
supplement may also add, update or change information contained in this
prospectus. Any statement that we make in this prospectus will be modified or
superseded by any inconsistent statement made by us in a prospectus supplement.
You should read both this prospectus and any prospectus supplement together with
additional information described under the heading "Incorporation of Certain
Documents by Reference."
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allows us to "incorporate by reference" the information we file with
the SEC, which means that we can disclose important information to you by
referring you to those documents that are considered part of this prospectus.
Information filed with the SEC after the date of this prospectus will
automatically update and supersede this information. The following documents
filed with the SEC are incorporated by reference:
(1) Annual report on Form 10-K for the year ended December 31, 1998;
(2) Quarterly report on Form 10-Q for the quarter ended March 31, 1999;
(3) The description of the common stock that is contained in our
registration statement on Form 8-A filed with the SEC on or about
December 21, 1981, including any amendment or report filed for the
purpose of updating the description; and
(4) The description of our Shareholders Rights Agreement that is contained
in our registration statement on Form 8-A filed with the SEC on December
18, 1998.
Any future filings we make with the SEC under Section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act are incorporated by reference in this
prospectus until we complete the offering of the Securities.
We will provide each person to whom a copy of this prospectus has been
delivered, without charge, a copy of any of the documents referred to above as
being incorporated by reference. You may request a copy by writing or
telephoning Kevin R. Collins, 1401 17th Street, Suite 1200, Denver, Colorado
80202 (telephone 303-298-8100).
You should rely only on the information incorporated by reference or
provided in this prospectus or any prospectus supplement. We have not authorized
anyone else to provide you with different information. We are not making an
offer of these Securities in any state where the offer is not permitted. You
should not assume that the information in this prospectus or any prospectus
supplement is accurate as of any date other than the date on the front of those
documents.
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PRUDENTIAL SECURITIES
A.G. EDWARDS & SONS, INC.
HOWARD, WEIL, LABOUISSE, FRIEDRICHS
INCORPORATED
HANIFEN, IMHOFF INC.
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